While supporting the PCAOB’s objective to clarify failure to supervise under Section 105(c)(6) of Sarbanes-Oxley and enhance documentation of these responsibilities, the Big Four audit firms believe that this effort should be implemented through the quality control project already on the Board's agenda. The consensus is that a separate rulemaking on supervision is not necessary. If the Board nonetheless decides to institute such a rulemaking, it should not do so before it has completed the QC project.
A PCAOB Concept Release examines issues relating to the responsibilities of an accounting firm and its supervisory personnel with respect to supervision (PCAOB Release No. 2010-005). Section 105(c)(6) of Sarbanes-Oxley authorizes the Board to impose sanctions on accounting firms and their supervisory personnel for failing reasonably to supervise associated persons who have violated certain laws, rules, or standards.
In its comment letter on the Concept Release, KPMG said that effective supervision is fundamental to any system of audit quality control and permeates all quality control elements designed and maintained collectively to provide reasonable assurance that a firm’s personnel are complying with applicable professional standards and regulatory and legal requirements, and with the firm’s standards of quality. The strength of a firm’s control environment is influenced by the extent to which individuals understand their responsibilities, recognize that they will be held accountable and understand the related implications of that accountability. Documentation of a firm’s supervisory structure would enable a clearer understanding of responsibilities in the context of the respective system of audit quality control. That clearer understanding supports the effective operation of a system of audit quality control.
Thus, due to the pervasive impact of supervision on any system of quality control, reasoned KPMG, it is most appropriate for any documentation requirement relative to supervision assignments and responsibilities contemplated in the Concept Release be considered in the context of the broader quality control standards project. Any supervisory responsibility documentation requirement proposed by the Board should be made part of the quality control standards and considered in the context of a firm’s system of audit quality control in its entirety.
While the Concept Release suggests that the supervisory structure imposed on broker-dealers may present an appropriate model for supervision of public accounting firms, KPMG believes that the broker-dealer model of supervision does not provide a useful guide for constructing rules for supervision of the auditing profession. The NASD rules under which broker-dealer supervision is maintained are highly detailed and prescriptive and are intended to give definitive guidance in a business with a rigid hierarchical structure wholly unlike that of an accounting firm.
These detailed requirements are inconsistent with the nature of supervision effected by registered public accounting firms and their personnel in fulfilling their respective obligations pursuant to the Board’s professional standards. While the SEC has brought charges in the broker-dealer arena challenging the actions and judgments of more senior officers and supervisors, those cases are highly fact-specific and do not present practical direction in the context of accounting firm supervision.
Echoing these comments, Ernst & Young said that the Board should not adopt separate failure to supervise rules but rather should clarify responsibilities within the existing quality control framework. The Board should consider expanding the quality control standards to clarify supervisory duties. While Sarbanes-Oxley Sec. 105(c)(6)(B) tracks the broker-dealer duty to supervise language of Exchange Act Sec. 15(b)(4)(E), E&Y pointed out that the structure of an audit firm is different from that of a brokerage firm. Enforcement cases against broker-dealer supervisors are generally brought for violation of their duty to supervise securities salespersons. The activities of audit firm personnel, by contrast, have little in common with the activities of registered representatives. For example, the activities of audit engagement teams involve the extensive exercise of professional judgment.
Deloitte also commented that efforts related to clarifying or adding to supervisory
responsibilities should be accomplished through revision to the PCAOB’s quality control standards. Similarly, in its comment letter. PricewaterhouseCoopers urged the Board to consider revising the existing standards to incorporate a requirement for additional documentation relating to supervision and monitoring within the quality control standards that meets Board's objectives. PwC believes that supervision requirements would be better defined in the context of existing QC and auditing standards, which are designed to establish comprehensive professional standards governing how firms conduct audits, than in separate stand-alone rules overlaid on top of applicable QC and auditing standards.
There was also a consensus at a recent meeting of the Board’s Standing Advisory Group that failure to supervise should be baked into quality control. John Archambault, Grant Thornton senior partner, said that the issue of failure to supervise flows into quality control standards. The main thrust of failure to supervise rules is that audit firm personnel need to know who has what responsibilities. Mary Hartman Morris, Calpers Investment Officer for Global Equity, said that failure to supervise is one more step toward audit quality and is tied to key quality performance indicators. Steven Rafferty of BKD added that if Board inspections are finding that the failure to supervise is a failure of people to do their jobs then it is part of the quality control system.