Global Audit Firms Still Have Problem with PCAOB Proposed Engagement Quality Review Standard

Despite a change in the PCAOB’s proposed engagement quality review standard from know or should have known to due professional care, global audit firms still have concerns with the PCAOB’s AS 7 as it comes up for SEC approval. In comment letters to the SEC, the firms voiced concern that comments in the Board’s Release may go beyond a due professional care standard. For example, Deloitte said that the Release incorrectly equates the standard of due professional care with the legal concept of negligence.

Initially, the audit firms complained that the proposed standard of performance for engagement quality review required reviewers to consider not merely what they know, but also what they should know. The firms were united in their opposition to injecting this legal standard into a review of the audit engagement. They believed that it was an unworkable standard that would have forced audit engagement reviewers to significantly increase the scope and extent of their work in order to protect themselves from SEC or PCAOB sanctions.

The Board amended the draft to specify that the review required by the standard be performed with “due professional care,” as defined in AU section 230, Due Professional Care in the Performance of Work. While supportive of this definition, the firms were concerned that the PCAOB’s further descriptive statements in the Release on the due professional care requirement could be an unrealistic standard for concurring approval of issuance and also improperly equate due professional care with negligence.

While the Board did replace the knows or should know standard with the due professional care standard, noted Deloitte, the Release also suggested that if a review is not performed with due professional care, the reviewer may not discover significant deficiencies that the reviewer reasonably should know about. Deloitte fears that this language suggests the PCAOB may still be seeking to impose a should know standard on the EQR reviewer. Deloitte urged the SEC to clarify in the final standard that conduct that may constitute a departure from due professional care will not necessarily constitute negligent conduct for regulatory or litigation purposes. Ernst & Young, while sharing similar concerns, simply urged that any interpretations of the meaning of due professional care come from the extant standard and not from language in the Release.

For its part, KPMG is concerned that commentary in the Release seems to impose a standard higher than due professional care on the engagement quality reviewer. More specifically, the statement in the Release that “a qualified reviewer who has done so will, necessarily, have discovered any significant engagement deficiencies that could have been discovered if the review had been performed with due professional care in compliance with this standard” could be read to suggest that the reviewer is responsible for identifying all significant engagement deficiencies. KPMG does not believe that this is the PCAOB’s intent, and urged the SEC to make this clear.

In its comments to the SEC, Grant Thornton said that the Release introduces confusion into the standard. GT cautioned that the Board should not set requirements in the standards, and then, in the Release, imply that the words in the standards do not mean what they say. Thus, GT also urged the SEC to clarify that due professional care, as defined in AU sec. 230, does not guarantee that any or all significant deficiencies will be detected, but rather that the engagement quality reviewer will have reasonable, but not absolute assurance, that significant engagement deficiencies have been discovered in the review.

PricewaterhouseCoopers was a little more sanguine in its comments. While noting that some of the Board's Release commentary goes well beyond, and may be inconsistent with, due professional care under AU sec. 230, PwC fully expects the Board to apply AS 7's due professional care standard in accordance with the terms of AU sec. 230. PwC found comfort in the Board’s statement in the Release that it was not redefining due professional care in the context of the EQR standard.

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