The activities of the PCAOB,
particularly its inspections and standard-setting roles, have been a
significant factor in the improvement of audit and financial reporting quality
in the decade after the enactment of the Sarbanes-Oxley Act, the Center for
Audit Quality told the House Capital Markets Subcommittee. Testifying for CAQ,
Michael Gallagher, Chair of CAQ’s Professional Practice Executive Committee,
and managing Partner of PwC’s audit quality functions, said that PCAOB
inspections promote audit quality in a number of ways. For example, they
reinforce accountability for audit quality at all levels of an audit firm,
including leadership. The inspections also highlight opportunities for audit
firms to improve, including identifying areas on an engagement where more or
different audit procedures should be performed. The inspections also help
identify areas in which additional training, audit guidance, skills, or communications
may be needed.
The CAQ official, who is
also a member of the PCAOB’s Standing Advisory Group, noted that the Board's
inspection activities are not limited to the U.S.
In CAQ’s view,
standard-setting can also have a significant impact on audit quality. The PCAOB
publishes its standard setting agenda, and solicits feedback, in part, through
its Standing Advisory Group, which comprises investors, public company
executives, audit committee members, auditors, and other stakeholders. Also,
CAQ works closely with the PCAOB and its staff on new and emerging auditing
issues, with a focus on promoting standards that enhance financial reporting
and audit quality.
More specifically, the
collective impact of PCAOB and SEC actions, and other factors, has led to a
general decline in compliance costs associated with the internal control
provisions of Sarbanes-Oxley. The
PCAOB’s original auditing standard on internal control, issued in 2004, was
widely viewed as being too rules-based and costly, as audit hours, audit fees,
and companies' associated internal costs increased significantly. The PCAOB
recognized these concerns and responded by issuing a revised standard in 2007
that was intended to promote a more risk-based audit and was less prescriptive,
thereby allowing the use of more auditor judgment. While focused on maintaining
audit quality, noted CAQ, that standard generally resulted in reductions to the
nature and extent of audit procedures, and a corresponding reduction in audit
hours and fees.
The PCAOB also published
staff guidance on its revised standard for audits of smaller public companies to
facilitate more efficient and effective audits of internal control over
financial reporting for smaller, less complex public companies. In addition,
the PCAOB conducted nation-wide forums for auditors of smaller audit firms to
help address implementation issues associated with its revised standard. Similarly,
the SEC issued guidance for companies to use in their assessment of internal
controls that improved management assessments, which has contributed to an
increase in auditor efficiency.
Other factors driving down
costs are that auditors have made continued progress in integrating their
audits of internal control over financial reporting with their financial
statement audits. Similarly, management’s processes and activities that support
a public company's required assertion about internal control over financial
reporting have become more integrated with their day-to-day activities and
related financial reporting, in part due to investments to update information
technology systems.