PCAOB Frames Audit Quality Issues

One of the greatest concerns facing the PCAOB, and indeed more broadly the SEC and the financial markets, is that the external audit report has essentially become a pass/fail exercise replete with meaningless boilerplate of litte value to investors and other users of financial statements. A PCAOB staff memo recently framed the discussion of audit quality indicators for the Standing Advisory Group, which the staff defines as measures that provide insight into financial statement audit quality. In November 2012, the Board identified a project to develop audit quality measures as a priority project for 2013, with a longer-term goal of tracking such measures with respect to domestic global network firms and reporting collective measures over time.

The staff’s initial thinking is that an audit quality definition, framework, and related audit quality indicators are an integrated construct.

Over the years, many organizations have sought to define audit quality, with little consensus. While the Board’s  initial purpose is to seek SAG member input on possible audit quality indicators, the Board recognizes the need to ground discussion with the working definition of audit quality developed by the staff. For purposes of the discussion, staff defines audit quality as meeting investors’ needs for independent and reliable audits and robust audit committee communications on financial statements, including related disclosures; assurance about internal control; and going concern warnings.

It is axiomatic that any definition of  audit quality must be based on concepts that are already widely accepted, rather than trying to break new conceptual ground. At  the most basic level, the audit quality framework includes three segments: audit inputs, processes, and results. The staff views these segments as intuitive and conceptually aligned with much of the existing work on audit quality completed by other organizations.