The Public Company Accounting Oversight Board has approved a concept release presenting a potential approach to revising the agency's quality control (QC) standards. At its open meeting on December 17, 2019, the board voted to issue the concept release, which is aimed at strengthening requirements for audit firms' quality control systems and ensuring consistent, high-quality audits. The potential approach is based on the International Standard on Quality Management 1 (ISQM 1) that has been proposed by the International Auditing and Assurance Standards Board (IAASB), with certain modifications as appropriate for firms that are subject to PCAOB standards and rules.
"The input we receive from the public through this concept release will play an important role in the Board's consideration of an approach to revising our quality control standards," said PCAOB Chairman Duhnke in a news release. "We encourage all interested parties to review our release and share their views with us."
The PCAOB noted that agency adopted its current quality control standards in 2003, based on standards originally developed and issued by the American Institute of Certified Public Accountants (AICPA). Given the significant changes in the auditing environment that have occurred in the intervening years, however, the PCAOB's current standards do not reflect relevant developments affecting audit and assurance practices and firms' quality control systems. For example, firms have made a greater use of technology in performing engagements, and some firms have also significantly increased their focus on governance and leadership, incentive systems and accountability, and monitoring and remediation.
ISQM 1. In remarks on December 12 at AICPA’s Conference on Current SEC and PCAOB Developments, Board Member Duane DesParte observed that the PCAOB does not operate in a vacuum and continues to assess developments of other standard setters and regulators, such as the IAASB. The proposed ISQM 1 serves as a good starting point, stated DesParte, because many firms that conduct audits in accordance with PCAOB standards also conduct audits in accordance with international standards. Thus, it would not be practicable to have fundamentally different frameworks for those firms to follow. Moreover, unnecessary differences in QC standards could detract from audit quality by diverting firms' efforts from focusing on matters of fundamental importance to effective QC systems, according to the fact sheet summarizing the concept release.
As discussed in the concept release, proposed ISQM 1 is designed to focus firms' attention on proactively identifying and responding to quality risks that may affect engagement quality. Proposed ISQM 1 describes a firm’s system of quality management as consisting of eight components, which are designed to be highly integrated: (1) Governance and Leadership; (2) Firm’s Risk Assessment Process; (3) Relevant Ethical Requirements; (4) Acceptance and Continuance of Client Relationships and Specific Engagements; (5) Engagement Performance; (6) Resources (Human, Technological, and Intellectual); (7) Information and Communication; and (8) Monitoring and Remediation. The components of proposed ISQM 1 cover the elements of a QC system under the PCAOB’s current standards, although in some cases more broadly, while also including components not currently included in PCAOB standards.
The concept release notes, however, that while the PCAOB seeks to avoid unnecessary differences between a future PCAOB QC standard and a finalized international standard, incremental or alternative requirements may be necessary for firms performing engagements under PCAOB standards. For example, different requirements may be needed to:
- align with federal securities laws, SEC rules, and other PCAOB standards and rules;
- retain important topics in the PCAOB’s current QC standards that either are not covered in Proposed ISQM 1 or are not covered as specifically;
- address specific emerging risks and problems observed through the PCAOB’s oversight activities; and
- provide more definitive direction to promote appropriate implementation of certain requirements by firms that are subject to PCAOB standards and rules.
The Board requests comments on the concept release by March 16, 2020.