Quality Control Protects Investors – Send Us Your Thoughts

The Public Company Accounting Oversight Board (PCAOB) needs your input on quality control. Last November, we issued a proposal for a new quality control (QC) standard that the Board believes would lead audit firms to significantly improve their QC systems. The deadline for comments from the public on our proposal is February 1, and we urge you to weigh in.

The PCAOB views this standard-setting proposal as critical – a watershed moment. Why? In a word, people. Our organization’s mission is to protect investors. And by investors, we mean people, whether that’s workers saving for retirement, families saving for college, or anyone who depends on the integrity of the U.S. capital markets to realize their version of the American dream.

I believe our QC proposal should improve audit quality and protect investors who depend on accurate, audited financial information to guide their decisions. Here are three ways the proposal could do that.

1. Our proposal takes a risk-based approach.

With any standard-setting project, we ask two questions:

• What is needed to ensure that investors are best protected?
• What changes are needed to achieve that goal?

For quality control, the answer to those questions starts with a risk-based approach. We know that risks vary from firm to firm, and effective QC systems should too. A one-size-fits-all approach is not the best way to keep investors protected. So the proposed standard would require all registered firms to identify their specific risks and design a QC system that includes policies and procedures to guard against those risks.

2. Our proposal fosters accountability.

The proposal would ensure accountability by requiring an audit firm to conduct an annual evaluation of its QC system, then report the results of that evaluation to the audit committees of every public company and broker-dealer client. Firms would also need to report the results of their QC evaluation to the PCAOB via a new Form QC. That form would be personally certified by firm personnel who are:

• Assigned ultimate responsibility and accountability for the firm’s QC system as a whole, or
• Assigned operational responsibility and accountability for the QC system.

Simply designing elaborate processes on paper won’t be enough. Firm leadership would have a personal stake in delivering results and additional incentives to fix problems quickly.

3. Our proposal closely aligns with QC standards from other standard setters – but goes further in important ways.

As we developed our QC proposal, we considered QC standards adopted by the International Auditing and Assurance Standards Board and the American Institute of CPAs.

Like our proposal, those organizations’ QC standards take a risk-based approach. But our proposal goes beyond those frameworks by including important requirements to address the U.S. regulatory environment, the needs and priorities of investors and other PCAOB stakeholders, and the PCAOB’s statutory mandate to protect investors and the public interest. For example, our proposal:

• Requires firms with more than 100 issuers to appoint an independent person to their governance boards;
• Includes more specific requirements for monitoring and remediation; and
• Has guidelines for a firm’s voluntary publication of QC information, such as firm statistics or engagement performance measures.

Tell us what you think.

Putting the above ingredients together, I believe the PCAOB’s proposed QC standard should improve audit quality and protect investors. But that’s just my view – tell us what you think by February 1. After that, the Board will evaluate the comments and determine the best way to move forward on this vital standard-setting project.

Erica Y. Williams is the Chair of the Public Company Accounting Oversight Board.