Transparency Fuels Trust – Send Us Your Input on Two PCAOB Proposals

Trust is essential to our capital markets. And transparency fuels trust.

Consistent, comparable information about audit firms and the public companies they audit bolsters confidence, strengthens oversight, and empowers investors and audit committees to make more informed decisions and help drive audit quality forward.

That is the goal of two proposals that the PCAOB issued in April. Both proposals reflect input from our Standards and Emerging Issues Advisory Group and our Investor Advisory Group, along with an extraordinary amount of research and analysis.

We’re not done gathering input. The deadline for public comment on both proposals is June 7, 2024, and I encourage investors and others to provide the PCAOB with their perspectives.

Firm and Engagement Metrics Proposal

The Firm and Engagement Metrics proposal sets out a standardized set of 11 metric areas for every firm that audits at least one public company classified as either an “accelerated filer” or a “large accelerated filer” to disclose each year.

The metrics are grounded in countless hours of research by our professional staff. They include information about firms’ overall audit practice, for example, how partners’ quality performance ratings affect their compensation, and information about individual engagements, for example the time incurred by partners and managers on the engagement team related to areas of significant risks, critical accounting policies and practices, and critical accounting estimates.

Collectively, these metrics would help investors make more informed decisions about how they invest their money. And they would provide audit committees with consistent data to analyze and compare as they are selecting and monitoring audit firms.

Firms could use these standardized metrics about themselves and their peers to assist in designing, implementing, monitoring, and remediating their systems of quality control.

The PCAOB could also benefit from having this information provided in a consistent and comparable format to use in our Inspections program and standard-setting initiatives.

Over time, the benefits from the disclosure of these metrics would likely increase as a greater amount of information is accumulated, making trends more apparent and enabling the benchmarking of information across engagement teams and firms. The proposal has been informed by more than a decade of careful study and collection of input from stakeholders.

Firm Reporting Proposal

The Firm Reporting proposal would modernize the PCAOB’s framework for collecting information from audit firms by amending the annual and special reporting requirements which have not been substantively updated since 2008.

It would facilitate the disclosure of more complete, standardized, and timely information by firms to empower investors and audit committees through greater transparency while also strengthening the PCAOB’s work to protect investors.

The amendments cover five key areas:

1. Financial Information. Under the proposal, all registered firms would report actual dollar amounts of various fee categories, rather than percentages that are currently required. The new requirements would also provide more disaggregated fee information that is more consistent and easier to compare across firms. Fee reporting would help investors, audit committees, and other stakeholders better understand how a firm’s audit practice fits into its overall business and the incentives that may influence resource allocation within the firms. The largest registered firms would also confidentially submit financial statements to the PCAOB. These firms play an essential role in our capital markets and overall economy. Their financial stability impacts their ability to invest in resources necessary to ensure quality audits and to withstand various financial events.

2. Audit Firm Governance Information. Firms’ leadership and governance have a direct impact on their incentives and ability to provide high-quality audit services investors deserve. Tone at the top and the priorities of firms’ leadership strongly influence the level of commitment to audit quality. The proposal would require all registered firms to report additional public information regarding their leadership, legal structure, ownership, and other governance information, including information on the structures and policies that would govern a change in the form of the organization.

3. Network Information. The proposal would require a more detailed public description of firms’ network arrangements. This would provide an important window into the accountability and oversight structure the firm is subject to and to the resources the firm has available to devote to high-quality audit work.

4. Special Reporting. Currently, special reporting directly to the PCAOB covers certain events such as whether a firm is the subject of a lawsuit or regulatory action. The proposal would shorten the timeframe for special reporting from 30 days to 14 days or more promptly as warranted, making certain information available to investors, audit committees, and the PCAOB inspection and investigation staff in a timelier manner. In addition to the existing special reporting requirements, the proposal would add a new confidential special reporting requirement for events material to a firm’s organization, operations, liquidity or financial resources, or provision of audit services. These events have the potential to significantly impact audit quality and investor protection, yet they are not covered under the current standard. For example, the additional requirement might include a determination that there is substantial doubt about the firm’s ability to continue as a going concern; or a planned or anticipated acquisition of the firm, change in control, or restructuring.

5. Cybersecurity. Cybersecurity threats are among the greatest risks to many businesses in today’s world, and audit firms are particularly attractive targets. The proposal would require public reporting of a brief description of the firm’s policies and procedures, if any, to identify and manage cybersecurity risks, and confidential reporting of significant cybersecurity events to the PCAOB within five business days.

Send Us Your Comments by June 7, 2024

If adopted, these two proposals would bolster confidence in our capital markets, strengthen oversight and accountability, and empower investors and audit committees with consistent, comparable information. I encourage all our stakeholders to read the proposals and provide your perspectives.

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