PCAOB Release No. 2022-006, (Rulemaking Docket Matter No. 046)
A Firm’s System of Quality Control and Other Proposed Amendments to PCAOB Standards, Rules, and Forms
On November 18, 2022, the Public Company Accounting Oversight Board (PCAOB) proposed a new quality control standard, together with other amendments to PCAOB standards, rules, and forms that the PCAOB believes would, if adopted, lead registered public accounting firms to significantly improve their quality control (QC) systems. The PCAOB is requesting public comment on the proposal by February 1, 2023.
The proposal would:
1. Supersede current PCAOB quality control standards with an integrated, risk-based standard, QC 1000, A Firm’s System of Quality Control, that would apply to all registered public accounting firms;
2. Create reporting requirements on quality control matters and a new, non-public reporting form, Form QC;
3. Expand the auditor’s responsibility to respond to deficiencies on completed engagements under an amended and retitled AS 2901, Responding to Engagement Deficiencies After Issuance of the Audit Report, and related amendments to their attestation standards for broker-dealer engagements;
4. Supersede the PCAOB’s existing standard ET 102 with a new standard, EI 1000, Integrity and Objectivity, to better align their ethics requirements with the scope, approach, and terminology of QC 1000; and
5. Make additional changes to PCAOB standards, rules, and forms.
The PCAOB believes their QC standards could be improved, thereby leading firms to improve their QC systems and ultimately better comply with applicable requirements, by:
- Expressly requiring a risk-based approach to QC, including well-defined quality objectives and a systematic effort to identify and proactively manage risks to the firm’s achieving those objectives;
- Emphasizing firm governance, the “tone at the top,” and individual accountability;
- Providing more direction regarding monitoring activities and remediation of identified deficiencies to encourage an ongoing feedback loop that drives continuous improvement;
- Addressing changes in the audit practice environment, including the increasing participation of other firms and other outside resources, the role of firm networks, the evolving use of technology and other resources, and the increasing importance of internal and external firm communications;
- Providing for a rigorous annual evaluation of a firm’s QC system;
- Introducing annual QC reporting to the PCAOB to underscore the importance of the annual evaluation of the QC system and support PCAOB oversight; and
- Requiring enhanced communication to the audit committee.
The PCAOB also believes that their QC standard should be sufficiently principles-based and scalable that firms could pursue an approach to QC that is appropriate in light of their specific circumstances.
Proposed QC 1000 has eight basic components, consisting of:
Two process components
1. The firm’s risk assessment process
2. The monitoring and remediation process
Six components that address aspects of the firm’s organization and operations
1. Governance and leadership
2. Ethics and independence
3. Acceptance and continuance of client relationships and specific engagements
4. Engagement performance
6. Information and communication
The proposed standard also includes requirements regarding individual roles and responsibilities in the QC system, a requirement to evaluate the effectiveness of the QC system annually and report on the results of that evaluation to the PCAOB and to the audit committee (or equivalent) of each issuer and broker-dealer audit client, and documentation requirements.
Under the proposal, all registered firms would be required to design a QC system that meets the requirements of QC 1000.
The PCAOB states that the structure they are proposing for QC 1000 is similar to the structure of International Standard on Quality Management 1, Quality Management for Firms that Perform Audits or Reviews of Financial Statements, or Other Assurance or Related Services Engagements (“ISQM 1”), adopted by the International Auditing and Assurance Standards Board (“IAASB”), and the Statement on Quality Management Standards No. 1, A Firm’s System of Quality Management (“SQMS 1”), adopted by the AICPA.
Effective Date: The PCAOB is considering an effective date of December 15 of the year after approval by the SEC, with the first evaluation of the QC system to be made as of the following November 30. The PCAOB also believes that firms should be permitted to elect to comply with the requirements of QC 1000, except reporting to the PCAOB on the annual evaluation of the QC system, before the effective date, at any point after SEC approval of the final standard.
Public Comments: Interested persons may submit written comments to the PCAOB’s Board. Comments should be sent by e-mail to firstname.lastname@example.org or through the Board’s website at pcaobus.org. Comments also may be sent to the Office of the Secretary, PCAOB, 1666 K Street, NW, Washington, DC 20006-2803. All comments should refer to PCAOB Rulemaking Docket Matter No. 046 in the subject or reference line and should be received by the Board no later than February 1, 2023.
The full text of the proposal can be found at: https://pcaob-assets.azureedge.net/pcaob-dev/docs/defaultsource/rulemaking/docket046/2022-006-qc.pdf?sfvrsn=b89546e2_2