SEC approves PCAOB quality control standard
September 9, 2024
The Securities and Exchange Commission today approved the Public Company Accounting Oversight Board's new quality control standard.
QC 1000, A Firm's System of Quality Control, will require all registered public accounting firms to identify specific risks to their practice and design a quality control system that can safeguard against those risks. The standard will require an annual evaluation of firms' QC systems and reporting to the PCAOB.
Firms that issue audit reports for more than 100 issuers per year will be required to establish an external quality control function consisting of one or more persons who can exercise independent judgment related to the firm's QC system.
"When a firm's QC system operates effectively, quality audits follow. And when QC systems operate ineffectively, investors are put at risk," PCAOB chair Erica Williams said in a statement. "Our new QC standard takes an integrated, risk-based approach that can be applied by firms of varying sizes and complexity. When put into practice, it will improve investor protection."
The current PCAOB quality control standards were developed nearly 30 years ago by the American Institute of CPAs. Following the accounting fraud scandals of the early 2000s, the Sarbanes-Oxley Act of 2002 established the PCAOB as an independent watchdog for auditors with the expectation of the Board proposing more appropriate standards moving forward.
"The auditing profession has changed in the 21st century, and the Amendments we are considering today are long overdue," SEC chair Gary Gensler said in a statement. "To put in context how important it is to update the quality control standards, the PCAOB found that 46% — nearly half — of the auditing engagements it reviewed in 2023 fell short of obtaining sufficient appropriate audit evidence."
"I am pleased to approve this standard because it will improve the quality control systems of auditors, and thus better protect investors," Gensler added. "Without high-quality audits, investors won't receive complete and truthful financial disclosures. Without strong quality control systems, auditors can't consistently conduct high-quality audits."
SEC commissioner Mark Uyeda opposed the updated standard, calling into question the SEC's effective oversight of the PCAOB in light of its process for approving this QC standard.
"'Fast and furious' might be a good theme for summer movies, but not for agency rulemaking. To be clear, my concern is not about whether there should be strong quality control requirements; there should be. The question is when," Uyeda said in a statement. "Having quality controls when there are no engagements provides little benefits. Because of the unnecessary costs and paternalistic approach of the updated QC standard's design-only requirement, as well as my concerns with the process, I do not support today's action, which I find arbitrary and capricious."
Commissioners Caroline Crenshaw and Jaime Lizárraga endorsed today's action.
"Investors should be confident that audit firms have robust quality control systems in place. These systems are designed to facilitate consistent, reliable, and informative audit reports. The QC Amendments that the Board adopted provide that floor," Crenshaw said in a statement.
"Because the amendments will help audit firms design, implement, and operate more effective QC systems, and potentially contribute to improved compliance with professional audit standards, I am pleased to support the staff's recommendation," Lizárraga said in a statement.
[Accounting Today]
