Notice2024-28142
Public Company Accounting Oversight Board; Notice of Filing of Proposed Rules on Firm and Engagement Metrics and Related Amendments to PCAOB Standards
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Published
December 11, 2024
Issuing agencies
Securities and Exchange Commission
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<title>Federal Register, Volume 89 Issue 238 (Wednesday, December 11, 2024)</title>
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[Federal Register Volume 89, Number 238 (Wednesday, December 11, 2024)]
[Notices]
[Pages 99968-100090]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-28142]
[[Page 99967]]
Vol. 89
Wednesday,
No. 238
December 11, 2024
Part II
Securities and Exchange Commission
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Public Company Accounting Oversight Board; Notice of Filing of Proposed
Rules on Firm and Engagement Metrics and Related Amendments to PCAOB
Standards; Notice
Federal Register / Vol. 89 , No. 238 / Wednesday, December 11, 2024 /
Notices
[[Page 99968]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101724; File No. PCAOB-2024-06]
Public Company Accounting Oversight Board; Notice of Filing of
Proposed Rules on Firm and Engagement Metrics and Related Amendments to
PCAOB Standards
November 25, 2024.
Pursuant to Section 107(b) of the Sarbanes-Oxley Act of 2002 (the
``Act''), notice is hereby given that on November 22, 2024, the Public
Company Accounting Oversight Board (the ``Board'' or the ``PCAOB'')
filed with the Securities and Exchange Commission (the ``Commission'')
the proposed rules described in items I and II below, which items have
been prepared by the Board. The Commission is publishing this notice to
solicit comments on the proposed rules from interested persons.
I. Board's Statement of the Terms of Substance of the Proposed Rules
On November 21, 2024, the Board adopted Firm and Engagement Metrics
and related amendments to its rules and forms (collectively, the
``proposed rules''). The text of the proposed rules appears in Exhibit
A to the SEC Filing Form 19b-4 and is available on the Boards website
at <a href="https://pcaobus.org/about/rules-rulemaking/rulemaking-dockets/docket-041">https://pcaobus.org/about/rules-rulemaking/rulemaking-dockets/docket-041</a>, and at the Commission's Public Reference Room.
II. Board's Statement of the Purpose of, and Statutory Basis for, the
Proposed Rules
In its filing with the Commission, the Board included statements
concerning the purpose of, and basis for, the proposed rules and
discussed any comments it received on the proposed rules. The text of
these statements may be examined at the places specified in Item IV
below. The Board has prepared summaries, set forth in sections A, B,
and C below, of the most significant aspects of such statements. In
addition, the Board is requesting that the Commission approve the
proposed rules, pursuant to Section 103(a)(3)(C) of the Sarbanes-Oxley
Act, for application to audits of emerging growth companies (``EGCs''),
as that term is defined in Section 3(a)(80) of the Securities Exchange
Act of 1934 (``Exchange Act''). The Board's request is set forth in
section D.
A. Board's Statement of the Purpose of, and Statutory Basis for, the
Proposed Rules
(a) Purpose
The Board has adopted a set of firm- and engagement-level metrics
(the ``final rules'' or ``final metrics'') that certain registered
public accounting firms (``firms'' or ``audit firms'') will be required
to publicly report relating to their audit practices and the audits
they lead. The Board believes these metrics will provide valuable
additional information, context, and perspective on auditors and audit
engagements, which can be used by investors, audit committees, and
other stakeholders, and which will further the Board's oversight
activities. The Board believes this will advance investor protection
and promote the public interest by enabling stakeholders to make
better-informed decisions, promoting auditor accountability, and
ultimately enhancing capital allocation and confidence in our capital
markets. The new reporting requirements will apply to firms that audit
at least one company that is an ``accelerated filer'' or ``large
accelerated filer'' (as those terms are defined in SEC rules).\1\
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\1\ vSee 17 CFR 240.12b-2 (``Rule 12b-2'').
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Lack of Consistent, Comparable Data About Audits and Auditors
Investors and audit committees cannot easily observe the services
performed by auditors. This can limit investors' ability to make
informed decisions about investing their capital, ratifying the
selection of auditors, and voting for members of the board of
directors, including directors who serve on the audit committee, and
audit committees' ability to choose among and monitor the performance
of auditors. At the same time, there is a lack of incentive for firms,
acting on their own or collectively, to provide accurate, standardized,
and decision-relevant information about their firms and the engagements
they perform. In response to these challenges, the Board has studied
ways to measure audit firm and audit engagement performance, primarily
with a view to providing information useful to investors in their
investment and proxy voting decisions, but also recognizing that
metrics could potentially be informative to other stakeholders. In
addition, the Board itself would benefit from having additional tools
to use in its oversight activities, including its inspections program,
standard-setting initiatives, and research activities.
The Board has observed that many of the firms that issue audit
reports for more than 100 issuers annually and audit companies that
account for the majority of U.S. public company market capitalization
already publicly disclose certain firm-level metrics through audit
quality reports, transparency reports, or similar documents. However,
these disclosures generally do not contain engagement-level
information, which investors have indicated would be the most useful to
them, and are inconsistent across firms and year to year, with no
common definitions or calculations that would allow for meaningful
comparisons. Moreover, most of the disclosures are voluntary, so firms
are free to revise or discontinue such reporting at any time.
In the Board's view, the current voluntary reporting regime cannot
provide consistent, comparable information that stakeholders can rely
on to inform their decisions over time. And it would appear that firms'
attempts at voluntary reporting have not, in fact, satisfactorily
addressed investor desire for additional information about audits and
auditors. On the contrary, support from investors and investor-related
groups for this rulemaking initiative has been consistent throughout
its history, even as the practice of firm voluntary reporting has
evolved and spread.
Metrics at Firm and Engagement Level
The final rules require reporting of metrics at both the firm and
the engagement levels. Firm-level metrics relate to aspects of the
firm's audit practice (e.g., average experience at a public accounting
firm of the firm's partners) and engagement-level metrics relate to
individual audit engagements (e.g., experience at a public accounting
firm of the engagement partner and the engagement quality reviewer
(``EQR'') and average experience of certain other engagement team
members). The Board is requiring firm-level metrics because it believes
information relevant to the firm will be beneficial in providing
context for engagement-level metrics and in evaluating the firm's audit
practice and its related system of quality control. The Board is
requiring engagement-level metrics because it believes that information
will be useful in gaining a richer understanding of a particular audit
and because investors have stressed the importance to them of
engagement-level information to assist them in evaluating the
performance of the auditor and the audit committee. Most metrics will
be reported at both firm- and engagement-level. However, the final
rules require reporting at only
[[Page 99969]]
the firm level in cases where the Board believes engagement-level data
would not be meaningful or would be disproportionally challenging to
collect in relation to the incremental benefit.
Final Metrics
The Board adopted metrics in the following eight areas:
Partner and Manager Involvement. Hours worked by senior
professionals relative to more junior staff across the firm's large
accelerated and accelerated filer engagements and on the specific
engagement.
Workload. Average weekly hours worked on a quarterly basis by
senior professionals who incurred hours on large accelerated and
accelerated filer engagements, including time attributable to
engagements, administrative duties, and all other matters, both firm-
wide and on the core engagement team.
Training Hours for Audit Personnel. Average annual training hours
for partners, managers, and staff of the firm, combined, both firm-wide
and on the core engagement team.
Experience of Audit Personnel. Average number of years worked at a
public accounting firm (whether or not PCAOB-registered) by senior
professionals across the firm and on the engagement.
Industry Experience. Average years of career experience of senior
professionals in key industries audited by the firm at the firm level
and the audited company's primary industry at the engagement level.
Retention of Audit Personnel (firm-level only). Continuity of
senior professionals (through departures, reassignments, etc.) across
the firm.
Allocation of Audit Hours. Percentage of hours incurred prior to
and following an issuer's year end across the firm's large accelerated
and accelerated filer engagements and on the specific engagement.
Restatement History (firm-level only). Restatements of financial
statements and management reports on internal control over financial
reporting (``ICFR'') that were audited by the firm over the past three
years.
Firms are permitted, but not required, to accompany the metrics
with narrative disclosure to provide additional context.
The final suite of metrics focuses primarily on information about
audit personnel. The Board believes these metrics will provide new
insights into how engagements are staffed, including the extent of
involvement of senior personnel; auditors' overall workload; retention
of personnel across the firm; and levels of training, audit experience,
and industry-specific expertise. The final metrics will also provide
information about the extent of audit work completed prior to the
issuer's year-end, an aspect of the audit process that the Board
believes is associated with improved audit outcomes, and about the
firm's history of restatements, a key measure of audit outcomes.
This new information will allow users to draw inferences about
audits and audit forms that are not possible today. Some may relate to
specific metrics. For example, a heavy workload for a particular
engagement team relative to the firm average or compared to peer firms
may raise questions about the quality of the work performed.
Conversely, a relatively high level of industry experience,
particularly for an engagement in an industry that benefits from
specific accounting and auditing expertise, would be a positive signal.
Other inferences may relate to combinations of metrics. For example,
the personnel-related metrics, taken together, give an overall sense of
how an engagement is staffed that can be compared to firm averages and
to engagements for similar issuers. It is possible that the precise
numerical values of metrics may be important in some cases but, in
general, the Board believes the metrics will be more useful to convey a
sense of whether a particular engagement or firm appears fairly typical
or is an outlier in one or more respects. This should provide a richer
context for understanding the work of the auditor than the current
environment of almost no publicly available information.
The Board also believes that gathering data and calculating the
final metrics, given the subjects they address, will not be overly
costly, time-consuming, or burdensome. Based on the Board's oversight
activities, it appears that the largest firms are already tracking data
in many of these areas. Many of the metrics are based on data that
firms already track or will be required to track for purposes of other
PCAOB requirements. For example, Partner and Manager Involvement and
Allocation of Audit Hours are based on the same time reporting required
for Form AP purposes. Training hours will reflect the same information
that firms track to ensure proper licensing of their personnel.
Restatement data, to the extent firms are not already tracking it, is
required to be tracked under QC 1000. In addition to required data,
many firms track the experience of their personnel, as well as industry
experience, for use in marketing materials and for inclusion in
requests for proposals, and some firms already track staff retention
and turnover metrics as part of their human capital management. Firms
should be able to generate other data required by the final metrics,
such as Workload, from their existing timekeeping systems with minimal
additional effort.
Responding to Commenter Concerns
After considering commenter input, the Board has made a number of
changes from the proposal. The final rules eliminate four proposed
metrics areas (Audit Resources--Use of Specialists and Shared Service
Centers, Audit Hours and Risk Areas, Quality Performance Ratings and
Compensation, and Audit Firms' Internal Monitoring) and add one new
metric area (Training Hours for Audit Personnel). In addition, only
firm-level reporting will be required for one area (Retention of Audit
Personnel) that was proposed to be reported at both the firm and
engagement level. The Board has also made revisions to simplify and
clarify some of the other metrics and exempted firms with a small
issuer practice from reporting on their industry experience. In
addition, the Board has expanded the optional narrative disclosure from
500 to 1,000 characters and has provided additional direction that the
narrative should be concise and focused on the reported metrics, with a
view to facilitating the reader's understanding of the metrics. The
Board believes that these changes will address commenter concerns about
challenges of data collection, potential sensitivity of data, and
potential ambiguity of the metrics, and that the final suite of metrics
will provide consistent, comparable information on auditors and audit
engagements, giving investors, audit committees, and other stakeholders
valuable new context and perspective.
The Board considered comments questioning the value of metrics,
whether they will be used by investors and other stakeholders or would
represent only a ``check the box'' compliance exercise, and whether
they might contribute to information overload or have other negative
consequences. Based on the other stakeholder input received, the Board
does not share those views. In comments provided in the Board's
rulemaking process and surveys conducted by a firm-related group,
investors and investor-related groups have repeatedly indicated that
the metrics will be useful. As one investor-related group noted:
Auditors say they want to be seen or evaluated as something
other than a commodity business evaluated based upon price. For this
to happen, auditors need to provide investors with information such
that
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they can value the work of the auditor--just as they evaluate and
value the business and the work of management.\2\
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\2\ Letter from CFA Institute, August 30, 2024, at 17.
The Board also notes that similar objections--that the new
information would not be used or would be confusing or misleading--were
raised by many of the same commenters in connection with its last two
rulemakings requiring disclosure of additional information about audits
and auditors: Form AP reporting of the name of the engagement partner
and information about other firms participating in the audit, and
auditor communication of critical audit matters (``CAMs''). In both
cases, these commenter concerns appear unsubstantiated. The Form AP
data set is now one of the most frequently visited areas of the PCAOB's
website.\3\ As for CAMs, while academic studies have shown mixed
results about the impact of CAMs, in a recent investor survey conducted
by a firm-related group, over 90% of the respondents indicated that
CAMs play an important role in their investment decision-making.\4\ In
addition, data aggregators, such as Audit Analytics, compile and make
available data on CAMs, which suggests market demand for that
information. The Board's experience therefore suggests that, contrary
to concerns about irrelevance and information overload, stakeholders
seek out additional information about auditors and audit engagements
when it is available.
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\3\ In 2023, there were over 333,000 unique searches performed
on AuditorSearch and the Form AP data set was downloaded over 2,000
times. Information related to usage statistics can be found on the
PCAOB's website (<a href="https://pcaobus.org/resources/auditorsearch">https://pcaobus.org/resources/auditorsearch</a>).
\4\ The Center for Audit (``CAQ'') Quality Critical Audit
Matters Survey (July 2024) at 9.
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Filing Requirements
Under the Board's final rules, firm-level reporting is required of
every firm that audits at least one ``accelerated filer'' or ``large
accelerated filer'' under SEC rules during the reporting period.
Engagement-level reporting will be required for every audit of an
accelerated or large accelerated filer. The thresholds will apply to
the audits, and auditors, of companies that account for the majority of
U.S. public company market capitalization, and the Board believes they
will capture the situations where investment and proxy voting decisions
will be most likely to benefit from additional information about the
audit and the auditor.
The final rules:
<bullet> Require reporting of firm-level metrics annually on a new
Form FM, Firm Metrics, pursuant to a new Rule 2203C, Firm Metrics, for
firms that issued an audit report with respect to at least one
accelerated filer or large accelerated filer during the reporting
period;
<bullet> Require reporting of engagement-level metrics for audits
of accelerated filers and large accelerated filers on a revised Form
AP, renamed ``Audit Participants and Metrics''; and
<bullet> Allow, but not require, limited narrative disclosures on
both Form FM and Form AP to provide context and explanation for the
required metrics.
Background
The final rules build on other actions the Board has taken to
provide stakeholders with additional information about registered firms
and the audits they perform, including information about firms
available through its registration and reporting forms, information
about auditors and engagements on Form AP, and communication of
critical audit matters and auditor tenure in the auditor's report. The
Board concurrently adopted other changes to firm reporting
requirements.\5\ The Board believes the final rules will complement
these efforts by providing investors, audit committees, and other
stakeholders with additional information in a consistent format and
compiled with sufficient rigor to assist them in making decisions. For
example, the metrics could inform investors' decision-making regarding
whether to ratify the audit committee's selection of an auditor or to
vote for members of the board of directors, including directors who
serve on the audit committee, as well as potentially assisting in audit
committee oversight, supporting continuous improvement of firms'
quality control systems, and facilitating the Board's own oversight and
rulemaking efforts. The Board further believes that the value of these
metrics will likely increase over time as firm reporting practices
develop and trends become observable.
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\5\ See Firm Reporting, PCAOB Rel. No. 2024-013 (Nov. 21, 2024)
(adopting amendments to reporting requirements for Form 2, Annual
Report Form, and Form 3, Special Reporting Form).
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As in its proposal, the Board uses the term ``firm and engagement
metrics'' rather than ``audit quality indicators'' (``AQIs'') to
describe the metrics that it adopted. The Board believes this avoids
the potential misimpression that any set of metrics can comprehensively
measure audit quality and emphasizes the Board's goal of promoting
informed decision-making through robust disclosure requirements. Some
commenters were critical of that change in terminology, suggesting that
it evidenced that the Board is no longer focused on audit quality. It
is simply a clarification. Because some of the most important elements
of a high-quality audit, such as application of due care and
professional skepticism, cannot be measured and quantified directly,
the metrics employ proxies, such as years of experience, auditor
workloads, and percentage of audit hours attributable to more senior
members of the engagement team, which can only partially capture these
concepts. Even though these proxies cannot provide a complete picture
of audit quality, the Board believes they will nevertheless convey
important information about auditors and the engagements they lead that
stakeholders will find relevant and useful. The Board believes that
consideration of the metrics in combination, together with any
additional context a firm may choose to provide, will help users
interpret the data, and that the metrics, analyzed across firms and
over time, will yield important, currently unavailable information that
will assist investors, audit committees, and other stakeholders in
their decision-making, oversight, and evaluation related to audits.
The Board developed the proposal after considering input from
numerous sources, including the recommendations of the U.S. Department
of Treasury's Advisory Committee on the Auditing Profession (``ACAP''),
including the October 6, 2008 Final Report of the Advisory Committee on
the Auditing Profession to the U.S. Department of the Treasury (``ACAP
Final Report''); the Concept Release on Audit Quality Indicators, PCAOB
Rel. No. 2015-005 (July 1, 2015) (``Concept Release''), and the
comments received; the voluntary practices of firms; recommendations
from the PCAOB's Investor Advisory Group (``IAG''); and the initiatives
of international regulators. The Board has carefully considered this
input and believes that the final amendments strike an appropriate
balance between the expected benefits of the new reporting requirements
and the associated costs of implementation and compliance.
Effective Dates
If the Commission approves the final rules and final metrics, both
firm-level and engagement-level reporting will be required for periods
beginning October 1, 2027. The Board also adopted a phased
implementation period for both
[[Page 99971]]
firm- and engagement-level reporting, where firms that issue audit
reports for more than 100 issuers will begin reporting in the first
year that reporting is required and other firms beginning one year
later.
(b) Statutory Basis
The statutory basis for the proposed rules is Title I of the Act.
B. Board's Statement on Burden on Competition
Not applicable. The Board's consideration of the economic impacts
of the proposed rules is discussed in section D below.
C. Board's Statement on Comments on the Proposed Rules Received From
Members, Participants or Others
The Board released the proposed rules for public comment in PCAOB
Release No. 2024-002 on April 9, 2024. Previously, the Board issued a
concept release for public comment in PCAOB Release No. 2015-055 on
July 1, 2015. The Board received over 45 comment letters in response to
the proposing release and 50 letters in response to the concept
release. See Exhibits 2(a)(B) and 2(a)(C). The Board has carefully
considered all comments received. The Board's response to the comments
it received and the changes made to the rules in response to the
comments received are discussed below.
Background
Project History
1. Importance and Potential Benefits of Increased Information About
Audit Firms and Engagements
With the passage of the Sarbanes-Oxley Act of 2002 (``Sarbanes-
Oxley'') and the establishment of the PCAOB, Congress acknowledged and
re-emphasized the auditor's important gatekeeping role.\6\ Reflecting
that importance, the Board believes requiring audit firms to provide
additional information about the firm and the engagements it performs
will advance investor protection and promote the public interest by
enabling investors to make better-informed decisions. As discussed in
more detail below, the Board has also heard from investors and other
stakeholders that they believe such information will be beneficial.
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\6\ See Section 101(a) of Sarbanes-Oxley, 15 U.S.C. 7211(a);
Senate Report No. 107-205, at 5-6 (July 3, 2002).
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Sarbanes-Oxley also mandated new exchange requirements regarding
the responsibilities of audit committees of listed companies, including
requiring that audit committees be charged with responsibility for the
appointment, compensation, and oversight of the auditor.\7\ The Board
believes that making information available to audit committees
regarding both the specific audit and auditor they oversee and the
audits and auditors of their peer companies will assist them in
carrying out this statutory mandate.
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\7\ See Securities Exchange Act of 1934, Section 10A(m)(2), 15
U.S.C. 78j-1(m)(2).
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Over the years, the Board has received significant input on the
importance and potential benefits to stakeholders of additional
information about audits and auditors. The key elements of that input
are summarized below.
i. ACAP Recommendations
In 2007, the U.S. Treasury constituted the ACAP to consider and
develop recommendations relating to the sustainability of the auditing
profession.\8\ On October 6, 2008, ACAP published a report detailing
recommendations intended to enhance the sustainability of a strong and
vibrant public company auditing profession.\9\ One of the ACAP
recommendations was that the PCAOB, in consultation with auditors,
investors, public companies, audit committees, boards of directors,
academics, and others, ``determine the feasibility of developing key
indicators of audit quality and effectiveness and requiring auditing
firms to publicly disclose those indicators'' \10\ and, assuming that
development and disclosure of indicators of audit quality are feasible,
that the PCAOB be required to monitor these indicators.
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\8\ See ACAP Final Report, at IV:1.
\9\ See ACAP's Fact Sheet: Final Report of the Advisory
Committee on the Auditing Profession, available at https://
home.treasury.gov/news/press-releases/
hp1158#:~:text=The%20U.S.%20Treasury%20Department%20%27s%20Advisory%2
0Committee%20on,into%20three%20sections%20by%20principal%20areas%20of
%20focus.
\10\ See ACAP Final Report, at VIII:14.
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ii. 2013 and 2017 PCAOB Investor Advisory Group Recommendations
At its October 2013 IAG Meeting,\11\ the IAG working group on AQIs
made recommendations for the PCAOB to prescribe informative, forward-
looking disclosures and indicators intended to measure the quality of
audits and enhance auditor accountability. They emphasized that
investors and audit committees generally care more about the quality
and credibility of audit work on specific engagements--the companies in
which they have invested or were considering investing, or the company
on whose board of directors they served--rather than firms' more
general efforts to improve quality. Accordingly, in addition to
disclosures and metrics to be reported at the firm level, they also
recommended disclosures and metrics to be reported at the engagement
level.
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\11\ See Oct. 2013 IAG meeting and presentations, Report from
the Working Group: Audit Quality Indicators, available at IAG
Meeting Archive, <a href="https://pcaobus.org/news-events/events/event-details/pcaob-investor-advisory-group-meeting_758">https://pcaobus.org/news-events/events/event-details/pcaob-investor-advisory-group-meeting_758</a>.
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At the October 2017 IAG meeting, an IAG working group discussed
three topics: (i) why audit quality and AQIs matter to investors, (ii)
the PCAOB's authority and efforts to date to enact AQIs, and (iii)
audit quality initiatives in other jurisdictions.\12\ The 2017 working
group also endorsed the 2013 AQI working group's recommendations.
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\12\ See Oct. 2017 IAG meeting and presentation, available at
IAG Meeting Archive, <a href="https://pcaobus.org/news-events/events/event-details/pcaob-investor-advisory-group-meeting_1085">https://pcaobus.org/news-events/events/event-details/pcaob-investor-advisory-group-meeting_1085</a>.
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The recommendations provided by the 2013 and 2017 IAG working
groups are reflected in many of the metrics the Board adopted.
2. PCAOB Initiatives
This section provides further background and expands on the history
of PCAOB activities related to providing additional information about
audit firms and audits, including firm and engagement metrics.
i. 2015 AQI Concept Release
In July 2015, the PCAOB issued the Concept Release and sought
comment on 28 potential indicators. The indicators were organized into
three groups:
<bullet> Audit professionals--Measures dealing with the
availability, competence, and focus of those performing the audit.
<bullet> Audit process--Measures related to an audit firm's tone at
the top and leadership, incentives, independence, attention to
infrastructure, and record of monitoring and remediation.
<bullet> Audit results--Financial statements, internal control,
going concern, communications between auditors and audit committees,
and enforcement and litigation.
The Concept Release discussed (i) the nature of the potential
indicators and potential calculations, (ii) the usefulness of the
indicators, (iii) suggestions for other indicators, (iv) potential
users of the indicators, and (v) the approach to implementation. In
response to the Concept Release, the PCAOB received 50 comment letters.
Most commenters expressed support for the general idea that AQIs
may be
[[Page 99972]]
useful.\13\ However, commenter views varied widely. Comments from firms
and firm-related groups suggested that no standard group of indicators
could advance a person's understanding of audit quality. These
commenters suggested that AQIs should be voluntary, should be reported
to audit committees through two-way discussions to provide context for
the indicators, or should be required only at the firm level. Investors
and investor-related groups recommended that indicators should be made
public as they could be used to stimulate competition based on quality
among audit firms, remedy the deficiency of information about audits,
and give shareholders meaningful information to help them in voting on
auditor selection. Some commenters suggested that engagement-level
metrics are more useful than firm-level metrics. One commenter
suggested that promoting competition around an implied variability in
audit quality may not always be appropriate and in the public interest
because audit quality should be nonnegotiable and a fundamental goal
for all audits. Another commenter suggested that it was critical to
define what AQIs do and do not represent so that they are used
appropriately.
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\13\ See Nov. 2015 Standing Advisory Group (SAG) Briefing Paper
available at SAG Meeting Archive, <a href="https://pcaobus.org/news-events/events/event-details/standing-advisory-group-meeting_910">https://pcaobus.org/news-events/events/event-details/standing-advisory-group-meeting_910</a>.
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ii. PCAOB Rulemakings To Increase Audit Transparency: Identification of
the Engagement Partner and Other Audit Participants on Form AP and
Auditor Communication of Critical Audit Matters
In 2015, the PCAOB adopted rules requiring information on Form AP,
Auditor Reporting of Certain Audit Participants, regarding the
engagement partner and other accounting firms that participate in
audits of issuers.\14\ The rulemaking was initially in response to the
ACAP recommendation that the engagement partner should be required to
sign the audit report.\15\ As the rulemaking evolved, it also took
account of stakeholder input, including IAG recommendations to identify
the engagement partner and the firms, other than the firm signing the
audit report, that participate in audits.
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\14\ See PCAOB Rule 3211.
\15\ See ACAP Final Report, at VII:19.
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The Board's intention was to make available information about the
engagement partner and other firms that participated in the audit,
saying that such information, even if not useful in every instance or
meaningful to every investor, would make an overall contribution to the
information available to investors in making voting and investment
decisions. The Board also asserted that increased transparency should
promote increased accountability in the audit process. The Form AP
reporting requirements became effective in 2017, and the data gathered
via Form AP has many users; the Form AP data set is frequently searched
through AuditorSearch, the PCAOB's online search tool, as well as
downloaded by users performing more detailed analyses.\16\
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\16\ See below.
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In 2017, the PCAOB adopted AS 3101, The Auditor's Report on an
Audit of Financial Statements When the Auditor Expresses an Unqualified
Opinion, which includes requirements regarding the disclosure of
auditor tenure and auditor determination and communication of
``critical audit matters.'' \17\ This project was also initiated in
response to ACAP's recommendation that the PCAOB undertake a standard-
setting initiative to consider improvements to the auditor's standard
reporting model.\18\ The rulemaking explored potential ways to increase
the transparency and relevance of the auditor's report, including by
requiring expanded auditor reporting regarding the audit and the
company's financial statements.\19\ In the adopting release, the Board
noted ACAP's statement that the complexity of financial reporting
supports improving the content of the auditor's report beyond the then-
current pass/fail model to include a more relevant discussion about the
audit of the financial statements.
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\17\ See AS 3101.11-.16.
\18\ See ACAP Final Report, at VII:13.
\19\ See Concept Release on Possible Revisions to PCAOB
Standards Related to Reports on Audited Financial Statements and
Related Amendments to PCAOB Standards; Notice of Roundtable (June.
21, 2011), available at <a href="https://pcaobus.org/news-events/news-releases/news-release-detail/pcaob-issues-concept-release-on-auditor">https://pcaobus.org/news-events/news-releases/news-release-detail/pcaob-issues-concept-release-on-auditor</a>'s-reporting-model_337.
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After multiple rounds of Board releases and stakeholder input, the
requirements took effect in 2019 and 2020.
iii. Recent PCAOB Standard-Setting and Rulemaking Activities
At the November 2022 Standards and Emerging Issues Advisory Group
(SEIAG) and the October 2022 and 2023 IAG meetings, several members
continued to urge the Board to take action on firm and engagement
metrics. Other members stated that some firms already publish similar
metrics through transparency reports and audit quality reports. Some
members of the IAG and SEIAG have requested increased information at
the firm and engagement levels through easily accessible and quantified
metrics, potentially with accompanying context provided by the
auditors.\20\
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\20\ See Nov. 2022 SEIAG meeting, available at <a href="https://pcaobus.org/news-events/events/event-details/pcaob-standards-and-emerging-issues-advisory-group-meeting-2022">https://pcaobus.org/news-events/events/event-details/pcaob-standards-and-emerging-issues-advisory-group-meeting-2022</a>. See Oct. 2022 IAG
meeting, available at <a href="https://pcaobus.org/news-events/events/event-details/pcaob-investor-advisory-group-meeting">https://pcaobus.org/news-events/events/event-details/pcaob-investor-advisory-group-meeting</a> and Oct. 2023 IAG
meeting, available at <a href="https://pcaobus.org/news-events/events/event-details/pcaob-investor-advisory-group-meeting">https://pcaobus.org/news-events/events/event-details/pcaob-investor-advisory-group-meeting</a>-october-2023.
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In response to the Board's request for comment on the draft 2022-
2026 Strategic Plan, some commenters encouraged the Board to continue
to consider this topic.\21\ Additionally, in a January 2023 comment
letter on the PCAOB's proposed quality control standard, members of the
IAG advocated for ``a minimum requirement of eight indicators.'' \22\
These eight indicators were (i) staffing leverage; (ii) partner
workload; (iii) manager and staff workload; (iv) audit hours and risk
areas; (v) quality ratings and compensation; (vi) audit fees, effort,
and client risk; (vii) audit firm's internal quality review results;
and (viii) PCAOB inspection results.
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\21\ See comments on 2022-2026 Strategic Plan Documents,
available at <a href="https://pcaobus.org/about/strategic-plan-budget/comments-on-pcaob-draft-strategic-plan-2022-2026">https://pcaobus.org/about/strategic-plan-budget/comments-on-pcaob-draft-strategic-plan-2022-2026</a>.
\22\ See A Firm's System of Quality Control and Other Proposed
Amendments to PCAOB Standards, Rules, and Forms, PCAOB Rel. No.
2022-006 (Nov. 18, 2022). The comment letters received in response
to the proposal are available on the Board's website in Docket 046.
See comment letter from members of the IAG, available at <a href="https://assets.pcaobus.org/pcaob-dev/docs/defaultsource/rulemaking/docket046/4_iag.pdf?sfvrsn=1941e7c0_4">https://assets.pcaobus.org/pcaob-dev/docs/defaultsource/rulemaking/docket046/4_iag.pdf?sfvrsn=1941e7c0_4</a>.
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a. QC 1000: Requirements
The Board adopted a new quality control standard for firms, QC
1000, A Firm's System of Quality Control (``QC 1000''),\23\ which
contains provisions that are relevant to firm reporting of firm- and
engagement-level metrics. QC 1000 will become effective in December
2025.
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\23\ See A Firm's System of Quality Control and Other Amendments
to PCAOB Standards, Rules, and Forms, PCAOB Rel. No. 2024-005 (May
13, 2024) (``QC Adopting Release'').
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(1) Public Communication of Firm-Level or Engagement-Level Information
QC 1000 includes a quality objective that, if a firm communicates
firm-level or engagement-level information with respect to the firm's
audit practice, firm personnel, or engagements, such as firm or
engagement metrics, to external parties, such information is accurate
and not misleading and, with respect to any such metrics that are
communicated
[[Page 99973]]
in writing, the communication explains in reasonable detail how the
metrics were determined and, if applicable, how the method of
determining them changed since the metrics were last communicated.\24\
(With respect to metrics reported on Form FM and Form AP, the form
itself provides the required explanation.) The final firm and
engagement metrics include reporting elements that focus on the firm's
responsibility to produce and report information that is accurate and
not misleading, for example, an optional narrative to accompany the
metrics. This element is discussed further below.
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\24\ QC 1000.53e.
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(2) Use of Metrics in Monitoring the Firm's QC System
Under QC 1000, in determining the nature, timing, and extent of QC
system-level monitoring activities, the firm is required to take into
account any metrics that the firm may use in its QC system.\25\ QC 1000
does not require the use of any specific metrics; firms have the
ability both to develop metrics on their own and to use any or all of
the metrics required to be reported under Rule 2203C and Rule 3211 in
their QC system, but that is not required. The Board believes these
metrics would provide information that could be used in the firm's
system of quality control. However, not all firms may find all metrics
useful in operating or monitoring their QC system, and the Board is not
mandating their use in connection with monitoring a firm's QC system at
this time.
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\25\ QC 1000.65c.
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b. Firm Reporting
Concurrently with this rulemaking, the Board adopted certain
updates to its annual and special reporting requirements to facilitate
the disclosure of more complete, standardized, and timely information
regarding audit firms. Among other new requirements, the updates will
(i) require firms to disclose additional information on Form 2 about
their fees, leadership and governance structure, and network
arrangements; (ii) require, in connection with QC 1000, a one-time
update to the statement on a firm's quality control policies and
procedures on a new Form QCPP; and (iii) expand the scope of special
reporting to include events that pose a material risk, or represent a
material change, to the firm's organization, operations, liquidity or
financial resources, in such a manner that it will affect the provision
of audit services, as well as new cybersecurity reporting
requirements.\26\
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\26\ See PCAOB Rel. No. 2024-013.
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c. Proposed Firm and Engagement Metrics
In April 2024, the Board proposed amendments to the PCAOB's rules
and reporting forms to require the reporting of specified firm-level
metrics on new Form FM, Firm Metrics, and specified engagement-level
metrics on an amended and renamed Form AP, Audit Participants and
Metrics. In the Board's proposal, it proposed a set of firm-level and
engagement-level metrics across 11 areas to be publicly reported for
the firms that serve as lead auditor for at least one accelerated filer
or large accelerated filer.
The Board received over 45 comment letters on the proposal.\27\
Commenters included investor-related groups, firms, firm-related
groups, academics, and others.
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\27\ The comment letters received on the proposal are available
at <a href="https://pcaobus.org/about/rules-rulemaking/rulemaking-dockets/docket-041/comment-letters">https://pcaobus.org/about/rules-rulemaking/rulemaking-dockets/docket-041/comment-letters</a>.
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Some commenters expressed concerns about the speed of rulemaking by
the Board. Some commenters asked the PCAOB for more than 60 days to
respond to the proposal, citing overlapping comment proposal periods,
the duration of comment periods, the length and complexity of various
proposals, and overlapping SEC 19b-4 filing comment periods. On the
other hand, a commenter urged the Board not to delay this rulemaking
because investors need a relatively standardized data set to analyze
and compare over time and across companies. The Board believes that 60
days was a sufficient period for commenting on the proposal. Despite
that, the Board considered comment letters that were submitted after
the 60-day period closed. The Board received robust comments on the
proposal, which informed the final metrics or final rules.\28\ These
comments are addressed throughout this Exhibit 1 and in the Board's
adopting release (Exhibit 3).
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\28\ See also below for consideration of the 2015 AQI Concept
Release (including comments received) and the PCAOB IAG
recommendations.
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3. Overview of Existing Requirements
Under current PCAOB rules and standards, certain information about
PCAOB-registered firms is already made available to investors, audit
committees, and other stakeholders. The disclosure of firm- and
engagement-level metrics would supplement this information. This
section discusses the key PCAOB standards and rules that require
certain firm- and engagement-level information to be provided to
various stakeholders.
i. Available Information Related to Firms
PCAOB rules require firms to file Form 2 (Annual Report Form) to
report basic information about the firm and its audit practice and Form
3 (Special Reporting Form) after the occurrence of certain events.\29\
In addition, the PCAOB makes portions of inspection reports publicly
available for firms that are subject to annual or triennial PCAOB
inspections.
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\29\ PCAOB Rule 2200, Annual Report; PCAOB Rule 2201, Time for
Filing of Annual Report; PCAOB Rule 2203, Special Reports;
Instructions to Form 2, available at <a href="https://pcaobus.org/about/rules-rulemaking/rules/form_2">https://pcaobus.org/about/rules-rulemaking/rules/form_2</a>; Instructions to Form 3, available at
<a href="https://pcaobus.org/about/rules-rulemaking/rules/form_3">https://pcaobus.org/about/rules-rulemaking/rules/form_3</a>. Information
reported on Forms 2 and 3 is publicly available unless a firm
requests confidential treatment.
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a. Form 2 and Form 3
As required by Section 102(d) of Sarbanes-Oxley and PCAOB Rule
2200, each year registered firms must file an annual report with the
Board. Under PCAOB rules, firms must do so by filing Form 2. The annual
reporting period runs from April 1 to March 31, and the due date for
filing is June 30.\30\ In addition to basic identifying information
about the firm,\31\ firms report on Form 2 general information about
their audit practices and other business relationships. Information
required to be provided on Form 2 includes:
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\30\ PCAOB Rule 2201; General Instructions 3-4 to Form 2
(registered public accounting firm that has its application for
registration approved by the Board in the period between and
including April 1 and June 30 of any year not required to file an
annual report in that year).
\31\ Instructions to Form 2, Item 1.1.
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<bullet> Whether the firm issued audit reports for issuers,
brokers, or dealers or played a substantial role in issuer or broker-
dealer audits; \32\
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\32\ Id., Item 3.1. The Board's release uses the terms
``issuer,'' ``broker,'' and ``dealer'' as those terms are defined
under Sections 2(a)(7) and 110(3)-(4) of Sarbanes-Oxley. 15 U.S.C.
7201(a)(7), 7220(3)-(4). See also paragraphs (b)(iii), (d)(iii), and
(i)(iii) of PCAOB Rule 1001, Definitions of Terms Employed in Rules.
Entities that are brokers or dealers or both are sometimes referred
to as ``broker-dealers.''
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<bullet> Percentage of total fees billed to issuers for audit
services, other accounting services, tax services, and non-audit
services; \33\
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\33\ Instructions to Form 2, Item 3.2.
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<bullet> For each issuer or broker-dealer for which the firm issued
an audit report, the issuer's or broker-dealer's name, its Central
Index Key (CIK) number and Central Registration Depository (CRD) number
(if any), and the date of the audit report, as well as the total number
[[Page 99974]]
of firm personnel who exercised authority to sign the firm's name to an
audit report for an issuer or broker-dealer during the reporting
period; \34\
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\34\ Id., Items 4.1, 4.3.
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<bullet> Physical address (and, if different, mailing address) of
each firm office; \35\
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\35\ Id., Item 5.1.
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<bullet> Whether the firm has any memberships, affiliations, or
similar arrangements involving certain activities related to audit or
accounting services (including use of name in connection with audit
services, marketing of audit services, and employment or lease of
personnel to perform audit services), and the entities with which the
firm has those relationships; \36\
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\36\ Id., Item 5.2.
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<bullet> Total number of accountants, certified public accountants,
and personnel; \37\
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\37\ Id., Item 6.1.
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<bullet> Relationships with certain individuals and entities with
disciplinary or other histories (if not previously identified); \38\
and
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\38\ Id., Items 7.1, 7.2.
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<bullet> Acquisitions of another public accounting firm or a
substantial portion of another firm's personnel.\39\
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\39\ Id., Item 8.1
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In addition to annual reporting on Form 2, firms are required to
file Form 3 within 30 days after the occurrence of certain events, such
as when the firm's legal name has changed while otherwise remaining the
same legal entity, the firm has withdrawn an audit report on the
financial statements of an issuer or has resigned, declined to stand
for re-appointment, or been dismissed from an audit engagement as
principal auditor, and the issuer has failed to comply with applicable
Form 8-K reporting requirements for such events.\40\
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\40\ General Instruction 3 to Form 3; Instructions to Form 3,
Items 2.17, 2.1, 2.1-C, 3.1, 3.2.
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b. Firm Inspection Reports
Sarbanes-Oxley authorizes the PCAOB to inspect firms for the
purpose of assessing compliance with certain laws, rules, and
professional standards in connection with a firm's audit work for
issuers, brokers, and dealers. Firms that issue audit reports for more
than 100 issuers per year are inspected annually. Firms that issue 100
or fewer audit reports per year for issuers are generally inspected at
least once every three years. The Board also inspects firms that play a
substantial role in audits of issuers. Many firms registered with the
Board perform no audit work for issuers or broker-dealers,\41\ or only
participate in audits below the level of a substantial role, and the
Board has not historically inspected those firms. The PCAOB provides
each inspected firm with a report summarizing any deficiencies
identified through the inspections process. Portions of these
inspection reports are publicly available on the PCAOB's website.\42\
Recently the PCAOB introduced enhanced search tools that enable
investors and others to better access and understand data from PCAOB
inspection reports.\43\
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\41\ See QC Adopting Release at 54.
\42\ See <a href="https://pcaobus.org/oversight/inspections">https://pcaobus.org/oversight/inspections</a> for
inspection reports, basics of inspections, and inspection
procedures. Sarbanes-Oxley provides that no portions of an
inspection report that deal with criticisms of or potential defects
in the quality control systems of the firm shall be made public if
those criticisms or defects are addressed by the firm, to the
satisfaction of the Board, no later than 12 months after the
issuance of the inspection report. See Sarbanes-Oxley Section
104(g)(2). Full (expanded) inspection reports are publicly available
on the PCAOB's website when a firm fails to satisfactorily remediate
within 12 months.
\43\ See <a href="https://pcaobus.org/news-events/news-releases/news-release-detail/pcaob-launches-new-online-tools-to-help-users-find-and-compare-inspection-report-data">https://pcaobus.org/news-events/news-releases/news-release-detail/pcaob-launches-new-online-tools-to-help-users-find-and-compare-inspection-report-data</a> for a summary of the
enhancements, including six new search filters, including Part I.A
deficiency rate, to help users analyze and compare more than 3,700
inspection reports.
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ii. Available Information Related to Issuer Engagements
a. Auditor's Communications With Audit Committees
Investors and other financial statement users are the beneficiaries
of the audit. Audit committees protect the interests of investors by
assisting the board of directors in fulfilling its responsibility to
oversee the integrity of the company's accounting and financial
reporting processes, including the audit of the company's financial
statements--and in carrying out that duty, they also benefit other
financial statement users. To support the audit committee in this
crucial role, PCAOB standards and rules and SEC rules require auditors
to provide certain firm- and engagement-level information to audit
committees.\44\ AS 1301, Communications with Audit Committees, requires
various communications to facilitate the audit committee's financial
reporting oversight.\45\ Among other things, AS 1301 requires the
auditor to communicate: (i) significant risks; \46\ (ii) critical
accounting policies and practices, critical accounting estimates, and
significant unusual transactions; \47\ (iii) the auditor's evaluation
of the quality of the company's financial reporting; \48\ and (iv)
other matters that are significant to the oversight of the company's
financial reporting process.\49\ In addition, other PCAOB standards and
rules and SEC rules independently require certain audit committee
communications.\50\
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\44\ See Auditing Standard No. 16, Communications with Audit
Committees; Related Amendments to PCAOB Standards; and Transitional
Amendments to AU Sec. 380, PCAOB Rel. No. 2012-004 (Aug. 15, 2012),
at 2, available at <a href="https://assets.pcaobus.org/pcaob-dev/docs/default-source/rulemaking/docket030/release_2012-004.pdf?sfvrsn=7872effb_0">https://assets.pcaobus.org/pcaob-dev/docs/default-source/rulemaking/docket030/release_2012-004.pdf?sfvrsn=7872effb_0</a>.
\45\ Id. (``Communications with the audit committee provide
auditors with a forum separate from management to discuss matters
about the audit and the company's financial reporting process.'').
\46\ See AS 1301.09.
\47\ See AS 1301.12
\48\ See AS 1301.13.
\49\ See AS 1301.24.
\50\ See Appendix B of AS 1301 (listing other PCAOB standards
and rules requiring audit committee communications); see also 17 CFR
210.2-07; PCAOB Rule 3526, Communication with Audit Committees
Concerning Independence.
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b. Auditor's Public Communications of Certain Information
AS 3101 and Rule 3211 require firms to publicly disclose certain
engagement-specific information in the auditor's report and on Form AP.
In addition to specifying the requirements for an unqualified opinion
on the financial statements, AS 3101 requires the auditor's report to
describe (i) critical audit matters, which inform investors and other
financial statement users of matters arising from the audit that
required especially challenging, subjective, or complex auditor
judgment; and (ii) how the auditor addressed those matters. AS 3101
further requires the auditor's report to include a statement disclosing
the year in which the auditor began serving consecutively as the
company's auditor. Other standards require additional information to be
included in the auditor's report, including AS 2415, Consideration of
an Entity's Ability to Continue as a Going Concern, which requires an
explanatory paragraph when the auditor concludes that there is
substantial doubt about the entity's ability to continue as a going
concern for a reasonable period of time.\51\
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\51\ See AS 2415.12.
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PCAOB Rule 3211 requires auditors to file Form AP, which, among
other things, provides information to investors and other financial
statement users about the engagement partner and other accounting firms
participating in the audit of issuers. Disclosures on Form AP provide
increased transparency about certain audit participants. The key
provisions include annual disclosures of (a) the name of the engagement
partner and (b) the name and extent of participation of other
accounting firms in the audit.\52\
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\52\ See Instructions to Form AP. Form AP requires different
disclosures regarding other accounting firms that participate in an
audit depending on their level of participation. For other
accounting firms with individually 5% or greater participation in
the audit, the Form AP filer must disclose the legal name of the
other accounting firm, the city and state (or, if outside the United
States, the city and country) of that firm's headquarters, and the
percentage of total audit hours (either as a single number or within
a range provided on the form) attributable to each other accounting
firm. For other accounting firms with individually less than 5%
participation, the filer must disclose the total number of such
other accounting firms and the aggregate percentage (either as a
single number or within a range provided on the form) of total audit
hours for all such firms.
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[[Page 99975]]
The PCAOB makes the Form AP data set available on AuditorSearch, by
which users can conduct live searches or download the entire data set
in a searchable, machine-readable format.\53\ Using this data, a user
can determine, for example, the changes in engagement partner for any
given issuer or obtain a list of all issuers for which an engagement
partner is responsible. After identifying an engagement partner, a user
can then compile information from other sources, including information
about whether the partner is associated with restatements of financial
statements, has been subject to public disciplinary proceedings, or has
experience as an engagement partner for issuers of a particular size or
in a particular industry. Similarly, starting from the Form AP data
set, users may perform further research on the other accounting firms
that participate in an audit, such as whether those firms are
registered with the PCAOB, whether they have any publicly available
disciplinary history, whether they have been inspected, and, if so, the
results of those inspections.
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\53\ See AuditorSearch, available at <a href="https://pcaobus.org/resources/auditorsearch">https://pcaobus.org/resources/auditorsearch</a>.
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4. Voluntary Firm Reporting
Since the Concept Release, many of the audit firms that issue audit
reports for more than 100 issuers and audit the majority of the market
capitalization for issuers have been publicly disclosing certain firm-
level information discussed in the Concept Release through their audit
quality reports, transparency reports, or other published reports. A
firm-related group has published a framework to assist its members in
these efforts.'' \54\ Many firms may also be developing and monitoring
certain firm and engagement metrics to be used internally by the firm.
In 2023, the same firm-related group published a summary analysis of
the most recent audit quality reports issued by the eight firms
represented on the group's governing board.\55\ The report indicated
that firms were reporting similar firm-level quantitative metrics
related to several areas, including audit firm inspections; training;
use of auditor's specialists; audit report reissuances and financial
statement restatements; measures of experience, such as tenure with the
firm; and personnel turnover. The report further noted that some firms
disclosed qualitative as well as quantitative information, including
information relating to audit methodology and execution, people and
firm culture, quality management and inspections, and technology and
innovation.
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\54\ CAQ, Audit Quality Disclosure Framework (Update) (June
2023). The framework provides that metrics ``may provide those
overseeing the audit and other stakeholders with information and
additional transparency into the firm's systems and processes that
impact audit quality. However, the CAQ believes that a combination
of metrics--taken as a whole and supplemented with robust
discussion--may provide those overseeing the audit and other
stakeholders with information and additional transparency into the
firm''s systems and processes that impact audit quality.'' Id. at 4.
\55\ See CAQ Audit Quality Reports Analysis: A Year in Review
(Mar. 2023), available at <a href="https://www.thecaq.org/aqr-analysis-yir">https://www.thecaq.org/aqr-analysis-yir</a>
(``CAQ Report''). The eight firms on the CAQ's governing board are
BDO USA, LLP, Crowe LLP, Deloitte & Touche LLP, Ernst & Young LLP,
Grant Thornton LLP, KPMG LLP, PricewaterhouseCoopers LLP, and RSM US
LLP.
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The Board has observed the firms that report firm-level metrics
generally do not report engagement-level metrics.\56\ Where firm-level
metrics are reported, the firms report different metrics, calculated in
different ways, and using different definitions, thereby preventing
users from making comparisons across firms.
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\56\ In connection with the Nov. 2022 SEIAG meeting, the Board
staff researched various reports issued during the prior three years
by the top 20 accounting firms (by 2022 revenue) and identified nine
firms that disclosed firm-level metrics. See Firm and Engagement
Performance Metrics Briefing Paper and Related Attachments from Nov.
2022 SEIAG meeting, available at <a href="https://pcaobus.org/news-events/events/event-details/pcaob-standards-and-emerging-issues-advisory-group-meeting-2022">https://pcaobus.org/news-events/events/event-details/pcaob-standards-and-emerging-issues-advisory-group-meeting-2022</a>. For each firm-level metric reported by those
nine firms, the PCAOB staff included examples of how firms
calculated the metric as well as the number of firms reporting that
metric.
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One commenter on the Concept Release stated that many firms are
using the 28 AQIs identified in the Concept Release at some level to
(i) manage the firm and (ii) manage the quality of audits at the office
level and at the engagement level. Another commenter specifically
indicated that its audit committee reviewed the engagement-level AQIs
identified in the Concept Release that were provided by their auditor.
One commenter on the proposal asserted that the voluntary reporting
firms already do through transparency and audit quality reports
includes firm-level metrics, as well as explanations of how they are
calculated, including changes in the calculation that could affect
comparability, as well as context necessary for understanding the
metrics, and would be preferable to the mandatory metrics that the
Board proposed. On the other hand, an investor-related group presented
an analysis of firm transparency and audit quality reports, finding
that the measures used in transparency reports and audit quality
reports by different firms are not consistent or comparable across
firms in their computations, presentation and inclusion, and are not
provided at the engagement level, which the commenter believes is the
level at which they would be most useful. This commenter stated that
having both firm- and engagement-level metrics enhances the metrics'
usefulness because it provides broader context for understanding at
both levels.
Actions in Other Jurisdictions
Some jurisdictions outside the United States have moved forward
with mandatory or voluntary initiatives related to the monitoring and
disclosure of metrics. In May 2022, Accountancy Europe published a
factsheet about recent related initiatives in Europe and elsewhere.\57\
The Accountancy Europe Report described initiatives conducted in 10
countries (including the United Kingdom (U.K.), South Africa and
Canada) by various organizations, including audit oversight bodies
(including the U.K.'s Financial Reporting Council (FRC), Portugal's
Securities Market Commission (CMVM), South Africa's Independent
Regulatory Board for Auditors (IRBA), and the Canadian Public
Accountability Board (CPAB)),\58\ professional organizations,\59\ a
group of independent experts,\60\ and the CAQ. Additionally, the FRC in
the U.K. issued a consultation document and a feedback statement in
2022 on publishing AQIs for the largest U.K. audit firms,\61\ the IRBA
in South Africa
[[Page 99976]]
requested firms auditing listed companies to submit AQI-related
information to the IRBA,\62\ and the CPAB launched an exploratory pilot
project to solicit feedback on AQIs' usefulness in support of broader
national and international discussions.\63\ The primary users of the
metrics from these initiatives were audit committees, oversight bodies,
and professional organizations. Although many of the metrics in these
initiatives were nonpublic, public reporting was encouraged or
anticipated in the future for half of the initiatives.\64\ The
Accountancy Europe Report suggested that several factors should be
considered when selecting, evaluating, and reporting metrics and
recommended that a combination of metrics would provide ``profound
insight into audit quality.''
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\57\ See Accountancy Europe, Factsheet, Audit Quality
Indicators--A Global Overview of Initiatives (May 2022), available
at <a href="https://www.accountancyeurope.eu/wp-content/uploads/220401-Factsheet-Audit-Quality-Indicators.pdf">https://www.accountancyeurope.eu/wp-content/uploads/220401-Factsheet-Audit-Quality-Indicators.pdf</a> (``Accountancy Europe
Report'').
\58\ Id. Other oversight bodies in the Accountancy Europe Report
include the Federal Audit Oversight Authority (FAOA) in Switzerland
and the Accounting and Corporate Regulatory Authority (ACRA) in
Singapore.
\59\ Id. Professional organizations in the Accountancy Europe
Report include the Institute of Public Auditors (IDW), Germany and
The Institute of Chartered Accountants (ICAI), India.
\60\ Id. Quartermasters, Netherlands.
\61\ See FRC, Consultation Document: Firm-level Audit Quality
Indicators (June 2022), available at <a href="https://media.frc.org.uk/documents/FRC_AQI_Consultation.pdf">https://media.frc.org.uk/documents/FRC_AQI_Consultation.pdf</a>. See FRC, Feedback Statement:
Firm-level Audit Quality Indicators Consultation (Dec. 2022),
available at <a href="https://www.frc.org.uk/getattachment/afbf3bc4-cf15-468a-85da-afb8e5af222a/Feedback-Statement_-2022.pdf">https://www.frc.org.uk/getattachment/afbf3bc4-cf15-468a-85da-afb8e5af222a/Feedback-Statement_-2022.pdf</a> (``FRC Feedback
Statement'').
\62\ See IRBA 2021 Survey Report Audit Quality Indicators,
available at <a href="https://www.irba.co.za/upload/IRBA%20AQI%20Report%202021.pdf">https://www.irba.co.za/upload/IRBA%20AQI%20Report%202021.pdf</a> and IRBA 2022 Survey Report Audit
Quality Indicators, available at <a href="https://www.irba.co.za/upload/2022%20AQI%20Report.pdf">https://www.irba.co.za/upload/2022%20AQI%20Report.pdf</a>.
\63\ See CPAB Audit Quality Indicators Final Report, available
at <a href="https://cpab-ccrc.ca/docs/default-source/thought-leadership-publications/2018-aqi-final-report-en.pdf?sfvrsn=5af68dba_12&sfvrsn=af68dba_12">https://cpab-ccrc.ca/docs/default-source/thought-leadership-publications/2018-aqi-final-report-en.pdf?sfvrsn=5af68dba_12&sfvrsn=af68dba_12</a> (``CPAB Final Report'').
See also CPAB Audit Quality Indicators: How to put them to work,
available at <a href="https://cpab-ccrc.ca/docs/default-source/thought-leadership-publications/2019-aqi-put-to-work-en.pdf?sfvrsn=246de787_10">https://cpab-ccrc.ca/docs/default-source/thought-leadership-publications/2019-aqi-put-to-work-en.pdf?sfvrsn=246de787_10</a>.
\64\ See Accountancy Europe Report (public reporting encouraged
or anticipated by ACRA, CAQ, FRC, IDW, and Quartermasters).
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In January 2023, Accountancy Europe published a position paper.\65\
The position paper defined key concepts related to audit quality,
presented considerations for developing AQIs, and explained what, in
its view, can and cannot be achieved by reporting such indicators (for
example, the paper pointed out that all metrics have limitations, that
metrics are not a proxy for financial reporting quality, and that user
expectations should be managed to make them aware that metrics do not
provide definitive results). The paper stated as part of its conclusion
that ``[AQIs] should not be considered as an end in themselves but
could be a useful tool to drive audit quality'' and reiterated that a
combination of metrics would provide insight into audit quality.
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\65\ See Accountancy Europe, Position Paper, Key Factors to
Develop and Use Audit Quality Indicators (Jan. 2023), available at
<a href="https://accountancyeurope.eu/wp-content/uploads/221206-AQIs-Position-Paper_FINAL.pdf">https://accountancyeurope.eu/wp-content/uploads/221206-AQIs-Position-Paper_FINAL.pdf</a>.
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Some commenters noted that initiatives in other jurisdictions do
not currently require public disclosure. Others suggested that the
requirements that the Board proposed were more onerous than other
jurisdictions and may cause reporting of different calculations for
similar metrics in different jurisdictions. One commenter provided
examples in other jurisdictions including providing optional guidance,
allowing engagement-level metrics to be shared confidentially with
audited entities, and allowing for voluntary adoption. Another
commenter expressed its belief that the Board is attempting to justify
individual metrics based on certain jurisdictions' use but have not
fully considered the context in how they are being used or the process
that has been undertaken in those jurisdictions. An additional
commenter stated that the comparability problem between jurisdictions
could be solved by allowing firms to voluntarily disclose the metrics
as defined. One commenter expressed the hope that audit regulators
globally will seek to align requirements relating to the reporting of
metrics.
While other jurisdictions have not historically required public
reporting, the U.K. FRC has announced that it will begin to require
public reporting in 2025.\66\
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\66\ See <a href="https://www.frc.org.uk/consultations/aqis-consultation">https://www.frc.org.uk/consultations/aqis-consultation</a>.
In June 2025, the FRC is requiring firms that audit 20 or more
public interest entities to publicly report ten firm-level metrics
across five areas. These areas include (i) Performance monitoring
and remediation, (ii) Quality monitoring, (iii) Resource planning
and people management, (iv) Information and communication, and (v)
Governance and leadership.
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The Board considered the actions taken in other jurisdictions in
developing the final metrics. While substantially all the final metrics
are the same as, or similar to, metrics used in some other
jurisdictions, the Board acknowledges that no other jurisdiction has
embraced either the full set of metrics or the public reporting
requirements the Board has adopted. However, the Board's objective in
understanding actions in other jurisdictions was not to conform to what
they have done but rather to consider those actions in the context of
the Board's own rulemaking, which is addressed further below. The Board
believes that its approach to evaluating and determining which metrics
should be disclosed is appropriate in light of its statutory investor-
protection mission.
Discussion of the Final Rules
Overview
As noted above, the Board considered ways to measure audit firm and
audit performance, primarily with a view to providing information that
investors can use in making decisions regarding their investments, such
as ratifying the selection of the auditor and voting for members of the
board of directors, including directors who serve on the audit
committee. The Board also believes that firm and engagement metrics
will benefit other stakeholders. For audit committees, metrics will
provide additional context, including consistent comparative
information that is not currently available, that can be used when
deciding whether to select or retain a firm and when overseeing the
auditor's performance. For audit firms, metrics will provide
standardized information about themselves and their peers that can be
used in designing, implementing, monitoring, and remediating their
systems of quality control. The Board will also benefit from having
additional tools to use in its inspections program and standard-setting
initiatives.
This rulemaking addresses the need for information by requiring
consistent, comparable disclosures that the Board believes will provide
insight into aspects of the firm and the engagement team conducting the
audit, including information relating to workloads, retention,
allocation of audit hours, experience, and restatements.
1. Purpose of the Metrics
Investors and other stakeholders lack information that is available
to company management. The federal securities laws seek to reduce this
information asymmetry through various disclosure, internal control, and
other requirements, including requirements for public companies to
prepare and disclose financial statements accompanied by audit reports
issued by an independent public accounting firm. Investors and other
stakeholders also lack information available to the auditor and cannot
observe the auditor's work or other aspects of a public company audit.
Instead, they must rely on the audit committee, which is charged with
overseeing the external auditor, and on other available public
information, such as the reputation of the firm issuing the audit
report or the name of the engagement partner. These difficulties in
evaluating the audit and the auditor may lead to reduced accountability
for auditors and an inefficient allocation of audit effort. Such
allocations allow audit risk to remain insufficiently evaluated,
ultimately risking suboptimal investment decisions, hampering the
efficient functioning of the audit profession, and negatively affecting
the
[[Page 99977]]
capital markets.\67\ Furthermore, while the audit committee has more
information regarding the specific auditor it oversees, it lacks
insight into other audit engagements and other firms; such comparable
information would assist the audit committee in more effectively
selecting and monitoring the auditor.
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\67\ There is a long stream of research regarding the effects
that information asymmetry about product features, such as quality,
and disclosure have on markets. See, e.g., George A. Akerlof, The
Market for ``Lemons'': Quality Uncertainty and the Market Mechanism,
84 The Quarterly Journal of Economics 488 passim (1970); and Robert
E. Verrecchia, Essays on Disclosure, 32 Journal of Accounting and
Economics 97 (2001).
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Investors and other stakeholders may seek to reduce these
information disparities by gathering additional information about the
firm responsible for the audit and the relevant audit engagement. As
discussed above, the PCAOB has previously sought to facilitate those
efforts through rules and standards requiring the disclosure of such
information. From its inception, the Board's registration and reporting
program has yielded important information about registered firms.
Annual updates on Form 2 include information such as the issuers
audited by the firm, a breakdown of fees charged to issuers, and
network affiliations, and current reporting on Form 3 discloses
significant events such as the withdrawal of an audit report and
certain legal actions involving the firm or its professionals. The
Board concurrently adopted amendments to both of those reporting forms
to mandate the disclosure of standardized and timely information by
firms.\68\ Firms are required to disclose on Form AP the name of the
engagement partner and certain audit participants.\69\ The Board also
made the auditor's report more relevant and informative by, among other
things, requiring communication of critical audit matters and the
tenure of the auditor.\70\ The Board intends the firm and engagement
metrics to complement these other initiatives and to add to the mix of
information available to investors and other stakeholders when
evaluating the auditor and the audit.\71\
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\68\ See PCAOB Rel. No. 2024-013.
\69\ See PCAOB Rule 3211.
\70\ See AS 3101.10.b, .11-.16.
\71\ In addition to disclosures on Form AP and in the audit
report, the Board previously required information on periodic and
special reports to be publicly available. See Rules on Periodic
Reporting by Registered Public Accounting Firms, PCAOB Rel. No.
2008-004 (June 10, 2008), 28-32.
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The Board's oversight activities have revealed that there are
identifiable performance differences across firms and among engagement
teams within the same firm, including variations among firms belonging
to global networks. The Board considered such differences when
performing regulatory functions. For example, the Division of
Registration and Inspections uses, among other factors, information
about the firm and the engagement to identify audit engagements for
risk-based selections in the Board's inspections program.
Mandating public disclosure of firm- and engagement-level metrics
will provide investors, audit committees, and other stakeholders with
comparable information that is not currently available and will
otherwise be difficult or impossible to obtain. These stakeholders will
be able to learn about both specific engagements and specific firms and
have a basis to compare them to other engagements and other firms. The
firms themselves could also benefit from access to information about
their peers, both in gaining new perspective on how their practices
compare and in potentially gaining new opportunities for competition
based on markers that users come to associate with quality. Required
disclosures will facilitate development of standardized data for
consistent comparison and analysis over time, which the Board believes
will be more valuable than the ad hoc, individualized disclosures that
some firms have made on a voluntary basis. Mandatory public disclosure
will also ensure that the information will be accessible to all
stakeholders, so that any decision-useful information can be readily
evaluated. The Board believes this information will enable investors,
audit committees, and other stakeholders to make better-informed
decisions.\72\
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\72\ Under Section 102 of Sarbanes-Oxley, the Board may require
registered public accounting firms to submit periodic and special
reports containing financial or other information as is ``necessary
or appropriate in the public interest or for the protection of
investors.'' 15 U.S.C. 7212(d). Section 103 of Sarbanes-Oxley tasks
the Board with adopting quality control and other standards to be
used by registered firms ``in the preparation and issuance of audit
reports . . . as may be necessary or appropriate in the public
interest or for the protection of investors.'' 15 U.S.C. 7213(a)(1).
See also 15 U.S.C. 7211(a), (c)(5), 7213(a)(2)(B). The Board
believes the proposed metrics would further the public interest and
would protect investors in accordance with these provisions.
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The Board believes the metrics will also assist the PCAOB in a
variety of ways. Metrics will help to inform the Board's inspection
activities, including in the selection of firms, engagements, and focus
areas for review. For example, the final metrics could refine the
selection models used to aid in predicting negative audit outcomes,
enhancing the Board's risk-based inspections. They could also enrich
the discussions the Board has with audit committee chairs as part of
the Board's inspections process. Metrics may also inform future
standard-setting activities by helping the Board to identify areas
where regulatory action is needed and suggesting potential approaches.
In addition, the Board expects metrics to enhance the PCAOB's ability
to produce impactful research and to provide valuable information
sources for the public, including academic research, helping to create
new insights into the audit.
The Board's discussion of the potential benefits of the final
metrics in greater detail below.
2. Public Reporting of Metrics
Many commenters on the proposal addressed the fundamental question
of whether there was value in mandating a set of publicly reported
metrics, expressing conflicting views. Investors and investor-related
groups were generally supportive. Many other commenters, primarily
firms and firm-related groups criticized the proposal. These commenters
either supported public reporting of some firm-level metrics but not
others while generally opposing any public reporting of engagement-
level metrics, or opposed all public reporting of metrics at both the
firm and engagement levels.
Among the commenters that supported the metrics proposal, several
stressed the benefits of increased transparency for key stakeholders
and the public overall. Several commenters generally agreed with the
PCAOB's rationale for the metrics, including increasing competition
among audit firms, including on the basis of audit quality; promoting
auditor accountability, which will lead to greater audit quality; and
providing investors with decision-useful comparable information that
will assist them in making decisions about audit-related matters (e.g.,
ratifying the appointment of the auditor or voting for reelection of
Board members that serve on the audit committee). Two of these
commenters asserted that investors currently lack information to make
an independent and informed decision regarding ratification of the
appointment of the auditor and to hold audit committee members to
account in the performance of their duties. In that context, one of
these commenters pointed out that most failures to ratify the
appointment of the auditor occur after a financial reporting failure,
and argued that metrics would provide information allowing investors to
make
[[Page 99978]]
an ex ante, rather than ex post, evaluation of the auditor's work.
Two commenters particularly favored engagement-level metrics. One
said it would enable the compilation of engagement-level data for all
public company audit engagements within a specific office to compare
data for competing offices within the same geographic area. In this
commenter's view, metrics such as workload would provide great value to
prospective employees and would improve the talent pipeline issue
because firms' workload need to be competitive in the eyes of
prospective employees. Another argued that engagement-level metrics are
most useful to investors, using firm-level metrics to provide context.
This commenter also emphasized the importance of firm-level metrics,
which will provide context in evaluating engagement-level metrics and a
firm's audit practice and its related system of quality control.
Several commenters said that the benefits of metrics would likely
evolve over time, for example, as users are able to aggregate multiple
data points, make comparisons, and observe trends. The Board agrees and
believes that analyzing the metrics over time, across engagements and
across firms, in the context of known good practices and indicators of
audit failure, will enable the PCAOB, as well as academics and users of
the metrics, to gain a new perspective on the audit and potentially
deeper insights into some of the drivers of audit quality.
Many larger firms generally supported certain firm-level metrics.
These commenters generally agreed that firm-level reporting could
provide stakeholders with relevant information through consistent
disclosure by all firms required to report. While some of the
commenters raised concerns about the usefulness, comparability, and
risk of misinterpretation of certain firm-level metrics; the risk that
standardization of metrics limits their adaptability to change in the
business and auditing environment; and more generally concerns that the
costs may outweigh the benefits, commenters agreed that the proposed
firm-level metrics are generally consistent with voluntary disclosures
that some firms are already making in firm transparency and audit
quality reports. A discussion of the comments made with regard to
particular metrics is provided below.
However, firms and firm-related groups generally opposed
engagement-level metrics. Some questioned whether investors would use
the metrics. Others expressed concern that publicly available metrics
could contribute to information overload. Many said that it would not
be possible to provide sufficient context to enable users to understand
the metrics, even with the firm-level metrics or narrative disclosures.
Some commenters asserted that, because the underlying circumstances of
engagement-level metrics are not homogeneous and users would not have
necessary context, engagement-level metrics would not be
comparable.\73\ Others focused on the significance of qualitative
factors such as professional judgment and the duty to exercise due
care, including professional skepticism, saying that metrics were
inappropriately ``one size fits all'' or not decision-useful because
they do not capture these key concepts.
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\73\ Commenters listed various types of contexts that in their
view would be necessary for proper understanding of the engagement-
level metrics, including variations across firms (e.g., differences
in operations, structures, methodologies, and resources), the unique
circumstances of each engagement (e.g., differences in risk areas,
team compositions, and timelines), and the unique circumstances of
each issuer (e.g., differences in policies and resources).
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Many commenters expressed concern that users would not find metrics
meaningful and may even misunderstand them and reach inappropriate
conclusions. Absent providing substantial context and understanding how
stakeholders would use the metrics, in one commenter's view, investors
may make capital allocation decisions based on a misinterpretation of a
metric, resulting in a new element of volatility in the capital
markets. Two commenters raised a concern that the proposal does not
provide a tie between assessing audit quality and the proposed metrics.
Some commenters went on to say that providing metrics in isolation
without context and effective two-way communication would have very
minimal, or even negative, impact on audit quality. Another commenter
stated that most of the data points required as part of the proposal
are currently available to the PCAOB.
One commenter expressed concern that overemphasis on metrics could
lead firms to focus on consistency of the metrics to avoid the
implication of weak auditing or other potential misinterpretations,
which in the commenter's view could lead to commoditization of the
audit and reduce incentives to innovate the audit approach. On the
other hand, several other commenters argued that metrics would support
more robust competition based on quality, making the audit less of a
commodity.
Some commenters said that the metrics seemed particularly focused
on larger firms or would be especially burdensome for smaller firms.
The Board believes the final metrics call for data that will be
relevant to and obtainable by firms regardless of size. The potential
differential cost impacts are discussed below.
Some commenters questioned whether public reporting of metrics
would undermine the authority of the audit committee. For example, one
expressed concern that there would be public pressure on the audit
committee to appoint auditors whose metrics were perceived to be within
some acceptable range, even if the committee was satisfied with the
work of the current auditor. Another commenter asserted that it is not
investors' responsibility to oversee the auditor, and raised a concern
that public reporting of metrics could undermine confidence in audit
committees and the PCAOB, both of which have responsibilities for
direct oversight of audits and audit firms and have the context to
properly understand these metrics. However, an investor-related group
specifically disagreed with this reasoning and asserted that this
rulemaking exhibits commitment to faithfully executing the PCAOB's
responsibilities and working to improve audit quality and trust in the
audit market.
Several commenters opposed both firm- and engagement-level metrics.
One asserted that the proposal did not provide sufficient evidence that
public disclosure of the proposed metrics will have any meaningful
impact on the quality of audit services. Another commenter said that
the metrics were not grounded in or intended to have any nexus with
audit quality, focusing instead on auditor accountability, and on that
basis went beyond the PCAOB's remit. The commenter asserted that the
proposed metrics would overload audit committees and investors with a
large set of complex data that was not sought, needed, meaningful, or
obviously usable by them, suggesting that the current voluntary
approach should be maintained instead. Another expressed concern that
public disclosure of the information specified in the proposals could
do more harm than good, particularly in relation to an increase in
litigation and reputational risk and potentially furthering the talent
crisis in the profession. That commenter particularly questioned the
potential value of metrics for audit committees, saying that they
already have access to most of the information that would be mandated
and that annual reporting would be unhelpful since evaluation of the
auditor is a continuous process. One commenter who advocated delay and
[[Page 99979]]
further study before the Board takes further action on the metrics
expressed skepticism that metrics would influence shareholder votes on
ratification of the appointment of the auditor or benefit most
investors, because metrics are only indirectly related to audit quality
and there would not be sufficient incentive for users to engage with
them.
Most of the commenters who objected to public reporting of metrics
recommended alternatives, including mandatory or voluntary
communication with the audit committee, particularly for engagement-
level metrics. Many commenters asserted that the audit committee is the
appropriate party to whom engagement-level metrics should be
communicated, because the audit committee has the statutory
responsibility to appoint, compensate, and replace the external auditor
and is sufficiently informed to understand the context of the company,
the audit, and the auditor. Commenters said that audit committees could
engage in dialog with the auditor, enabling them to understand the
metrics in the context of the specific audit, promoting accountability
in the performance of the audit on behalf of investors. Another
commenter asserted that providing information to, and allowing the
assessment by, audit committees would be more likely to provide greater
benefits to investors and the capital markets than public reporting,
while minimizing unintended consequences (such as users reaching
inappropriate conclusions), and would be consistent with the PCAOB's
objective to improve audit quality. Another commenter, who questioned
the value of metrics for most investors, said metrics had the potential
to be quite useful for audit committees, who could use their direct
access to the auditor to gain valuable context and would have the
opportunity, using metrics, to communicate more about the audit process
in their audit committee report. On the other hand, an investor-related
group pointed out that audit committees are reliant on communications
from the auditor regarding the company's audit issues and the quality
of the audit; their principal tool is inquiry, not observation, which,
in audit parlance, is the weakest form of audit evidence.
Many commenters that objected to publicly available metrics like
the ones the Board proposed advocated a non-prescriptive, principles-
based approach, whereby auditors and audit committees would discuss
potential metrics and the audit committee would determine which metrics
and other information it finds meaningful and when it wants to receive
and evaluate them. This approach, the commenters said, would encourage
more tailored metrics that could be appropriately discussed in context
and could change over time, adapting to changes in the audit
environment, regulation, technology and audit processes, and the
information needs of audit committees and investors and would
prioritize relevance rather than consistency. Some commenters
specifically recommended amending AS 1301 to mandate such a discussion
(for example, initially in connection with audit planning and later as
part of reporting on audit results). However, one investor-related
group disagreed with this principles-based approach, asserting that it
would not promote comparability or accountability because a set of
principles would inevitably result in qualitative rather than
quantitative disclosure and the information would not be comparable
between firms and engagements and over time. This commenter asserted
that the standardized metrics the Board proposed would be more useful
to investors.
This commenter also provided analysis of audit quality reports
published by the Big 4 firms, observing that elements of the proposed
firm-level metrics are already presented in those reports under a
principles-based approach whereby each firm has developed its own
metrics.\74\ The commenter noted that some of these metrics are
qualitative, some are quantitative, some use different definitions, and
some unfavorable metrics or facts may be excluded. This commenter also
asserted that because metrics voluntarily published by firms are self-
defined and principles-based and are only at the firm level and not at
the engagement level, they are largely unused by the investment
community; they are regarded as marketing materials rather than
investor information. This commenter emphasized that investors need
more standardized information contextualized at the engagement-level to
the company they are investing in and that are anchored to the firm-
level standardized information.
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\74\ This commenter provided several examples of inconsistencies
in reporting metrics. For example, it stated while all Big 4 firms
provide data on turnover or attrition, they are defined and
calculated in different ways and any comparison among the firms is
stymied.
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Several commenters noted that it would be possible for audit
committees to provide additional public disclosure via the audit
committee report in the issuer's proxy statement,\75\ which investors
could consider in deciding whether to ratify the audit committee's
selection of auditor and whether to vote for the board members who
serve on the audit committee. Some of these suggested that the SEC
could take action instead of, or along with, the PCAOB. Two argued that
expanded audit committee disclosure would result in more relevant and
decision-useful information for investors than the proposed metrics or
would be a more direct way to address the information asymmetry than
through this rulemaking. The other suggested that the SEC, together
with the New York Stock Exchange and Nasdaq, should require inclusion
of the metrics in the proxy statement to provide context for existing
fee disclosures and to make investors aware of the metrics without
having to search for them separately.
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\75\ See Schedule 14A. Information required in proxy statement,
17 CFR 240.14a-101. If action is to be taken at a shareholders'
meeting with respect to the election of directors, Item 7 of
Schedule 14A requires the proxy statement to contain a report of the
audit committee as specified in Item 407 of Regulation S-K, 17 CFR
229.407.
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One firm suggested that the PCAOB gather the information underlying
the metrics via inspection. However, this would defeat the objective of
enhancing transparency to enable better informed decision-making by
stakeholders.
Another firm expressed concern that engagement-level metrics may
not be useful because they will become available only once a year, with
a delay of up to 35 days after the audit is completed until Form AP is
filed. However, an investor-related group disagreed with this argument
indicating that the financial results for companies are delivered with
the same, or a more significant delay, to investors and usefulness of
the information is not simply its immediate discrete disclosure but the
trends in the information within and between companies over time.
In addition, commenters raised general concerns about metrics
requirements, including
<bullet> the risk that publishing metrics would involve releasing
confidential or nonpublic information, which may violate
confidentiality obligations imposed by the American Institute of CPAs
(``AICPA'') Code of Professional Conduct or conflict with non-US laws
and regulations;
<bullet> diverting the attention of the engagement team and firm
resources away from performing quality audits;
<bullet> lessening competition by releasing competitively sensitive
information and reducing the number of registered public accounting
firms, particularly in foreign jurisdictions, that would be available
to play a substantial role in a large multinational group audit;
[[Page 99980]]
<bullet> being burdensome and costly to compile data for each
individual engagement;
<bullet> becoming a ``check the box'' or compliance exercise that
may not improve audit quality or provide meaningful transparency to
stakeholders; and
<bullet> implying that audit committees have a legal duty to
consider metrics even though the PCAOB has no authority over audit
committees.
The Board adopted requirements for firms to provide both firm- and
engagement-level metrics, with changes from its proposal as described
in further detail below. The Board continues to believe that public
reporting of a mandated set of firm- and engagement-level metrics will
provide stakeholders with comparable information that is not currently
available, would otherwise be difficult or impossible to obtain, and
will position them to make better-informed decisions. Further, the
Board believes that required public disclosures will facilitate
development of standardized data for consistent comparison and analysis
over time, which will be more valuable than the ad hoc, individualized
disclosures that some firms have made on a voluntary basis or the
information that could be provided by individual firms to audit
committees or investors without any basis for cross-firm comparisons.
The Board believes the new data points, when analyzed together with the
audited financial statements, critical audit matters, auditor tenure,
and other information about the firm and the engagement on Form 2 and
Form AP, will provide more information about the audit and, therefore,
the reliability of the auditor's report.
The Board considered comments questioning the value of metrics,
whether they will be used by investors and other stakeholders or would
represent only a ``check the box'' compliance exercise, and whether
they might contribute to information overload or have other negative
consequences. Based on comments received from investors and other data
provided, among other factors, the Board does not share those concerns.
Investors and investor-related groups have commented throughout the
course of this rulemaking that the metrics will be useful. A firm-
related group commented that, in a recent investor survey it conducted,
almost all of the metrics the Board proposed were regarded as
``extremely helpful'' by between 30% and 50% of participating
investors. (The commenter did not indicate whether the survey allowed
positive responses other than ``extremely helpful''--for example,
``helpful'' or ``somewhat helpful''--and, if so, what the results were
inclusive of those responses.) By contrast, the Board understands--
including from one commenter that argues that the voluntary approach
should be maintained--that voluntarily provided metrics have not proven
useful to investors. The Board believes that the value of voluntary
metrics is undermined by a lack of the consistency and comparability,
as well as enhanced credibility, that can be achieved through common
definitions and calculations and required reporting.
The Board also noted that similar objections--that the new
information would not be used or would be confusing or misleading--were
raised by many of the same commenters in connection with the Board's
last two rulemakings requiring disclosure of additional information
about audits and auditors: Form AP reporting of the name of the
engagement partner and information about other firms participating in
the audit, and auditor communication of critical audit matters. In both
cases, these commenter concerns appear unsubstantiated. The Form AP
data set is now one of the most frequently visited areas of the PCAOB
website.\76\ Indeed, in an investor survey conducted by one commenter,
79% of respondents indicated that they often or very often navigate to
AuditorSearch, the search tool for Form AP data on the PCAOB website.
As for CAMs, in a recent investor survey conducted by the same
commenter, over 90% of the respondents indicated that CAMs play an
important role in their investment decision-making.\77\ In addition,
data aggregators, such as Audit Analytics, compile and make available
data on CAMs, which suggests market demand for that information. The
Board's experience suggests that contrary to concerns about irrelevance
and information overload, stakeholders seek out additional information
about auditors and audit engagements when it is available.
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\76\ In 2023, there were over 333,000 unique searches performed
on AuditorSearch and the Form AP data set was downloaded over 2,000
times. Information related to usage statistics can be found on the
PCAOB's website (<a href="https://pcaobus.org/resources/auditorsearch">https://pcaobus.org/resources/auditorsearch</a>).
\77\ The Center for Audit Quality Critical Audit Matters Survey
(July 2024) at 9.
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In lieu of public reporting, the Board considered the alternative
of encouraging or mandating communication of engagement-level metrics
to the audit committee, as many commenters suggested. However, such an
approach would not achieve the Board's goals of increasing the
information about audit engagements and audit firms available to
investors and other stakeholders, and fostering comparability of data
through mandated reporting based on common definitions and specified
calculations. The Board also believes that a non-prescriptive,
principles-based approach, whereby firms would potentially develop and
discuss different metrics for different audit committees, drawn from
different data and based on different definitions and calculations and
changing over time, could itself create significant costs and
challenges for firms without necessarily contributing to the audit
committee's ability to understand the audit it oversees in a broader
context.
Of course, under the Board's final requirements auditors and audit
committees will be free to discuss performance metrics--whether the
metrics required under the Board's rules or additional or alternative
metrics they develop themselves--through the kinds of discussions the
commenters recommend. The Board is not requiring that auditors make
metrics-specific communications at this time. However, where matters
addressed by the metrics are the subject of an otherwise required
communication, discussion of the metrics may be a useful part of the
communication.
The Board appreciates that the audit committee is charged by
statute with responsibility for oversight of the auditor, and the Board
cannot, and do not purport to, impose any obligations on audit
committees or imply that audit committees have any specific duties in
relation to metrics. The Board assumes that audit committees will
fulfill their responsibilities as they see fit; whether that entails,
for example, discussion of metrics with auditors or proxy statement
disclosure regarding their consideration of metrics will be for them to
determine.
But the Board also notes that investors--including many investors
that are themselves fiduciaries for others--have their own investment
and voting decisions that they are called upon to make, like decisions
about electing members of the board of directors, including those who
serve on the audit committee, and ratifying the appointment of the
auditor. And in the current environment, they have extremely limited
access to information about the auditor's work--work that, after all,
is undertaken for their benefit. By requiring public reporting of
metrics, the Board is not suggesting that investors will have the
ability or the responsibility to oversee the work of the auditor.
However, they will have the
[[Page 99981]]
opportunity to gain new perspective to inform their decision-making.
The Board agrees with a commenter that, far from undermining investor
trust, this new transparency should enhance that trust by helping
investors better understand the audit and the audit committee's
oversight of it.
The Board has determined to go forward with published metrics so
that investors and other stakeholders will have direct access to the
metrics and so that comparative data can be accumulated that will allow
comparisons to be made across different firms and different
engagements. As discussed below, the Board believes it has addressed
many of the challenges associated with potential lack of comparability
by narrowing the metrics to a group that it believes will send
relatively clear, comprehensible signals that users will be able to
interpret when taken together with the other information about the
issuer and the auditor that is available to them. In the Board's view,
public reporting is the most practical way for comparative data to be
created and disseminated. While two commenters suggested that audit
committees could obtain comparative data when they consider changing
auditors, the Board's understanding is that is a relatively infrequent
occurrence, and in any case is not a route available to other
stakeholders.
The Board also believes that gathering data and calculating the
final metrics, given the subjects they address, will not be overly
time-consuming or burdensome, and will not entail disclosure of
confidential or otherwise protected information, as discussed below.
Regarding the concerns of possibly disclosing confidential
information and competition lessening effect due to public reporting of
metrics; unintended consequences, including attention diversion,
litigation and reputation risks, competition lessening effect, and
audit labor market impacts; and costs, see discussions below.
3. Legal Authority
Some commenters questioned the Board's statutory authority to
require all or some of the proposed firm and engagement metrics. In
addition, one commenter stated that the statement in the proposal that
``this [rulemaking] would advance investor protection and promote the
public interest by enabling stakeholders to make better informed
decisions, promoting auditor accountability and ultimately enhancing
capital allocation and confidence in our capital markets'' is beyond
the Board's rulemaking authority. Other commenters questioned the
Board's authority with respect to specific aspects of the rulemaking.
Two commenters questioned how the requirements could extend beyond the
accounting firms' issuer and broker-dealer audit practices. One of
these commenters stated that it believes including non-issuer
information could be misleading to stakeholders who may mistake such
disclosures as being within the PCAOB's purview and that including the
non-issuer portion of a firm's audit practice appears contradictory to
the Board's pursuit of clarity through its proposed PCAOB Rule 2400,
Proposals Regarding False or Misleading Statements Concerning PCAOB
Registration and Oversight and Constructive Requests to Withdraw from
Registration. This commenter suggested that if the Board intends to
make clear what lies within and outside its purview through proposed
PCAOB Rule 2400, the rulemaking related to firm- and engagement-level
metrics should reflect similar principles.\78\ Another commenter
suggested that several new requirements seem to require public
production of information that is confidential or otherwise outside of
or unnecessary for the Board's oversight function.
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\78\ To date, the Board has not adopted proposed PCAOB Rule
2400.
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In accordance with Sarbanes-Oxley, the PCAOB is endowed with
regulatory powers designed to ensure transparency, uphold high
professional standards, and protect investors in the auditing process.
This discussion outlines the statutory basis for this rulemaking as
outlined in Sections 101, 102, and 103 of Sarbanes-Oxley. In
particular, here and throughout the release, the Board discussed how
the final rules will increase transparency regarding audit practices,
increase the comparability and accessibility of information available
to investors and others, and enhance investors' ability to efficiently
and effectively make investment and voting decisions, in line with the
Board's statutory mandate.
Section 102 of Sarbanes-Oxley mandates that each registered firm
must submit an annual report to the Board. Beyond this, Section 102
grants to the Board the authority to require more frequent and detailed
reporting, empowering the Board to require registered firms to report
``such additional information as the Board or the Commission may
specify.'' \79\ This authority must be exercised through PCAOB
rulemaking that deems the information ``necessary or appropriate in the
public interest or for the protection of investors.'' \80\ This
statutory language supports the Board's authority to adapt its
reporting requirements to the evolving needs of audit oversight,
thereby enhancing investor protection and public confidence in the
financial markets.
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\79\ 15 U.S.C. 7212(d).
\80\ 15 U.S.C. 7212(b)(2)(H).
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The metrics the Board adopted in its release are important for
increasing transparency regarding the practices of registered firms,
particularly in their audits of issuers. By mandating the disclosure of
this information, the PCAOB will enable investors and other market
participants to have a clearer and more comprehensive view of the
operational practices of the registered firms that audit issuers. This
enhanced transparency will allow investors and other market
participants to make more informed decisions, contributing to the
integrity and reliability of financial reporting and audit practices.
Additionally, Section 103 of Sarbanes-Oxley grants the Board
authority to establish auditing standards and quality control standards
``to be used by registered public accounting firms in the preparation
and issuance of audit reports'' as ``may be necessary or appropriate in
the public interest or for the protection of investors.'' \81\ Although
the information the PCAOB requires from registered firms does not
appear directly within audit reports, it is comfortably within the
ambit of the Board's rulemaking mandate under Section 103--especially
given the flexibility inherent in the statutory language.\82\ In brief,
this mandate involves establishing the procedures and practices of
registered firms that promote the quality and accuracy of audit
reports, which extends to
[[Page 99982]]
overseeing how firms report their operational conduct.
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\81\ 15 U.S.C. 7213(a)(1).
\82\ See Loper Bright Enters v. Raimondo, 144 S. Ct. 2244, 2263
(2024) (the term ``appropriate'' ``leaves agencies with
flexibility'' (citation and quotation marks omitted)); Kisor v.
Wilkie, 588 U.S. 558, 632 (2019) (Kavanaugh, J., concurring in the
judgment) (the word ``appropriate'' ``afford[s] agencies broad
policy discretion''); Metrophones Telecommc'ns, Inc. v. Global
Crossing Telecommc'ns, Inc., 423 F.3d 1056, 1068 (9th Cir. 2005)
(``Given the reach of the [FCC's] rulemaking authority under
201(b)''--which granted to the FCC the ``broad power to enact such
'rules and regulations as may be necessary in the public interest to
carry out the provisions of this Act' ''--``it would be strange to
hold that Congress narrowly limited the Commission's power to deem a
practice 'unjust or unreasonable.' ''); Brown v. Azar, 497 F. Supp.
3d 1270, 1281 (N.D. Ga. 2020) (``[W]hen an agency is authorized to
'prescribe such rules and regulations as may be necessary in the
public interest to carry out the provisions of the Act,' Congress'
intent to give an agency broad power is clear.''), appeal dismissed
as moot, 20 F.4th 1385 (11th Cir. 2021) (mem.).
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In alignment with Section 103 of Sarbanes-Oxley, the PCAOB views
the rule, form, and associated amendments requiring the metrics as
fundamental auditing and quality control standards at their core. The
information required by the metrics relates to practices of the firm
that directly bear on the conduct of audits and ultimately the quality
and accuracy of audit reports. By mandating the submission of this
information to the PCAOB, the Board provides deeper transparency into
the auditing practices that support issuer audits. The information
required by the metrics will also support the Board's oversight and
enhance the reliability of audit performance.\83\
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\83\ See, e.g., Mark DeFond and Jieying Zhang, A Review of
Archival Auditing Research, 58 Journal of Accounting and Economics
275, (2014) (asserting that audit quality improves financial
reporting quality by increasing the credibility of the financial
reports).
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Finally, the Board notes that Section 101 of Sarbanes-Oxley
provides ancillary authority that supports the Board's primary powers
in Sections 102 and 103.\84\ This provision enables the PCAOB to
develop standards that protect investors and serve the public interest.
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\84\ For example, Section 101(c)(5) empowers the Board to
perform additional duties or functions that are ``necessary or
appropriate to promote high professional standards among, and
improve the quality of audit services offered by'' registered firms
and their associated persons. 15 U.S.C. 7211(c)(5). This provision
empowers the PCAOB to implement measures that enhance the integrity
and efficacy of the auditing profession. In addition, Section
101(g)(1) provides rulemaking authority to the Board, specifying
that the Board's rules, subject to the approval of the Commission,
are to ``provide for the operation and administration of the Board,
the exercise of its authority, and the performance of its
responsibilities under'' Sarbanes-Oxley. 15 U.S.C. 7211(g)(1).
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Some firms and firm-related groups questioned the Board's statutory
authority to require the reporting of the proposed metrics on the basis
that the Board's rulemaking authority should correspond directly with
the type of information outlined in Sarbanes-Oxley Section 102(b)(2)
for the contents of registration applications. However, this
interpretation significantly misreads the reporting provisions of
Sarbanes-Oxley. Sections 102(b)(2)(H) and 102(d) clearly grant to the
Board broad authority to require additional information in periodic
reports that it finds necessary or appropriate to serve the public
interest or protect investors.
Section 102(b)(2) generally details baseline requirements for
reported information and Section 102(b)(2)(H) primarily details
requirements for any additional information the Board requires,
providing that additional information in reports must be deemed
``necessary or appropriate in the public interest.'' It is incorrect to
construe those provisions as imposing a rigid limitation that restricts
the content of reports exclusively to the types of information
specified in Section 102(b)(2)(A)-(G) for initial registration
applications. Indeed, Section 102(b)(2)(H) expressly contemplates the
provision of ``other information'' the Board may require through
rulemaking. This provision shows that Congress intended to provide the
Board authority to require additional information beyond that
enumerated in Section 102(b).\85\ By referencing this provision,
Section 102(d) applies this broader authority to periodic reports that
the Board finds necessary or appropriate to serve the public interest
or protect investors. The Board's release has outlined how the
disclosures mandated by the metrics will enhance transparency and
bolster the PCAOB's oversight capabilities. Such enhancements are
designed to ultimately improve audit quality. For example, as discussed
more completely below, the final metrics will enhance (i) audit
committees' ability to efficiently and effectively monitor and select
auditors as well as (ii) investors' ability to efficiently and
effectively make decisions about ratifying the appointment of their
auditors and allocating capital. In addition, as an important indirect
benefit, the final rules could further spur competition to the benefit
of investors. Thus, the final rules align with the overarching
objectives of Sarbanes-Oxley, and therefore are appropriate exercises
of the Board's authority under Section 102.
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\85\ See Navajo Nation v. Dalley, 896 F.3d 1196, 1212-13 (10th
Cir. 2018) (``Congress expressed its scope in broad terms, to
encompass `any other subjects that are directly related to the
operation of gaming activities.' But the key word here is `other.' .
. . And applying the ordinary and everyday meaning of the word
`other' . . ., it becomes patent that Congress did not intend for
that clause to address the `subjects' covered in the preceding
clauses of subsection (C)[.]'' (citation omitted)); see also, e.g.,
Madison v. Virginia, 474 F.3d 118, 133 (4th Cir. 2006) (``other
Federal statute prohibiting discrimination'' is a ``catch-all
provision''); Meehan v. Atl. Mut. Ins. Co., 2008 WL 268805, at *7
(E.D.N.Y. Jan. 30, 2008) (``The term `other policies' now
accomplishes the task of including all governmental activity and
becomes a catch-all phrase including all other policies not already
implied[.]'' (citations and quotation marks omitted)).
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In response to the concerns raised by firm commenters regarding the
Board's use of Sarbanes-Oxley's relevant ``necessary and appropriate''
clauses, it is important to clarify that the Board has not claimed any
implicitly delegated authority beyond the regulatory parameters
established by Congress. The use of the Section 101, 102, and 103
authorities in this rulemaking is firmly grounded within the explicit
mandates provided by Sarbanes-Oxley, and is consistent with the
statutory limitations and directives outlined in those provisions. The
Board's application of these authorities has been specifically aimed at
enhancing the transparency and quality of audits of issuers and broker-
dealers, which directly aligns with the Board's core mission to protect
investors and the public interest. The Board has utilized the tools
provided by Sarbanes-Oxley to carry out the responsibilities entrusted
to it.
Other commenters raised concerns about the Board's authority to
include metrics extending beyond a registered firm's issuer and broker-
dealer audit practice. One of these commenters asserted that including
non-issuer information could be misleading to stakeholders who may
mistake such disclosures as being within the PCAOB's regulatory
purview. The Board disagrees with these comments. The metrics the Board
is requiring are designed to provide information that directly relates
to firms' audits of issuers, and will be important for such matters as
assessing auditor performance and resource allocation as it relates to
issuer audits. For instance, in the Workload metric, firms are required
to report not only the hours worked dedicated to issuer engagements but
the entire workload of the personnel involved. This includes hours
spent on non-issuer engagements, training, practice development, staff
development, or other firm activities. A narrower focus, which only
accounts for hours worked on issuer engagements, could provide an
incomplete picture. It would fail to reflect the true extent of the
auditor's commitments and how these may impact their capacity and focus
on tasks in issuer audit work. Without this comprehensive view,
investors and other stakeholders would lack important information to
assess the potential risks over overcommitment on audit quality and
auditor performance in audits of issuers. By requiring firms to report
certain narrowly tailored information regarding their audit engagements
and audit practices, the Board is not seeking to extend its purview to
regulate those aspects of the firm's operations. Rather, in line with
the Board's statutory authority, it is enhancing the transparency and
the depth of information available to investors and other stakeholders
concerning firms' audits of issuers.
[[Page 99983]]
4. Summary of the Metrics
The Board adopted a set of firm-level and engagement-level metrics
across eight areas. Firm-level metrics will provide a basis for drawing
comparisons between firms as well as a baseline for evaluating
engagement-level metrics. Engagement-level metrics will elicit more
granular information and will enable comparisons over time and across
engagements both within the firm and across other firms.
Firm-level metrics will be disclosed on a new Form FM, Firm
Metrics, and engagement-level metrics will be disclosed on a revised
and renamed Form AP, together with the other engagement-specific
information currently required (the name of the engagement partner and
information regarding other firms participating in the audit).
Most of the metrics the Board has adopted will be presented at both
the firm and the engagement level. However, two metrics will be
reported only at the firm level, because the Board believes aggregated
data will be most meaningful or appropriate.
The metrics are:
<bullet> Partner and Manager Involvement. Hours worked by senior
professionals relative to more junior staff across the firm's large
accelerated and accelerated filer engagements and on the specific
engagement.
<bullet> Workload. For senior professionals who incurred hours on
large accelerated and accelerated filer engagements, average weekly
hours worked on a quarterly basis, including time attributable to all
engagements, administrative tasks, training, and all other matters.
<bullet> Training Hours for Audit Personnel. Average annual
training hours for partners, managers, and staff of the firm, combined,
across the firm and on the engagement.
<bullet> Experience of Audit Personnel. Average number of years
worked at a public accounting firm (whether or not PCAOB-registered) by
senior professionals across the firm and on the engagement.
<bullet> Industry Experience. Average years of career experience of
senior professionals in key industries audited by the firm at the firm
level and the audited company's primary industry at the engagement
level.
<bullet> Retention of Audit Personnel (firm-level only). Continuity
of senior professionals (through departures, reassignments, etc.)
across the firm.
<bullet> Allocation of Audit Hours. Percentage of hours incurred
prior to and following an issuer's year end across the firm's large
accelerated and accelerated filer engagements and on the specific
engagement.
<bullet> Restatement History (firm-level only). Restatements of
financial statements and management reports on ICFR that were audited
by the firm over the past three years.
Figure 1. Firm and Engagement Metrics Reporting
------------------------------------------------------------------------
Engagement-
Firm and engagement metrics reporting Firm- level level
------------------------------------------------------------------------
Partner and Manager Involvement....... [check] [check]
Workload.............................. [check] [check]
Training Hours for Audit Personnel.... [check] [check]
Experience of Audit Personnel......... [check] [check]
Industry Experience................... [check] [check]
Retention of Audit Personnel.......... [check] X
Allocation of Audit Hours............. [check] [check]
Restatement History................... [check] X
------------------------------------------------------------------------
The final suite of metrics focuses primarily on information about
audit personnel. The Board believes these metrics will provide new
insights into how engagements are staffed, including the extent of
involvement of senior personnel; auditors' overall workload; retention
of personnel across the firm; and levels of training, audit experience,
and industry-specific expertise. The final metrics will also provide
information about the extent of audit work completed prior to the
issuer's year end, an aspect of the audit process that the Board
believes is associated with improved audit outcomes, and about the
firm's history of restatements, a key measure of audit outcomes.
This new information will allow users to draw inferences about
audits and audit firms that are not possible today. Some may relate to
specific metrics. For example, a heavy workload for a particular
engagement team relative to the firm average or compared to peer firms
may raise questions about the quality of the work performed.
Conversely, a relatively high level of industry-specific experience,
particularly for an engagement in an industry requiring specific
accounting and auditing expertise, would be a positive signal. Other
inferences may relate to combinations of metrics. For example, the
personnel-related metrics, taken together, give an overall sense of how
an engagement is staffed that can be compared to firm averages and to
engagements for similar issuers. It is possible that the precise
numerical values of metrics may be important in some cases, but in
general the Board believes the metrics will be more useful to convey a
sense of whether a particular engagement or firm appears fairly typical
or is an outlier in one or more respects. This should provide a richer
context for understanding the work of the auditor than the current
environment of almost no publicly available information.
Based on the Board's oversight activities, it appears that the
largest firms are already tracking data in many of these areas,\86\ and
the Board believes that all firms should be able to capture the data
required by the metrics without undue burden. Many of the metrics are
based on data that firms already track or will be required to track for
purposes of other PCAOB requirements. For example, Partner and Manager
Involvement and Allocation of Audit Hours are based on the same ``total
audit hours'' that firms are already required to track for Form AP
reporting. Training hours will reflect the same information that firms
track to ensure proper licensing of their personnel. Restatement data,
to the extent firms are not already tracking it, is required to be
tracked under QC 1000.\87\ In addition to required data, many firms
track the experience of their personnel, as well as industry
experience, for use in marketing materials and for inclusion in
requests for proposals, and some firms already track staff retention
and turnover metrics as part of their human capital management. Firms
should be able to generate other data required by the final metrics,
such as Workload,
[[Page 99984]]
from their existing timekeeping systems with minimal additional effort.
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\86\ This point is discussed more fully below.
\87\ See QC 1000.64g, Note to QC 1000.67e.
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Below, the Board provides a detailed discussion of key terms and
concepts used in the metrics, as well as a description of each final
metric and its calculations.
5. Comparability
Developing comparable data regarding firms and engagements has been
one of the Board's key objectives throughout this rulemaking. As noted
previously, the information currently provided in firm transparency
reports is not based on common definitions or methods of calculation,
which prevents users from being able to make comparisons across firms
or over time. The Board believes that an important benefit of mandatory
reporting will be the ability of investors and other stakeholders to
compare the metrics, within the same firm over time, among firms, and
among engagements.
The basic approach of the Board's final rules--a required set of
metrics, derived from specified calculations incorporating consistently
defined terms and concepts--is designed to generate comparable data
with respect to firms and engagements that are subject to the reporting
requirements. One investor-related group agreed that standardized and
contextualized metrics will provide investors with a consistent data
set for analysis over time and for comparison between companies and
firms and a set of standardized data is more valuable than the ad hoc
individual measures that some firms have made on a voluntary basis.
In some cases, considering the importance of scalability, the Board
has also designed the proposed metrics as percentages (e.g., relative
to total audit hours) or averages where the Board believes that will
provide more comparability across firms and engagements than methods
based on absolute amounts.
Several firms and firm-related groups expressed skepticism about
whether the metrics could generate comparable data because of inherent
differences across firms and engagements, either with regard to any
metrics or engagement-level metrics specifically. For example, one
commenter said that differences between firms and among engagements
will create heterogeneity in the underlying data, so that cross-
sectional differences and changes over time will be unclear and
challenging to interpret, and will cause confusion. Another commenter
emphasized the importance of comparability between larger and smaller
firms so that investors and audit committees can interpret them
appropriately.
Two commenters stated that if context, including qualitative
aspects of data, is necessary to understand the metrics, that would
suggest that the data are not comparable, which could mean that the
metrics are not decision-useful and are at risk of misinterpretation.
One commenter expressed the opposite concern, that metrics would become
homogenized over time due to peer comparisons, making them considerably
less useful to investors.
One commenter asserted that the Board's choices in defining terms
and specifying calculations undermine the comparability of the
metrics--for example, because some metrics include issuers other than
accelerated or large accelerated filers, the Board's proposed industry
classification taxonomy differs from the one used by the SEC, and its
proposed period for measuring restatements differs from the period used
by a commonly-used data provider. These issues are addressed below in
the discussion of the final metrics.
With regard to firm-level metrics, several commenters expressed
concern that some or all of the metrics would not be comparable across
firms. They cited factors such as the size of the firm (including the
number of issuer and non-issuer engagements), specialization of the
firm's audit practice, strategies, priorities, investments,
organizational structure and quality control system of the firm, and
size of the issuer (which affects, among other things, whether an
integrated audit is required).
Several commenters expressed particular concern about comparability
between U.S. and non-U.S. firms because non-U.S. firms tend to have
structural, jurisdictional, and cultural aspects that differ from U.S.
firms. In addition, non-U.S. firms may have a relatively smaller issuer
audit practice, which could skew metrics that are based on the entire
practice because there may be significant differences between issuer
audits and the rest of the firm's audit practice, and could increase
the volatility of metrics based on the issuer practice because of its
small size. One of these commenters also criticized the application of
metrics to non-U.S. firms because they would not capture the
qualitative benefits of being a part of a global network (e.g., use of
consistent policies and procedures that drive use of training,
technology, consultation and other centrally available support across
the network). Another commenter also noted that some non-U.S. firms may
publicly report firm-level metrics on similar topics, such as workload,
using different calculation methods under PCAOB and local reporting
requirements, which would be costly for these firms and potentially
confusing to the users.
Many commenters expressed concern that engagement-level metrics are
inherently incomparable. Commenters suggested a number of factors that
could affect the comparability of engagement-level metrics, some
relating to the firm (e.g., the firm's organizational structure, IT
systems, resources, and audit methodologies), some to the individual
audit engagement (e.g., selected audit approaches including substantive
analytical procedures or test of details, audit findings including
internal control deficiencies, use of technology, first year or
recuring engagement, and risk of material misstatement), and some to
the issuer (e.g., business structure (including the extent of
centralization or decentralization and number of business units),
complexity of the organizational structure and IT infrastructures,
number of significant unusual transactions, and business and industry
risks affecting the issuer). In addition, one commenter noted that
there are significant developments (e.g., in delivery models,
technology, and professional rules and standards) that affect the way
audits are performed each year.
The Board solicited comment on whether comparability could be
enhanced by further segmenting firm-level reporting (for example, on
the basis of the size of the firm or the size of the issuer) or
engagement-level reporting (for example, on the basis of industry
sector, region, or whether it is a first-year audit). One commenter
stated that all stakeholders would benefit from a consistent
calculation methodology and comparable presentation format of firm-
level reporting. Several commenters indicated that more disaggregated
data for engagement- or office-level reporting could be useful, though
one acknowledged that this benefit would need to be weighed with the
cost of requiring this data. Other commenters cited challenges
associated with providing subsets of information, including that firm
and issuer sizes change over time and that smaller firms' metrics could
disclose individual client information. One of these asserted, however,
that the reported data could be disaggregated and compared without
additional data fields being collected.
The Board determined not to collect additional data fields or
require additional segmentation of the metrics at this time because of
the potential cost and complexity it would add to the process of
compiling and reporting the metrics. Stakeholders that want to perform
more detailed analysis (for
[[Page 99985]]
example, segmenting data based on size of the issuer, size of the firm,
region, or industry sector) will be able to do so using information
that is already publicly available in combination with the metrics.
The Board understands that firms differ from each other in the
number and types of audits they perform and in their resources, such as
the number, experience, and degree of specialization of their people as
well as their access to technological resources and resources provided
by networks. The Board also understands that engagements differ based
on factors such as the size of the engagement, the industry of the
company, the risks related to the company and the audit, whether it is
a new engagement for the firm or the engagement partner.
However, the Board does not believe that such differences make
useful, comparable metrics impossible. As one commenter noted,
investors are experienced in using a wide array of performance metrics,
such as non-GAAP measures and key performance indicators, and are able
to analyze them despite a lack of perfect comparability between
companies or over time. Indeed, the commenter argued that, due to the
nature of the audit process and audit firms, the proposed firm and
engagement metrics have a greater propensity for comparability than
many companies whose financial results investors already analyze.
The Board believes it has also addressed many of the challenges
associated with potential lack of comparability by narrowing the
metrics to a group that should send relatively clear, comprehensible
signals in a variety of different contexts. Metrics on workload,
training hours, experience in public accounting, retention of
personnel, and restatement history should send a clear signal,
regardless of the circumstances of the firm and the engagement. Metrics
on partner and management involvement and allocation of audit hours may
be more influenced by those circumstances. For example, unusually high
involvement by senior professionals could signal an especially complex
audit or one that encountered unexpected problems; a relatively low
percentage of audit hours incurred before year end could signal a
poorly planned audit or simply that, due to the nature and scope of a
company's business, it was unnecessary or impractical to perform many
audit procedures prior to year end. The Board has limited the scope of
the Partner and Manager Involvement, Workload, and Allocation of Audit
Hours metrics to large accelerated filer and accelerated filer
engagements to enhance the comparability of the underlying data. The
metric on relevant industry experience may also be influenced by the
circumstances of the firm and the engagement in that industry
experience may be more important in some industries than others.
However, the Board believes users will be able to interpret this metric
when taken together with the other information about the issuer and the
auditor that is available to them. Common definitions and consistent
methodology will also contribute to comparability. Taken together, the
metrics should enable users to make both broad comparisons across the
full population of reporting firms and accelerated filer and large
accelerated filer audits, and more targeted comparisons across smaller
subgroups of similar firms and engagements, and will be a very
significant improvement over the information that is currently
available--ad hoc reporting by the largest firms at the firm level, and
essentially no information at the engagement level.
Of course, any additional context that firms believe is necessary
for proper understanding can be provided as narrative disclosure. While
narrative disclosure will not make the metrics comparable, it will
balance the comparability of standardized metrics disclosure with the
ability to provide further context if needed. For example, a firm could
provide an explanation for why a metric changed significantly from what
was reported in the prior year.
6. Time Period Covered by the Metrics
Firm-level metrics are reported as of September 30, generally
covering the period from October 1 of the previous year through
September 30.\88\ Specific commenter feedback regarding the reporting
period is discussed in detail below. Firms are required to file Form FM
on or before November 30, 61 days after the end of the reporting
period, also discussed below.
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\88\ For two of the metrics areas the Board proposed, Quality
Performance Ratings and Compensation and Audit Firms' Internal
Monitoring, firms would have reported based on their own internally
established cycles. Neither of these is included in the metrics the
Board adopted.
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Related to the Training Hours for Audit Personnel metric, the Board
understands that many firms already have defined periods or cycles that
may not align with the final reporting date (e.g., for which the firm
tracks training data in order to comply with state continuing
professional education (``CPE'') reporting requirements). Therefore,
the firm is permitted to use its already-established training calendar
cycle for calculation and reporting of this metric, provided that the
cycle covers a 12-month period (which is expected to be consistently
applied). The Board does not believe that the data will be especially
sensitive related to any particular 12-month period. The Board believes
allowing firms flexibility to use their internally established dates
for this metric is appropriate and still provides the comparability
discussed above since all firms would be reporting this metric based on
a 12-month period.
For engagement-level metrics, which will be reported on Form AP,
the data and information underlying the reported metrics will generally
be based on the most recent period's audit. However, some engagement-
level metrics relate to information about personnel on the engagement,
such as Experience of Audit Personnel, and these metrics will reflect
information that may not be directly related to the most recent
period's audit. Specific commenter feedback regarding the reporting
period and filing date of Form AP is discussed in detail below.
In addition, the time period covered by each metric also is
discussed in more detail below.
7. Rounding and Use of Estimates
Many of the metrics involve the calculation of a numerical value
that may result in very small fractional parts. Consistent with the
proposal, firms are required to report metrics that are rounded to the
nearest whole number, except where additional decimal places (no more
than two) are needed to properly interpret the result or to enable
comparison to prior periods.
In calculating the firm- and engagement-level metrics, actual
amounts should be used, if available. However, if actual amounts are
unavailable, firms are permitted to use a reasonable method to estimate
the components of a calculation. This approach is consistent with
existing Form AP, which allows firms to use a reasonable method to
estimate certain information required in the calculation of total audit
hours.\89\ Firms are also required to document in their files the
method(s) used to estimate amounts when actual amounts are unavailable.
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\89\ See Instructions to Part IV of Form AP as currently in
effect. Under the amendments to Form AP adopted by the Board, this
appears in General Instruction 9, as amended.
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Commenters generally agreed with the proposed approaches, with one
commenter agreeing that rounding and estimation should be permitted for
all metrics. Other commenters stated that rounding and estimation will
be
[[Page 99986]]
especially important for metrics related to the reporting of hours,
with two of these pointing to the subjectivity involved with the
proposed metrics that would require allocation of hours to specific
audit areas.\90\ One commenter stated that the PCAOB should not
restrict the number of decimal places. However, the Board believes that
limiting reporting to hundredths will allow for the presentation of an
appropriate level of detail while ensuring comparability of
presentation and avoiding the technical issues that could arise with
unlimited digits.
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\90\ The proposed Audit Hours and Risk Areas metric is not
included in the metric that the Board adopted, as discussed further
below.
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8. Operational Narrative Disclosure
In order to give firms the ability to provide any context they
thought necessary for an appropriate understanding of the reported
metrics, the Board proposed that firms would be permitted, but not
required, to provide a brief narrative disclosure (no more than 500
characters per metric) to accompany any, or all, of the firm-level and
engagement-level metrics reported on Form FM or Form AP. While some
commenters agreed with the proposal to provide firms with the ability
to include an optional narrative to accompany the metrics, one
commenter explicitly agreed with the proposed 500-character limit, one
commenter asserted that the 500-character limit greatly limits the
context that could be provided, and one commenter suggested revising
the character limit to no more than 1,000 characters. Two commenters
suggested increasing the character limit beyond 500 characters without
suggesting an upper limit. Approximately half of the commenters
suggested that there should be no character limit imposed on the
optional narrative. A firm-related organization also suggested that the
narrative be mandatory and not optional, while a firm suggested that
the utility of metrics would be diminished without potentially
extensive accompanying narrative.
One commenter suggested that firms can also provide a link in the
narrative to their transparency reports and audit quality reports if
they wish to provide further context to the metrics. One commenter
stated that there should be guidelines such as the narratives being
factual, directly relevant to the metric, and free from promotional or
marketing language. Another commenter stated that it would provide the
following narrative in Form FM, potentially with respect to every firm
metric:
We do not believe any one metric or even a combination of metrics is
necessarily indicative of audit quality, nor is it useful or
productive to speculate on the questions reviewers of this
information may have on each metric for every audit. We further
discuss this metric in our Audit Quality Report, along with the
measures we believe are better indications of our audit quality.\91\
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\91\ See Letter from PricewaterhouseCoopers LLP (June 7, 2024).
Taking into consideration commenter feedback, the Board is
retaining the option to provide narrative disclosure with each metric
but expanding the character limit to 1,000 characters. The Board
believes this character limit strikes the right balance between
allowing firms the ability to provide any contextual information they
believe is necessary to interpret the results of a particular metric
while also managing the length of the forms and keeping them to a
manageable size.\92\
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\92\ Nothing in PCAOB rules and forms, including Form FM and
Form AP, provides for incorporation by reference of external
documents or other materials.
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In addition, in an effort to assist firms in making the optional
narrative disclosures as helpful and substantive as possible, to help
remind firms of their responsibility under QC 1000 to produce and
report information that is accurate and not misleading, and to reduce
the possibility that users will find the narrative confusing or in
conflict with the required metrics, the following provision has been
added as a general instruction to Form FM and a note to Part VI of Form
AP to provide additional direction to those firms electing to provide
an optional narrative for any metric:
``When the Firm elects to provide a brief narrative to accompany any
of the Items in [the part of the form in which metrics are
reported], language should be concise and focused on the reported
metrics, with a view to facilitating the reader's understanding of
the metrics.''
Firm and Engagement Metrics
1. General Comments
Investors and investor-group commenters were broadly supportive of
the proposed metrics, saying that the metric areas would provide
investors with decision-useful information about audit firms and
audits. However, they expressed mixed views on certain specific metric
areas. These commenters also suggested additional metric areas,
including investments in both training audit professionals and in
technology, and further details related to PCAOB inspection results
(e.g., Part I.A deficiencies). The Board has addressed these comments
in the discussion of each metric area below. On the topic of
implementation of the proposed metrics, one commenter requested
analytical tools and research showing how investors might use metrics.
The information disclosed on Form FM will be available in a searchable
database on the Board's website, similar to the Form AP database, and
will provide users of the information the ability to perform
comparisons across engagements.
Firms and firm-related groups were broadly supportive of some of
the proposed firm-level metrics. However, they generally opposed public
reporting of engagement-level metrics, asserting that no amount of
context around engagement-level metrics would provide an appropriate
basis for public reporting. These commenters suggested that the audit
committee, being deeply familiar with the company, the audit, and the
independent auditor, is the only party equipped to appropriately
interpret the metrics. Instead of public reporting, they suggested
several alternatives, including adding a requirement for communication
to the audit committee under AS 1301; expanding SEC requirements for
audit committee disclosures; encouraging voluntary reporting; issuing
PCAOB Spotlights, practice alerts, or guidance; and performing further
outreach before adopting any requirements. These alternatives are
discussed in greater detail above. One commenter suggested that the
PCAOB take a proactive role in educating all users as to the proper use
of reported metrics, including the need for them to be interpreted in
context and making users aware of potential dangers and drawbacks
associated with a mere comparison of isolated metrics between firms.
The Board discussed the forms and how the data can be accessed in more
detail below.
Commenters generally expressed concern that proposed metrics were
not all calculated from the same data sources. Some metrics were
calculated on the basis of all audit engagements, others on the basis
of issuer engagements, and engagement-level metrics on the basis of
large accelerated and accelerated filer engagements. Some commenters
suggested that calculating firm-level metrics based solely on total
audit hours on large accelerated and accelerated filer engagements may
result in more comparable data among firms. The Board discussed this in
greater detail below.
Other commenters recommended that the PCAOB establish criteria for
determining which metric areas warrant public disclosure, so as to
build in flexibility over time and minimize the risk of
misinterpretation. The following
[[Page 99987]]
criteria were among those suggested by these commenters:
<bullet> Is the metric's relation with audit quality unambiguous?
<bullet> Can the metric be appropriately interpreted on its own,
without additional context (e.g., client mix or complexity--size,
industry, international operations; firm's audit approach; etc.)?
<bullet> If disclosure of the metric results in behavioral change
in audit firms, does research suggest the change will improve audit
quality or, at least, not adversely impact audit quality?
<bullet> Will the metric require firms to develop systems,
processes, and procedures that they do not already have and at a
reasonable cost?
<bullet> Will the metric impose ongoing administrative burdens on
engagement teams that result in a reallocation of effort away from
audit quality enhancing activities?
<bullet> Will the metrics align with measures used in the system of
quality control to manage the audit practice?
<bullet> Will the metrics meet the information needs of the users?
<bullet> Will the disclosure of metrics not result in the
communication of proprietary information?
In responding to commenters and articulating the rationale for
adopting the firm- and engagement-level metrics below, the Board
considered the views of commenters, including these suggested
evaluation criteria. The Board believes some of the suggested criteria
would impose an unworkable framework that is inconsistent with the
Board's regulatory objectives. For example, the Board does not think it
is necessarily practicable to establish an ``unambiguous'' relationship
to audit quality, as suggested, for any individual metric, nor would
such an exercise be consistent with the intended uses of the metrics,
which envisions their being considered as part of the total mix of
information available to stakeholders. Moreover, the Board believes
that imposing rigid criteria for each proposed metric imposes too high
a burden and is not conducive to effective regulation. It does not
permit the Board to account for facts and circumstances unique to
individual metrics and their potential uses, nor does it account for
the holistic manner in which the Board intends for the metrics to be
used or developing information about the utility of the metrics over
time.
A number of commenters recommended that the PCAOB engage in
additional stakeholder outreach, sponsor pilot programs, or otherwise
engage in further study and research before finalizing the metrics
requirements, or even withdraw the proposal. Based on the lengthy
project history described in Section II, which includes repeated input
over time from the Board's advisory groups, multiple rounds of public
notice and comment, study of relevant academic literature, study of
voluntary firm disclosures, and consideration of actions taken in other
jurisdictions, the Board does not believe further study is necessary or
that the Board's investor protection mission would be served by
delaying adoption of the final rules. However, the Board will monitor
and determine if further implementation resources or support is
appropriate for users of these metrics.
2. Key Terms and Concepts
As described below, the Board developed certain key terms and
concepts that were used in calculating the proposed metrics. Where
practical and relevant, these key terms and concepts align with
existing definitions in PCAOB standards and rules. In other cases, the
Board has developed new definitions and new descriptions of terms
specifically for use in the metrics, which are not intended to inform
the interpretation of other rules, standards, or forms of the PCAOB.
The Board provided the key terms and concepts along with formulas for
calculating each metric to drive consistency among firms and engagement
teams.
One investor-related group said that the units of account (e.g.,
hours, years of experience) or measurement used within the proposed
metrics are sufficiently standardized and adaptable by firms as they
are commonly used within audit practice or defined within the existing
standards.
Some commenters raised concerns about the definitions and
descriptions of the population used for various metrics or about not
having a defined set of terms applicable to all standards and rules.
Other commenters questioned whether the PCAOB had provided sufficient
guidance to address potential variations in the interpretation and
application of terminology used in the metrics or asserted that not
having sufficient guidance would add complexity and challenges in
calculating the metrics and understanding them or result in
inconsistent reporting of metrics or lack of comparability across audit
firms and audits engagements. Two of these commenters recommended that
the PCAOB create a glossary of defined terms to support consistent use
of terms throughout the standards and rules or conduct additional study
to evaluate the defined terms in the proposal against terms already
defined in other PCAOB standards and rules. Another commenter raised a
concern that defining terms and specifying computations for each metric
undermines their comparability.
Some firms offered examples of areas where they suggested that
clarification would be needed, which the Board discussed below in the
context of the relevant metrics. In general, however, the Board
continues to believe that the use of defined terms is critical to
driving consistent calculation of the metrics.
Other firms questioned why different metrics are based on different
underlying data (for example, total audit hours vs. total hours worked
or engagement team vs. core engagement team). In general, the Board's
choice of the data on which to base a metric is tailored to the
intended objective of the metric, and also takes into account the
practicality and potential costs associated with gathering data and
calculating the metrics. The Board does not believe that metrics based
on a single data set would be as clear or as informative.
The Board addresses specific concerns raised in the discussion of
each metric below. The Board has clarified certain terms and concepts
used or revised the descriptions of proposed terms and concepts after
consideration of the specific comments received.
i. Populations Covered by the Metrics
a. Partners and Managers (Used in All Metric Areas Except for
Allocation of Audit Hours and Restatement History); Staff (Used in
Training Hours for Audit Personnel)
While some of the functional roles played by individuals involved
in an audit are otherwise defined and used in the Board's standards
(e.g., engagement partner \93\ and EQR),\94\ the Board proposed to
clarify following additional functional roles referred to in the
metrics to ensure consistent reporting by firms.
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\93\ See paragraph .A1 of AS 1201, Supervision of the Audit
Engagement (``the member of the engagement team with primary
responsibility for the audit'').
\94\ See AS 1220, Engagement Quality Review, for a description
of the engagement quality reviewer's role.
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Partners--Partners or persons in an equivalent position (e.g.,
shareholders, members, or other principals) who participate in audits;
\95\
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\95\ As noted in the proposing release, the Board believes this
is consistent with the use of the term ``partner'' in the Board's
auditing standards. Although the Board does not usually state
expressly that partners are limited to those who participate in
audits, as a practical matter the Board's auditing standards apply
only in those circumstances.
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[[Page 99988]]
Managers--Accountants or other professional staff commonly referred
to as managers or senior managers (or persons in an equivalent
position) who participate in audits; and
Staff--Accountants or other professional staff who participate in
audits and are not partners or managers.
Some engagement-level metrics differentiate between engagement
partner and the other partners who participate in the audit. The Board
believes the differences between the responsibilities borne by
engagement partner and those of other participating partners justify
presenting data for the two categories separately in those metrics. For
firm-level metrics, ``engagement partners'' include all partners who
served as the engagement partner on any audit the firm performed of an
accelerated filer or large accelerated filer. Partners that are
included in the metrics as an engagement partner are not included as an
``other partner,'' even if they served in a non-engagement partner role
in other audits (in other words, partners are only counted once within
any metric).
The Board adopted the definitions of partners, managers, and staff
as proposed, with clarifications discussed below.
The Board solicited comment on whether the proposed definitions of
partners, managers, and staff are clear and appropriate. Two commenters
agreed that the proposed definitions for partners, managers, and staff
are clear and appropriate, one saying that linking the definitions used
in the metrics to existing definitions would help in preventing
multiple definitions throughout the auditing standards. However, some
commenters expressed concern that titles and roles are not consistent
across firms or most firms have roles which do not clearly or obviously
reconcile to the roles listed. One of these commenters also raised a
concern about continuing emphasis on the engagement staffing model that
currently exists, on the basis that artificial intelligence and other
tools could affect the staffing of audit engagements in the future.
This commenter recommended including ``contractors'' engaged by firms
in the definition and clarifying whether the definitions are meant to
be descriptions of the roles rather than legal interpretations of the
roles. Another commenter recommended aligning the definitions of
partners, managers and staff with the definition of engagement team, by
using the phrase ``who perform audit procedures'' instead of ``who
participate in audits'' to avoid inclusion of personnel who may
participate in audits in an administrative or project management
function, but who do not perform audit procedures. Another commenter
expressed concern that audit effort associated with roles typically
referred to as ``national office'' and ``professional practice
development,'' especially for managers through partners, would be
excluded from the definitions and calculations of the metrics.
For the definition of partners, one commenter questioned whether
the definition is intended to have any alignment with ownership
interests in a firm and requested clarification as to how a leadership
level role such as a managing director would be classified because, in
the commenter's view, that role does not appear to meet the definition
of either a partner or a manager.
For the definition of managers, the same commenter requested
clarification on whether the manager title is based on the person's
general title in the firm because, for example, in certain cases an
experienced supervisor may serve a manager capacity on a less complex
engagement. Another commenter suggested adding a specific number of
years of audit experience to the definition of managers because of the
risk that firms could inflate percentage of audit hours incurred by
managers by changing the titles of more junior professionals to
increase the number of managers.
The Board adopted the definitions of partners, managers, and staff
as proposed. Because there are differing legal structures and titles
among firms, the Board is providing foundational definitions so that
each firm can allocate its professionals in three levels: partners,
managers, and staff. The Board believes that the vast majority of firms
have these three levels, and that, although staffing models may change
over time, these levels are likely to be retained for the foreseeable
future. The Board also believes that other job titles, such as managing
director, can be fit into the appropriate category based on the level
of responsibility assigned to them. For example, in a firm where
managing directors are given similar responsibilities as the firm's
principals (for example, signing authority on audit engagements), they
would be treated as partners under the Board's definition; otherwise,
they would align with managers. Similarly, professionals in a firm that
does not use the title ``manager'' would be reported as managers if
they are assigned the duties that are typically carried out by managers
and senior managers at firms that do use those titles. Professionals
who work under the firm's direction and control and function as the
firm's employees, such as secondees and contractors, may or may not
have these titles but would be reported based on their level of
responsibility and decision-making authority. In all cases, the
determination would be made based on the responsibilities, decision-
making authority, and scope of duties of the person. If necessary,
firms could utilize the optional narrative disclosure to describe how
the firm aligned their categories of professionals with partners,
managers, or staff levels.
The Board considered adding a specified minimum number of years of
audit experience in the definition of manager but determined not to.
Some managers qualify for promotion with fewer years of audit
experience due to other relevant education or experience. The Board was
concerned that building a minimum number of years of audit experience
into the definition would result in people with the responsibilities
and title of manager being required to be reported as staff, making the
metrics less meaningful while increasing the administrative burden
associated with reporting.
The Board did not use the phrase ``who performed audit procedures''
in the definitions of partners, managers, and staff because use of this
term would exclude professionals who do not perform audit procedures--
for example, partners who only conduct engagement quality reviews \96\
or national office personnel in connection with certain types of
consultations that are not audit procedures.
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\96\ Engagement quality review is not considered the performance
of an audit procedure. See AS 1220.07 (The EQR ``should not make
decisions on behalf of the engagement team or assume any of the
responsibilities of the engagement team.'').
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Because the definitions of managers and staff are limited to
``accountants or other professional staff,'' administrative personnel
are not included.
In the Board's proposal, the Board generally did not specify how to
account for promotions within the reporting period from one level to
another (e.g., from manager to partner),\97\ although the Board noted
that firms would be expected to be consistent in their approach across
metrics. The only commenter to address this issue supported the
flexibility
[[Page 99989]]
proposed with respect to the treatment of promotions. Consistent with
the proposal, the final rules do not impose any prescriptive
requirements regarding the reporting of professionals whose job title
or responsibilities change during the reporting period. However, the
Board believes that treating such transitions inconsistently, whether
within a metric or across metrics, would be misleading and the Board
expects firms to report such changes in a consistent way.
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\97\ Note, however, that the Retention of Audit Personnel metric
treats promotions as if they had occurred at the beginning of the
year. See note to Item 4.6 of Form FM.
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(1) Participate in Audits (Used in the Terms Partners, Managers, and
Staff)
``Participate in audits'' is a broad concept that would include the
work of all professionals (partners, managers, and staff) that are
involved in the firm's audits, including tax personnel, information
technology (``IT'') personnel, and employed specialists.
The Board proposed the phrase ``participate in audits'' rather than
referring to the activities of individuals assigned to a specific
business line, such as the firm's audit practice, because some firms do
not assign individuals to specific business lines. However, the Board
solicited comment on whether the relevant population would be partners,
managers, and staff of the firm's audit practice, if the firm assigns
its professionals to specific business lines.
Some commenters agreed with the phrase ``participate in audits'' as
used in the proposal. One of these commenters suggested that, because
firms have different structures, attempting to separate members of the
engagement team based on a firm's structure could lead to less
comparability across metrics. One firm stated that it assigns
individuals to specific business lines, and collecting data based on
that assigned business line would be more practical to implement versus
the proposal's requirement to include all individuals participating in
audits.
Some other commenters stated that firm-level metrics should look
only to the firm's audit practice because (i) the inclusion of other
service lines in the metrics would impair comparability between firms
due to the varying size and scope of non-assurance practices and (ii)
the work of tax professionals and consultants would not improve the
usefulness of these metrics for the purposes outlined in the Board's
proposal. Another commenter requested clarification on how to account
for individuals who move between audit support roles and engagement-
facing functions.
The final definitions of ``partners,'' ``managers,'' and ``staff''
include the phrase, ``who participate in audits,'' as proposed. Because
some firms do not assign partners and other professionals to a specific
business line, the Board believes this approach is the best way to
drive consistent reporting by firms with different organizational
structures.
In the proposal, the Board clarified that members of the engagement
team who participate in audits would include every partner and manager
who worked on any aspect of the audit, even if their involvement was
extremely limited. The Board proposed not to provide a participation
threshold, such as a minimum number of hours, because the Board
believes, based on the objectives of these metrics, that the metrics
should capture all partners, managers, and staff who participate in
audits in any capacity. However, the Board solicited comment on whether
the concept should include a participation threshold.
One commenter agreed there was no need to create a minimum
threshold for participation on the basis that it would increase the
complexity and cost of calculating the metrics without a corresponding
benefit. Another commenter recommended establishing a minimum threshold
for participation because exclusion of professionals with certain firm
roles (e.g., firm leadership, national office, or specialist line of
service individuals with limited participation during the year in any
specific engagement) would not reduce the reliability of the metric.
This commenter further recommended creating a minimum threshold for
purposes of firm-level metrics, such as individuals who spent more than
10% of their time participating on audit engagements, and engagement-
level metrics (e.g., similar to the concept of core engagement team).
This commenter and another commenter recommended the additional
threshold as optional for firms to use due to cost-benefit
considerations, particularly for smaller firms, and should only be
considered if additional thresholds allow for simpler aggregation or
preparation of the data.
The Board did not adopt additional thresholds to be used for firm-
level or engagement-level metrics, except for the concept of core
engagement team used in certain engagement-level metrics discussed
below. The objectives of the five metrics that use ``partners,
managers, and staff of the firm'' are to understand the firm's
professionals who participate in audits in totality, and the Board
believes imposing a threshold on what counts as participation would
defeat that objective.
(2) Partners, Managers, and Staff ``of The Firm'' (Used in Workload,
Training Hours for Audit Personnel, Experience of Audit Personnel,
Industry Experience, and Retention of Audit Personnel)
Because firm-level metrics provide information about the firm, in
calculating some firm-level metrics, the Board proposed to include
partners, managers, and staff ``of the firm,'' which refers to
individuals participating in audits who work for the firm or work under
the firm's direction and control and function as the firm's employees
(e.g., secondees and contractors), regardless of whether the audits are
performed under PCAOB standards or other auditing standards.\98\ The
Board believes including individuals in the firm-level metrics who
participate on any firm audit is appropriate because these metrics
would provide information about the firm and not about specific
engagements (for example, in the area of firm-level industry
experience, which would be relevant across a firm's entire audit
practice). The Board added a new section to Part III, Terminology in
Form FM to clarify the meaning of these phrases. The Board also
clarified that participation in audits means any involvement
(including, for example, consultation on specific matters), and thus
may include individuals outside the engagement team, such as national
office personnel.
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\98\ This should be interpreted consistently with ``firm
personnel,'' as defined in QC 1000.A5.
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b. Engagement Team (Used in Partner and Manager Involvement)
The Board proposed to provide information about partners and
managers on the engagement team, a term defined in AS 2101, Audit
Planning.\99\ The Board believes it is
[[Page 99990]]
appropriate to provide metrics related specifically to the engagement
team because this would provide investors and other stakeholders with
relevant information related to the audit as a whole, who perform audit
procedures on the audit or assist in planning or supervising the audit.
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\99\ The ``engagement team'' is defined in AS 2101.A3 [as
adopted by the Board in Planning and Supervision of Audits Involving
Other Auditors and Dividing Responsibility for the Audit with
Another Accounting Firm, PCAOB Rel. No. 2022-002 (June 21, 2022), to
take effect with respect to audits of fiscal years ending on or
after December 15, 2024] as follows (footnotes omitted):
.A3 Engagement team--
a. Engagement team includes:
1. Partners, principals, and shareholders of, and accountants
and other professional staff employed or engaged by, the lead
auditor or other accounting firms who perform audit procedures on an
audit or assist the engagement partner in fulfilling his or her
planning or supervisory responsibilities on the audit pursuant to
this standard or AS 1201, Supervision of the Audit Engagement; and
2. Specialists who, in connection with the audit, (i) are
employed by the lead auditor or an other auditor participating in
the audit and (ii) assist that auditor in obtaining or evaluating
audit evidence with respect to a relevant assertion of a significant
account or disclosure.
b. Engagement team does not include:
1. The engagement quality reviewer and those assisting the
reviewer (to which AS 1220, Engagement Quality Review, applies);
2. Partners, principals, and shareholders of, and other
individuals employed or engaged by, another accounting firm in
situations in which the lead auditor divides responsibility for the
audit with the other firm under AS 1206, Dividing Responsibility for
the Audit with Another Accounting Firm; or
3. Engaged specialists.
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One commenter suggested clarifying whether ``engagement team'' for
purposes of this rule includes internal specialists. Another commenter
stated that the proposal appeared to provide an alternative definition
of partners and managers on the engagement team compared to AS 2101,
which is aligned to other PCAOB standards, and recommended providing
clarity as to the treatment of specialists. Another commenter expressed
concern that the definition of ``engagement team'' under AS 2101 could
have ramifications for the calculation of engagement-level metrics, but
did not provide any indication of what those ramifications might be.
The Board adopted the AS 2101 term ``engagement team,'' as
proposed. The definition of engagement team in AS 2101 includes
specialists who, in connection with the audit, (i) are employed by the
lead auditor or an other auditor participating in the audit and (ii)
assist that auditor in obtaining or evaluating audit evidence with
respect to a relevant assertion of a significant account or disclosure.
It excludes engaged specialists.
Figure 2. Engagement Team Members
[GRAPHIC] [TIFF OMITTED] TN11DE24.022
[[Page 99991]]
c. Core Engagement Team (Used in Workload, Training Hours for Audit
Personnel, Experience of Audit Personnel, and Industry
Experience)<SUP>100 101 102 103</SUP>
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\100\ See AS 1210, Using the Work of an Auditor-Engaged
Specialist.
\101\ AS 1220 applies to those persons.
\102\ AS 2601, Consideration of an Entity's Use of a Service
Organization, sets forth the auditor's responsibilities with respect
to using the work of service auditors who issue reports on the
controls of a third-party service organization.
\103\ Because of their roles at the company, the work of
individuals employed or engaged by the company is not subject to
supervision under AS 1201; they are not considered members of the
engagement team under the adopted definition. PCAOB standards
include requirements regarding the auditor's use of work performed
by some of these individuals. See, e.g., AS 1105, Audit Evidence,
Appendix A; AS 2201, An Audit of Internal Control Over Financial
Reporting That Is Integrated With An Audit of Financial Statements;
AS 2605, Consideration of the Internal Audit Function.
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For some engagement-level metrics, the Board proposed to include
information about members of the ``core engagement team'' rather than
the full ``engagement team,'' so as to focus the metrics on the
individuals who make the primary decisions regarding planning and
performance of the audit and determine the final conclusions supporting
the auditor's opinion. With the ``core engagement team'' concept, the
Board intends to provide more meaningful and focused data by excluding
information about certain partners and managers with lesser
participation. The Board also simplifies the data collection effort by
limiting these metrics to firm personnel.
The Board proposed that the core engagement team would include the
engagement partner and members of the engagement team who are partners
or employees of the firm issuing the audit report. In addition, under
the proposal, core engagement team would include either a partner
(excluding the engagement partner as described above) who worked ten or
more hours on the engagement or a manager or staff who worked on the
engagement for 40 or more hours or, if less, 2% or more of the total
hours.\104\
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\104\ See below for the discussion of ``total audit hours.''
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Figure 3 illustrates how partners, managers, and staff used in the
calculation of the metrics, relate to the firm, engagement team, and
the core engagement team.
Figure 3. Relationship Between the Groups of Individuals Included in
Metric Calculations
[GRAPHIC] [TIFF OMITTED] TN11DE24.000
The Board solicited comments on whether the proposed definition of
core engagement team, and the proposed participation thresholds for
inclusion in the core engagement team, were appropriate.
One commenter agreed that at the engagement level, metrics related
to only the core engagement team will be more useful to investors and
other stakeholders. Two commenters supported the proposed 10-hour
minimum threshold for partners other than engagement partners. One of
these
[[Page 99992]]
also supported the proposed threshold for managers and staff. This
commenter suggested, however, that the Board includes only partners and
employees of the lead audit firm and exclude component auditors.
One commenter suggested aligning the definition of ``core
engagement team'' with the ``lead auditor'' definition in amended AS
1201 and AS 2101. Another commenter indicated that the creation of
thresholds would conflict with other existing aspects of Form AP. This
commenter further stated there would be challenges for firms to
accumulate and report this data, specifically obtaining the data from
firms that are not required to report on Form FM or Form AP and
additional time may be needed for implementation of these metrics.
Another commenter recommended replacing the phrase ``who worked''
in the proposed definition to ``who performed audit procedures'' to be
consistent with the definitions of engagement team because this
commenter was concerned that wording inconsistencies may cause
confusion as to whether the same criteria apply across the various
definitions. One commenter indicated that it is not clear on what basis
the proposed threshold is determined and further indicated that the
concept of core engagement team suggests that certain work in the
engagement would be either not important or optional and recommended
further study.
The proposal also asked whether other individuals involved in the
audit (e.g., individuals in the firm's national office, the EQR,
employees of shared service centers, or individuals involved in loaned
staff arrangements and alternative practice structures) should be
treated differently in the metrics and, if so, how they should be
considered in the definition of core engagement team. One commenter
sought clarification as to whether shared service center employees
should be included in the definition of core engagement team and
recommended considering the nature and use of centralized services and
how service centers continue to evolve across a changing professional
landscape. Another commenter suggested including the EQR and
specialists in the core engagement team but not treating them
differently from other individuals involved in the audit. Two
commenters recommended the definition to simply include all individuals
who charged time to the engagement or whose cost was included within
the engagement to minimize the cost of reporting the metrics, but one
of the two commenters recommended excluding the quality functions such
as the EQR to avoid any impression that they are part of the engagement
team.
The Board adopted the proposed definition of core engagement team
substantially as proposed:
1. The engagement partner and
2. Members of the engagement team who are:
a. Partners or employees of the registered public accounting firm
issuing the audit report (or individuals who work under that firm's
direction and control and function as the firm's employees); and
b. Either of the following:
i. A partner (excluding the engagement partner) who reported ten or
more hours on the engagement; or
ii. Managers and staff who reported 40 or more hours on the
engagement or, if less, 2% or more of the total audit hours.
As suggested by two commenters, the Board reformatted the
presentation of core engagement team to clarify that the engagement
partner is part of the core engagement team. In addition, the Board
modified the descriptions of core engagement team members by
substituting ``who reported'' for ``who worked'' to make clear that the
basis for determining whether hours thresholds have been reached is
time reported in the firm's timekeeping system. The Board did not align
the definition of ``core engagement team'' with the ``lead auditor''
definition because including information from all of the partners and
managers of the firm, rather than just those with significant
participation in the engagement, would potentially skew or dilute the
data, making the metrics less meaningful.
As the Board proposed and the Board adopted, the term core
engagement team excludes other auditors. As a result, there will be no
need to obtain data from other auditors, and the definition will not
encompass firms that are not required to file Form AP. Under current
reporting requirements for Form AP, the lead auditor has to accumulate
all of the hours worked on issuer engagements.\105\ While it will
require some disaggregation of this data, the Board does not believe
reporting the data for the engagement team for Partner and Manager
Involvement and total audit hours for Allocation of Audit Hours will
create a significant challenge for firms. Regarding individuals at
shared service centers, if partners or managers employed by a shared
service center meet the definition of core engagement team, they will
be included. As further discussed below, the Board did not include the
EQR in the definition of the ``core engagement team''; the core
engagement team is a subset of the engagement team, and the EQR is not
a part of the engagement team.
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\105\ See discussion of ``total audit hours'' used for Form AP
reporting below.
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Figure 4. Core Engagement Team Members
[[Page 99993]]
[GRAPHIC] [TIFF OMITTED] TN11DE24.003
[[Page 99994]]
d. Engagement Quality Reviewer (Used in Experience of Audit Personnel
and Industry Experience)
The objective of the EQR is to perform an evaluation of the
significant judgments made by the engagement team and the related
conclusions reached in forming the overall conclusion on the engagement
and in preparing the engagement report, if a report is to be issued, in
order to determine whether to provide concurring approval of
issuance.\107\ The EQR must possess the level of knowledge and
competence related to accounting, auditing, and financial reporting
required to serve as the engagement partner on the engagement under
review.\108\ While reporting on specific hours spent by the EQR or
including the EQR's time in engagement-level metrics may have a
negligeable quantitative impact, the Board believes reporting on EQR's
competency for two of the engagement-level metric areas will be
important and valuable for stakeholders.
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\107\ See AS 1220.02.
\108\ See AS 1220.05.
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Because the EQR is not a member of the engagement team as defined
in AS 2101, EQRs were not included in the proposed metrics when the
proposed metrics required disclosure of the engagement team's
information unless the disclosure of EQRs was specifically called out
in the proposed metric area. Therefore, the Board solicited comment
about whether EQRs should be added to any of the proposed metrics,
separately or together with a group such as the engagement team.
Some commenters agreed that EQRs should be excluded from the
engagement-level metrics. These commenters indicated not to add them as
a separate category because the EQR is not a part of the engagement
team as defined by AS 2101 and the inclusion of the EQR would be
inconsistent with AS 2101.
One commenter suggested that the EQR should be included in the
metrics but presented separately, to ensure that there is no impression
that the EQR is not independent. One commenter recommended including
EQR in firm-level metrics because firms generally do not assign
partners to solely perform engagement quality reviews and firm-level
metrics should include all partners with no requirement to allocate
their time spent between the roles of an engagement partner and an EQR.
Two investor-related commenters generally supported including EQR hours
in the metrics. Another commenter questioned the rationale for not
including metrics relating specifically to engagement quality
reviewers, despite the fact that they are not part of the engagement
team.
In the final requirements, EQRs are included in the two experience-
related metrics (Experience of Audit Personnel and Industry
Experience), where the Board believes that the information would be
significant to users. EQRs are not included in other metrics, primarily
due to their quantitatively insignificant impact on the metrics and to
avoid any confusion regarding whether they are part of the engagement
team. For metrics that depend on total audit hours (i.e., Partner and
Manager Involvement and Allocation of Audit Hours), this approach also
aligns with the reporting required for purposes of Form AP, from which
EQRs are excluded.
ii. Total Audit Hours (Used in Partner and Manager Involvement and
Allocation of Audit Hours)
For several metric areas, the Board proposed to use ``total audit
hours,'' which would be the same as the hours used to compute the
extent of participation in an audit of other accounting firms in Form
AP.\109\ Total audit hours include hours attributable to: (1) the
financial statement audit; (2) reviews pursuant to AS 4105, Reviews of
Interim Financial Information; and (3) the audit of ICFR pursuant to AS
2201.\110\
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\109\ See Part IV of Form AP.
\110\ ``Total audit hours'' [as amended and adopted by the Board
in PCAOB Rel. No. 2024-005, to take effect on December 15, 2025]
exclude the hours incurred by: (1) the engagement quality reviewer;
(2) specialists engaged, not employed, by the firm; (3) accounting
firms in performing the audit of entities in which the issuer has an
investment that is accounted for using the equity method; (4)
internal auditors, other company personne
[…truncated; see source link]Indexed from Federal Register on December 11, 2024.
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