Notice2026-22483
Public Company Accounting Oversight Board; Order Granting Approval of Amendments to QC 1000, A Firm's System of Quality Control, and Related Rule and Forms
Primary source
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Published
November 4, 2026
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 91 Issue 212 (Wednesday, November 4, 2026)</title>
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[Federal Register Volume 91, Number 212 (Wednesday, November 4, 2026)]
[Notices]
[Pages 69620-69629]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-22483]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-106791; File No. PCAOB-2026-01]
Public Company Accounting Oversight Board; Order Granting
Approval of Amendments to QC 1000, A Firm's System of Quality Control,
and Related Rule and Forms
November 2, 2026.
I. Introduction
On September 10, 2026, the Public Company Accounting Oversight
Board (the ``Board'' or the ``PCAOB'') filed with the Securities and
Exchange Commission (the ``Commission'' or the ``SEC''), pursuant to
section 107(b) \1\ of the Sarbanes-Oxley Act of 2002 (``SOX'') and
section 19(b) \2\ of the Securities Exchange Act of 1934 (the
``Exchange Act''), a proposal to adopt (1) amendments to certain
provisions of Quality Control (``QC'') 1000, A Firm's System of Quality
Control (``QC 1000''); (2) related amendments to PCAOB Rule 2203A and
PCAOB forms; and (3) technical amendments to Auditing Standard (``AS'')
2101, Audit Planning (each, an ``Amendment'' and collectively, the
``Amendments'').\3\ The Amendments were approved by the PCAOB on
September 9, 2026.\4\ On September 11, 2026, the Board adopted a
technical correction to one of the proposed rules included in the
Amendments and then filed the technical correction with the SEC on
September 14, 2026.
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\1\ 15 U.S.C. 7217(b).
\2\ 15 U.S.C. 78s(b).
\3\ See Public Company Accounting Oversight Board: Notice of
Filing of Proposed Rules on Amendments to QC 1000, A Firm's System
of Quality Control, and Related Rule and Forms, Release No. 34-
106372 (Sept. 15, 2026) [91 FR 59354 (Sept. 18, 2026)] (``Notice of
Filing of Proposed Rules''), available at <a href="https://www.sec.gov/files/rules/pcaob/2026/34-106372.pdf">https://www.sec.gov/files/rules/pcaob/2026/34-106372.pdf</a>.
\4\ See Amendments to QC 1000, A Firm's System of Quality
Control, and Related Rule and Forms, PCAOB Release No. 2026-007
(Corrected) (Sept. 9, 2026) (``Adopting Release''), available at
<a href="https://assets.pcaobus.org/pcaob-dev/docs/default-source/rulemaking/docket-057/2026-007-qc-amendments--final-rule.pdf?sfvrsn=75e5ad2_2">https://assets.pcaobus.org/pcaob-dev/docs/default-source/rulemaking/docket-057/2026-007-qc-amendments--final-rule.pdf?sfvrsn=75e5ad2_2</a>.
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The Amendments were published for comment in the Federal Register
on September 18, 2026.\5\ We received ten comment letters from the
public regarding the Amendments.\6\ This Order approves the Amendments,
which we find to be consistent with the requirements of Title I of SOX
and the rules and regulations issued thereunder and necessary or
appropriate in the public interest or for the protection of
investors.\7\ The Amendments and the findings with respect thereto are
discussed in further detail below.
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\5\ See Notice of Filing of Proposed Rules, supra note 3.
\6\ Copies of the comment letters received on the Notice of
Filing of Proposed Rules are available on the Commission's website
at <a href="https://www.sec.gov/rules-regulations/public-comments/pcaob-2026-01">https://www.sec.gov/rules-regulations/public-comments/pcaob-2026-01</a>.
\7\ See Section 107(b)(4)(A)-(B) of SOX, 15 U.S.C.
7217(b)(4)(A)-(B).
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II. Background and Description of the Amendments
On September 9, 2024, the Commission approved QC 1000, an
integrated, risk-based QC standard intended to replace the interim QC
standards that the PCAOB had adopted in 2003.\8\ The PCAOB stated it
believed QC 1000 would lead registered public accounting firms
(``firms'') to significantly improve their QC systems.\9\ QC 1000 was
set to become effective on December 15, 2025; however, the PCAOB
subsequently delayed the effective date of QC 1000 for one year--until
December 15, 2026--after considering information it received from
various sources that some firms had encountered implementation
challenges that, as a practical matter, may be insurmountable by the
effective date.\10\
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\8\ See Public Company Accounting Oversight Board; Order
Granting Approval of QC 1000, A Firm's System of Quality Control,
and Related Amendments to PCAOB Standards, Rules and Forms, Release
No. 34-100968 (Sept. 9, 2024) [89 FR 74324 (Sept. 12, 2024)] (``2024
Approval Order''), available at <a href="https://www.sec.gov/files/rules/pcaob/2024/34-100968.pdf">https://www.sec.gov/files/rules/pcaob/2024/34-100968.pdf</a>.
\9\ Id.
\10\ See Public Company Accounting Oversight Board; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change
Postponing the Effective Date of Amendments to Board Standards,
Rules and Forms Adopted on May 13, 2024, Exchange Act Release No.
34-103803 (Aug. 28, 2025) [90 FR 42649 (Sept. 3, 2025)], available
at <a href="https://www.sec.gov/files/rules/pcaob/2025/34-103803.pdf">https://www.sec.gov/files/rules/pcaob/2025/34-103803.pdf</a>.
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On September 9, 2026, the Board adopted the Amendments.\11\ The
Amendments were preceded by a June 2026 supplemental request for
comment \12\ and other outreach engaged in by the PCAOB. The Amendments
were targeted to modify only certain provisions of QC 1000, as
described in more detail below. Except for the targeted Amendments, QC
1000 would remain unchanged.
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\11\ See Adopting Release, supra note 4. As noted above, the
Board subsequently adopted a technical correction and then filed the
technical correction with the Commission.
\12\ See Public Company Accounting Oversight Board: Supplemental
Request for Comment: Proposed Amendments to QC 1000, A Firm's System
of Quality Control, and Related Rule and Forms, PCAOB Release No.
2026-002 (June 9, 2026) (``Supplemental Request for Comment''),
available at <a href="https://assets.pcaobus.org/pcaob-dev/docs/default-source/rulemaking/docket-057/2026-002-qc-src.pdf?sfvrsn=92c20332_2">https://assets.pcaobus.org/pcaob-dev/docs/default-source/rulemaking/docket-057/2026-002-qc-src.pdf?sfvrsn=92c20332_2</a>.
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In the Notice of Filing of Proposed Rules, the PCAOB stated that it
was proposing Amendments to QC 1000 that it believes address concerns
regarding the implementation challenges identified by firms and to
better align certain provisions with other quality management
standards, both internationally and in the United States.\13\ As
described by the Board, these Amendments are designed to reduce
compliance costs while maintaining the investor protection benefits of
QC 1000.\14\ According to the Board, although several of the Amendments
the Board adopted better align QC 1000 with other quality management
standards with which most firms are already complying,\15\ differences
remain in areas where the Board continues to believe that alternative
or incremental provisions of QC 1000 better address the United States'
legal and regulatory environment, the needs and priorities of the
Board's stakeholders, and the Board's statutory mandate of protecting
investors and the public interest.\16\
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\13\ See Notice of Filing of Proposed Rules, supra note 3, at 3
(pointing to International Standard on Quality Management 1, Quality
Management for Firms that Perform Audits or Reviews of Financial
Statements, or Other Assurance or Related Services Engagements
(``ISQM 1''), issued by the International Auditing and Assurance
Standards Board (effective on December 15, 2022) and Statement on
Quality Management Standards No. 1, A Firm's System of Quality
Management (``SQMS 1''), issued by the Auditing Standards Board of
the American Institute of CPAs (effective on December 15, 2025)).
\14\ Id.
\15\ Id. at 124.
\16\ Id. at 4-5.
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[[Page 69621]]
The Amendments consider the feedback the PCAOB received on its
Supplemental Request for Comment and information obtained through the
PCAOB's implementation support efforts (e.g., workshops, stakeholder
outreach, and feedback received from firms and other stakeholders
regarding implementation, including implementation guidance provided by
the PCAOB), among other sources.\17\ The principal Amendments adopted
by the PCAOB are intended to:
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\17\ Id. at 8-10.
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<bullet> Rescind the ``design-only'' requirement so that QC 1000
imposes requirements only on firms that are required to comply with
applicable professional and legal requirements with respect to any
``engagement'' as defined in QC 1000 (QC 1000.06 and .07d);
<bullet> Provide increased flexibility in filling certain specified
roles in the QC system by permitting those roles to be assigned to non-
firm personnel and divided among multiple individuals (QC 1000.12);
<bullet> Rescind the requirement to have an External QC Function
(``EQCF'') (QC 1000.28);
<bullet> Narrow and simplify communication requirements relating to
metrics that the firm communicates to external parties about its audit
practice, firm personnel, or engagements (QC 1000.53e);
<bullet> With respect to identified engagement deficiencies,
require evaluation of whether similar engagement deficiencies exist on
other engagements only if the identified deficiency resulted or could
result in (i) a failure to obtain sufficient appropriate evidence to
support the conclusion reached on an engagement or (ii) an
inappropriate overall conclusion on the subject matter of an engagement
(QC 1000.68d);
<bullet> Revise the definition of QC deficiency to make clear that,
when firms have implemented more than one quality response to address
the same quality risk, they can take those other quality responses
(e.g., compensating responses) into account when determining whether a
QC deficiency exists (QC 1000.A8);
<bullet> Allow firms to select the date as of which they annually
evaluate the effectiveness of their QC system, rather than requiring
firms to evaluate as of September 30 (QC 1000.77);
<bullet> Revise the QC system evaluation conclusions to align more
closely with the conclusions in other quality management standards,\18\
while retaining a structured process, including specified factors for
consideration, to guide the evaluation (QC 1000.77 and .78); and
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\18\ See supra note 13 for a discussion of other quality
management standards.
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<bullet> Simplify the requirements for retention of QC system
documentation and abbreviate the retention period from seven to five
years (QC 1000.84 and .86).\19\
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\19\ See Notice of Filing of Proposed Rules, supra note 3, at 3-
4.
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The Amendments will be effective on December 15, 2026, the same
effective date as the rest of QC 1000.\20\ Under the Amendments, the
first period for firms' evaluation of their QC systems will cover the
period beginning on the effective date of QC 1000 (i.e., December 15,
2026) and ending on the firm's selected evaluation date, subject to a
five-month minimum period of operation before a firm is first required
to evaluate its QC system.\21\ Subsequent evaluation periods will cover
the 12-month period ending on the firm's selected evaluation date.\22\
The PCAOB has proposed that the Amendments apply to audits of emerging
growth companies (``EGCs''),\23\ as discussed in Section IV below.
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\20\ Id. at 5.
\21\ Id. at 60, 64. The PCAOB explained that, under the
Amendments, a firm would be required to evaluate its QC system once
the firm has been subject to the requirement to design, implement,
and operate a QC system for at least five consecutive months
(whether due to the effectiveness of QC 1000 on December 15, 2026,
or due to the firm's later becoming subject to the requirements of
QC 1000). Id. at 60.
\22\ Id. at 62.
\23\ The term ``emerging growth company'' is defined in section
3(a)(80) of the Exchange Act (15 U.S.C. 78c(a)(80)). See also
Inflation Adjustments under Titles I and III of the JOBS Act,
Release No. 33-11098 (Sept. 9, 2022) [87 FR 57394 (Sept. 20, 2022)],
available at <a href="https://www.sec.gov/files/rules/final/2022/33-11098.pdf">https://www.sec.gov/files/rules/final/2022/33-11098.pdf</a>.
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III. Discussion and Commission Findings
We continue to believe that QC 1000 will lead firms to
significantly improve their QC systems. We are also aware of the
implementation challenges experienced by firms, including with respect
to the EQCF and the ``design-only'' requirements, which were brought to
the PCAOB's attention in connection with their implementation support
efforts for QC 1000, as well as through other avenues.\24\ As such, we
believe it was reasonable for the Board to reconsider whether the new
standard imposes costs that may not be necessary to achieve the Board's
regulatory goals and, relatedly, whether there were certain aspects of
QC 1000 that could be brought into closer alignment with other quality
management standards with which most firms are complying.\25\
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\24\ See Notice of Filing of Proposed Rules, supra note 3, at 7-
10.
\25\ See supra note 13 for a discussion of other quality
management standards.
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As noted above, in response to the Notice of Filing of Proposed
Rules, to date, we have received ten comment letters from the
public.\26\ Many of the commenters expressed support for the
Amendments.\27\ For example, one commenter stated that it believes the
Amendments will ``reduce unnecessary cost and operational complexity
without compromising the rigor of firms' systems of quality control.''
\28\ Similarly, another commenter stated that it believes ``the final
standard benefits from greater consistency with ISQM 1, reduces
incremental costs that would outweigh the benefits, and focuses on the
matters most important to advancing audit quality.'' \29\ This
commenter also explained that it believed the Amendments ``reflect
insights gained through implementation that could not have been fully
anticipated earlier in the rulemaking process.'' \30\ Further, one
commenter stated it believes the Amendments ``will strengthen the
standard's ability to drive continuous improvement in audit quality and
promote consistent and scalable application across firms of varying
sizes and structures.'' \31\ Another commenter stated that the
Amendments ``do not diminish investor protection;'' rather, they
``enhance the focus and scalability of the standard by addressing
implementation challenges, eliminating unnecessary costs and
redundancies, and addressing unintended consequences identified
following the standard's initial adoption.'' \32\ Some of these
commenters stated that they supported the PCAOB continuing to provide
implementation guidance for
[[Page 69622]]
QC 1000 \33\ or performing a post-implementation review of QC 1000 to
evaluate whether the standard is achieving its intended purpose.\34\
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\26\ See supra note 6 for a hyperlink to the comments received
by the Commission.
\27\ See letters from Andrew Sutherland, Boeing Associate
Professor of Management, Associate Professor of Accounting, MIT
Sloan School of Management (Oct. 5, 2026) (``Andrew Sutherland'');
Center for Audit Quality (Oct. 8, 2026) (``CAQ''); Deloitte & Touche
LLP (Oct. 2, 2026) (``Deloitte''); Ernst & Young LLP (Oct. 8, 2026)
(``EY''); Gary Berrigan, CISA, CC, Founder, sideLook Consulting LLC
(Oct. 7, 2026); KPMG LLP (Oct. 9, 2026) (``KPMG''); Mark E. Peecher,
Arthur R. Wyatt Endowed Chair in Accounting, Gies College of
Business, University of Illinois Urbana-Champaign (Oct. 9, 2026)
(``Mark Peecher'') (support focused on removal of EQCF requirement);
and PricewaterhouseCoopers LLP (Oct. 7, 2026) (``PWC'').
\28\ See letter from Deloitte.
\29\ See letter from EY.
\30\ See id.
\31\ See letter from KPMG.
\32\ See letter from PWC.
\33\ See letters from CAQ; Deloitte; and KPMG.
\34\ See letters from EY and PWC.
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Some of the commenters stated that we should not approve the
Amendments.\35\ One of these commenters stated that the Commission
should not approve the Amendments without addressing the commenter's
unresolved recommendations.\36\ This commenter provided recommendations
with respect to many of the Amendments as described in greater detail
below.\37\ Another commenter recommended that the Commission
``[i]nstitute proceedings to determine whether the [P]roposed [R]ules
should be disapproved.'' \38\ This commenter focused solely on
rescinding the EQCF requirement and believes the PCAOB should have
adopted the ``reasonable alternative'' of retaining the EQCF
requirement ``only for firms that issued audit reports with respect to
more than 500 issuers during the prior calendar year.'' \39\
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\35\ See letters from CFA Institute (Oct. 12, 2026) (``CFA'')
and Council of Institutional Investors (Oct. 8, 2026) (``CII'').
\36\ See letter from CFA.
\37\ Id.
\38\ See letter from CII.
\39\ Id.
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Commenters also provided feedback on specific aspects of the
Amendments, as described below, which informed their general views
discussed above.
A. External Quality Control Function
QC 1000 currently includes a requirement for firms with larger
PCAOB audit practices (firms that issue audit reports for more than 100
issuers in the prior calendar year) to adopt and implement an EQCF that
is composed of one or more persons who are not principals or employees
of the firm and do not otherwise have a relationship with the firm that
would interfere with the exercise of independent judgment with regard
to matters related to the QC system. The EQCF is required to evaluate
the significant judgments made and related conclusions reached by the
firm when evaluating and reporting on the effectiveness of its QC
system.\40\
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\40\ See 2024 Approval Order, supra note 8, at 6.
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As explained by the PCAOB, the Board proposed rescinding the EQCF
requirement based on information obtained in connection with PCAOB
staff implementation support efforts and outreach discussions, which
revealed that implementing this requirement had proven more difficult
and more costly than originally anticipated.\41\ The Board also
acknowledged the concerns raised about the costs, operability, and
potentially limited benefits of the EQCF requirement, including the
availability of qualified individuals to serve in an EQCF role, for
firms of any size. The Board explained that rescinding the EQCF
requirement meant giving up the benefits of an external second look.
The external second look would have focused on the significant
judgments made and related conclusions reached when evaluating and
reporting on the effectiveness of firms' QC systems. The Board said
that it believed those incremental benefits are difficult to quantify
and potentially limited. According to the Board, the incremental
benefits would come from the fresh perspectives of an individual
sitting in an EQCF role, beyond the benefits already provided by other
aspects of QC 1000.\42\
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\41\ Notice of Filing of Proposed Rules, supra note 3, at 25.
\42\ Id. at 31-32.
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Many of the commenters supported the Amendment to rescind the
EQCF.\43\ One commenter that supported the PCAOB's rescission of the
EQCF questioned the `` `independent' nature of the oversight'' expected
to be provided by the EQCF by noting that the person(s) serving in the
EQCF role ``would be directly remunerated, presumably, by the very
audit firms whose quality control standards they are supposed to
independently and objectively evaluate.'' \44\ This commenter also
stated that he agreed with prior commenters who had concerns about the
supply of talent for persons highly qualified for the EQCF role.\45\
Another commenter stated that ``the quality objectives of the EQCF seem
attainable under existing PCAOB oversight and firm governance
mechanisms,'' pointing to the ``ample incentives'' that senior leaders
of public accounting firms already have to ``develop and monitor QC
systems that balance the risk of audit failures against the cost of
preventing them,'' among other things.\46\ This commenter further
stated that the EQCF would impose ``considerable costs without a clear
promise of meaningful benefits.'' \47\
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\43\ See supra note 27 for a list of commenters that expressed
support for the Amendments.
\44\ See letter from Mark Peecher (additionally raising concerns
that the EQCF ``would send the wrong signal to retail investors''
and could lead to conjecture about whether ``the audit profession is
broken,'' among other things).
\45\ Id.
\46\ See letter from Andrew Sutherland.
\47\ Id.
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Conversely, some commenters opposed the rescission of the EQCF
requirement.\48\ These commenters stated that they would support an
alternative EQCF requirement imposed on firms that issued audit reports
for more than 500 issuers in the prior calendar year, if the original
EQCF requirement (which has a 100-issuer threshold) is rescinded.\49\
One of these commenters explained that it did not find the PCAOB's
consideration of the incremental costs and limited benefits of the
alternative approach in the Adopting Release to be persuasive.\50\ With
respect to costs, this commenter stated its belief that, even based on
a cost estimate included in the PCAOB's proposal, the annual estimated
cost of the EQCF requirement would amount to a small percentage of the
annual average revenue of the five largest firms that would fall within
the scope of the alternative approach.\51\ With respect to benefits,
this commenter disagreed with the PCAOB's statement that the benefits
of the alternative approach may be limited because the five largest
firms already obtain, through existing advisory structures, some of the
external perspectives that the EQCF might otherwise provide. This
commenter concluded that ``the PCAOB does not even attempt to
qualitatively analyze whether the potential offset of incremental costs
from the existing external advisory structures exceeds the potential
reduction in benefits from those structures.'' \52\ Another commenter
stated that the Commission ``should address the Board's claim that a
firm-selected and paid overseer would have limited independence.'' \53\
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\48\ See letters from CFA and CII.
\49\ Id. The Board solicited comment regarding this alternative
approach, among other potential alternatives to rescinding the EQCF
requirement, but ultimately determined not to adopt an alternative
approach. See Supplemental Request for Comment, supra note 12, at
22-23; Notice of Filing of Proposed Rules, supra note 3, at 133-34.
\50\ See letter from CII.
\51\ Id.
\52\ Id.
\53\ See letter from CFA.
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Although we still believe the EQCF requirement could lead to some
improvements in audit quality,\54\ we agree with the PCAOB's assessment
that the ability of the EQCF to provide an independent evaluation is
limited due to the structural features of the role. Specifically, QC
1000 only specifies the minimum responsibility for the EQCF role--
evaluating the significant judgments made and related conclusions
reached by the firm when evaluating and reporting on the effectiveness
of its QC system--and otherwise mostly leaves the assignment of
additional responsibilities as well as
[[Page 69623]]
the design and operation of the role up to the firm.\55\ Notably, QC
1000 does not provide the EQCF with decision-making authority and does
not specify procedures to be performed by the EQCF, including the
nature, timing, and extent of the EQCF's review and how any
disagreements between the EQCF and firm leadership should be addressed.
Although this flexibility allows firms to structure the role to suit
their circumstances, it also means that there is a lack of clarity
around the role, which could limit the potential effectiveness and
independent oversight benefits the role was originally expected to
provide.
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\54\ See 2024 Approval Order, supra note 8, at 27.
\55\ See QC 1000.28. See also Notice of Filing of Proposed
Rules, supra note 3, at 113 n. 422.
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Relatedly, the ability of the EQCF to conduct an objective and
impartial assessment of significant judgments made and related
conclusions reached by the firm when evaluating and reporting on the
effectiveness of its QC system rests on knowledge and understanding of
the firm's operations, risks to audit quality, and the design of the
firm's related quality responses. The EQCF's minimum prescribed
responsibilities under QC 1000 would leave many significant
implementation decisions up to the judgment of the firm, which could
result in a role that is not structured effectively and does not
provide the EQCF with the ability to obtain the knowledge and
understanding it needs to independently identify and effectively assess
the significant judgments made by the firm and the related conclusions.
In addition, the EQCF would be selected, engaged, compensated,
retained, and subject to removal by the firm. We agree with the Board
that these aspects of the EQCF potentially limit the independence of
the role.\56\ It is true that the role must be held by one or more
persons who are not partners, shareholders, members, other principals,
or employees of the firm and otherwise do not have a commercial,
familial, or other relationship with the firm, and therefore this
requirement would bring an additional, outside perspective. However,
such person(s) would still be subject to the firm's oversight, which we
agree with the PCAOB could create incentives to avoid challenging the
judgments of the firm.\57\ For example, a person performing an EQCF
role may avoid challenging the judgments of a firm that conflict with
investor interests if such person is concerned with preserving their
position. Although an independent perspective on firms' QC systems is
valuable, we agree with the PCAOB that the benefit of a fresh
perspective is limited due to the structural design of the EQCF.
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\56\ See Notice of Filing of Proposed Rules, supra note 3, at
155. See also letter from Mark Peecher.
\57\ See Notice of Filing of Proposed Rules, supra note 3, at
155.
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Furthermore, we agree with the PCAOB and one commenter that other
provisions of QC 1000 mitigate the potential loss of benefits from the
rescission of the EQCF requirement.\58\ For example, the QC 1000
quality objectives for the governance and leadership component continue
to call for (i) firm leadership to communicate and promote the firm's
commitment to quality; (ii) the firm to clearly define leadership's
responsibility for quality and hold them accountable; (iii) firm
leadership to demonstrate a commitment to quality through actions and
behaviors; (iv) the firm's strategic decisions and actions to be
consistent with and support the firm's commitment to quality; and (v)
resources to be obtained, developed, allocated, and assigned in a
manner that enables an effective QC system and the performance of
engagements in accordance with applicable professional and legal
requirements.\59\ Firms are required to design and implement quality
responses to achieve these objectives (based on an assessment of the
quality risks to achieving these objectives) and to reduce to an
appropriately low level the risk that quality objectives will not be
achieved.\60\ Firm leadership is ultimately responsible for the
effectiveness of the firm's QC system, and we believe the objectives of
QC 1000 will continue to lead firms to strengthen their QC systems
despite the rescission of the EQCF requirement. In addition, firms have
an obligation to serve the public interest, reinforced by PCAOB
oversight, professional obligations, and reputational and litigation
risks.\61\ We acknowledge commenters' concern about circumstances in
which firms' interests may diverge from investors' interests \62\ but,
for the reasons explained above, the EQCF's structural features would
limit its ability to meet commenters' expectations that it would
reliably prioritize investors' interests when such circumstances
occur.\63\ Therefore, we do not expect the rescission of the EQCF
requirement to have negative impacts on audit quality.
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\58\ Id. at 32-33; letter from Andrew Sutherland.
\59\ See QC 1000.12.
\60\ See QC 1000.21.
\61\ See Notice of Filing of Proposed Rules, supra note 3, at
155.
\62\ See letters from CFA and CII.
\63\ See Notice of Filing of Proposed Rules, supra note 3, at
155-56.
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Moreover, rescinding the EQCF requirement will eliminate the
attendant costs to firms, which include costs associated with
identifying, recruiting, and onboarding individuals with the necessary
expertise, independence, and availability to serve in the role, as
identified by commenters to the PCAOB.\64\ In the Notice, the Board
explained that it had limited ability to quantify the costs and could
not estimate the EQCF cost per audit for each firm. The Board also
acknowledged that ``the incremental costs may not impose a large per-
audit burden on the largest firms given the number of issuers and
broker-dealers they audit and the associated audit revenue.'' \65\
However, we agree with the Board that the incremental costs should be
evaluated together with the incremental benefits the EQCF may provide,
the magnitude of which is uncertain and may be limited,\66\
particularly in light of our conclusions regarding shortcomings in the
EQCF's ability to provide effective ``independent oversight,'' as
discussed above.
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\64\ Id. at 143-44 (acknowledging that any cost savings could be
attenuated to the extent that firms have already incurred costs
related to implementation of the EQCF requirement).
\65\ Id. at 149.
\66\ Id.
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With respect to the alternative approach of applying the EQCF
requirement at least to those firms that issued audit reports for more
than 500 issuers in the prior calendar year, the Board explained in
detail its basis for determining not to adopt the alternative.\67\
Generally, the Board explained that the implementation concerns raised
by commenters, including the availability of qualified individuals to
serve in an EQCF role, apply to all firms regardless of the number of
issuers they audit.\68\ The Board noted that while the costs of the
EQCF could vary substantially depending on how each firm chooses to
implement the requirement, the costs could be high for the largest
firms because they tend to have more complex QC systems.\69\ The Board
acknowledged
[[Page 69624]]
that incremental costs could be offset to the extent these firms could
modify their existing external advisory structures to satisfy the EQCF
requirement.\70\ Further, the Board stated that the potential
limitations on the ability of the EQCF to provide an independent
evaluation were due to its structural features--such as the person(s)
serving in the EQCF role being selected, compensated, and retained by
the firm--and that these limitations would apply regardless of the size
of the firms implementing the EQCF. The Board also acknowledged that
these firms would have the incremental benefit of a second look, but
that benefit could be limited if such firms obtain external
perspectives through their existing advisory structures.\71\
---------------------------------------------------------------------------
\67\ Id. at 177-79.
\68\ Id. at 32, 178.
\69\ Id. at 178. The Board explained that it had limited
information to reliably quantify the potential costs of compliance
but acknowledged that the EQCF role may not pose a large per-audit
burden on the largest firms. Id. at 149. We note that a commenter
estimated that the cost of the EQCF requirement would amount to a
small percentage of the annual average revenue of the five largest
firms. See letter from CII. Nevertheless, this commenter does not
explain how the relative costs of the EQCF, even if low, overcome
the underlying independence issue of the EQCF, which depends on its
structure.
\70\ See Notice of Filing of Proposed Rules, supra note 3, at
178. The PCAOB observed that, based on information from PCAOB
oversight activities, 9 of the 13 firms that would have been subject
to the EQCF requirement already incorporate external advisors into
their organizational and governance structures. Id. at 33. Although
these advisory roles differ from the EQCF role and would not
necessarily satisfy the requirement, they provide some of the
external perspective the EQCF would have offered, which further
limits the benefits forgone by rescission.
\71\ Id. at 179.
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We agree with the PCAOB's analysis and do not believe it would be
appropriate to institute proceedings or disapprove the Amendments so
that the PCAOB could reconsider the alternative approach described
above. Although it may be the case that the five largest firms could
bear the burdens and costs more readily than firms that are smaller in
size, the structural features of the EQCF role would not change and,
therefore, we agree with the Board that the benefits of retaining the
EQCF requirement for firms with more than 500 issuer audit clients may
be limited. Given the other provisions of QC 1000 discussed above that
mitigate the potential loss of the limited benefits, we believe that
the Board's decision not to adopt the alternative approach will not
negatively impact audit quality at these firms.
While we acknowledge the concerns raised by some commenters about
rescinding the EQCF requirement, we find that the Amendments are
consistent with the requirements of Title I of SOX and the rules and
regulations thereunder and are necessary or appropriate in the public
interest or for the protection of investors. In particular, we
appreciate the challenges related to costs, operability, and
availability of qualified individuals encountered by firms when
considering how to implement this function.\72\ We considered these
challenges within the context of the potentially limited benefits of
the EQCF requirement and our assessment that the other provisions of QC
1000 should mitigate any loss of potential benefits to investors, as
discussed above. We believe the Amendments as a whole will further the
Board's statutory mandate under SOX and enhance investor protection by
improving the efficiency and effectiveness of QC 1000, thereby better
supporting audit quality.
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\72\ Id. at 25, 31-32.
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B. Other Amendments
As noted above, many commenters supported the Amendments as a
whole. However, one commenter raised concerns regarding several of the
Amendments.\73\ The following discussion addresses concerns raised by
that commenter and the basis for the Commission's finding that the
Amendments are consistent with the requirements of Title I of SOX and
the rules and regulations thereunder and are necessary or appropriate
in the public interest or for the protection of investors.
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\73\ See letter from CFA.
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1. Roles and Responsibilities
As noted above, one of the Amendments would provide increased
flexibility in filling certain specified roles in the QC system by
permitting roles to be assigned to non-firm personnel and divided among
multiple individuals.\74\ The PCAOB explained that it believed that
this change would, among other things, expand the pool of individuals
with the requisite experience, competence, authority, and time to serve
in specified roles, in addition to aligning with ISQM 1 and SQMS 1.\75\
However, one commenter stated that the Commission should ``reject the
assignment of responsibilities to outside personnel'' because such
responsibilities ``should be limited to internal personnel for core
roles.'' This commenter also stated that firms should be required to
report ``each divided role's scope'' in Form QC.\76\
---------------------------------------------------------------------------
\74\ See Notice of Filing of Proposed Rules, supra note 3, at
19-24.
\75\ Id. at 19-20, 23.
\76\ See letter from CFA. Although there is no requirement to
report the specific scope of each individual's assigned
responsibilities, we note that the requirements in QC 1000 for firms
to establish and maintain clear lines of responsibility and
supervision--including defining authorities, responsibilities,
accountabilities, and supervisory and reporting lines for roles
within the firm--within the QC system and to document these matters
remain unchanged. See QC 1000.27 and .82a. Therefore, the specific
scope would be available to the PCAOB in connection with its
oversight activities, including inspection. See Notice of Filing of
Proposed Rules, supra note 3, at 23.
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We agree with the PCAOB that there are good reasons for permitting
flexibility in filling certain specified roles in the QC system. Rather
than taking a more prescriptive approach, audit quality--and ultimately
investors--would benefit the most from ensuring that important quality
control roles are assigned to the most qualified and best experienced
personnel. Some smaller firms, including non-U.S. affiliates of larger
firms within global networks, may not have sufficiently qualified
resources within the firm and filling roles with personnel from other
network member firms or outside sources may be more effective in
driving quality. In addition, this approach aligns with ISQM 1 and SQMS
1, reduces costs without sacrificing benefits, and may make it easier
for smaller firms to remain in the public company audit market, which
may be good for competition and eventually result in cost savings for
investors. Significantly, the Amendments emphasize that individuals
assigned specific roles understand and be accountable for their roles
and responsibilities.\77\ We further note that the requirement in QC
1000 that the individuals assigned the specified roles must have the
experience, competence, authority, and time needed to enable them to
carry out their assigned responsibilities remains unchanged, and
therefore we believe that these Amendments will not negatively impact
audit quality.\78\
---------------------------------------------------------------------------
\77\ See Notice of Filing of Proposed Rules, supra note 3, at
20.
\78\ By implication, the commenter's approach would suggest that
a person who has the requisite experience, competence, authority,
and time would otherwise be unqualified for filling a role in a QC
system if not directly employed by the firm. We disagree with any
such implication.
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2. Similar Engagement Deficiencies
One of the Amendments would limit the requirement to evaluate
whether similar engagement deficiencies exist so it would apply only
with respect to a subset of engagement deficiencies, specifically those
that resulted or could result in (i) a failure to obtain sufficient
appropriate evidence to support the conclusion reached on an engagement
or (ii) an inappropriate overall conclusion on the subject matter of an
engagement.\79\ The PCAOB explained that these changes were intended to
focus effort in areas where there is a risk that engagement teams have
not performed the work necessary to
[[Page 69625]]
support the conclusion reached on an engagement.\80\ One commenter did
not support this Amendment. This commenter said the Commission should
consider whether ``recurring audit-committee communication, Form AP, or
other excluded failures could or would be reliably found across
engagements without the broader look-across.'' \81\
---------------------------------------------------------------------------
\79\ See Notice of Filing of Proposed Rules, supra note 3, at
43-54.
\80\ See Supplemental Request for Comment, supra note 12, at 28.
\81\ See letter from CFA.
---------------------------------------------------------------------------
We agree with the Board's decision to focus a firm's attention on
the types of engagement deficiencies that represent the greatest risk
to audit quality. The types of deficiencies identified by the commenter
generally do not rise to the level of a Part I.A deficiency in a PCAOB
inspection report,\82\ and, hence, do not affect the reliability of the
auditor's report. The objective of an audit is to produce an
independent and accurate (i.e., reliable) audit report.\83\ To further
that objective, the QC processes that are related to identifying
similar engagement deficiencies in other engagements should be focused
on those types of deficiencies that could impact the reliability of the
auditor's report. Importantly, QC 1000 would still require firms to
evaluate QC observations related to Form AP and audit committee
communications to determine whether QC deficiencies exist.\84\
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\82\ ``Part I.A. deficiencies'' are defined by the PCAOB as
deficiencies ``that were of such significance that we believe the
firm, at the time it issued its audit report(s), had not obtained
sufficient appropriate audit evidence to support its opinion(s) on
the issuer's financial statements and/or internal control over
financial report (ICFR).'' See PCAOB Issued Firm Inspection Reports,
Part I.A., available at <a href="https://pcaobus.org/oversight/inspections/firm-inspection-reports">https://pcaobus.org/oversight/inspections/firm-inspection-reports</a>; see also PCAOB Staff, Guide to Reading the
PCAOB's New Inspection Report, at 2, available at <a href="https://pcaobus.org/Inspections/Documents/Inspections-Report-Guide.pdf">https://pcaobus.org/Inspections/Documents/Inspections-Report-Guide.pdf</a>. In
contrast to Part I.A deficiencies, PCAOB Staff explained that Part
I.B of the Inspection Report discusses any deficiencies that do not
relate directly to the sufficiency or appropriateness of evidence
the firm obtained to support its opinion(s) but nevertheless relate
to instances of noncompliance with PCAOB standards or rules. Some
examples of Part I.B deficiencies include communications with audit
committees pursuant to PCAOB AS 1301, Communications with Audit
Committees, and timely and accurate reporting of other participants
in the audit on Form AP pursuant to PCAOB Rule 3211. Id. at 4-5. See
also Supplemental Request for Comment, supra note 12, at 73 (``The
definition of a Part I.A deficiency aligns closely with the first
criterion for evaluating whether similar engagement deficiencies
exist.'').
\83\ An important part of the PCAOB's mission is to ``further
the public interest in the preparation of informative, accurate, and
independent audit reports.'' See SOX section 101(a). Given this
specific objective, it is appropriate for the PCAOB to re-focus
firms' QC processes on identifying and addressing the types of
engagement deficiencies that could impact the reliability of the
auditor's report.
\84\ See QC 1000.72. This evaluation is based on the nature,
severity, and pervasiveness of the matter(s) that gave rise to the
QC observation and considers the likelihood that matter(s) could
affect other QC components and other engagements.
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3. Definition of QC Deficiency--Compensating Responses
Another one of the Amendments would revise the definition of QC
deficiency to make clear that, when firms have implemented more than
one quality response to address the same quality risk, they can take
those other quality responses (e.g., compensating responses) into
account when determining whether a QC deficiency exists.\85\ The Board
explained that it was making this change because, among other reasons,
the relationship across quality objectives, quality risks, and quality
responses is generally not one-to-one.\86\ One commenter stated that
the Commission ``should establish a rule-text requirement to document
the linkage, testing, and operating effectiveness [of compensating
responses] relied on to conclude that no QC deficiency exists.'' \87\
We believe that QC 1000 sufficiently addresses the concerns raised by
this commenter. The Note to QC 1000.A8(1) clarifies that the other
quality responses (i.e., the compensating responses) can only be
considered to the extent that they ``achieve the relevant
objective(s).'' Only a well-designed, implemented, and effectively
operated response can achieve a quality control objective. In addition,
we believe the concept of compensating responses, including the need
for them to be sufficiently evaluated before they can be relied upon,
is well understood in practice given the application of a similar
concept of ``compensating controls'' in evaluating control deficiencies
under AS 2201, An Audit of Internal Control Over Financial Reporting
That Is Integrated with An Audit of Financial Statements. Moreover, QC
1000.82 requires firms to document their evaluation of QC observations
to determine whether QC deficiencies exist and the basis for each
determination.
---------------------------------------------------------------------------
\85\ See Notice of Filing of Proposed Rules, supra note 3, at
54-58.
\86\ Id. at 54.
\87\ See letter from CFA.
---------------------------------------------------------------------------
4. Annual Evaluation of the QC System
One of the Amendments would revise the QC 1000 system evaluation
conclusions to align more closely with the conclusions in other quality
management standards, while retaining a structured process, including
specified factors for consideration to guide the evaluation.\88\ The
PCAOB explained that it was making these changes because it learned
during its implementation support efforts that differences in
evaluation conclusions between QC 1000 and the other quality management
standards (i.e., ISQM 1 and SQMS 1) could create comparability and
clarity issues across jurisdictions, and could cause stakeholders to
potentially misunderstand whether differences in reported conclusions
reflect substantive differences in the effectiveness of the firm's QC
system.\89\ One commenter stated that the Commission ``should preserve
a meaningful early-warning signal, by restoring the stricter
``effective'' boundary and severity presumptions or requiring
equivalent reporting of serious deficiencies.'' This commenter also
suggested that the Commission should ``require a per-deficiency
severity indicator and a short explanation of how severe findings fit
the overall conclusion, while acknowledging the PCAOB inspectors can
review the internal Paragraph .82d record.'' \90\
---------------------------------------------------------------------------
\88\ See Notice of Filing of Proposed Rules, supra note 3, at
65-84.
\89\ See Supplemental Request for Comment, supra note 12, at 34-
35. See also Notice of Filing of Proposed Rules, supra note 3, at
166 (explaining that the Amendments may reduce potential confusion
by reducing (but not eliminating) the likelihood that firms reach
different conclusions about the effectiveness of their QC system
under different QC standards).
\90\ See letter from CFA. The ``internal Paragraph .82d record''
refers to the requirement for a firm to document the basis for the
conclusion the firm reaches in evaluating its QC system. See QC
1000.82d.
---------------------------------------------------------------------------
We note that all unremediated QC deficiencies identified by a firm
are required to be reported to the PCAOB on Form QC.\91\ Therefore, the
PCAOB should have information about all unremediated QC deficiencies.
Moreover, a firm's reporting on Form QC must include a description of
the specific requirements of the standard to which each unremediated QC
deficiency pertains and the firm's basis for determining that it was a
QC deficiency, among other information.\92\ The PCAOB has sufficient
expertise to assess the impact of the unremediated QC deficiencies
reported by the firm. Any questions the PCAOB may have may be clarified
through inspections or other PCAOB oversight activities. Taking all of
this into account, it is not clear who else may need the ``early
warning signal'' called for by the commenter, especially considering
the confidential nature of all QC
[[Page 69626]]
conclusions and the related reporting under QC 1000 and these
Amendments.
---------------------------------------------------------------------------
\91\ See QC 1000.80b.
\92\ Id.
---------------------------------------------------------------------------
Although the Amendments eliminate the requirement for firms to
determine whether a ``major QC deficiency'' exists as part of a firm's
evaluation and reporting on the effectiveness of its QC system, the
Amendments nonetheless would require firms to evaluate the severity and
pervasiveness of all unremediated QC deficiencies, individually and in
combination, considering both quantitative and qualitative
implications.\93\ Therefore, we agree with the PCAOB that the
Amendments do not remove the ability to identify particularly severe QC
deficiencies under QC 1000 \94\ given the explicit requirement for
firms to consider the severity and pervasiveness of all unremediated QC
deficiencies and the impact of the deficiencies on the conclusions
regarding the effectiveness of the firms' QC systems under the amended
QC 1000.77.\95\
---------------------------------------------------------------------------
\93\ See Notice of Filing of Proposed Rules, supra note 3, at
74-75. The Amendments would retain, in modified form, the factors to
consider in evaluating the severity and pervasiveness of
unremediated QC deficiencies, though removing the ``major QC
deficiency'' concept as noted above. Id.
\94\ Id. at 77.
\95\ Id. at 77.
---------------------------------------------------------------------------
Overall, we believe these changes to revise the QC system
evaluation conclusions to align more closely with other quality
management standards--while retaining a structured process to guide the
evaluation--will continue to enable the PCAOB to achieve its regulatory
goal of leading firms to significantly improve their quality control
systems.
5. Information and Communication
The Amendments also narrow and simplify communication requirements
relating to metrics that the firm communicates to external parties
about its audit practice, firm personnel, or engagements. Specifically,
the Amendments would narrow the requirements regarding the need for an
explanation of written metrics to those metrics that the firm makes
publicly available and would add a note stating that the explanation of
the method for determining metrics can be provided either within the
public written communication that includes the metrics or by referring
in the communication to a publicly available explanation presented
elsewhere, such as the firm's website, among other things.\96\ One
commenter stated that the Commission should require the PCAOB ``to
explain how investors can recreate a historical metric after a firm
updates its website'' because ``[i]nvestors need dated, durable
explanations and a visible notice when the method changes.'' \97\
---------------------------------------------------------------------------
\96\ Id. at 33-40.
\97\ See letter from CFA.
---------------------------------------------------------------------------
We note that the Amendments do not impact the requirement in QC
1000 that any public communication of a metric include ``an explanation
in reasonable detail of how the metrics were determined and, if
applicable, how the method of determining them changed since the metric
was last communicated.'' \98\ Therefore, as long as a metric exists in
the public domain, an explanation ``in reasonable detail'' of how the
firm's method of determination changed since the last communication
must also continue to be provided to the public. To the extent this
commenter is requesting that a firm be required to archive prior public
external communications even after they are no longer publicly
available, we do not believe that such a requirement is necessary. We
believe that, at best, such a requirement would provide limited benefit
to investors beyond the prescribed disclosures discussed above and, at
worst, would cause confusion. Although we acknowledge that some
investors may want to understand the historical context of a firm's
external communication of metrics, requiring a firm to archive prior
external communications after the metrics are no longer in the public
domain could be confusing because those metrics may no longer be
applicable to the firm or may be inaccurate. It could also be costly
and burdensome for a firm to maintain a historical archive of all prior
public external communications regarding metrics. As such, we believe
the Amendments are appropriately focused on ensuring that if a firm
voluntarily and publicly discloses a metric, then the metric is
accurate and not misleading.\99\ Overall, we believe these Amendments
make narrow and reasonable modifications to QC 1000's requirements
related to the communication of metrics and that they are consistent
with maintaining the investor protection benefits of QC 1000.
---------------------------------------------------------------------------
\98\ See QC 1000.53e (emphasis added).
\99\ See Public Company Accounting Oversight Board; Notice of
Filing of Proposed Rules on A Firm's System of Quality Control and
Related Amendments to PCAOB Standards, Release No. 34-100277 (June
5, 2024) [89 FR 49588 (June 11, 2024)] (stating, upon adoption of QC
1000, that the requirement for firms to establish a quality
objective that any communication of metrics explains in detail how
the metrics were determined and, if applicable, how the metrics or
method of determining them changed since the performance metrics
were last communication ``will prompt firms to implement targeted
policies and procedures that address, for example, the quality and
consistency of data and the need for context or explanation. This in
turn will improve the informativeness, reliability, and
comparability of such communications and to avoid misleading the
intended audience.''), available at <a href="https://www.sec.gov/files/rules/pcaob/2024/34-100277.pdf">https://www.sec.gov/files/rules/pcaob/2024/34-100277.pdf</a>.
---------------------------------------------------------------------------
6. Documentation--Retention
The Amendments would simplify the requirements for retention of QC
system documentation and abbreviate the retention period from seven to
five years.\100\ The PCAOB stated it believed that a five-year
retention period appropriately balances the objective of reducing
unnecessary retention costs with the need to preserve documentation
relevant to the PCAOB's oversight activities.\101\ One commenter stated
that the Commission ``should require a seven-year retention period for
QC evaluation records, or a targeted extension while related audit
records or an open PCAOB matter remain relevant.'' \102\
---------------------------------------------------------------------------
\100\ See Notice of Filing of Proposed Rules, supra note 3, at
95-99.
\101\ Id. at 98.
\102\ See letter from CFA.
---------------------------------------------------------------------------
We agree with the PCAOB's determination that a five-year retention
period is appropriate. The PCAOB evaluated the potential impacts of
shortening the retention period and concluded that this action should
not ``impair PCAOB oversight.'' \103\ We agree that a five-year
retention period would not impair the PCAOB's ability to conduct
inspections and to bring appropriate enforcement actions involving
firms' QC systems. We similarly do not believe that the targeted
extension called for by this commenter is necessary given the amount of
time the PCAOB would have to initiate an action and to take steps to
ensure documents are appropriately retained before the designated five-
year retention period ends.\104\ As such, we believe that requiring a
longer retention period would result in costs without meaningful
corresponding benefits. Further, we agree with the PCAOB's assessment
that applying different retention periods to different categories of QC
documentation could introduce unnecessary complexity and
[[Page 69627]]
inconsistency and potentially diminish the usefulness of documentation
in understanding the operation of the firm's QC system over time.\105\
More broadly, we believe that the Amendments related to documentation
appropriately respond to implementation challenges identified by firms
without negatively impacting the overall effectiveness of firms' QC
systems.
---------------------------------------------------------------------------
\103\ See Notice of Filing of Proposed Rules, supra note 3, at
171.
\104\ See also PCAOB Rule 5103, Demands for Production of Audit
Workpapers and Other Documents from Registered Public Accounting
Firms and Associated Persons (explaining that the Board and
designated staff ``may issue an accounting board demand for the
production of audit work papers or any other document or
information'' in the possession of a firm or an associated person
and original documents ``shall be maintained in a reasonably
accessible manner, shall be readily available for inspection by the
staff, and shall not be destroyed without the staff's consent'')
(emphasis added), available at <a href="https://pcaobus.org/about/rules-rulemaking/rules/section_5">https://pcaobus.org/about/rules-rulemaking/rules/section_5</a>.
\105\ See Notice of Filing of Proposed Rules, supra note 3, at
98-99.
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7. Selection of Evaluation Date
The PCAOB also adopted Amendments to allow firms to select the date
as of which they annually evaluate the effectiveness of their QC
systems, rather than requiring firms to evaluate as of September
30.\106\ The Board explained it believed this change would respond to
implementation challenges experienced by some firms and reduce the
burden and costs of multiple annual evaluations that some firms could
have experienced due to differences in required evaluation dates under
QC 1000 versus other regulations to which they are subject.\107\ One
commenter urged the Commission to ``require an anti-evasion safeguard
because notice after the firm changes its evaluation date may not
prevent strategic timing.'' \108\ We agree with the PCAOB that QC 1000,
as amended, contains other guardrails that should help deter firms from
strategically changing their selected evaluation date. Specifically,
the Amendments will require a firm to notify the PCAOB on Form QC if
the firm changes its evaluation date and to provide the rationale for
the change.\109\ In addition, changing a firm's evaluation date likely
would involve significant changes to many aspects of a firm's QC
processes, which may act as a deterrent. Although we acknowledge that
these guardrails may not actually prevent a firm's attempt to use
strategic timing, we believe they increase the likelihood that such
behavior would be brought to the attention of the PCAOB. Even if a firm
changes its evaluation date to avoid acknowledging known or anticipated
QC deficiencies within a given evaluation period, the period in which
the issues existed will be captured in the firm's evaluation of its QC
system at some point. Finally, a firm's deferral of its QC evaluation
date would not prevent the PCAOB from inspecting a firm's QC system
prior to the evaluation date, particularly if the PCAOB were to suspect
an attempt by the firm to evade reporting of certain QC deficiencies
and their impact on the effectiveness of the firm's QC system. Overall,
we believe the Board's decision to allow firms to select their own
evaluation date provides appropriate flexibility and reduces potential
costs without negatively impacting audit quality.
---------------------------------------------------------------------------
\106\ Id. at 58-60.
\107\ Id. at 60.
\108\ See letter from CFA.
\109\ See Notice of Filing of Proposed Rules, supra note 3, at
58-59.
---------------------------------------------------------------------------
8. Requirement To Design a QC System
Another Amendment would rescind the ``design only'' requirement so
that QC 1000 imposes requirements only on firms that are required to
comply with applicable professional and legal requirements with respect
to any ``engagement,'' as defined in QC 1000.\110\ The Board explained
that it proposed to eliminate this requirement because it would impose
costs on firms that do not perform engagements requiring registration
under SOX or PCAOB rules without commensurate benefits for
investors.\111\ One commenter, although appearing to support rescission
of the design-only requirement, stated that the Commission ``should
require a readiness trigger at bid or appointment and a Form 1
description of the [firm's] existing QC framework.'' \112\
---------------------------------------------------------------------------
\110\ Id. at 11-19.
\111\ Id. at 12.
\112\ See letter from CFA. We note that Form 1, the application
for registration with the PCAOB, already requires firms to furnish a
``narrative, summary description . . . of the quality control
policies of the applicant for its accounting and auditing practices,
including procedures used to monitor compliance with independence
requirements.'' See PCAOB, Form 1, available at <a href="https://pcaobus.org/about/rules-rulemaking/rules/form_1">https://pcaobus.org/about/rules-rulemaking/rules/form_1</a>. In addition, the Board stated
that it is considering the feedback received from commenters
regarding the contents of Form 1 with respect to quality control
standards and that it would determine in the future whether any
changes to its registration processes, including the content of Form
1, are necessary. See Notice of Filing of Proposed Rules, supra note
3, at 105.
---------------------------------------------------------------------------
The Board addressed this issue in response to a similar comment it
received. It explained that it did not believe an earlier trigger was
warranted because, among other reasons, it understood that some firms
may pursue engagements for issuers and broker-dealers months, or even
years, before they are awarded and commence such work. Therefore, it
may not be necessary in all circumstances for a firm to have a QC
system that fully complies with QC 1000 before it pursues an engagement
that it might not be awarded or that it might not commence for a
significant period of time.\113\ We agree with the Board's reasoning
with respect to the issue raised by this commenter and further
emphasize that each firm performing engagements is fully subject to the
requirement to design, implement and operate a QC 1000-compliant system
which should provide the firm with reasonable assurance that its
engagements are conducted in accordance with applicable professional
and legal requirements.
---------------------------------------------------------------------------
\113\ See Notice of Filing of Proposed Rules, supra note 3, at
18-19.
---------------------------------------------------------------------------
9. Prospective Savings/Lost Oversight
One commenter raised concerns regarding the quantified estimates in
the Adopting Release, stating that the PCAOB failed to provide
estimates for Amendment-specific avoidable costs, for investor-quality
losses, or for any fee reduction benefits to investors. The commenter
then stated that the SEC ``should weigh prospective savings against
lost oversight before approving those provisions.'' \114\ As noted by
the PCAOB, limited data and information are available to reliably
quantify certain costs and benefits.\115\ We are unaware of any data
that would allow us to estimate the cost savings that could be
attributed specifically to the Amendments. While the PCAOB was able to
provide estimates for the total costs of implementing QC 1000,\116\
these costs do not represent the specific costs that could be avoided
as a result of the Amendments because the Amendment-specific avoidable
costs would represent only a subset of the total costs of implementing
QC 1000. Further, we are unaware of any data that would allow us to
quantify investor-quality losses attributable to the Amendments or for
demonstrating whether cost savings to the audit firms would flow
through to lower audit fees. Thus, the Commission has considered the
costs and benefits of the Amendments qualitatively in evaluating the
Amendments, including the concerns raised by the commenter discussed
above.
---------------------------------------------------------------------------
\114\ See letter from CFA.
\115\ See Notice of Filing of Proposed Rules, supra note 3, at
112-13, 142.
\116\ Id. at 112-13.
---------------------------------------------------------------------------
The commenter also stated that the PCAOB failed to segment the
analyses by audit firms, by issuers (e.g., by EGC status or market-cap
cohorts), and by audit engagements (e.g., small issuer audits by small
firms). However, we note that the PCAOB provides a segmented discussion
of the impacts on various firms and issuers. For each Amendment, the
PCAOB identifies which firms would be impacted by the Amendment and
discusses how those firms could be impacted differently based on
certain characteristics such as whether firms have already
[[Page 69628]]
implemented ISQM 1 or SQMS 1.\117\ Further, the PCAOB discusses the
differential impacts for firms of different sizes, including the size
of the firms' issuers,\118\ as well as a separate EGC analysis.\119\
Most of the quantified estimates are not segmented across groups, but
we are unaware of data that would allow for such segmentation.
---------------------------------------------------------------------------
\117\ Id. at 116-71.
\118\ Id. at 171-75.
\119\ Id. at 183-87.
---------------------------------------------------------------------------
As described above, we have considered the information contained in
the Notice of Filing of Proposed Rules as well as the comments we have
received. Having reviewed the information in the public file before us,
we find that the Amendments are consistent with the requirements of
Title I of SOX and the rules and regulations thereunder and are
necessary or appropriate in the public interest or for the protection
of investors. In particular, we believe the Amendments as a whole will
further the Board's statutory mandate under SOX while reducing
compliance costs and maintaining the investor protection benefits of QC
1000. The amended standard will continue to lead registered public
accounting firms to improve their quality control systems, thereby
improving audit quality and protecting investors.
IV. Effect on Emerging Growth Companies
In the Notice of Filing of Proposed Rules, the Board recommended
that we determine that the Amendments apply to the audits of EGCs.\120\
Section 103(a)(3)(C) of SOX requires that any rules of the Board
requiring mandatory audit firm rotation or a supplement to the
auditor's report in which the auditor would be required to provide
additional information about the audit and the financial statements of
the issuer (auditor discussion and analysis) shall not apply to an
audit of an EGC.\121\ The Amendments do not fall into these categories.
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\120\ Id. at 187.
\121\ 15 U.S.C. 7213(a)(3)(C).
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Section 103(a)(3)(C) further provides that ``[a]ny additional
rules'' adopted by the PCAOB after April 5, 2012 do not apply to audits
of EGCs ``unless the Commission determines that the application of such
additional requirements is necessary or appropriate in the public
interest, after considering the protection of investors and whether the
action will promote efficiency, competition, and capital formation.''
\122\ To the extent that section 103(a)(3)(C) applies, we have
determined that the application of the Amendments to audits of EGCs is
necessary or appropriate in the public interest for the reasons stated
below.
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\122\ Id.
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When the Commission approved QC 1000 and related amendments in
2024, it determined that QC 1000 should apply to the audits of EGCs,
pointing to benefits for EGCs such as enhanced audit and financial
reporting quality.\123\ The Commission acknowledged that QC 1000 could
impose costs on EGCs, such as higher audit-related fees and costs
incurred to allocate more resources to internal control systems or to
respond to additional requests for evidence from audit firms.\124\ As
explained above, the Amendments make targeted changes to certain QC
1000 requirements that the Board determined were unclear in their
application, might impose higher costs than initially anticipated in
relation to the potential benefits, or might be unnecessarily
prescriptive. The Board stated that the Amendments are intended to
preserve QC 1000's core investor-protection objective while reducing
unnecessary complexity, duplication, and implementation costs.\125\
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\123\ See 2024 Approval Order, supra note 8, at 81-82.
\124\ Id. at 82.
\125\ See Notice of Filing of Proposed Rules, supra note 3, at
88.
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Consistent with the Commission's 2024 determination, we believe
that QC 1000 should not distinguish between the audits of EGCs and the
audits of all other public companies in applying these Amendments given
that they preserve the investor-protection benefits that the Commission
determined to extend to EGCs when it approved QC 1000. We note that the
Amendments may reduce implementation costs, which could favorably
impact EGCs. More specifically, we agree with the Board's assessment
and believe that applying the Amendments to the audits of EGCs is
necessary or appropriate in the public interest, after considering the
protection of investors and whether the Amendments will promote
efficiency, competition, and capital formation.
The PCAOB provided information, including data and analysis of
EGCs, that sets forth its views as to why it believes the Amendments
should apply to the audits of EGCs.\126\ In addition, the Board sought
public input on the application of the Amendments to the audits of
EGCs. Commenters generally did not provide views on whether the
Amendments should apply to the audits of EGCs.\127\
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\126\ Id. at 184.
\127\ Id. at 187.
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PCAOB staff analysis identified 2,379 EGCs \128\ and 245 PCAOB-
registered firms that audited EGCs, including 203 firms that performed
audits for both EGC and non-EGC issuers. Approximately 97% of EGCs were
audited by these 203 firms. None of these firms were design-only firms,
but design-only firms provided at least 5% of total audit hours on nine
EGC engagements. Sixteen of these firms withdrew from registration
since November 15, 2024, but none of these firms referenced QC 1000 as
a reason for withdrawal. Fourteen of these firms issued audit reports
with respect to more than 100 issuers, and 42% of EGCs were audited by
these 14 firms.\129\
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\128\ The PCAOB explained that the methodology for capturing the
EGC population covers only companies that self-identified as an EGC
by selecting the applicable check box on an Exchange Act annual
report or registration statement (Forms 10-K, 20-F, 40-F, 10-12B,
10-12G), or on a Securities Act registration statement (Forms F-1,
F-4, S-1, S-4, S-11) filed with the SEC during the 18-month period
ending November 15, 2024 (the measurement period). In instances
where a company had more than one such filing during the measurement
period, the most recent annual report was selected. If no annual
report was filed during the measurement period, the most recent
registration statement was selected. Staff removed companies whose
annual reports or registration statements did not include an audit
report signed by a registered firm in the measurement period (e.g.,
companies whose filings included unaudited financial statements or
audit reports signed more than 18 months before the measurement
date). Of the 2,379 EGCs the Board identified, 1,820 (1,721) filed
an annual report during the 18-month (12-month) period ending
November 15, 2025. Id. at 183 n. 534.
\129\ Id. at 184.
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The PCAOB stated that the Amendments would likely decrease costs
incurred by firms to design, implement, and operate their QC systems,
and firms could pass part of these cost savings down to their clients,
including EGCs, in the form of lower audit fees. The PCAOB noted that
EGCs are disproportionately audited by smaller firms; however, because
it is unclear whether the Amendments would disproportionately impact
smaller firms, it is also unclear whether EGCs would be
disproportionately impacted by cost savings passthrough.\130\
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\130\ Id. at 185.
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According to the PCAOB, reduced audit fees could increase capital
formation by decreasing the overall regulatory burdens of being a
public company and could also lessen a competitive disadvantage for
EGCs in their respective product markets to the extent EGCs compete
with companies that are not audited by PCAOB-registered firms. The
PCAOB stated this could increase competition in product markets where
EGCs have a less than
[[Page 69629]]
dominant market share, which is likely the case as EGCs tend to be
newer companies; however, it believed any impacts on competition in EGC
product markets would likely be modest because audit fees reflect only
0.6% of exchange-listed EGCs' revenues.\131\
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\131\ Id. at 186.
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The PCAOB acknowledged that any reduction in audit quality arising
from the Amendments could reduce financial reporting quality, which
could result in less efficient capital allocation, higher cost of
capital, and less capital formation. The PCAOB stated that this effect
could be particularly pronounced for EGCs because they tend to be
smaller and have a shorter SEC financial reporting history than the
broader population of public companies. The PCAOB also explained that
it believed EGCs are likely to exhibit greater information asymmetry
between management and investors and hence the importance of the
external audit to investors may be more pronounced. However, the PCAOB
concluded that the Amendments would have minimal impact on audit
quality and, therefore, any impact on EGCs' financial reporting quality
should also be minimal.\132\
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\132\ Id. at 184-85.
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The PCAOB explained that any new PCAOB standards and amendments to
existing standards determined not to apply to the audits of EGCs would
require auditors to design and implement different requirements within
their methodologies or policies and procedures with respect to audits
of EGCs and non-EGCs, which would create the potential for confusion
and may not be practical in the context of these Amendments. Some of
the Amendments are necessarily firm-wide and cannot easily be
differentiated for different types of audits (e.g., rescinding the EQCF
requirement and permitting the selection of the evaluation date), and
even where differentiation is possible, maintaining two separate QC
components for EGC and non-EGC audits may add to cost or
confusion.\133\
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\133\ Id. at 186-87.
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We agree with the Board's analysis and further emphasize the
benefits discussed by the PCAOB, including the possibility that firms
will pass part of their cost savings on to EGCs in the form of lower
audit fees, which could increase capital formation by decreasing the
overall regulatory burdens of being a public company. Reduced audit
fees could also lessen a competitive disadvantage for EGCs in their
respective product markets to the extent they compete with companies
that are not audited by PCAOB-registered firms, although we acknowledge
that any impacts on competition would likely be modest given that audit
fees reflect a small percentage of exchange-listed EGCs' revenues. We
believe that any detriment to audit quality or financial reporting
quality of EGCs would be minimal because we do not expect the
Amendments to have a significant impact on audit quality. As noted
above, we agree that the Amendments maintain QC 1000's investor-
protection benefits, while making targeted changes to a small number of
QC 1000's requirements to reduce unnecessary complexity, duplication,
and implementation costs. Furthermore, we believe that applying the
Amendments to the audits of EGCs would be efficient because it would
mean that the 203 registered firms that audit both EGCs and non-EGCs
would not have to implement different requirements for these two
categories of issuers which, in practice, would not be possible for the
Amendments with firm-wide impacts.
Accordingly, after considering the protection of investors and
whether the action will promote efficiency, competition, and capital
formation, we believe there is a sufficient basis to determine that
applying the Amendments to the audits of EGCs is necessary or
appropriate in the public interest.
V. Conclusion
We have reviewed and considered the Amendments, the information
submitted therewith by the PCAOB, the ten comment letters we received,
and the recommendation of the Commission's staff. We conclude that the
determinations made by the PCAOB as described in the Notice of Filing
of Proposed Rules are reasonable. Generally, the Amendments make
targeted changes to QC 1000 to address implementation challenges
identified by firms and to better align certain provisions of QC 1000
with other quality management standards with which most firms are
already complying. As discussed in greater detail above, we believe
that the Amendments could reduce unnecessary costs and enhance
efficiency while not compromising QC 1000's goal of driving continuous
improvements in firms' quality control systems and maintaining the
standard's investor protection benefits.
Therefore, in connection with the PCAOB's filing and our review,
A. We find that the Amendments are consistent with the requirements
of Title I of SOX and the rules and regulations thereunder and are
necessary or appropriate in the public interest or for the protection
of investors; and
B. Separately, we find that the application of the Amendments to
the audits of EGCs is necessary or appropriate in the public interest,
after considering the protection of investors and whether the action
will promote efficiency, competition, and capital formation.
It is therefore ordered, pursuant to section 107 of SOX and section
19(b)(2) of the Exchange Act, that the Amendments (File No. PCAOB-2026-
01) be and hereby are approved.
By the Commission.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2026-22483 Filed 11-3-26; 8:45 am]
BILLING CODE 8011-01-P
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