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PCAOB puts fraud and going concern on its five-project standard-setting agenda
PCAOB named five standard-setting projects, including fraud and going concern, after its first public comment request on standard setting. Its most recently completed project, amendments easing the new QC 1000 quality-control rule, is the best evidence of which way the five will be drafted.
The Investor · Invest desk
What happened
- Comfort-letter negative assurance, auditor independence, and noncompliance with laws and regulations make up the other three standard-setting projects.
- Research projects cover data and technology, firm and engagement performance metrics, and communications with audit committees.
- A separate rulemaking project would create a permanent broker-dealer inspection program.
- QC 1000 amendments approved on Sept. 9 still need SEC approval and leave the standard's Dec. 15 effective date in place.
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Why it matters
- cost Cutting quality-control record retention from seven years to five shortens the storage period by about 29%, a saving firms collect only once the SEC approves the package.
- exposure The SEC has 97 days from the Sept. 9 vote to the Dec. 15 start; without its approval by then, firms begin under QC 1000 as first adopted.
- decision Each firm must now choose the date of its annual quality control evaluation, a date the original rule fixed at Sept. 30.
Two of the nine QC 1000 amendments remove a requirement entirely: the "design-only" requirement, and the requirement to have an external quality control function [16][9]. Others let firms assign quality control roles to people outside the firm or split a role among several individuals [13]. They also limit the check for similar deficiencies on other engagements. That check now applies only where the original deficiency did or could leave a conclusion without sufficient appropriate evidence, or produce an inappropriate overall conclusion [14]. The board said the package seeks to reduce compliance costs without compromising its statutory mission to protect investors [8]. QC 1000 is a new standard, and the board amended it before it took effect [15][7].
The PCAOB says the new agendas reflect feedback from the comment period it opened in June [3][1]. Chairman Demetrios Logothetis set out the test for what made the list. "Under these updated agendas, we will continue to focus our efforts on projects that are practical, responsive to today's capital markets, and ultimately, advance audit quality and investor protection," he said in a Sept. 30 statement [6].
As reported, the agenda lists the five projects by topic, with no timelines or drafts [2]. The projects could follow QC 1000 and trim what auditors must do. They could also add procedures, since a standard on fraud, legal noncompliance or going concern can ask for more audit work as easily as less. Or some could stay on the agenda without ever reaching a proposal [2][16]. I think the first is the likeliest for at least part of the list. The board's most recently completed project went that way, and the chairman's test starts with the word "practical" [16][6]. The counter-case is timing. QC 1000 was trimmed before any firm had to comply with it [15], so the rollback took away nothing auditors were already doing. If the first proposal under any of the five adds procedures to existing audit work, the QC 1000 pattern has not carried over [2].
On metrics, the board acted before it finished its research. The amendments narrow and simplify the rules on metrics that firms communicate to outside parties about their audit practice, personnel or engagements [12]. A project on firm and engagement performance metrics is still on the research agenda [4].
What to watch
- Whether the research project on firm and engagement performance metrics produces a proposal that restores some of the external reporting the QC 1000 amendments narrowed.
- The first proposal from the rulemaking project on a permanent broker-dealer inspection program.
- Whether the board runs a second public comment request on standard setting before it publishes proposals on any of the five topics.