PCAOB amends quality control standard

QC 1000, A Firm’s System of Quality Control, first proposed by the PCAOB in 2022 and passed by the SEC in 2024, is “one of the most consequential standards that the board has ever adopted,” according to Chair Jim Logothetis.

But “consequential,” in the eyes of some audit firms, also translated to “burdensome.” Based on comment letters from stakeholders, the PCAOB proposed amendments to QC 1000, which, as of September 9, it has unanimously adopted. The amendments will next go to the SEC for approval.

EQCF scotched. One of the biggest changes the PCAOB made was removing the controversial external quality function (EQCF) from the standard. The EQCF mandated that firms that audit more than 100 issuers a year have an independent observer evaluate their judgments when reporting on their quality control (QC) systems.

Firms told the PCAOB that they were having trouble finding people to fulfill the EQCF, Thomson Reuters reported. Logothetis observed during the board’s September 9 meeting that the requirement might not, in practice, encourage greater independence, as each firm “selects, engages, compensates, and can remove the individual performing the EQCF role.”

Modernizing inspections and implementing QC 1000, Logothetis argued, will give the PCAOB more visibility into firms’ QC systems. “Against that backdrop,” he said, “the case for retaining the EQCF requirement becomes even less compelling.”

George Botic, the sole remaining PCAOB member from the Biden administration, raised objections to cutting the EQCF requirement. He recommended, instead, making it applicable only to firms issuing 500 or more audits per year. With that change, only the five largest audit firms, which, he noted, audit around 82% of the US market cap, would need to comply.

Other changes. The PCAOB also cut the so-called “design-only requirement” from QC 1000. This requirement would have mandated that all PCAOB-registered firms design QC systems, even if the firms did not perform any audits. This requirement is “not appropriately tailored to the risk presented, and may impose costs that outweigh the benefits for some firms,” Logothetis said.

Other changes included allowing firms more flexibility over QC roles, which now may be performed by more than one person or by personnel from outside a firm; allowing firms to choose the date for their annual QC evaluations; and reducing the document retention period from seven years to five.

“Importantly, these targeted amendments, in our view, strike an appropriate balance by reducing unnecessary implementation burdens while preserving the investor protection benefits and core framework of QC 1000,” PCAOB acting chief auditor Dominika Taraszkiewicz said during the meeting.

The effective date for QC 1000 remains December 15, 2026.