PCAOB approves modernized inspections

The PCAOB’s plans to modernize inspections are picking up steam.

On November 2, the SEC approved amendments the PCAOB recommended to audit regulation QC 1000, A Firm’s System of Quality Control. That regulation, which requires audit firms to design quality control (QC) procedures and report on them annually to the PCAOB, is the “foundation” of Chair Jim Logothetis’s initiative to modernize inspections. Logothetis has introduced plans to focus inspections less on examinations of individual files and more on firms’ systems of quality control.

The amendments to QC 1000 are intended to make the standard less costly and burdensome for firms to comply with. Perhaps the most notable change is rescinding the external quality control function (EQCF) provision: the requirement that firms auditing 100 or more issuers a year have an external party review their judgments on the effectiveness of their QC systems.

In comment letters, all of the Big Four firms argued in favor of the amendments, Thomson Reuters reported. The Council of Institutional Investors (CII) and the CFA Institute, however, opposed the blanket removal of the EQCF, arguing that it should apply in some form to the five largest audit firms, to whom its cost would be negligible.

Logothetis gave one of his strongest defenses yet of the PCAOB’s inspections modernization initiative to the board’s Standards and Emerging Issues Advisory Group (SEIAG) on October 30.

“The key tenets of the inspection programs you know today are expected to remain in place,” Logothetis reassured group members, who included CPAs, partners at large accounting firms, attorneys, accounting academics, and representatives of professional organizations. “We’re not going backwards. We’re not scaling back anything.”

At the same time, he reminded listeners that statutes do not specify the number of files PCAOB staff need to examine during examinations. How many files to look at is “a judgmental call, and we will make it as appropriate,” he said.

Logothetis also tacitly criticized current inspections procedures, noting that they culminate in reports that audit committees and investors can read to determine whether an audit firm’s work has been satisfactory, “if they can rely on this report, if they even use it.” The PCAOB currently does not share quality control issues with outside parties for a year, he noted, to give firms time to address and correct them. He stated that the updated inspections process will “giv[e] you a much better product…You’re going to get the files.”