PCAOB chair charts new course for audit inspections

The PCAOB has entered a new phase, similar to where it was in 2022: After threats to its existence, budget battles, salary cuts (that was new), close to wholesale replacement of the members and the chair, and intermittent signals of a new direction, it’s now laying out its grand plan.

In his prepared remarks for the USC SEC Reporting Conference on June 4, PCAOB chair Demetrios “Jim” Logothetis mapped changes to the board’s inspection program that would de-emphasize reviewing “a handful of audits in isolation” in favor of a more acute focus “on audit firms’ systems of quality control.”

“Today, we select a non-statistical sample of audits. We review those engagements, and from that limited set, we infer conclusions about a firm’s broader system of quality control with relatively limited direct testing of the system itself,” Logothetis said.

But that approach “does not provide a complete view of how a firm’s system actually operates, and it is not the most effective way to deliver on our core objective—protecting investors at scale.”

The board will “move toward a model where the primary focus of inspections is the firm’s system of quality control and where engagement-level work serves to corroborate how that system operates in practice,” Logothetis said. “This reflects a simple reality: Audit quality is produced by systems, not by isolated engagements.”

That doesn’t mean, according to Logothetis, that the PCAOB will stop reviewing individual audit files.

“We will continue to have a baseline of traditional file reviews,” he said. “But we will increasingly use our understanding of a firm’s quality control system to guide us. That introduces both targeting and unpredictability. And in some cases, it may mean we actually touch more files—but in different, more risk-informed ways.”

Control systems. Logothetis mentioned the 2023 case that the SEC brought against Marcum LLP involving SPAC audits as an example of why the PCAOB is changing its direction. In “the Marcum SPAC matter…the SEC and the PCAOB alleged systemic quality control deficiencies across the firm—driven in part by rapid growth that outpaced the firm’s capacity,” he said.

“Those system failures, outlined in government charging papers, showed up as engagement level breakdowns in supervision, documentation, risk assessment, and engagement quality review.”

Steps forward. The modernized inspections model will have at its foundation QC 1000, Logothetis said. QC 1000 is the PCAOB’s new quality control standard. Among its requirements, “firms registered with the PCAOB will have to design a quality control system that addresses the firm’s unique risks and to reevaluate the system each year in a new filing to the board,” CFO Brew reported in 2024.

The PCAOB is holding an open board meeting on June 9 to consider “narrow revisions to the standard,” Logothetis said, because comment letters from stakeholders have observed that “certain requirements included in QC 1000 have proven to be costlier than expected and may not contribute to audit quality as intended.”

Meanwhile, on May 28, the PCAOB announced it was forming an Inspections Modernization Council to “bring together external experts to help the PCAOB build a modern inspection program that is forward-looking, risk-based, and anchored in the systems that drive audit quality,” Logothetis said at the USC meeting.

Applications to serve on the council are open to the public and due by June 15.