Investor Advisory Group seeks resumption of audit quality indicators project

A working group of the PCAOB’s Investor Advisory Group (IAG) urged the board to resume development of a formal set of audit quality indicators.

“Audit quality is the foundational purpose for which the PCAOB was created,” Norman Harrison, a managing director with Duff and Phelps LLC and a coleader of the working group, said during the advisory panel’s Oct. 24, 2017, meeting in Washington. “You could better manage what you measure ..., and we believe audit quality indicators are concrete measures.” As he sees it, the indicators will help accounting firms and public company directors improve their evaluations of the work performed by auditors.

After the PCAOB in July 2015 published Release No. 2015-005, Concept Release on Audit Quality Indicators, to solicit views for developing a set of indicators, the board shifted to monitoring audit firms’ voluntary actions in the area, to the disappointment of investor advocates.

The PCAOB set aside the project as a rulemaking effort after auditors and public company audit committees questioned why the indicators were needed. In their view public accounting firms could address the indicators through policies they developed. Accounting firms also said they were worried that if engagement-specific indicators were disclosed, investors may not fully understand them or misinterpret them.

Investors, however, said they can fully understand the indicators, and voluntary reports by accounting firms only provide high-level, general information that is less useful. Moreover, they said firms often use the indicators as promotional material. “They are not an adequate substitute for a uniform set of indicators with definitional uniformity,” Harrison said.

As PCAOB inspectors continue to find a high level of audit work deficiencies, he said the measures could be used as an important tool to address problems with audit work. The 2016 annual report by the International Forum of Independent Audit Regulators (IFIAR) said the deficiency rate among the six largest global accounting firms decreased from 47 to 42 percent, but the report emphasized that “the level of deficiency is still too high, and improvement must be accelerated. Consistency of execution and quality control systems are not robust enough.”

“There’s very clearly room for improvement,” Harrison added.

Harrison said the measures would also help investors make informed decisions when public companies conduct their annual shareholder vote to ratify selection of the external accounting firm.

“The annual process of interviewing and proposing and reproposing to shareholders the election of an auditor should not be a pro forma process,” he said. “It is an election, and we believe that the audit quality initiative framework would provide important information to people charged with proposing, electing auditors.” The indicators could provide early warning signs on issues related to auditor capacity, resource constraints, and problems with audit competence.

Harrison added that because the indicators were among the recommendations the Treasury Department's Advisory Committee on the Auditing Profession (ACAP) made in the final report it issued in 2008, nine years have elapsed without a set of indicators for accounting firms, public company directors, and investors to use. Given the length of time that has gone by, he felt the PCAOB should address the project “with a sense of urgency.”

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