The Public Company Accounting Oversight Board voted Tuesday to seek public comment on a potential approach to revising the board’s quality control standards applicable to audit firms.

The PCAOB currently uses quality control standards adopted back in 2003, PCAOB Chairman William Duhnke explained at a PCAOB meeting. During the session, board members agreed to release a so-called “concept release” seeking public comment on the potential approach.

The release is not a proposed regulation. “Rather than issue a proposed rule for public comment, we believe it is appropriate to obtain broad feedback from our stakeholders at the threshold of our project,” Duhnke said. “This is a complex area and we want to ensure we hear from all impacted.”

“The concept release contemplates that firms will receive feedback from a number of sources, including risk assessments, internal monitoring, and inspections by regulators such as the PCAOB. Missing from the list is the vital role for investors and the public.”

PCAOB Board Member J. Robert Brown Jr.

The PCAOB was created by the Sarbanes-Oxley Act to oversee audits of public companies. With more than “15 years of inspections-related experience and corresponding findings,” Duhnke noted, those findings “show continued weaknesses in firms’ quality control systems.”

The problem

Current quality control standards “don’t reflect many of the changes of today’s environment, including in particular the evolving use of technology,” said PCAOB Chief Auditor Megan Zietsman at the meeting.

In addition, the PCAOB’s standards “could do more to prompt firms to take a proactive, preventative approach to managing audit quality,” Duhnke said.

Risk-based and scalable

More than in the past, the approach identified in the concept release focuses on risk and scalability. “A strong system of quality control should direct an audit firm to identify, assess, and respond to risks to audit quality proactively,” Duhnke maintained. “When firms focus on identifying and mitigating the specific quality-related risks they face, audit quality can and should improve.”

Scalability is important as well. An auditing firm “needs to be able to tailor its quality control system appropriately ” based on its size, the nature of engagements, and risks to the quality of an audit, Zietsman said.

Requiring auditing firms to establish strong quality control systems is also key to the PCAOB’s “objective of shifting towards a more preventive regulatory approach,” Zietsman said. The PCAOB is basing its new approach in large part on the proposed International Standard on Quality Management 1 (ISQM 1) developed by the International Auditing and Assurance Standards Board.

ISQM 1 is “designed to focus attention on proactively identifying and responding to risks,” Zietsman explained. Many firms will have to follow the PCAOB’s standard as well as ISQM1, she said. Significant differences between the two “would be very challenging and potentially impossible for firms to manage,” she said. There are differences, though, as the PCAOB’s requirements must be aligned with U.S. federal securities laws.

Even more room for improvement

The PCAOB’s contemplated changes to quality control requirements already are being met with a measure of disappointment by some. “Reliable financial reporting is critical to advancing the public interest in ensuring confidence in our capital markets,” PCAOB Board Member J. Robert Brown Jr. said at the meeting. “Trusted, reliable financial reporting depends on rigorous independent auditing, which in turn relies on an effective quality control system.”

As drafted, though, the concept release does not go far enough to require firms to obtain feedback from certain stakeholders. “The concept release contemplates that firms will receive feedback from a number of sources, including risk assessments, internal monitoring, and inspections by regulators such as the PCAOB,” Brown said. “Missing from the list is the vital role for investors and the public.”

Opportunity for input

Those wishing to provide feedback of their own on the PCAOB’s contemplated approach to revisions to its quality control standards have until March 16, 2020, to submit comments on the “concept release.”

“The input we receive from the public through this concept release will play an important role in the board’s consideration of an approach to revising our quality control standards,” Duhnke said in a press release announcing the concept release’s approval. “We encourage all interested parties to review our release and share their views with us.”

Lori Tripoli is a writer based in the greater New York City area who focuses on legal and regulatory issues.