Audit regulators plan to take a much closer look at how firms manage audit quality in 2019, retooling their inspections process to focus on quality control systems.

The Public Company Accounting Oversight Board is emerging from a year of self-examination under an all-new board with plans to alter the existing approach to auditing public companies, including how audit inspections are conducted. “Beginning with the 2019 inspection cycle, we will increase our focus on firms’ quality control systems,” said board member Kathleen Hamm in a recent speech.

The board recently published a brief on how it plans to focus more on quality control in its inspections in 2019, in addition to independence issues and areas of recurring deficiencies. Acknowledging the board has always used a risk-based approach to select audits for inspection, now the board plans to take the same approach to inspect quality control systems.

“This approach will allow our staff to tailor our inspection procedures based on the size, complexity, and risk profile of firms, including their past inspection results, identified weaknesses, and known changes in controls,” said Hamm.

Under this new approach, inspections staff will assess the processes firms use to identify the risks that they may not deliver audits compliant with the board’s standards and rules. “In addition to assessing the overall control environment, including firm culture and tone at the top, our inspectors will assess the specific controls that firms use to mitigate their self-identified risks,” said Hamm.

The idea is for inspectors to ascertain how well firms “timely detect negative audit quality,” said Hamm. “We will also learn how such systems prevent risky audit behavior and activities.” The outcome of those assessments will then inform inspectors on where to look next, as in selecting audits to review, selecting aspects of those audits to review, and determining remediation.

The board will gather data on what audit quality indicators firms use to plan, manage, monitor, and staff their engagements, and what indicators the firms share with audit committees. “The goal of this data collection is to start to pinpoint metrics that correlate with, or at least provide indicia of, audit quality,” said Hamm.

The board is also reviewing its approach to assessing remediation around quality control deficiencies. “Yes, we want to make our remediation determinations timelier, and that effort is already under way,” Hamm said. “But we also want to push for more impactful improvements in firm quality control systems using the information we gather through these inspections.”

The board is also creating a new “quality control leader” position, said Hamm, to coordinate the initiative around the quality control focus. “This leader's job will be to scan horizontally across firms and programs to identify behaviors and practices that promote and enhance, or alternatively degrade, audit quality,” said Hamm. “Once identified, we are committed to sharing these insights with the marketplace.”