CURRENT MONTH (May 2024)
PCAOB Adopts New Standards for Auditor Responsibilities and Quality Control
By Thomas W. White, Retired Partner, WilmerHale
In its current strategic plan, the Public Company Accounting Oversight Board (PCAOB) identified modernization of auditing and other professional standards for public company auditors—many of which predate formation of the PCAOB in 2003—as a key goal. On May 13, the PCAOB advanced this objective with the adoption of two comprehensively revised standards.
The PCAOB adopted a new auditing standard, AS 1000, General Responsibilities of the Auditor in Conducting an Audit, and amended related standards. AS 1000 revises and consolidates several standards that address the general principles and responsibilities of the auditor, such as due professional care, professional skepticism, and professional judgment. According to the PCAOB, the new standards will:
- Modernize, clarify, and streamline the general principles and responsibilities of auditors and provide a more logical presentation (but without creating new principles or responsibilities)
- Clarify the auditor’s responsibility to evaluate whether the financial statements are “presented fairly” (but without changing existing responsibilities to conduct this evaluation in conformity with the existing the applicable accounting framework, e.g., GAAP)
- Clarify the engagement partner’s due professional care responsibilities by adding specificity to certain audit performance principles set out in the standards
- Accelerate the completion date for the auditor’s audit documentation from forty-five days to fourteen days (thereby enabling the PCAOB to speed up its inspection process)
- Clarify that an auditor’s professional skepticism extends to other information that is obtained to comply with PCAOB standards and rules
This standard and related amendments are subject to Securities and Exchange Commission (SEC) approval. They will become effective for audits of fiscal years ending after December 15, 2024 (i.e., for 2025 audits of calendar-year companies), except that the fourteen-day documentation requirement will be phased in for smaller firms.
The PCAOB also adopted a new quality control (QC) standard, QC 1000, A Firm’s System of Quality Control, and related amendments to other standards, rules, and forms. The standard is designed to “lead registered public accounting firms . . . to significantly improve their QC systems.” The new QC 1000 is an integrated, risk-based standard that mandates quality objectives and key processes for all firms’ QC systems. The components of the standard include:
- Process components: The firm’s risk assessment process and monitoring and remediation process
- Firm organization and operations components: Governance and leadership; ethics and independence; acceptance and continuance of engagements; engagement performance; resources; and information and communication
- Evaluation and reporting: Annual evaluation of the effectiveness of the QC system; reporting to the PCAOB on the QC system evaluation
The standard imposes additional requirements for larger firms (those that audit more than one hundred issuers per year). Most notably, the standard requires these firms to establish an external oversight function for their QC systems.
This standard and related amendments, which are also subject to SEC approval, will take effect on December 15, 2025.
