The Public Company Accounting Oversight Board plans to revisit a proposal introduced last year that advises audit firms on how to evaluate their work internally.
The board will vote on whether to re-propose the auditing standard during its meeting on Wednesday. The firms’ internal evaluations, which the PCAOB calls “engagement quality reviews,” are usually conducted by a firm partner not associated with a particular audit. They are designed to catch problems with audits, such as lack of proper documentation, before the firm issues its opinion.
In the past, the revisions to legacy engagement-review guidelines that the PCAOB adopted from the American Institute of Certified Public Accountants have stymied the board from issuing its own version of the auditing standard. It’s been nearly seven years since the PCAOB was created out of the Sarbanes-Oxley Act, and just over a year since the board released its initial proposal for a 75-day public comment period. PCAOB staffers were working on the proposal today and were not available to comment for this story.
To be sure, the topic has been on the PCAOB’s priority list for years. In 2004, board members asked for input from its Standing Advisory Group on how to craft a new rule, and emphasized the importance of the reviews. “The engagement quality reviewer plays a critical public interest role in the process of preparing and issuing audit reports that are necessary to protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audit reports,” the PCAOB staff wrote in their agenda for their advisers.
Under the proposal released last February, reviewers may be a partner or someone with a high level of experience and expertise that could opine on a particular engagement but not be directly involved in the audit under review. The reviewers could also come from another firm — which could help out staff-strapped auditors. However, several commentators to the original proposal expressed concerns with such an allowance.
Many of the 38 letters the PCAOB received last year asked the board to write out the point of the standard. Those critics of the proposal were also concerned the proposal’s wording could lead to unnecessary work by reviewers worried about their liability. Under the original proposal, the reviewers would have to say there is nothing they “know or should know” that would prevent the issuance of an audit report. That language, critics wrote, has legal implications and would likely lead to extra — and subsequently, costly — work by lawsuit-wary reviewers, who are not fully responsible for the audit.
For example, in a joint letter with the head of his company’s audit committee, John Call, CFO of Ross Stores Inc., wrote that he was satisfied with the existing standard and worried that the new proposal would add undue cost and time to his audits.
However, the interim rule only applies to audit firms that are members of the AICPA’s SEC Practice Section and not all of the PCAOB’s registered firms. The regulator adopted AICPA rules as its own with the idea that it would eventually revise them.
The PCAOB staff has acknowledged the imminent changes are mostly meant for small audit firms, which are less likely than the larger firms to have internal review policies that reflect the PCAOB’s wishes. The board has cited the lack of efficient partner reviews as one of 11 main problems areas noted during the PCAOB’s inspections of the smaller firms.