Last week, I blogged that the SEC would consider adopting changes to financial statement audit standards. Sure enough, the SEC adopted them. As Liz Dunshee (back from medical leave herself) writes on TheCorporateCounsel.net:
“… the SEC approved the PCAOB’s new quality control standard, QC 1000 – A Firm’s System of Quality Control – and related amendments. Here’s the 85-page adopting release – and here’s an overview of what the new standard will require, from the SEC’s press release:
‘QC 1000, A Firm’s System of Quality Control, establishes an integrated, risk-based quality control standard that will require all registered public accounting firms to identify specific risks to their practice and design a quality control system that includes appropriate responses to guard against those risks. Registered firms that perform engagements under PCAOB standards will be required to implement and operate the QC system. The new quality control standard focuses on an audit firm’s accountability and continuous improvement of its audit practice and will require an annual evaluation of the firm’s QC system and related reporting to the PCAOB, certified by key firm personnel.’
In addition, firms that annually issue audit reports for more than 100 issuers will be required to establish an external quality control function (EQCF) composed of one or more persons who can exercise independent judgment related to the firm’s QC system. These new requirements will go into effect in December 2025. As Dave noted last week, QC 1000 replaces the existing AICPA standard that pre-dated the creation of the PCAOB.”
In my opinion, the most striking aspect of the new standards (and the one that sparked the most criticism by commenters) is the requirement for audit firms to establish the EQCF
“composed of one or more persons who are not principals or employees of the firm and do not otherwise have a relationship with the firm that would interfere with the exercise of independent judgment with regard to matters related to the QC system.The EQCF is required to evaluate the significant judgments made and related conclusions reached by the firm when evaluating and reporting on the effectiveness of its QC system.”
The SEC adopting release clarified this only applies to “13 out of the approximately 1,600 PCAOB-registered firms,” but this is still a big deal and I suspect competitve/quality pressures may push other firms to do that same. As I said in last week’s blog, the new standards “only apply to financial statement audits, but offer a much needed improvement opportunity for other audit types, including sustainability/ESG audits and assurance engagements. Even if the QC improvements aren’t mandated, buyers of non-financial audit services would do well to ask their audit firms (and industry association audit mechanisms) how firm practices and procedures address QC risks and concerns the standard is intended to address.”
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