SEC Chief Accountant Paul Munter emphasized the importance of setting the right "tone at the top" at audit firms to maintain the integrity of capital markets. The leaders of these firms play a crucial role in ensuring that professionals within the firm uphold integrity and professionalism over profit and growth.

The "tone at the top" determines whether a firm's culture focuses on delivering high-quality audits or prioritizing short-term profits. It influences the firm’s capacity to exercise professional skepticism and have an effective quality control system. Unfortunately, there have been instances where audit firms have neglected this, resulting in violations that undermine public trust.

The SEC Chief Accountant argues that setting the right tone at the top involves more than just having appropriate policies. “Senior partners must lead by example through their actions. This includes supporting staff when difficult calls need to be made, admitting mistakes, taking corrective action, and holding individuals accountable for unethical behaviour. Moreover, ethics and character should be fundamental to the firm’s hiring, retention, and promotion criteria. Firms should reward technical excellence and integrity at least as much as billing, profitability, and business development. Transparency and the empowerment of staff to report misconduct are also essential.”

In conclusion, he emphasizes that the “tone at the top” is crucial in maintaining the integrity of audit firms and the capital markets. Leaders of public accounting firms must prioritize integrity and professionalism over profit and growth.

Access the statement on the SEC’s website.

The updates reflect the PCAOB’s recent progress and continued drive toward its strategic goal of modernizing the PCAOB’s standards and rules. Since 2022, the Board has completed four standard-setting projects and issued proposals on six additional standard-setting and rulemaking projects.

The Board has approved two projects, namely Quality Control and General Responsibilities of the Auditor in Conducting an Audit (AS 1000), and they are currently awaiting SEC approval. Furthermore, two fresh initiatives have been incorporated into the short-term standard-setting agenda. The first one, Inventory, was shifted from the mid-term agenda, while the second one, Other Reporting, is a newly introduced project. In addition, a new venture focusing on Internal Audit has been added to the mid-term standard-setting agenda. The Attestation Standards Update project has had its timeline revised, with the expected time for action now set for 2025. Lastly, the project on Follow-On Disciplinary Proceedings has been removed from the PCAOB’s rulemaking agenda.

Access the updates on the PCAOB’s website.

AS 1000 enhances and consolidates a group of standards that the PCAOB adopted on an interim basis in April 2003 and that address the general principles and responsibilities of the auditor, such as due professional care, professional skepticism, competence, and professional judgment. Merging these foundational standards into one standard enhances investor protection by reaffirming the general principles and responsibilities of the auditor and solidifying the foundation of every audit.

 Key Provisions of the New Standard and Related Amendments:

• The new standard streamlines and modernizes auditors' general principles and responsibilities, enhancing usability without creating new principles. It reaffirms the auditor’s responsibility to investors, providing a foundation for an objective and independent audit.
• It clarifies the auditor’s responsibility for evaluating if financial statements are “presented fairly” in conformity with the applicable financial reporting framework.
• The role and responsibilities of the engagement partner are further specified, distinguishing between the duties applicable to all auditors and those specific to engagement partners.
• The documentation completion period is reduced from 45 to 14 days, limiting opportunities for improper alteration of audit documentation and potentially accelerating the inspection process.
• The standard also clarifies that an auditor’s professional skepticism extends to other information obtained to comply with PCAOB standards and rules, emphasizing that this skepticism is exercised throughout the audit process.

The new standard and related amendments will take effect for audits of financial statements for fiscal years beginning on or after December 15, 2024, subject to approval by the Securities and Exchange Commission.

Access the new standard on the PCAOB’s website.

The new standard would require all PCAOB-registered firms to identify their specific risks and design a QC system with policies and procedures to guard against them.

 Key Provisions of the New Standard:

• The new standard adopts a balanced approach to Quality Control (QC), combining a risk-based strategy that encourages proactive risk management with set mandates to ensure rigorous QC system design, implementation, and operation.
• All firms registered with the PCAOB must design a QC system that complies with this standard, continuously monitor its operations, and take corrective actions for any inefficiencies, fostering continuous improvement.
• Such firms must also conduct an annual evaluation of their QC system and submit the results to the PCAOB via the new Form QC, endorsed by critical firm personnel, to enhance individual accountability.
• Firms auditing over 100 issuers annually must establish an External QC Function (EQCF) for independent judgment on the QC system, including evaluating significant judgments made in assessing and reporting on the QC system's effectiveness.

The Board developed the improvements to PCAOB QC standards through consultations with advisory groups. It issued a concept release in December 2019 and a proposal for public comment in November 2022. Substantial stakeholder feedback and PCAOB's economic analysis collectively informed the new standard.

In designing, implementing, and operating their QC systems, the PCAOB expects firms that are subject to both PCAOB standards and IAASB QC standards— which the PCAOB believes constitute a very substantial majority of firms that perform engagements under PCAOB standards—can leverage the work they have already done and the investments they have already made to comply with those other requirements.

Access the new standard on the PCAOB’s website.

This staff Spotlight highlights important considerations and examples for auditors related to commercial real estate (CRE), as they plan and conduct audits and reviews of interim financial information in many industries with CRE exposure. For example, the report provides a specific set of questions that auditors may want to consider in the context of identifying and assessing risks, including the risk of fraud.

The Spotlight also provides reminders in the following key areas:

• Asset impairment and allowance for credit losses
• Going concern
• Interim review considerations

Access the Spotlight report on the PCAOB’s website.

The PCAOB strongly encourages firms to assess the underlying root causes of a deficiency so that the deficiency can be effectively addressed and ultimately remediated and eliminated. Root Cause Analysis (RCA) is used by many audit firms to evaluate the adequacy of and compliance with their quality control system.

The PCAOB staff believes that RCA is an effective practice for firms to drive audit quality. The Spotlight covers:

• General considerations related to RCA
• Other observations about RCA from PCAOB inspections
• Key questions for audit firms to consider

In addition to audit firms, audit committees and others charged with governance may find the firm’s root cause analysis informative as they discuss past inspection deficiencies, the cause of those deficiencies, what corrective actions were taken to address these deficiencies, and what preventive measures a firm has taken to improve their audit quality going forward.

Access the Spotlight report on the PCAOB’s website.

The report states that company-produced information (like invoices or IT system reports) and external information (like customer purchase orders or bank records) are critical in audits. In the 2021 and 2022 inspection cycles, around 17% of audited firms had deficiencies due to inadequate procedures for testing the accuracy and completeness of this information.

To improve audit quality, the Spotlight highlights:

• Common audit deficiencies
• Good practices
• Other reminders that may improve auditor understanding of how to properly test IPC and information from external sources.

Access the Spotlight report on the PCAOB’s website.

According to the AASB, the draft Strategic Plan 2026-2029 has been crafted carefully considering the changing environment and the diverse needs of interested and affected parties. Building on the foundation of the current strategy, the new plan now leverages the emerging issues monitoring process. It prioritizes an ongoing commitment to connect through a tailored engagement process. This iterative approach ensures that activities remain responsive to the needs of the community in the face of emerging challenges and opportunities.

The strategic goals for 2026-2029 are as follows:

• Monitor and understand emerging issues in the changing environment to better anticipate standard setting needs.
• Engage and collaborate with interested and affected parties to understand their needs and expectations.
• Set high-quality standards and guidance that respond to the evolving needs and expectations of interested and affected parties.
• Enhance standard-setting processes and capabilities to develop timelier solutions.
• Support the effective implementation and application of standards and guidance to enhance consistency and quality in engagement performance.

The response deadline to collect inputs through the survey is June 28, 2024.

Access the draft strategic plan and the survey on the AASB’s website.

The new strategy reaffirms the IAASB's commitment to serving the public interest by developing globally accepted audit, review, and other assurance standards.

Key highlights of the strategy include:

• Completing priority audit and assurance projects, emphasizing fraud, going concern, and sustainability assurance.
• Commencing new initiatives and projects, including focusing on supporting the adoption and implementation of the overarching standard for sustainability assurance engagements, establishing an IAASB Technology Position, and conducting post-implementation reviews, as well as standard setting on, among other topics, audit evidence and risk response, materiality, and reviews of interim financial information.
• Collaborating with official stakeholders across the external reporting ecosystem, including the International Ethics Standards Board for Accountants (IESBA), regulators, standard setters, and other stakeholders.
• Engaging with regulatory and standard-setting partners to strengthen trust in markets globally.
• Further, the Monitoring Group’s recommendations will be implemented to enhance independence and accountability in standard settings.

Access the press release on the IAASB’s website.

The firm and engagement metrics proposal would, if adopted, require PCAOB-registered public accounting firms that audit one or more issuers that qualify as an accelerated filer or large accelerated filer to publicly report specified metrics relating to such audits and their audit practice.

The proposal sets out standardized firm- and engagement-level metrics that PCAOB staff believes would create a useful dataset available to investors and other stakeholders for analysis and comparison. The proposed metrics cover (1) partner and manager involvement, (2) workload, (3) audit resources (4) experience of audit personnel, (5) industry experience of audit personnel, (6) retention and tenure, (7) audit hours and risk areas (engagement-level only), (8) allocation of audit hours, (9) quality performance ratings and compensation (firm-level only), (10) audit firms’ internal monitoring, and (11) restatement history (firm-level only).

The proposal would require reporting of firm-level metrics annually on a new Form FM, for firms that serve as the lead auditor for at least one accelerated filer or large accelerated filer. Reporting of engagement-level metrics for audits of accelerated filers and large accelerated filers would happen via a revised Form AP, which would be renamed “Audit Participants and Metrics.” Finally, the proposal would allow, but not require, limited narrative disclosures on both Form FM and Form AP to provide context and explanation for the required metrics.

The firm reporting proposal would, if adopted, amend the PCAOB’s annual and special reporting requirements to facilitate the disclosure of more complete, standardized, and timely information by registered public accounting firms. As is current practice, much information would be disclosed publicly, and some would be available to the PCAOB only for oversight.

The Board is proposing to enhance the required reporting of information by registered firms on the PCAOB’s public Annual Report Form, also known as Form 2, and the Special Reporting Form, also known as Form 3, in several key areas (financial information, governance information, network information, special reporting and cybersecurity).

The deadline for public comment on both proposals is June 7, 2024.

Access the press release on the PCAOB’s website.