The Public Company Accounting Oversight Board on Feb. 11 filed a notice with the Securities and Exchange Commission to withdraw its new standard on audit firm reporting of standardized firm and engagement metrics for approval—a victory for those that opposed the rules, including many of the largest accounting firms in the U.S. and the AICPA.
The PCAOB had approved the new standard last November and was awaiting a rubber stamp from the SEC.
Under the rules, PCAOB-registered public accounting firms that audit one or more issuers that qualify as an accelerated filer or large accelerated filer would be required to publicly report specified metrics relating to their audits and their audit practices. These metrics—which the PCAOB said will further oversight activities and can be used by investors, audit committees, and other stakeholders—would cover eight areas, including involvement of a partner and manager on an audit, auditor workload, and auditor experience.
Reporting of firm-level metrics would be done 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 be required via a revised Form AP, which would be renamed “Audit Participants and Metrics.”
However, there was opposition to the new standard almost from the get-go. During the comment period, the PCAOB heard from several accounting firms, state CPA societies, academics, and the AICPA, among others, who voiced concerns over the standard.
Groups like the Pennsylvania Institute of CPAs and the Center for Audit Quality had asked the PCAOB to extend the 60-day comment period to give stakeholders, firms, and investors more time to carefully consider and provide feedback on the proposal.
John Keyser, assistant professor in the department of accountancy at Case Western Reserve University, wrote that he was “not enthusiastic” about the proposed rules and said he didn’t believe the proposal “provides sufficient evidence that public disclosure of the proposed metrics will have any meaningful impact on the quality of audit services.” He also was concerned that some of the proposed metrics “[would] impose excessive administrative burdens on firms and engagement teams while others are ambiguous with respect to audit quality.”
“The unintended consequences from this proposal could include exit of smaller firms from the market, reallocation of firm and engagement team effort away from audit quality-enhancing activities, and confusion among investors with regard to interpretation of some of the metrics,” he wrote.
In its comment letter, top 10 accounting firm Grant Thornton said it supports “meaningful transparency to relevant stakeholders that will enhance their understanding of audit firms.” However, “we believe that additional study is needed in order to determine what information is truly meaningful to the broader population of ‘stakeholders,’ as described in the proposal.” The firm also wrote it had concerns that the proposed engagement-level metrics “would be misunderstood by investors who do not have the necessary context to comprehend the metrics, which could lead to inappropriate conclusions.”
“We believe audit committees are best positioned to determine what engagement-level metrics are meaningful in their oversight and to request such metrics from the auditor,” Grant Thornton wrote. “Audit committees oversee the independent auditor and also have a unique role in overseeing the company’s financial reporting, activities, and performance. Consequently, audit committees recognize the unique aspects of the companies they oversee and have the necessary and appropriate context to understand engagement-level metrics for that company’s audit, as well as the ability to ask the auditor follow-up or probing questions as needed. We believe the audit committee in its oversight function is the appropriate recipient for the discussion and contextualization of the engagement-level metrics.”
Big Four accounting firm EY wrote that the proposal “introduces a new public oversight model to issuer audits that, in our opinion, has not been adequately studied and is based on metrics susceptible to misinterpretation and misuse that will be costly to produce. The rule also has the potential of disrupting the model established by the Sarbanes-Oxley Act of 2002 (SOX) for auditor oversight by an independent audit committee and also does not properly address the information needs of audit committees.”
In its comment letter, Big Four firm KPMG wrote that it has concerns about certain implications for metrics “that do not necessarily correlate with audit quality.”
“Rather, imposition of an overly burdensome set of reporting requirements that feature metrics that have a tenuous relationship with audit quality may result in outcomes different from the board’s intent and objective,” KPMG said. “Specifically, the board has not definitively demonstrated the benefits and needs to stakeholders for requiring the public reporting of the proposed metrics. Throughout the Release the relationship of the reported metrics to decision-useful information is merely suggestive given the significant usage of ‘may’ when discussing benefits and utilization. This suggests the board has not obtained substantive evidence to demonstrate how the benefits to support furthering the public interest and investor protection outweighs the cost of compliance.”
The AICPA called for the SEC to reject the PCAOB standard, saying the new requirements would particularly burden small and midsized audit firms, as well as unintentionally hurt capital markets and the investing public.
“Alternative approaches that better balance transparency, cost, and the needs of audit committees, while continuing to support the quality of audit services and choice of audit providers available to perform public company audits and serve the public interest should be pursued, rather than introducing potentially detrimental unproven regulations,” the AICPA wrote in its comment letter.
The AICPA also added that the requirements would drive small and medium-sized firms out of the public company auditing practice.
“This would result in fewer firms performing audits which are critically important for smaller and medium-size companies seeking to access the U.S. capital markets,” the AICPA wrote. “Consequently, companies will face greater challenges and higher costs in meeting necessary audit requirements to access to the U.S. capital markets. The PCAOB acknowledges that midsized and smaller accounting firms serving small to midsized public companies will incur substantial, if not prohibitive, costs in complying with the proposed amendments. The final rules reaffirm the PCAOB’s belief that the rules will disproportionately affect smaller firms.”
In a statement following the PCAOB’s withdrawal of the metrics standard, Sue Coffey, the AICPA’s CEO of public accounting, said the PCAOB’s decision “is the right one.”
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Tags: Accounting, Auditing, PCAOB
