The Public Company Accounting Oversight Board (PCAOB) recently proposed new updates requiring auditing firms to provide specific information regarding their audit practices on an engagement and firm level, expanding the public reporting.
Audit Firms that work with accelerated filers and large accelerated filers are obliged to report specific metrics publicly, by a registered public accounting firm, on an expanded Form AP and a new Form FM, respectively, at both the firm and engagement level. The firm metrics would be made publicly accessible as a new annual Form FM, Firm Metrics and engagement metrics will be accessible as Form AP, renamed as Audit Participants and Metrics.
The Background
On 21st November 2024, the PCAOB set new standards on two projects, if approved by SEC, will require expansion of metrics in public reporting by audit firms about their audits and audit best practices: Engagement level metrics and Firm Reporting. This proposal was issued by PCAOB begun in April 2024 with some revisions and with one board member dissenting on the initiative.
The intent of the introduction of these two projects by PCAOB is to address gaps in information available, improve reporting, and enhance transparency with investors, stakeholder, audit committees and PCAOB on the audit firm’s engagement and audit practices. In Spite of the affirmative side of the PCAOB’s new standards, there are certain debates and concerns developed by virtue of this proposal, regarding the role of the audit committee and investors in the auditor’s supervision.
Required Metrics That Should Be Reported
The PCAOB requires specific metrics for reporting that covers the following eight areas:
| Partner and Manager Involvement | Hours worked by senior professionals relative to more junior staff across the firm’s large accelerated and accelerated filer engagements and on the specific engagement |
| Workload | For senior professionals who incurred hours on large accelerated or accelerated filer engagements, average weekly hours worked on a quarterly basis, including time attributable to all engagements, administrative tasks, training, and all other matters |
| Training Hours for Audit Personnel | Average annual training hours for partners, managers, and staff of the firm, combined, across the firm and on the engagement |
| Experience of Audit Personnel | Average number of years worked at a public accounting firm (whether or not PCAOB-registered) by senior professionals across the firm and on the engagement |
| Industry Experience | Average years of career experience of senior professionals in key industries audited by the firm at the firm level and the audited company’s primary industry at the engagement level |
| Retention of Audit Personnel (firm level only) | Continuity of senior professionals (through departures, reassignments, etc.) across the firm |
| Allocation of Audit Hours | Percentage of hours incurred prior to and following an issuer’s year end across the firm’s large accelerated and accelerated filer engagements and on the specific engagement |
| Restatement History (firm level only) | Restatements of financial statements and management reports on internal control over financial reporting (ICFR) that were audited by the firm over the past three years |
Further Areas To Be Covered in Enhanced Reporting
| Financial Information | Additional fee information for all registered firms Confidential financial statements (for the largest registered firms) |
| Audit Firm Governance Information | Additional information regarding the firm’s leadership, legal structure, ownership, and other governance information, including reporting on certain key quality control operational and oversight roles |
| Network Information | A more detailed description of any network arrangement to which a registered firm is subject, including the network’s structure, the registered entity’s access to resources, and whether the firm shares information with the network regarding its audits, including whether the firm is subject to inspection by the network |
| Cybersecurity | Prompt confidential reporting of certain significant cybersecurity incidents affecting the audit practice Periodic reporting of a brief description of the firm’s policies and procedures, if any, to identify and manage cybersecurity risks |
| Material Events | Events material to the firm’s organization, operations, liquidity or financial resources such that they affect the provision of audit services (confidential and only for annually inspected firms) |
| Update of Firm’s Quality Control Policies and Procedures for QC 1000, A Firm’s System of Quality Control | A new form (Form QCPP) to capture updates to the firm’s quality control policies and procedures as a result of adopting the new quality control standard |
The Next Steps
The PCAOB has submitted the adopted rules to the Securities and Exchange Commission (SEC) and is subject to its approval. If the rules are published in the Federal Register, the SEC will consider the comments to decide whether to approve or dismiss.
During the SEC’s notice and comment period, the commenters will have the chance to consider and address gaps in the following aspects of the new rules:
- PCAOB’s decision to seek engagement level metric requirements on an expanded Form AP.
- Basis of calculation for individual metrics.
- Economic analysis by PCAOB – on the usage of information by investors and audit committees for decision-making and on the potential costs to audit firms and their clients.
