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News

SEC Approves PCAOB's New Quality Control Standard

By:
Karen Sibayan
Published Date:
Sep 11, 2024

GettyImages-614840826 Audit

On Sept. 9, the Securities and Exchange Commission (SEC) approved the Public Company Accounting Oversight Board (PCAOB)’s new quality control standard and related changes to its standards, rules, and forms. In the release, the SEC said that QC 1000, titled A Firm’s System of Quality Control, creates an integrated and risk-based quality control standard. This standard mandates that all registered public accounting firms identify the specific risks to their practice while designing a quality control system with appropriate responses to avoid those risks. 

 “An auditing firm is ultimately a professional services firm, and it needs to ensure the quality of the services it provides,” said SEC Chair Gary Gensler. “I am pleased to approve this standard because it will improve the quality control systems of auditors and thus better protect investors.”

In the statement, the SEC mentioned that the current PCAOB quality control standards were developed about 30 years ago by the AICPA—way before the accounting fraud scandals that happened in the early 2000s that caused the PCAOB’s establishment under the Sarbanes-Oxley Act of 2002. 

QC 1000 is an answer to the shifts in the audit practice environment since then. The response also leverages what the PCAOB has learned in the 20 years of conducting inspections and enforcement programs.

“Effective QC systems provide critical investor protections by driving continuous improvement in firms’ audit quality in support of the issuance of informative, accurate, and independent audit reports,” said Paul Munter, the SEC’s chief accountant.

According to the SEC, registered firms that perform engagements under PCAOB standards must implement and operate the QC system. The new quality control standard zeroes in on an audit firm’s accountability. It also improves its audit practice and requires a yearly evaluation of its QC system and related reporting to the PCAOB, certified by key firm personnel.

The SEC release said that firms that issue audit reports for over 100 issuers must also establish an external quality control function comprising one or more persons who can exercise independent judgment related to the firm’s QC system.

Despite the approval, Commissioner Hester Pierce released a statement saying that the standard will pose many considerable challenges when it is implemented. Among the various concerns that stand out, one of them is that, even though many registered firms do not perform audits of issuers or broker-dealers, all registered firms are required to design a quality control system that complies with QC 1000. 

Commissioner Mark Uyeda also chimed in, saying that during the initial 90-day period of the standard, many commenters were worried that the PCAOB had not given the public the chance to consider the requirement for certain firms to adopt and implement an external quality control function in its rulemaking process. He added that the final requirement "was not a logical outgrowth from the Board’s proposal."