Proposed PCAOB Standards Focus on Metrics, Pose Questions for Funds and Boards

Keeping the momentum of a record breaking 2023 — when the PCAOB was more active with standard setting and rulemaking than it had been over the past 10 years — the oversight body issued its second and third proposals of 2024 on April 9.

PCAOB Release No. 2024-004, Firm and Engagement Metrics, and PCAOB Release No. 2024-003, Firm Reporting, are both aimed at enhancing and standardizing the reporting and disclosure of accounting firm and engagement metrics that investors, audit committees and other stakeholders use to evaluate overall audit quality. The question? Will these proposed standards help stakeholders in their decision making?

Below offers a look at both proposals and questions to consider in evaluating their potential impact.

What’s Being Proposed in the PCAOB’s New Firm and Engagement Metrics Standard?

This proposal would require accounting firms to report on both firm and engagement-level metrics, including:

• Reporting firm-level metrics annually on new Form FM for those that serve as lead auditor for at least one accelerated filer or large accelerated filer. Filer status is generally defined as an issuer with public float as of the last business day of the issuer’s most recently completed second fiscal quarter as follows:
  • Accelerated filer: $75 million or more, but less than $700 million
  • Large-accelerated filer: $700 million or more
• Reporting engagement-level metrics for audits of accelerated filers and large accelerated filers on a revised Form AP (Audit Participants and Metrics). Note, except for funds registered under the Securities Exchange Act of 1934, such as business development companies and grantor trusts, ‘40 Act investment companies are largely exempt from the proposed engagement-level metrics based on their SEC filing status.
• Allowing but not requiring, limited narrative disclosures on both Form FM and Form AP to provide context and explanation for the required metrics.

The proposed metrics cover 11 areas:

1. Partner and manager involvement
2. Workload
3. Audit resources – use of auditor’s specialists and shared service centers
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 firm’s internal monitoring
11. Restatement history (firm-level only)

What’s Being Proposed in the PCAOB’s Firm Reporting Standard?

This proposal would shorten the timeframe registered funds have to report on the PCAOB’s Annual Report Form (Form 2) and Special Reporting Form (Form 3) from 30 days to 14 days. The proposal would also expand the scope of special reporting. Additionally, this proposal would:

• Implement new cybersecurity requirements; and
• Implement a new form — “Update to the Statement of Applicant’s Quality Control Policies and Procedures” or “Form QCPP” — to capture updates to a firm’s quality control policies.

How Would the Proposed Standards Enhance Information for Stakeholders?

The PCAOB believes the proposal would update and improve reporting requirements to allow more public disclosure that is informative and useful to investors, audit committees and other stakeholders. The PCAOB has observed some firms already disclosing certain firm-level metrics through audit quality reports, transparency reports and other documents; however, these disclosures are inconsistent across the accounting industry. With the trend of increased disclosures for accounting firms regarding metrics, there could be a larger market demand for this information; providing guidelines on required metrics would allow for more consistent comparisons.

What to Consider in Evaluating the PCAOB’s Proposed Metrics for Accounting Firms

Initially at least, the majority of the PCAOB Board has shown support for the proposals. The public open comment period runs through June 7, 2024. While the PCAOB has requested comments on certain aspects, those potentially impacted by the proposals are encouraged to not only address those areas but also comment on any aspect of the proposal, offering reasoning and relevant data as support.

While these proposals hold merit, it is important to consider the degree of correlation present between certain metrics and audit quality. Currently, boards and fund leadership are required to assess the quality and performance of the services provided by their audit firms. For example, audit quality can be informed through review and discussion of PCAOB inspection results with audit firms, among other interactions between fund management, the board and the auditors. But is this enough? 

Specifically, boards, fund leadership and investors will want to carefully consider certain aspects of these rules:

• Will this information be meaningful and useful to the average investor?
• With the fast pace of technology and varying degrees in which audit firms use it, will the metrics required in these proposals actually be as comparative as intended?
• Will differences in audit approaches between firms allow for true comparison?
• Will the required granular reporting inadvertently diminish audit quality, causing audit firms to focus on reporting and metrics rather than audit processes and procedures?

We encourage anyone impacted by these proposed rules to carefully review the aspects requested for specific commentary from the PCAOB, as well as consider what information would be accretive and meaningful when conducting audit firm oversight and monitoring audit quality.

>> Read the PCAOB's proposed rules on Firm and Engagement Metrics and Firm Reporting.

Contact Stacey Wilson or a member of your service team to discuss this topic further.

Cohen & Co is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.