Investor Protection

Public Company Audits Need a Quality Control Upgrade

CFA submitted a comment letter to the Public Company Accounting Oversight Board calling on the agency to adopt new quality control standards that hold audit firms accountable for conducting the high quality audits upon which the integrity and reliability of our financial reporting system depends. The letter was filed in response to a Concept Release in which the PCAOB considers changes to its quality control standards using a proposed international standard (ISQM 1) as its starting point. “While we appreciate the PCAOB’s focus on this important topic, we do not believe the proposed approach is sufficiently rigorous to achieve its intended goal,” CFA wrote. CFA faulted the PCAOB’s proposed reliance on ISQM 1 as its starting point, both because that standard has not yet been finalized, let alone tested for effectiveness, and because it does not set a high enough objective for improving audit quality.

In its letter, CFA cited evidence from the PCAOB’s staff inspection reports that improvements to audit firms’ quality control systems are badly needed. It wrote, however, “We are concerned … that neither proposed ISQM 1 nor the Concept Release sets an appropriately high bar for what improvements to firms’ quality control systems should be designed to achieve.” And it outlined changes to the proposal that would be needed to achieve the desired improvement.

“The goal should not simply be to ensure compliance with applicable laws and standards, it should be designed to promote audits of the highest quality. Toward that end, the PCAOB should seek to develop a standard that has as its clear objective providing a high level of assurance that audit firms will rigorously guard their independence, approach audits with a high degree of professional skepticism, comply with all applicable audit standards and rules, meet their obligations to identify fraud and other material legal violations, and conduct the high quality, independent audits upon which the integrity of our financial system depends,” the letter concludes.