PCAOB Tackles Audit Quality in New Initiative– June 25, 2014

The PCAOB has taken to task the Audit Quality Indicator (AQI) project in an attempt to implement quantitative measures surrounding financial statement audits, thereby enhancing their overall quality and usefulness. A quality audit should meet investors' needs for independent and reliable audits and robust audit committee communications in a variety of areas, including financial statements and related disclosures, assurance about internal controls and going concern warnings.

While the AQI project is in its infancy, with a three-pronged Concept Release expected soon, AQIs in some form have the potential to greatly impact both audit firms and their clients for the long term. Below is a brief outline of the project's current structure.

The audit quality framework would include three segments.

  • Audit Inputs. This segment includes elements related to the competence of audit professionals, including audit team, partner workloads, staff workloads, professional experience, supervision and review, and continuing education.

  • Audit Processes. This segment includes tone at the top, personnel management, risk assessment and response, information and communication, control activities and monitoring.
  • Audit Results. This segment includes reliable financial statements, assurance about internal control, going concern warnings and robust audit committee communications.

The PCAOB envisions approximately, 10-20 that could be used when evaluating the three quality segments. Some possible AQIs include:

  • Partner to staff leverage
  • Staff utilization
  • Industry expertise
  • Percentage and timing of audit efforts of partners, managers and staff
  • Findings of the PCAOB inspection process
  • Firm leadership and communication on audit quality
  • Anonymous survey of audit committees about their auditor's quality of communications
  • Percentage of work outsourced
  • Absence of a going concern report before a bankruptcy

There are many considerations to take into account as the AQI project moves forward. How can the data accumulated really be used to improve audit quality? How can the data be comparable across firms given differences in size, geography, offices and affiliations? Which AQIs would be most helpful and to whom? How can we test the usefulness, accuracy and consequences of the AQIs?

These questions and many more will need to be answered. Both audit firms and investment companies will need to speak up and let their voices be heard on this important initiative.

Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.