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PCAOB adopts updated ‘foundational’ rules requiring faster audit filing The U.S. audit watchdog updated standards created two decades ago and aligned regulation with changes in technology.
Published May 13, 2024
Jim Tyson Senior Reporter
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PCAOB nameplate at PCAOB office CFO Editorial Staff
Dive Brief:
The Public Company Accounting Oversight Board on Monday adopted “foundational” audit standards that include trimming the deadline for filing final documentation after completion of an audit to 14 days from 45 days. The standards, replacing interim rules set in 2003, “will help ensure that PCAOB standards on the most fundamental auditor responsibilities are up to date and optimized for investor protection,” PCAOB Chair Erica Williams said in a statement. The PCAOB rule unifies into a single standard several rules that are focused on ensuring professional skepticism, independence, competence and judgment. The standards, subject to approval by the Securities and Exchange Commission, will take effect for fiscal years beginning on or after Dec. 15, 2024.
Dive Insight: Williams has championed several new audit standards and sharpened PCAOB enforcement since taking the board’s leadership role in January 2022.
Efforts by Williams align with the aims of Gary Gensler who, after becoming SEC chair in 2021, shook up the five-member board and called on it to strengthen oversight of the accounting firms that audit publicly listed companies.
The new standards “modernize, clarify and streamline the general principles and responsibilities of auditors and provide a more logical presentation,” Williams said. The set of changes “solidifies the foundation of every audit, leading to investor protection and informative, accurate and independent audit reports.”
The standards — geared to streamlining with new technology — clarify the responsibility of the auditor to determine whether financial statements are presented fairly, as well as the obligations of the engagement partner.
“The foundational standards include reasonable assurance, due professional care, professional skepticism, independence, competence and professional judgment,” the PCAOB said. “These principles and related responsibilities provide a foundation for the proper performance of the audit.”
The rules underscore that “an auditor’s professional skepticism extends beyond the evaluation of the sufficiency and appropriateness of audit evidence,” the board said. “As noted by this change, an auditor exercises professional skepticism throughout the audit process.”
Firms that annually complete audits for more than 100 publicly-traded companies will need to accelerate the document completion date to 14 days for financial statements beginning on or after Dec. 15, 2024. Smaller audit firms will have an additional year to meet the standard.
The accelerated filing date will enable the PCAOB to begin the inspection process sooner and “reduce the window of opportunity for improper alteration of audit documentation,” the board said.
While tightening requirements, the PCAOB is also giving the auditor more clout, Kara Stein, a board member, told her colleagues before the unanimous approval of the rule.
“The standard before us today for the first time reorients and empowers the independent auditor with the freedom and the requirement to decide issues in an unbiased and objective manner,” Stein said. “This is especially important when auditor conclusions may be contrary to the interests of management,” she said.
The board also adopted a rule requiring audit firms to upgrade their quality control systems by identifying their risks and creating a system with policies and procedures to safeguard against the risks.
The current standards were developed by the American Institute of Certified Public Accountants before the PCAOB was created in 2002.
“When quality control systems operate effectively, quality audits follow and investors are better protected,” Williams said in a statement.
The rule drew a dissent from Christina Ho, a board member.
“I agree that we need a robust and modernized quality control standard, which was why I supported the proposal over 18 months ago,” she said before the board approved the rule by a 4-1 vote. “But we must do it right and not rush to replace an outdated standard with one harmful to audit quality by increasing burdens without credible benefits that will likely reduce competition.”
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Filed Under: Financial Reporting, Compliance, Risk Management