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PCAOB’s Proposal Would Shed Additional Sunlight on Auditor Firmwide and Engagement Practices

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PCAOB’s Proposal Would Shed Additional Sunlight on Auditor Firmwide and Engagement Practices

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Earlier this month, the PCAOB proposed rules requiring enhanced and standardized disclosure relating to public companies, with the intent of providing investors and other stakeholders with consistent, comparable, and useful information for decision-making purposes. The PCAOB's proposal would require public reporting—by PCAOB-registered public accounting firms that audit one or more SEC issuers that qualify as an accelerated filer or large accelerated filer—of prescribed information relating to these audits at an engagement level and of broader audit practices of the accounting firm at a firmwide level

This standardized information would then assist investors and other stakeholders (including audit committees making auditor engagement or re-engagement decisions) in comparing auditor performance relative to 11 specified metrics. The areas covered by the proposed metrics include:

  1. Partner and Manager Involvement: Hours worked by senior professionals relative to more junior staff across the firm's issuer engagements and on the engagement.
     
  2. Workload: Average weekly hours worked on a quarterly basis by engagement partners and by other partners, managers, and staff.
     
  3. Audit Resources: Use of auditor's specialists and shared service centers (measured on a percentage of engagements basis at the firm level, and on an hours' basis at the engagement level).
     
  4. Experience of Audit Personnel: Average number of years worked at a public accounting firm by senior professionals across the firm and on the engagement.
     
  5. Industry Experience of Audit Personnel: Average years of experience of senior professionals in key industries audited by the firm at the firm level, and the audited company's primary industry at the engagement level.
     
  6. Retention and Tenure: Continuity of senior professionals (through departures, reassignments, etc.) across the firm and on the engagement.
     
  7. Audit Hours and Risk Areas: Hours spent by senior professionals on significant risks, critical accounting policies, and critical accounting estimates relative to total audit hours (engagement-level only).
     
  8. Allocation of Audit Hours: Percentage of hours incurred prior to and following an issuer's year end across the firm's issuer engagements and on the engagement.
     
  9. Quality Performance Ratings and Compensation: Relative changes in partner compensation (as a percentage of adjustment for the highest rated group) between groups of partners based on internal quality performance ratings (firm-level only).
     
  10. Audit Firms' Internal Monitoring: Percentage of issuer engagements subject to internal monitoring and percentage with engagement deficiencies (firm level); whether the engagement was selected for monitoring and, if so, whether there were engagement deficiencies and the nature of such engagement deficiencies (engagement level).
     
  11. Restatement History: Restatements of financial statements and management reports on ICFR that were audited by the firm over the past five years (firm-level only).

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