As reported by Journal of Accountancy last week, the AICPA has asked the SEC not to approve the PCAOB’s new Firm and Engagement Metrics rules approved by the audit regulator in November.
The rule requires reporting of metrics at both the firm and the engagement levels. Those metrics are (text taken directly from the PCAOB):
- Partner and Manager Involvement. Hours worked by senior professionals relative to more junior staff across the firm’s large accelerated and accelerated filer engagements and on the specific engagement.
- Workload. For senior professionals who incurred hours on large accelerated or accelerated filer engagements, average weekly hours worked on a quarterly basis, including time attributable to all engagements, administrative tasks, training, and all other matters.
- Training Hours for Audit Personnel. Average annual training hours for partners, managers, and staff of the firm, combined, across the firm and on the engagement.
- Experience of Audit Personnel. Average number of years worked at a public accounting firm (whether or not PCAOB-registered) by senior professionals across the firm and on the engagement.
- Industry Experience. Average years of career 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.
- Retention of Audit Personnel (firm-level only). Continuity of senior professionals (through departures, reassignments, etc.) across the firm.
- Allocation of Audit Hours. Percentage of hours incurred prior to and following an issuer’s year-end across the firm’s large accelerated and accelerated filer engagements and on the specific engagement.
- Restatement History (firm-level only). Restatements of financial statements and management reports on internal control over financial reporting (“ICFR”) that were audited by the firm over the past three years.
The PCAOB believes these metrics will “provide new insights into how engagements are staffed, including the extent of involvement of senior personnel; auditors’ overall workload; retention of personnel across the firm; and levels of training, audit experience, and industry-specific expertise. And will also “provide information about the extent of audit work completed prior to the issuer’s year end, an aspect of the audit process that we believe is associated with improved audit outcomes, and about the firm’s history of restatements, a key measure of audit outcomes.”
The PCAOB believes gathering and calculating these metrics “will not be overly costly, time-consuming, or burdensome” as “it appears that the largest firms are already tracking data in many of these areas…” and “…many of the metrics are based on data that firms already track or will be required to track for purposes of other PCAOB requirements.”
If approved, the earliest effective date of the firm-level metrics will be October 1, 2027, with the first reporting as of September 30, 2028, and engagement-level metrics for the audits of companies with fiscal years beginning on or after October 1, 2027.
And here’s what the AICPA had to say about it:
“We believe the recently adopted PCAOB rules will pose significant challenges for accounting firms, especially mid-sized and smaller firms, and may not achieve the intended benefits of improved oversight and audit quality,” Sue Coffey, CPA, CGMA, the AICPA’s CEO–Public Accounting, wrote in the comment letter. “Therefore, we respectfully urge the SEC to refrain from approving these rules. Instead, alternative approaches that better balance transparency, cost, and the needs of audit committees, while continuing to support the quality of audit services and choice of audit providers available to perform public company audits and serve the public interest should be pursued, rather than introducing potentially detrimental unproven regulations.”
“As we expressed to the PCAOB in our comment letter dated June 18, 2024, the recently adopted rules mandate the disclosure of performance metrics for audits of accelerated and large accelerated filers, and expanded operational and financial condition reporting by registered accounting firms,” Coffey wrote in Thursday’s letter. “These rules will disproportionately affect smaller and medium-sized audit firms.
“We believe these rules will have unintended negative consequences, including driving small and medium-sized firms out of the public company auditing practice. This would result in fewer firms performing such audits which are critically important for smaller and medium size companies seeking to access the U.S. capital markets. Consequently, companies will face greater challenges and higher costs in meeting necessary audit requirements to access the U.S. capital markets.”
What do we think? Bravely advocating to liberate firms from more tedious paperwork or is there perhaps some more sinister reason they’re against it?
Full comment letter for your reading pleasure below.
They’re against it because these specific metrics would show how overworked the “professionals” are at non-B4 firms.
It appears Susan Coffey lacks professional skepticism. She writes, “These rules will have unintended negative consequences, including driving small and medium-sized firms out of the public auditing market”. Unintended? Is Coffey serious? I doubt even Erica Williams (EW) is that stupid, that she can’t see this as the likely result.
The B4 have audited 97-98% of SEC registrants by market cap (MC) for decades. If some smaller CPA firms will be driven out of auditing large accelerated filers (LAF), where will the LAFs? The B4 and Little 3.
If the PCAOB was interested in protecting investors, it would spend its time on the B4. That’s where the dollars are.
Coffey also writes, “we believe the recently adopted PCAOB rules … may not achieve the intended benefits of improved oversight and audit quality”. I do not believe the PCAOB intends to”improve audit quality”. Has it in 22 years? Rather, the PCAOB intends to provide innumerate, economically ignorant lawyers and CPAs sinecures.
Coffey, you missed an opportunity. Send your concerns to Lina Khan at the FTC. Try to get the FTC to war with the PCAOB. I would enjoy that. Include some serious economic analysis and anti-trust case law.
In 22 years the PCAOB has driven a few obscure CPA firms which did poor audits out of business, That’s it. Did these firms even audit .001 of total SEC registrant MC? I doubt it.
The only thing the PCAOB does is increase CPA firms’ paperwork and make them spend time on compliance issues. Does EW believe no matter what the new “metrics” show, the B4 will lose LAF audits to the 600 smaller firms? Apparently not. EW believes these firms would “exit the market for” LAF. I agree.
EW, if you read this, I am being blunt, in my opinion, you are as qualified to hold your $670,000 a year position as I am to be an NBA center. I’m 5′ 7″, not 7′ tall. I weigh 147, not 290. Draw your own conclusions. Your “sweeps” only show that the PCAOB is overstaffed. With over 1,000 B4 client restatements, the PCAOB has plenty of potential problems to look at. I am asking you, EW, to fire every PCAOB employee who took part in the “sweeps”. They are surplusage.
Your inspections focus on compliance trivia. The PCAOB inspects non-B4 firms audits at 91X the rate of non-B4 firms based on MC. Microsoft has more MC than that audited by the “little three” and the 600 smaller firms combined, yet the PCAOB focuses on insignificant audits.
If any of you SEC Commissioners read this, follow Nancy Reagan, “just say no'”.
Thanks for that comment George- I have been screaming these points myself for quite awhile. The AICPA belatedly showed up now that the Big 4 finally found the actions of the tyrannical lawyers and bureaucrats at the PCAOB objectionable. What is more shameful is the AICPA wrapping themselves as protectors of small firms. Give me a break. This is disingenuous and too little, too late- the small firms have already been destroyed and driven out by this regime. You rightfully call out Erica Williams- a career bureaucrat and enforcement attorney. She, as well as all except maybe one Board Member (Christina Ho), are completely unqualified to be regulating the audit profession, and promulgating audit standards. The reason there was a deliberative standard setting process was to properly vet standards, and allow professionals to prepare. Now some hack bureaucrats, doing the bidding of leftist operatives who hate the CPA profession, want to rewrite every audit standard in one term, while adding useless and duplicate administrative requirements. The small firms have been fined out of existence- God forbid a Form AP be filed late. Where was the AICPA, as well as our useless state societies like mine in NJ, when the PCAOB was destroying small firms, and they had no professional support. The AICPA has long ceased to represent the interests of the CPA profession, and the PCAOB has destroyed the audit profession. This isn’t just a niche CPA issue- it is destructive to our capital markets. If we want more young and innovative companies, with their support network, to want to utilize the capital markets rather than PE, than we need to fundamentally reexamine our regulatory regime.
Repeal the law requiring public companies to be audited and many, many problems in the accounting profession would be instantly solved. Every reputable company will still want/need an audit, but it won’t be just about price anymore. The quality of audits performed by firms will become an actual issue, and a major factor in each company’s decision of which auditor to hire. The low quality audit firms will become known by reputation, as will the high quality firms.
The above will never happen for a number of reasons, not least of which is laziness. Why work hard to save the profession when we can just stay on the gravy train a little longer because companies are required by law to get an audit?
It is completely laughable that the AICPA is attempting to portray its response as being concerned for small – mid-sized firms. The one and only reason the AICPA is concerned is because this will impact the Big 4.
Robert Broyle:
I have not been an AICPA member for 30 years. I concluded it represents the interests of 14,000 CPAs. The 14,000 B4 partners.
I do not know why Susan Coffey wrote her letter, but believe she cleared it with the B4 before sending it. Why should the B4 object to the new proposed reports? At the margin, they will drive more audits to the B4. Are the B4 appearing to object to the new proposed reports while secretly favoring them?
I agree, Christina Ho is the only PCAOB Commissioner arguably worth keeping. The other four are hopeless.
Yes, “we need to fundamentally reexamine our regulatory regime”. Part of the problem is the SEC. The SEC brings absurd enforcement cases like one against Groom over $13,000 of insider trading profits. That’s right, $13,000. The total 12/31/23 market cap of all SEC registrants was $64 trillion. $64,000 is one billionth the relevant total. $13,000 is one 4.92 billionth the total and the SEC had time for Groom. The SEC brings 800 enforcement cases a year. For about 35 years, I’ve said it should bring about 80, and each one a blockbuster. That won’t happen.
In 1976, 48 years ago, Senator Metcalf wrote a 1,788-page report, “The Accounting Establishment” about problems with accounting firm regulation. He criticized the SEC for its differential treatment of small and large CPA firms. Nothing has changed in 48 years. Conclusion: Congress may huff and puff, but at the end of the day, the B4 do what Congress wants.
The PCAOB bureaucrats have never and will never drive a B4 firm out of business. Do they care about a few million dollars a year in fines? The fines are only a minor cost of doing business.