Group Wants Quality Control Standards to Cover Firm Governance and Leadership

December 14, 2018

With the Public Company Accounting Oversight Board (“PCAOB”) researching whether to update quality control standards, its Standing Advisory Group (“SAG”) believes the standards should be amended to include firm governance and leadership. Talking to reporters after the SAG’s November 29 meeting, PCAOB Chairman William Duhnke said the board may elevate its research on the standards to a standard-setting project sometime next year but is currently determining the next steps.

The PCAOB’s quality control standards mandate accounting firms to employ systems with reasonable assurance that a firm’s employees meet professional standards and the firm’s quality standards. Firm governance and leadership include four concepts: firm culture, organization, assignment of authorities and responsibilities, and incentive systems. Despite the importance of firm governance leadership, however, PCAOB deputy chief auditor Keith Wilson stated that the standard as is does not directly address the topic.

Relaying member sentiment from a closed session of the SAG meeting, Wilson noted SAG members believe the firm governance and leadership guidance should be principles-based and should focus on those four concepts. Examples advisory group members gave included providing clear firm expectations and holding leadership accountable. Wilson also said that the PCAOB should consider appropriate tools to identify issues related to the concepts of governance and leadership, and ensure that such issues are resolved in a timely manner.

Several SAG members want the PCAOB to consider developing a framework based on audit engagement outcomes that includes principles and guidance. Speaking on the proposed framework, PCAOB staff member Brian Degano remarked that firms should consider performing a risk assessment on their culture as well as a stress test focused on the risks underlying clients. Degano also shared that other SAG members want the board to host a roundtable involving firms’ independent board members. The roundtable would allow participating board members to exchange best practices about their firm culture and governance.

Some members commented that if the quality control standard is principles-based, then the same principles should affect all firms. However, they also support having application guidance tailored to big and small-sized firms.

Collectively, SAG members agreed that the PCAOB should convey that incentive systems are necessary and are tied to firm culture, emphasize clear expectations, and establish accountability and penalties for poor performance.