The Public Companies Accounting Oversight Board (PCAOB) has issued a proposal to update its rules  governing auditing firms’ quality control (QC) systems.

These are the first changes to these standards since the PCAOB, created in 2002 under the Sarbanes-Oxley Act, inherited the old rules from the AICPA in 2003. The proposal came in response to requests from investors for more oversight of auditors in the wake of recent financial scandals, Accounting Today reported.

“The auditing environment has changed significantly since that time, including evolving and greater use of technology, and increasing auditor use of outside resources, including other firms and providers of support services,” the proposal read. It proposed updating quality control standards with the following actions:  

▪ Expressly requiring a risk-based approach to QC, including well-defined quality objectives and a systematic effort to identify and proactively manage risks to the firm’s achieving those objectives;
▪ Emphasizing firm governance, the “tone at the top,” and individual accountability;
▪ Providing more direction regarding monitoring activities and remediation of identified deficiencies to encourage an ongoing feedback loop that drives continuous improvement;
▪ Addressing changes in the audit practice environment, including the increasing participation of other firms and other outside resources, the role of firm networks, the evolving use of technology and other resources, and the increasing importance of internal and external firm communications;
▪ Providing for a rigorous annual evaluation of a firm’s QC system;
▪ Introducing annual QC reporting to the PCAOB to underscore the importance of the annual evaluation of the QC system and support PCAOB oversight; and
▪ Requiring enhanced communication to the audit committee.

“By elevating all firms’ QC systems, this proposal directly aligns with our mission to protect investors and further the public interest in the preparation of informative, accurate, and independent audit reports,” PCAOB Chair Erica Williams said in a statement. 

The PCAOB last tried to revise the rules in 2019, when it issued a concept release that suggested changing QC rules to align with international standards, The Wall Street Journal reported. Those suggestions never made it to the proposal stage.

The comment period on the proposals is open until Feb. 1, 2023. The rule would go into effect on Dec. 15 of the year that it receives SEC approval. Audit firms would have to conduct their first evaluations of quality controls under the new rule’s provisions by the following Nov. 30.