PCAOB Re-Proposes Engagement Quality Review; 45 Day Comment Period

At its board meeting earlier today, the Public Company Accounting Oversight Board voted unanimously to re-propose its Engagement Quality Review (EQR) standard. There will be a 45 day comment period, and the final standard (if approved as a final standard by the PCAOB and the U.S. Securities and Exchange Commission following the public comment period) would be effective for EQR of this year’s audits (specifically, for audits of years ending after Dec. 15, 2009, with a different effective date pertaining to EQR of interim reviews, as noted below.) See the PCAOB’s press release issued on today’s vote to repropose EQR, further details follow.

As previously announced, Chief Auditor Tom Ray will be leaving the PCAOB to rejoin the private sector. PCAOB Chairman Mark Olson noted Ray is leaving the PCAOB at the end of this week, and Olson together with all the PCAOB board members thanked Ray for his service, nothing he had been with the board since its inception.

Highlights of Engagement Quality Review Re-Proposal
Details on the Engagement Quality Review (EQR) re-proposal follow, based on my listening to the webcast of the PCAOB meeting (unless otherwise noted).

Background: The PCAOB is required under the Sarbanes-Oxley Act to mandate all public company audits undergo a concurring partner review (CPR). Currently, under the interim standards which PCAOB adopted when it was first formed (i.e. standards previously established by the AICPA), only member audit firms that were members of the AICPA’s SEC Practice Section are required to undergo concurring partner review. PCAOB staff noted today that under the current standards, generally, non-U.S. audit firms and smaller audit firms are not subject to the existing CPR requirements. In issuing its proposal last year for Engagement Quality Review (EQR), the PCAOB was proposing to not only extend the current CPR requirements to all registered audit firms, but to enhance the quality of the CPR (renaming it as well to EQR). Some commenters on the original proposal voiced concern that the EQR as proposed by PCAOB would add significant cost and time, as it appeared to those commenters to amount to a requirement to perform a ‘re-audit’. The PCAOB believes its amended proposal (which it approved for release for public comment today) addresses these concerns through various changes to the original proposal.

Effective Date: According to Deputy Chief Auditor Greg Scates (who we contacted following the meeting), the proposed effective date for the re-proposed EQR standards is as follows:
Annual audit: “For EQRs of audits, the Board intends to make a final standard effective, subject to SEC approval, for audits of fiscal years ending on or after December 15, 2009.
Interim review: “For EQRs of interim financial information, the Board intends to make a final standard effective, subject to approval by the SEC, for fiscal years beginning after December 15, 2009.”

Different requirements for EQR of annual audit, interim review: The reproposed standard will differentiate the requirements for EQR of annual audits vs. interim (e.g. quarterly) reviews.

Replacement of ‘know or should have known’ with ‘due professional care’: The amended proposal removes the reference to what the reviewer ‘knows or should have known’ which was criticized in some comment letters as too high of a threshold that could trigger second-guessing; the amended proposal uses words in existing standards like ‘due professional care.’. However, a number of board and staff members expressed the view that in substance, the requirements (know or should have known, vs. due professional care) are essentially the same, but they made the wording change in response to commenters who said the original language was too ‘legalese’ and instead are referencing existing language (due professional care) which auditors are long familiar with in existing standards. Board member Dan Goelzer asked if the ‘due professional care’ standard was effectively a ‘negligence’ standard, PCAOB General Counsel Gordon Seymour indicated that for all intents and purposes, it was a ‘negligence’ standard. Goelzer also asked if the amended proposal was consistent with case law, Seymour said it was.

Not a reaudit’ says PCAOB– In response to commenters who said the original proposal seemed to them to require a re-audit, it appeared from the discussion during the PCAOB board meeting today that there may be language included in the re-proposal that will specify it is not the PCAOB board’s intent to require a re-audit. PCAOB Associate Chief Auditor Dima Andriyenko stated: ”The new proposal makes clear for both EQR of [annual audits and interim reviews], the EQR should be performed through discussions with the engagement team, and … reviewing the engagement teams’ work, rather than auditing the company him/herself.”

NOTE: In analyzing the impact of the re-proposal, reference will need to be made to the specific requirements (and the general principles) specified in the proposal.