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By a divided vote at its open meeting yesterday, the SEC approved the PCAOB’s new quality control standard, QC 1000 – A Firm’s System of Quality Control – and related amendments. Here’s the 85-page adopting release – and here’s an overview of what the new standard will require, from the SEC’s press release:

QC 1000, A Firm’s System of Quality Control, establishes an integrated, risk-based quality control standard that will require all registered public accounting firms to identify specific risks to their practice and design a quality control system that includes appropriate responses to guard against those risks. Registered firms that perform engagements under PCAOB standards will be required to implement and operate the QC system. The new quality control standard focuses on an audit firm’s accountability and continuous improvement of its audit practice and will require an annual evaluation of the firm’s QC system and related reporting to the PCAOB, certified by key firm personnel.

In addition, firms that annually issue audit reports for more than 100 issuers will be required to establish an external quality control function (EQCF) composed of one or more persons who can exercise independent judgment related to the firm’s QC system.

These new requirements will go into effect in December 2025. As Dave noted last week, QC 1000 replaces the existing AICPA standard that pre-dated the creation of the PCAOB.

The U.S. Chamber of Commerce had urged the SEC to reject QC 100, saying that the proposed requirement for an External Quality Control Function was “fundamentally flawed” and that the Standard would face “legal peril” in the absence of a full cost-benefit analysis. So, even though the adopting release does provide an economic analysis, we may see this standard challenged in court.

In his dissenting statement, Commissioner Uyeda took issue with the SEC’s process for approving the new standard, noting that the PCAOB had elaborated on the EQCF aspect of the standard in mid-August, which led to the SEC receiving new feedback within the past month. Meanwhile, the adopting release – and Commissioner Crenshaw’s supporting statement – position the rule as the culmination of a years-long initiative, which included a 2019 concept release and 2022 proposal. Whichever view you share, public companies are likely to experience both costs & benefits from the enhanced quality procedures that the standard will require.

The SEC has been busy with audit rules – in late August, it approved 3 important rule changes about auditors’ responsibilities, use of technology assisted data analysis in audits, and auditor liability.

– Liz Dunshee