TheCorporateCounsel.net

Earlier this month, a divided SEC approved the PCAOB’s new audit quality control standard, QC 1000 – A Firm’s System of Quality Control. Over on The Audit Blog, Dan Goelzer has a recent post that says public companies are going to feel the impact of the new standard.

On the plus side, he suggests that audit quality may improve, and that audit committees may have more visibility into audit deficiencies and audit firm quality controls. Unfortunately, those benefits may be accompanied by some fairly significant costs, including higher audit fees and, as this excerpt explains, an increase in “CYA” behavior by auditors:

Auditing requires the exercise of judgment, and the line between permissible judgments that in hindsight appear flawed and auditing standard violations is not always clear. QC 1000 seems to assume that an audit deficiency identified by the PCAOB’s inspectors is evidence of a potential QC lapse. In turn, a QC breakdown potentially raises questions about whether the individuals responsible for the operation of the system properly performed their responsibilities.

As a result, firm leadership will have strong new personal incentives to avoid inspection deficiency findings. This could of course be viewed as one the benefits of QC 1000. But it could also create a dynamic under which auditing becomes more focused on the mechanics of compliance and documentation at the expense of a big-picture understanding of the company’s financial reporting risks and the exercise of judgment concerning how best to address those risks in the audit.

The blog also echoes concerns expressed by Commissioner Peirce that the compliance costs associated with the new standard may drive some audit firms out of the public company market, thus providing smaller public companies with fewer audit firms to choose from.

– John Jenkins