By Jason Bramwell
A document the Public Company Accounting Oversight Board (PCAOB) recently added to its website offers insight into the process the PCAOB uses to determine whether an audit firm has addressed quality control criticisms.
The document issued by PCAOB inspections staff, Information Concerning the Quality Control Remediation Process under PCAOB Rule 4009, provides information to firms that receive a final inspection report that includes any criticism of the firm's system of quality control.
"Such criticisms reflect concerns about the design or operating effectiveness of a firm's system of quality control based on the requirements set out in the board's quality control standards", the PCAOB noted in the document. "Any such criticism is nonpublic when the report is issued, but it will remain nonpublic only if the firm addresses the criticism to the board's satisfaction no later than twelve months from the date of the report."
The PCAOB is encouraging all firms to start a dialogue with the inspections staff early in the twelve-month remediation period, develop draft remediation plans that describe how the firm intends to address the quality control criticisms, and share those plans with the inspections staff.
"The board provides the opportunity for a dialogue between the inspections staff and the firm so that a firm can receive timely, constructive feedback regarding its proposed efforts for each quality control criticism before the twelve-month deadline", the PCAOB stated. "The board's experience has shown that, the earlier in the twelve-month period that the firm initiates such a dialogue, the better it will be able – based on inspections staff feedback – to adjust its approach, if necessary, to achieve a positive staff recommendation."
In evaluating a firm's remediation efforts, the inspection staff applies the following five criteria:
1. Change. Does the remedial step represent a change to the firm's system of quality control that was in effect at the time of the conduct that resulted in the quality control criticism? Depending on the circumstances, relevant change may involve supplementing or replacing previous guidance, policies, or procedures or taking steps to increase the technical competence and proficiency of the firm's personnel.
2. Relevance. Is the remedial step responsive to and does it specifically address the quality control criticism described in the inspection report? Does it help satisfy compliance with the PCAOB's quality control standards? If the root cause of the underlying quality control criticism is unclear, did the firm perform an appropriate root cause analysis in developing the remedial action?
3. Design. Is the remedial step appropriately designed (either individually or in combination with other actions) to remediate the quality control criticism?
4. Implementation. To what extent was the remedial step put in operation by the close of the twelve-month remediation period? If not fully implemented, has the firm demonstrated an appropriate level of diligence and reasonable progress in addressing the criticism during the twelve-month period?
5. Execution and effectiveness. Has the remedial step achieved (or, if sufficient time has not passed to measure results, is it expected to achieve) the proposed effect that it was designed to achieve? If available, what do the subsequent firm monitoring procedures and external inspection results suggest about the effectiveness of the remedial step?
The PCAOB explained it generally avoids prescribing specific remediation approaches.
"Ultimately, the recommendation that the inspections staff makes to the board about whether a firm's efforts to remediate a particular criticism are satisfactory depends upon the inspections staff's evaluation of whether the firm has identified steps suited to the particular quality control objective and its evaluation of the nature and extent of the firm's efforts to implement those steps", the PCAOB stated.