In April, the Public Company Accounting Oversight Board issued for comment two proposals that would significantly expand the disclosures that certain accounting firms must make regarding their performance of audit engagements (Firm and Engagement Metrics proposal) and their operational and financial condition (Firm Reporting proposal). A primary objective of these new disclosures would be to aid audit committees in their oversight. See PCAOB Proposes Engagement Metrics and Audit Firm Operational and Financial Reporting, April 2024 Update. In response to these proposals, the Center for Audit Quality conducted surveys of audit committee members and investors to gather data concerning how they evaluate audit quality. On August 1, the CAQ filed a supplemental comment letter with the PCAOB reporting the survey results.
The audit committee survey had 242 respondents, 96 percent of whom were on an audit committee or had served on a committee within the past five years; 78 percent were, or had served as, audit committee chair. Three-quarters of respondents were or had been on the board of a public company with at least $1 billion in market capitalization. Findings of the audit committee survey included:
Ninety-five percent of audit committee members surveyed said the information currently available meets all (59 percent) or most (36 percent) of their needs in fulfilling their external auditor oversight responsibilities.
Forty-three percent of audit committee members would like additional information on their company’s audit engagement. Frequently identified types of additional information sought were partner and manager involvement (47 percent); more information about how my individual engagement is being performed (43 percent); details about what goes into auditor judgment (35 percent); and industry experience of audit personnel (30 percent).
Most audit committee members surveyed “strongly agree” (48 percent) or “somewhat agree” (30 percent) with the statement “Mandated public disclosure of engagement-level performance metrics, including issuer name, could lead to unintended consequences and as such should be voluntary.” Eleven percent disagree either strongly or somewhat.
Seventy-three percent of audit committee members surveyed believe there are “potential challenges and limitations” in interpreting the data that would be disclosed under the PCAOB’s Firm and Engagement Metrics proposal, particularly concerning measuring audit quality. In addition, 63 percent do not believe that the Firm Reporting proposed would be useful in their oversight role.
Eighty-two percent of respondents have concerns about data specific to their audit being publicly available, and 40 percent think that public disclosure under the Firm and Engagement Metrics proposal could increase director liability.
Fifty-nine percent of respondents said that the following statement most closely matches their view: “Boards and audit committees should consider some standard information about auditors should be considered when making their selection and performing their oversight responsibilities, but ultimately rely on their unique needs and knowledge of the company and its industry.” In contrast, only one percent said that the statement “Boards and audit committees should defer to standardized metrics about auditor performance when selecting and overseeing their auditor” matched their views.
The investor survey had 100 responses from institutional investors. Respondents were professional investors employed at companies with a minimum of $500M in assets under management who serve at the Director level or higher and have at least 5 years of experience. Findings of the investor survey included:
Ninety-two percent of investor respondents thought that the information currently available to assess public company audit quality meets all (57 percent) or most (35 percent) of their needs.
Forty-six percent of investors surveyed would like more information about the auditing process. Other types of additional information investors wanted included scope of the audit (25 percent), any amendments made to financial statements (24 percent), and engagement team specifics (20 percent).
Most investor respondents agreed either strongly or somewhat with these statements: “Boards and audit committees should consider some standard information about auditors when making their selection, but ultimately rely on their unique needs and knowledge of the company and its industry.” (84 percent); “Mandatory and standardized firm and engagement metrics are necessary for company management and audit committees to uphold fiduciary responsibilities to shareholders.” (81 percent); and “Boards and audit committees lack access to the information they need to make an informed decision about selecting an auditor.” (69 percent)
Eighty percent of investors agreed strongly or somewhat that performance metrics alone without context cannot adequately communicate factors relevant to a particular audit engagement or firm. Eighty-three percent similarly agreed that mandated public disclosure of engagement-level performance metrics could lead to unintended consequences and that disclosure should be voluntary.
In its supplemental comment letter, the CAQ asserts that the results of the audit committee and investor surveys, support five findings:
More research is necessary to establish whether evidence supports the need for and benefits of proposed metrics.
Audit committees and many investors already have the information they need.
Any reporting should be voluntary.
Any changes to the PCAOB’s standards should promote auditor-audit committee discussion.
A majority of investors and audit committee members are of the view that the PCAOB’s auditing standards and rules have kept pace with change and require only targeted updating.
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