PCAOB Defers New Quality Control Standard for One Year

On August 28, the Public Company Accounting Oversight Board announced that it was postponing the effective date of its new quality control standard, QC 1000, A Firm’s System of Quality Control. The PCAOB adopted QC 1000 in May 2024 with an effective date of December 15, 2025.  The Board’s action extends that date to December 15, 2026.  Firms may, however, comply voluntarily with QC 1000 before the effective date.

The PCAOB’s announcement states that the postponement “takes into account information from various sources that some firms have encountered implementation challenges that, as a practical matter, may be insurmountable within the previously established timeframe.”  The Center for Audit Quality submitted a letter to the PCAOB on July 23 requesting at least a one-year delay, along with phased implementation for firms that audit fewer than 100 issuers, implementation guidance addressing interpretive questions, and consideration of the need for amendments to QC 1000.  According to reporting by Thomson Reuters, SEC Chair Paul Atkins and SEC Chief Accountant Kurt Hohl urged the Board to delay QC 1000.

QC 1000 establishes detailed requirements for audit firm quality control (QC) systems. See PCAOB Adopts Enhanced Quality Control Standard for Audit Firms, May-June 2024 Update.  Among other things, QC 1000 requires firms to identify their specific risks and design a QC system that includes policies and procedures to guard against those risks.  QC 1000 also requires an annual evaluation of the effectiveness of a firm’s QC system and reporting of the results to the PCAOB.  Firms that annually issue more than 100 public company audit reports must establish an independent QC oversight function composed of one or more persons who are not principals or employees of the firm.  PCAOB-registered firms that are not currently issuing audit reports on the financial statements of SEC registrants would be required to design a QC system meeting the requirements of QC 1000 but would not be required to implement the system unless they began auditing an SEC reporting public company or broker-dealer.

The PCAOB’s August 28 announcement stresses that the “Board has not made or proposed any changes to the text of the new and amended standards, rules, or forms from the text adopted by the Board.”  However, in her statement supporting the deadline extension, Board Member Christina Ho said that the extension provides “an opportunity to re-evaluate QC 1000 and related amendments and consider whether there may be a more pragmatic, cost-effective, and principle-based regulatory path.”  Even if the other Board members don’t agree, significant changes in the Board’s membership appear to be imminent (see The SEC Begins to Shake Up the PCAOB, August 2025 Update), and it is possible that new PCAOB leadership will make changes to QC 1000 before it becomes effective.

As noted in the May-June 2024 Update, most audit committees are unlikely to see specific changes in their auditor’s procedures due to QC 1000, although, to the extent that it improves compliance with professional standards, some companies could face requests for more extensive audit evidence. QC 1000 will involve internal implementation costs for audit firms, and audit committees may encounter audit fee increases as a result. QC 1000 could also cause some smaller audit firms to drop their PCAOB registration, which would reduce competition in the audit market for smaller public companies.  For these reasons, notwithstanding the postponement, audit committees may want to discuss with their auditor whether the implementation of QC 1000 is likely to have any effect on the company’s audit. Audit committees of companies audited by smaller firms or firms with a limited SEC practice may also want to verify with their auditor that it is not considering dropping its PCAOB registration in response to QC 1000.

For a discussion of the potential impact of QC 1000 on public companies and their audit committees, see Goelzer, Enhanced Auditor Quality Control: Companies Will Feel the Effects (September 20, 2024) on The Audit Blog.