PCAOB supplements guidance on remediation process

The Public Company Accounting Oversight Board released a supplement Wednesday to its staff guidance on the remediation process for auditing firms that have deficiencies in quality control that need to be fixed.

The supplement gives firms more advice, including making the most of the remediation period, the potential influence of nontechnical factors on persistent quality control criticisms, and more. 

Under the Sarbanes-Oxley Act of 2002 and PCAOB rules, the board can’t disclose its criticisms of an audit firm’s quality control systems for at least 12 months after the PCAOB’s initial publication of its inspection report of the firm. During that year-long period, the audit firm is expected to remediate the quality control criticisms identified by PCAOB inspectors. If the firm fails to address any identified quality control criticisms to the PCAOB’s satisfaction, the board will then disclose those criticisms to the public. The revelations can prove to be embarrassing, especially for large firms, and remediating the problems helps firms claim they’re addressing the findings.

“Making sure audit firms remedy defects in their quality control systems is an important way for the PCAOB to drive improvement in audit quality and protect investors,” said PCAOB chair Erica Williams in a statement Thursday. “The PCAOB encourages audit firms to apply this supplement to the staff guidance when addressing quality control criticisms.”

The original staff guidance was published over a decade ago, in 2013, and needed updating, especially amid the tougher stance that the PCAOB has taken in recent years under Williams and a new set of board members. The document offers information for audit firms receiving a final inspection report from the PCAOB that includes any criticism of the firm’s system of quality control. It discusses considerations that the PCAOB’s inspections staff has identified as relevant to its recommendations to the board concerning the sufficiency of firms’ remediation efforts.  

While the update doesn’t change or supersede the 2013 staff guidance, the new supplement draws from the PCAOB staff’s experience since the 2013 staff guidance was issued.  

This isn’t the PCAOB’s first effort to update the guidance. In February 2023, the PCAOB issued a Spotlight document, “Additional Insights on the Remediation Process,” outlining the factors that the staff considers, especially regarding design, implementation and effectiveness of a firm’s actions to remediate quality control deficiencies. Leveraging insights gleaned from the PCAOB’s years of evaluating remediation efforts, the Spotlight pointed out that PCAOB Inspections staff was reviewing the staff guidance to determine if any changes might be needed. 

Following up on the 2023 Spotlight, the new staff guidance supplement recommends that audit firms, when addressing quality control criticisms, can benefit by considering the following:  

• Beginning the remediation process sooner to take advantage of the full remediation period; 
• Planning ahead in order to gain the benefit of inspections staff feedback;  
• Implementing actions early enough to be able to monitor their operation and include them in the submission evidence that they are effective;  
• Considering whether certain quality control criticisms persist due to the influence of nontechnical factors, such as a firm’s culture; and,  
• Understanding the limits of acceptable supplemental submissions after the submission deadline. 

The PCAOB’s Remediation page includes the latest staff guidance, the 2023 Spotlight providing extra insights into the remediation process, and other materials regarding remediation.