On September 9, 2024, three of the SEC’s five Commissioners voted to approve the new PCAOB Quality Control Standard QC 1000 A Firm’s System of Quality Control. The new standard will substantially revise and refine public accounting firm QC requirements, but some have questioned certain aspects of the rule and the process leading to its adoption.

The new standard will replace current QC standards that were developed decades ago prior to the founding of the PCAOB. The current standards are general, high-level rules requiring audit firms to establish and maintain a system to provide the firm with reasonable assurance that its personnel comply with applicable professional standards, including by establishing policies and procedures related to independence, personnel management, client acceptance, engagement performance, and other matters. QC 1000 includes a number of changes to these pre-existing rules. Some of the most notable changes include:

• In many areas, QC 1000 will replace the more general standards of current QC rules with more detailed and explicit procedures to follow in the operation of the QC systems overseeing firm business.
• Firms auditing more than 100 issuers annually must establish an external quality control oversight function composed of one or more individuals who are independent from the firm and who can exercise unbiased judgment regarding the operation of the QC system.
• QC 1000 will require annual evaluation of the QC system to be completed each year by November 30. Firms must document that evaluation and report the results to the PCAOB by the following January 15. Firms will also be required to communicate the results of their evaluation to the audit committees of their issuer clients.
• While QC 1000 permits some leeway in how firms assign responsibility for the QC systems, the standard mandates that the firm’s chief executive officer is ultimately responsible for the QC system.
• While only firms that perform engagements under PCAOB standards are required to implement and operate a QC system, all firms are required to design such a system, even if they will never implement the system they design.

The adoption of these changes has not been without controversy. SEC Commissioners Peirce and Uyeda both issued statements voicing opposition to the adoption of the standard for numerous reasons, many of which echo concerns raised by firms and other stakeholders. Both dissenting Commissioners questioned whether the PCAOB and SEC had allowed sufficient time to consider and refine the standard prior to adoption. And both suggested that requiring firms who do not perform engagements under PCAOB standards to design a QC system that they will likely never use is a mistake and wasteful. Commissioner Peirce stated that “the standard leaves lots of room for second-guessing through inspections and enforcement . . . . [A]s written, the standard will pose many implementation challenges and perhaps scare people away from taking leadership roles because the scope of their liability under such a far-reaching and ambiguous standard is unclear.”In particular, Commissioner Peirce noted that the requirements around the external quality control function applicable to large firms were vague and it was unclear exactly how this concept should or could be executed in practice. Despite these objections, the standard was approved and will be effective December 15, 2024.

Overall, QC 1000 will provide firms with additional guidelines in their design and implementation of their systems of quality control, but it is unclear whether these guidelines will prove sufficiently clear or cost effective in the long-term. What is clear is that the PCAOB and SEC continue to focus heavily on audit firm QC systems and firm leadership.

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