backOn September 9, 2024, the SEC approved a new PCAOB standard relating to quality control, QC 1000, and amendments to standards, rules, and forms related to the new standard.
The Commission approved QC 1000, A Firm’s System of Quality Control, by a vote of 3-2, with Commissioners Peirce and Uyeda voting against the standard. The standard establishes an integrated, risk-based quality control standard that requires that all registered public accounting firms identify specific risks to their practice and design control systems to guard against the identified risks, and will require registered firms to implement and operate quality control systems they design. The new standard focuses on firm accountability and the continuous improvement of its audit practice, and will require annual evaluations and reporting on the firms quality control systems to the PCAOB. QC 1000 also requires that firms that issue audit reports for more than 100 issuers annually establish an external quality control function that is composed of individuals who can exercise independent judgment as to the firm’s QC system. QC 1000 and the related amendments will take effect on December 15, 2025.
SEC Chair Gary Gensler stated in support of approving QC 1000 that “I am pleased to approve this standard because it will improve the quality control systems of auditors, and thus better protect investors,” and continued, “[a]n auditing firm is ultimately a professional services firm, and it needs to ensure the quality of the services it provides.” SEC Chief Accountant Paul Munter, also in support of the new standard, stated that “QC 1000 is an integrated risk-based QC standard that strikes an appropriate balance that can be applied by firms of varying sizes and complexities along with a set of mandates tailored to the size of the firms’ audit practices, which should assure that QC systems are designed, implemented, and operated with an appropriate level of rigor.” Following the SEC’s approval of the new standard, PCAOB Chair Erica Y. Williams issued a statement that read, in part, “[w]hen a firm’s QC system operates effectively, quality audits follow. And when QC systems operate ineffectively, investors are put at risk. Our new QC standard takes an integrated, risk-based approach that can be applied by firms of varying sizes and complexity. When put into practice, it will improve investor protection.”
SEC Commissioners Hester Peirce and Mark Uyeda dissented to the approval of QC 1000. Commissioner Peirce did not support approval of QC 1000 because the standard, “required more time for additional pointed questions, comment, reflection, and revision. The PCAOB, now with the Commission’s assent, cut the process short and put out QC 1000, a standard that still needs work.” Commissioner Peirce identified several concerns with QC 1000, including that it applied to firms that do not perform audits of issuers or broker-dealers and is difficult, costly, and pointless for those firms; the standard was prescriptive and left room for second-guessing through inspections and enforcement; the standard did not adequately account for interactions with quality control standards from other standard setters; and the final standard’s requirement that large audit firms establish external QC functions was materially different from the proposed version of the standard. Commissioner Uyeda also expressed concerns with QC 1000, including the rushed comment period for the final version of QC 1000 and that the costs imposed by the requirement for every registered audit firm to design a QC system, even those that do not currently have audit engagements. Commissioner Uyeda stated, “because of the unnecessary costs and paternalistic approach of the updated QC standard’s design-only requirement, as well as my concerns with the process, I do not support today’s action, which I find arbitrary and capricious.”
SEC Press Release is here. A PCAOB Press Release containing Chair Williams’ statement is here. SEC Chair Gensler’s statement is here. SEC Commissioner Peirce’s statement is here. SEC Commissioner Uyeda’s statement is here. SEC Commissioner Crenshaw’s statement is here. SEC Commissioner Lizárraga’s statement is here.