The Public Company Accounting Oversight Board is conducting a post-implementation review of its Engagement Quality Review standard and is looking for feedback on the effectiveness of the 2009 standard.
The post-implementation review process is a new one for the PCAOB, but it has been used successfully by other standard-setters, such as the Financial Accounting Foundation in evaluating the usefulness of standards from the Financial Accounting Standards Board and the Governmental Accounting Standards Board after a few years since they took effect.
The goal, according to the PCAOB, is to evaluate whether the adopted rules and standards are accomplishing their intended purposes, and identify any unintended consequences, as well as gauge the overall effects of the rules or standards.
"The PCAOB is committed to furthering the use of economic analysis to better serve the investing public with well-informed regulatory decision making," said PCAOB Chairman James R. Doty. "The launch of the post-implementation review program is an important step in achieving a holistic view of the economic impact of individual auditing standards and rules."
The request for comment will provide the PCAOB’s Center for Economic Analysis with information to evaluate AS No. 7, Engagement Quality Review, known as AS 1220 under the PCAOB's reorganized standards. The engagement quality review standard was adopted in 2009, replacing an auditing standard that had been in place since the 1970s.
The standard requires an engagement quality reviewer to evaluate the significant judgments made by the engagement team. When the EQR standard was adopted, the PCAOB indicated that a "well-performed EQR can serve as an important safeguard against erroneous or insufficiently supported audit opinions and, accordingly, can contribute to audit quality."
The PCAOB expected the standard to provide a meaningful check on the work performed by the engagement team and increase the likelihood that a registered firm will catch significant engagement deficiencies before it issues its audit report.
"This initiative is a great example of the value economic analysis adds to the PCAOB oversight process," said Luigi Zingales, the Center's founding director and a professor at the University of Chicago's Booth School of Business. "The engagement quality review standard is ideal for the Center's first evaluation. The standard addresses a long-standing audit practice and has been in effect long enough to provide a sound basis for gauging practices before and after the new requirements."
In addition to conducting a careful analysis of both internal and external data, the Center is requesting public comment on the overall effect of the EQR standard, including the following questions:
• Has AS 7 accomplished its intended purpose? In particular, has the implementation of AS 7 increased the likelihood that a registered public accounting firm will detect significant engagement deficiencies before the audit report is issued? Do engagement quality reviews performed under AS 7 provide for a meaningful check on the audit work performed by the engagement team?
• Do users of financial statements believe that the implementation of AS 7 has affected the credibility of financial reporting?
• What have been auditors' experiences with implementation of AS 7? How did the implementation of AS 7 change practice? Has the implementation of AS 7 given rise to any unintended consequences or changes?
• What have been preparers' and audit committees' experiences with the implementation of AS 7? How did the implementation of AS 7 change practice from their perspectives? Has the implementation of AS 7 given rise to any unintended consequences or changes?
• What have been the initial and recurring costs and benefits associated with the implementation of AS 7 from the perspectives of auditors, preparers, audit committee members, investors and other users of financial statements?
• Could AS 7 be refined or improved to better achieve its intended purpose? If so, how?
Responses to the request for comment are due July 5, 2016 and will help inform a public report on the post-implementation review of the EQR standard.
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