PCAOB Passes EQR Standard, Solicits Comments on Engagement Partner Signatures on Audit Reports

The PCAOB on Tuesday passed an auditing standard, Engagement Quality Review, requiring an independent reviewer to perform EQRs and superseding the existing concurring partner review requirement. 

If approved by the SEC, the standard will take effect for the EQR of audits and interim reviews for fiscal years that begin on or after Dec. 15, 2009, which the PCAOB staff said should allow for adequate time for registered firms to prepare for the adoption of the standard.

“A strong second set of eyes on the audit is critical to audit quality,” PCAOB Chairman Mark Olson said during Tuesday’s open meeting. “This approach focuses the engagement quality reviewer’s attention on the areas that are most likely to contain a significant engagement deficiency and increases the likelihood of identifying and correcting those deficiencies before the audit report is issued.”

One of the biggest concerns among the 68 comments received since the standard was proposed last year was that such a standard would drive the reviewers to perform a re-audit, board member Daniel L. Goelzer said, adding that revisions the board made to the standard address those concerns.

“This focuses on significant judgments and the engagement team’s responses to significant risks it identified,” Goelzer said. “The standard makes clear reviewers are responsible for evaluating how the team responded to risk, not starting from scratch to evaluate risk independently.”

Board member Charles D. Niemeier agreed, adding that a well-performed EQR should reduce the risk of a re-audit and is “well worth the cost.”

“There’s no way to see this as a re-audit, which is an enormous undertaking,” he said. “It’s a review of work already preformed using certain techniques—talk with the engagement partner, review certain documents and apply critical thinking to determine whether to sign off for approval.”

The standard was first proposed in February 2008 and revised this March, when the board emphasized that a reviewer’s role differs significantly from that of an engagement partner.

Among other things, the standard requires that:

• A reviewer be a partner in the firm that issues the engagement report, someone in an equivalent position in the firm or someone from outside the firm who is associated with a registered public accounting firm.
• An audit engagement partner be prohibited from serving as the reviewer on that engagement for at least a two-year “cooling-off period.”
• The reviewer’s documentation should not duplicate the engagement documentation.

Engagement Partner Signature Requirements
In other actions, the PCAOB voted to seek public comments for 45 days on a Concept Release to consider the effects of a potential requirement for the engagement partner to sign the audit report in addition to the existing requirement for the audit firm to sign its name on the audit report.

Board members cited comments they received that such a move would increase an individual’s sense of responsibility and said that many members of its Standing Advisory Group with backgrounds as investors support it.

They also said they felt they needed to play catch-up on an international level. In May 2006, the European Parliament passed the Eighth Directive on Statutory Audits, which requires, among other things, that the engagement partner sign the auditor’s report. Member states of the European Union were required to adopt Article 28 of the Eighth Directive by June 29, 2008.

On the other hand, PCAOB members expressed concerns about acting with haste and agreed that issuing a concept release and carefully evaluating comments was the wise move.

“The strongest law is the law of unintended consequences. It’s important we learn as much as we can about the likely impact so we won’t be surprised by these results,” Goelzer said.

The concept release poses 16 questions, among which Goelzer highlighted:

• What are the liability ramifications for the engagement partner?
• Are there steps the board should take for minimizing liability in personal litigation?
• Are there tangible reasons for believing it would improve audit quality?
• If adding a signature affects behavior, how would behavioral change affect audit cost?

The PCAOB has discussed the engagement partner signature with the SAG three times, and taken a close look at the Treasury’s Advisory Committee recommendations as well as the new signature requirements for member states in the European Union, Olson said. 

“This is very much the beginning of a complex subject,” Goelzer said.

More information on these proposals, including the final EQR standard, is expected to be available Wednesday on the PCAOB’s Web site,pcaob.org. An archived version of the Webcast is available at connectlive.com/events/pcaob.