Public Company Accounting Oversight Board; Notice of Filing of Proposed Rules on Firm and Engagement Metrics and Related Amendments to PCAOB Standards

Federal RegisterDec 11, 2024

Ask Donna

What actually matters in this document.

Text

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-101724; File No. PCAOB-2024-06]

Public Company Accounting Oversight Board; Notice of Filing of Proposed Rules on Firm and Engagement Metrics and Related Amendments to PCAOB Standards

November 25, 2024.

Pursuant to Section 107(b) of the Sarbanes-Oxley Act of 2002 (the “Act”), notice is hereby given that on November 22, 2024, the Public Company Accounting Oversight Board (the “Board” or the “PCAOB”) filed with the Securities and Exchange Commission (the “Commission”) the proposed rules described in items I and II below, which items have been prepared by the Board. The Commission is publishing this notice to solicit comments on the proposed rules from interested persons.

I. Board's Statement of the Terms of Substance of the Proposed Rules

On November 21, 2024, the Board adopted

Firm and Engagement Metrics

and related amendments to its rules and forms (collectively, the “proposed rules”). The text of the proposed rules appears in Exhibit A to the SEC Filing Form 19b-4 and is available on the Boards website at

https://pcaobus.org/about/rules-rulemaking/rulemaking-dockets/docket-041,

and at the Commission's Public Reference Room.

II. Board's Statement of the Purpose of, and Statutory Basis for, the Proposed Rules

In its filing with the Commission, the Board included statements concerning the purpose of, and basis for, the proposed rules and discussed any comments it received on the proposed rules. The text of these statements may be examined at the places specified in Item IV below. The Board has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. In addition, the Board is requesting that the Commission approve the proposed rules, pursuant to Section 103(a)(3)(C) of the Sarbanes-Oxley Act, for application to audits of emerging growth companies (“EGCs”), as that term is defined in Section 3(a)(80) of the Securities Exchange Act of 1934 (“Exchange Act”). The Board's request is set forth in section D.

A. Board's Statement of the Purpose of, and Statutory Basis for, the Proposed Rules

(a) Purpose

The Board has adopted a set of firm- and engagement-level metrics (the “final rules” or “final metrics”) that certain registered public accounting firms (“firms” or “audit firms”) will be required to publicly report relating to their audit practices and the audits they lead. The Board believes these metrics will provide valuable additional information, context, and perspective on auditors and audit engagements, which can be used by investors, audit committees, and other stakeholders, and which will further the Board's oversight activities. The Board believes this will advance investor protection and promote the public interest by enabling stakeholders to make better-informed decisions, promoting auditor accountability, and ultimately enhancing capital allocation and confidence in our capital markets. The new reporting requirements will apply to firms that audit at least one company that is an “accelerated filer” or “large accelerated filer” (as those terms are defined in SEC rules).

See

17 CFR 240.12b-2 (“Rule 12b-2”).

Lack of Consistent, Comparable Data About Audits and Auditors

Investors and audit committees cannot easily observe the services performed by auditors. This can limit investors' ability to make informed decisions about investing their capital, ratifying the selection of auditors, and voting for members of the board of directors, including directors who serve on the audit committee, and audit committees' ability to choose among and monitor the performance of auditors. At the same time, there is a lack of incentive for firms, acting on their own or collectively, to provide accurate, standardized, and decision-relevant information about their firms and the engagements they perform. In response to these challenges, the Board has studied ways to measure audit firm and audit engagement performance, primarily with a view to providing information useful to investors in their investment and proxy voting decisions, but also recognizing that metrics could potentially be informative to other stakeholders. In addition, the Board itself would benefit from having additional tools to use in its oversight activities, including its inspections program, standard-setting initiatives, and research activities.

The Board has observed that many of the firms that issue audit reports for more than 100 issuers annually and audit companies that account for the majority of U.S. public company market capitalization already publicly disclose certain firm-level metrics through audit quality reports, transparency reports, or similar documents. However, these disclosures generally do not contain engagement-level information, which investors have indicated would be the most useful to them, and are inconsistent across firms and year to year, with no common definitions or calculations that would allow for meaningful comparisons. Moreover, most of the disclosures are voluntary, so firms are free to revise or discontinue such reporting at any time.

In the Board's view, the current voluntary reporting regime cannot provide consistent, comparable information that stakeholders can rely on to inform their decisions over time. And it would appear that firms' attempts at voluntary reporting have not, in fact, satisfactorily addressed investor desire for additional information about audits and auditors. On the contrary, support from investors and investor-related groups for this rulemaking initiative has been consistent throughout its history, even as the practice of firm voluntary reporting has evolved and spread.

Metrics at Firm and Engagement Level

The final rules require reporting of metrics at both the firm and the engagement levels. Firm-level metrics relate to aspects of the firm's audit practice (

e.g.,

average experience at a public accounting firm of the firm's partners) and engagement-level metrics relate to individual audit engagements (

e.g.,

experience at a public accounting firm of the engagement partner and the engagement quality reviewer (“EQR”) and average experience of certain other engagement team members). The Board is requiring firm-level metrics because it believes information relevant to the firm will be beneficial in providing context for engagement-level metrics and in evaluating the firm's audit practice and its related system of quality control. The Board is requiring engagement-level metrics because it believes that information will be useful in gaining a richer understanding of a particular audit and because investors have stressed the importance to them of engagement-level information to assist them in evaluating the performance of the auditor and the audit committee. Most metrics will be reported at both firm- and engagement-level. However, the final rules require reporting at only

the firm level in cases where the Board believes engagement-level data would not be meaningful or would be disproportionally challenging to collect in relation to the incremental benefit.

Final Metrics

The Board adopted metrics in the following eight areas:

Partner and Manager Involvement.

Hours worked by senior professionals relative to more junior staff across the firm's large accelerated and accelerated filer engagements and on the specific engagement.

Workload.

Average weekly hours worked on a quarterly basis by senior professionals who incurred hours on large accelerated and accelerated filer engagements, including time attributable to engagements, administrative duties, and all other matters, both firm-wide and on the core engagement team.

Training Hours for Audit Personnel.

Average annual training hours for partners, managers, and staff of the firm, combined, both firm-wide and on the core engagement team.

Experience of Audit Personnel.

Average number of years worked at a public accounting firm (whether or not PCAOB-registered) by senior professionals across the firm and on the engagement.

Industry Experience.

Average years of career experience of senior professionals in key industries audited by the firm at the firm level and the audited company's primary industry at the engagement level.

Retention of Audit Personnel (firm-level only).

Continuity of senior professionals (through departures, reassignments, etc.) across the firm.

Allocation of Audit Hours.

Percentage of hours incurred prior to and following an issuer's year end across the firm's large accelerated and accelerated filer engagements and on the specific engagement.

Restatement History (firm-level only).

Restatements of financial statements and management reports on internal control over financial reporting (“ICFR”) that were audited by the firm over the past three years.

Firms are permitted, but not required, to accompany the metrics with narrative disclosure to provide additional context.

The final suite of metrics focuses primarily on information about audit personnel. The Board believes these metrics will provide new insights into how engagements are staffed, including the extent of involvement of senior personnel; auditors' overall workload; retention of personnel across the firm; and levels of training, audit experience, and industry-specific expertise. The final metrics will also provide information about the extent of audit work completed prior to the issuer's year-end, an aspect of the audit process that the Board believes is associated with improved audit outcomes, and about the firm's history of restatements, a key measure of audit outcomes.

This new information will allow users to draw inferences about audits and audit forms that are not possible today. Some may relate to specific metrics. For example, a heavy workload for a particular engagement team relative to the firm average or compared to peer firms may raise questions about the quality of the work performed. Conversely, a relatively high level of industry experience, particularly for an engagement in an industry that benefits from specific accounting and auditing expertise, would be a positive signal. Other inferences may relate to combinations of metrics. For example, the personnel-related metrics, taken together, give an overall sense of how an engagement is staffed that can be compared to firm averages and to engagements for similar issuers. It is possible that the precise numerical values of metrics may be important in some cases but, in general, the Board believes the metrics will be more useful to convey a sense of whether a particular engagement or firm appears fairly typical or is an outlier in one or more respects. This should provide a richer context for understanding the work of the auditor than the current environment of almost no publicly available information.

The Board also believes that gathering data and calculating the final metrics, given the subjects they address, will not be overly costly, time-consuming, or burdensome. Based on the Board's oversight activities, it appears that the largest firms are already tracking data in many of these areas. Many of the metrics are based on data that firms already track or will be required to track for purposes of other PCAOB requirements. For example, Partner and Manager Involvement and Allocation of Audit Hours are based on the same time reporting required for Form AP purposes. Training hours will reflect the same information that firms track to ensure proper licensing of their personnel. Restatement data, to the extent firms are not already tracking it, is required to be tracked under QC 1000. In addition to required data, many firms track the experience of their personnel, as well as industry experience, for use in marketing materials and for inclusion in requests for proposals, and some firms already track staff retention and turnover metrics as part of their human capital management. Firms should be able to generate other data required by the final metrics, such as Workload, from their existing timekeeping systems with minimal additional effort.

Responding to Commenter Concerns

After considering commenter input, the Board has made a number of changes from the proposal. The final rules eliminate four proposed metrics areas (Audit Resources—Use of Specialists and Shared Service Centers, Audit Hours and Risk Areas, Quality Performance Ratings and Compensation, and Audit Firms' Internal Monitoring) and add one new metric area (Training Hours for Audit Personnel). In addition, only firm-level reporting will be required for one area (Retention of Audit Personnel) that was proposed to be reported at both the firm and engagement level. The Board has also made revisions to simplify and clarify some of the other metrics and exempted firms with a small issuer practice from reporting on their industry experience. In addition, the Board has expanded the optional narrative disclosure from 500 to 1,000 characters and has provided additional direction that the narrative should be concise and focused on the reported metrics, with a view to facilitating the reader's understanding of the metrics. The Board believes that these changes will address commenter concerns about challenges of data collection, potential sensitivity of data, and potential ambiguity of the metrics, and that the final suite of metrics will provide consistent, comparable information on auditors and audit engagements, giving investors, audit committees, and other stakeholders valuable new context and perspective.

Auditors say they want to be seen or evaluated as something other than a commodity business evaluated based upon price. For this to happen, auditors need to provide investors with information such that

they can value the work of the auditor—just as they evaluate and value the business and the work of management.

Letter from CFA Institute, August 30, 2024, at 17.

The Board also notes that similar objections—that the new information would not be used or would be confusing or misleading—were raised by many of the same commenters in connection with its last two rulemakings requiring disclosure of additional information about audits and auditors: Form AP reporting of the name of the engagement partner and information about other firms participating in the audit, and auditor communication of critical audit matters (“CAMs”). In both cases, these commenter concerns appear unsubstantiated. The Form AP data set is now one of the most frequently visited areas of the PCAOB's website.

As for CAMs, while academic studies have shown mixed results about the impact of CAMs, in a recent investor survey conducted by a firm-related group, over 90% of the respondents indicated that CAMs play an important role in their investment decision-making.

In addition, data aggregators, such as Audit Analytics, compile and make available data on CAMs, which suggests market demand for that information. The Board's experience therefore suggests that, contrary to concerns about irrelevance and information overload, stakeholders seek out additional information about auditors and audit engagements when it is available.

In 2023, there were over 333,000 unique searches performed on AuditorSearch and the Form AP data set was downloaded over 2,000 times. Information related to usage statistics can be found on the PCAOB's website (

https://pcaobus.org/resources/auditorsearch

The Center for Audit (“CAQ”) Quality Critical Audit Matters Survey (July 2024) at 9.

Filing Requirements

Under the Board's final rules, firm-level reporting is required of every firm that audits at least one “accelerated filer” or “large accelerated filer” under SEC rules during the reporting period. Engagement-level reporting will be required for every audit of an accelerated or large accelerated filer. The thresholds will apply to the audits, and auditors, of companies that account for the majority of U.S. public company market capitalization, and the Board believes they will capture the situations where investment and proxy voting decisions will be most likely to benefit from additional information about the audit and the auditor.

The final rules:

• Require reporting of firm-level metrics annually on a new Form FM,

Firm Metrics,

pursuant to a new Rule 2203C,

Firm Metrics,

for firms that issued an audit report with respect to at least one accelerated filer or large accelerated filer during the reporting period;

• Require reporting of engagement-level metrics for audits of accelerated filers and large accelerated filers on a revised Form AP, renamed “Audit Participants and Metrics”; and

• Allow, but not require, limited narrative disclosures on both Form FM and Form AP to provide context and explanation for the required metrics.

Background

The final rules build on other actions the Board has taken to provide stakeholders with additional information about registered firms and the audits they perform, including information about firms available through its registration and reporting forms, information about auditors and engagements on Form AP, and communication of critical audit matters and auditor tenure in the auditor's report. The Board concurrently adopted other changes to firm reporting requirements.

The Board believes the final rules will complement these efforts by providing investors, audit committees, and other stakeholders with additional information in a consistent format and compiled with sufficient rigor to assist them in making decisions. For example, the metrics could inform investors' decision-making regarding whether to ratify the audit committee's selection of an auditor or to vote for members of the board of directors, including directors who serve on the audit committee, as well as potentially assisting in audit committee oversight, supporting continuous improvement of firms' quality control systems, and facilitating the Board's own oversight and rulemaking efforts. The Board further believes that the value of these metrics will likely increase over time as firm reporting practices develop and trends become observable.

See Firm Reporting,

PCAOB Rel. No. 2024-013 (Nov. 21, 2024) (adopting amendments to reporting requirements for Form 2,

Annual Report Form,

and Form 3,

Special Reporting Form

As in its proposal, the Board uses the term “firm and engagement metrics” rather than “audit quality indicators” (“AQIs”) to describe the metrics that it adopted. The Board believes this avoids the potential misimpression that any set of metrics can comprehensively measure audit quality and emphasizes the Board's goal of promoting informed decision-making through robust disclosure requirements. Some commenters were critical of that change in terminology, suggesting that it evidenced that the Board is no longer focused on audit quality. It is simply a clarification. Because some of the most important elements of a high-quality audit, such as application of due care and professional skepticism, cannot be measured and quantified directly, the metrics employ proxies, such as years of experience, auditor workloads, and percentage of audit hours attributable to more senior members of the engagement team, which can only partially capture these concepts. Even though these proxies cannot provide a complete picture of audit quality, the Board believes they will nevertheless convey important information about auditors and the engagements they lead that stakeholders will find relevant and useful. The Board believes that consideration of the metrics in combination, together with any additional context a firm may choose to provide, will help users interpret the data, and that the metrics, analyzed across firms and over time, will yield important, currently unavailable information that will assist investors, audit committees, and other stakeholders in their decision-making, oversight, and evaluation related to audits.

The Board developed the proposal after considering input from numerous sources, including the recommendations of the U.S. Department of Treasury's Advisory Committee on the Auditing Profession (“ACAP”), including the October 6, 2008

Final Report of the Advisory Committee on the Auditing Profession to the U.S. Department of the Treasury

(“ACAP Final Report”); the

Concept Release on Audit Quality Indicators,

PCAOB Rel. No. 2015-005 (July 1, 2015) (“Concept Release”), and the comments received; the voluntary practices of firms; recommendations from the PCAOB's Investor Advisory Group (“IAG”); and the initiatives of international regulators. The Board has carefully considered this input and believes that the final amendments strike an appropriate balance between the expected benefits of the new reporting requirements and the associated costs of implementation and compliance.

Effective Dates

If the Commission approves the final rules and final metrics, both firm-level and engagement-level reporting will be required for periods beginning October 1, 2027. The Board also adopted a phased implementation period for both

firm- and engagement-level reporting, where firms that issue audit reports for more than 100 issuers will begin reporting in the first year that reporting is required and other firms beginning one year later.

(b) Statutory Basis

The statutory basis for the proposed rules is Title I of the Act.

B. Board's Statement on Burden on Competition

Not applicable. The Board's consideration of the economic impacts of the proposed rules is discussed in section D below.

C. Board's Statement on Comments on the Proposed Rules Received From Members, Participants or Others

The Board released the proposed rules for public comment in PCAOB Release No. 2024-002 on April 9, 2024. Previously, the Board issued a concept release for public comment in PCAOB Release No. 2015-055 on July 1, 2015. The Board received over 45 comment letters in response to the proposing release and 50 letters in response to the concept release.

See

Exhibits 2(a)(B) and 2(a)(C). The Board has carefully considered all comments received. The Board's response to the comments it received and the changes made to the rules in response to the comments received are discussed below.

Background

Project History

1. Importance and Potential Benefits of Increased Information About Audit Firms and Engagements

With the passage of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and the establishment of the PCAOB, Congress acknowledged and re-emphasized the auditor's important gatekeeping role.

Reflecting that importance, the Board believes requiring audit firms to provide additional information about the firm and the engagements it performs will advance investor protection and promote the public interest by enabling investors to make better-informed decisions. As discussed in more detail below, the Board has also heard from investors and other stakeholders that they believe such information will be beneficial.

See

Section 101(a) of Sarbanes-Oxley, 15 U.S.C. 7211(a); Senate Report No. 107-205, at 5-6 (July 3, 2002).

Sarbanes-Oxley also mandated new exchange requirements regarding the responsibilities of audit committees of listed companies, including requiring that audit committees be charged with responsibility for the appointment, compensation, and oversight of the auditor.

The Board believes that making information available to audit committees regarding both the specific audit and auditor they oversee and the audits and auditors of their peer companies will assist them in carrying out this statutory mandate.

See

Securities Exchange Act of 1934, Section 10A(m)(2), 15 U.S.C. 78j-1(m)(2).

Over the years, the Board has received significant input on the importance and potential benefits to stakeholders of additional information about audits and auditors. The key elements of that input are summarized below.

i. ACAP Recommendations

In 2007, the U.S. Treasury constituted the ACAP to consider and develop recommendations relating to the sustainability of the auditing profession.

On October 6, 2008, ACAP published a report detailing recommendations intended to enhance the sustainability of a strong and vibrant public company auditing profession.

One of the ACAP recommendations was that the PCAOB, in consultation with auditors, investors, public companies, audit committees, boards of directors, academics, and others, “determine the feasibility of developing key indicators of audit quality and effectiveness and requiring auditing firms to publicly disclose those indicators”

and, assuming that development and disclosure of indicators of audit quality are feasible, that the PCAOB be required to monitor these indicators.

See

ACAP Final Report, at IV:1.

See

ACAP's

Fact Sheet: Final Report of the Advisory Committee on the Auditing Profession,

available at

https://home.treasury.gov/news/press-releases/hp1158#:~:text=The%20U.S.%20Treasury%20Department%20%27s%20Advisory%20Committee%20on,into%20three%20sections%20by%20principal%20areas%20of%20focus

See

ACAP Final Report, at VIII:14.

ii. 2013 and 2017 PCAOB Investor Advisory Group Recommendations

At its October 2013 IAG Meeting,

the IAG working group on AQIs made recommendations for the PCAOB to prescribe informative, forward-looking disclosures and indicators intended to measure the quality of audits and enhance auditor accountability. They emphasized that investors and audit committees generally care more about the quality and credibility of audit work on specific engagements—the companies in which they have invested or were considering investing, or the company on whose board of directors they served—rather than firms' more general efforts to improve quality. Accordingly, in addition to disclosures and metrics to be reported at the firm level, they also recommended disclosures and metrics to be reported at the engagement level.

See

Oct. 2013 IAG meeting and presentations, Report from the Working Group: Audit Quality Indicators,

available at

IAG Meeting Archive,

https://pcaobus.org/news-events/events/event-details/pcaob-investor-advisory-group-meeting_758.

At the October 2017 IAG meeting, an IAG working group discussed three topics: (i) why audit quality and AQIs matter to investors, (ii) the PCAOB's authority and efforts to date to enact AQIs, and (iii) audit quality initiatives in other jurisdictions.

The 2017 working group also endorsed the 2013 AQI working group's recommendations.

See

Oct. 2017 IAG meeting and presentation,

available at

IAG Meeting Archive,

https://pcaobus.org/news-events/events/event-details/pcaob-investor-advisory-group-meeting_1085.

The recommendations provided by the 2013 and 2017 IAG working groups are reflected in many of the metrics the Board adopted.

2. PCAOB Initiatives

This section provides further background and expands on the history of PCAOB activities related to providing additional information about audit firms and audits, including firm and engagement metrics.

i. 2015 AQI Concept Release

In July 2015, the PCAOB issued the Concept Release and sought comment on 28 potential indicators. The indicators were organized into three groups:

• Audit professionals—Measures dealing with the availability, competence, and focus of those performing the audit.

• Audit process—Measures related to an audit firm's tone at the top and leadership, incentives, independence, attention to infrastructure, and record of monitoring and remediation.

• Audit results—Financial statements, internal control, going concern, communications between auditors and audit committees, and enforcement and litigation.

The Concept Release discussed (i) the nature of the potential indicators and potential calculations, (ii) the usefulness of the indicators, (iii) suggestions for other indicators, (iv) potential users of the indicators, and (v) the approach to implementation. In response to the Concept Release, the PCAOB received 50 comment letters.

Most commenters expressed support for the general idea that AQIs may be

useful.

However, commenter views varied widely. Comments from firms and firm-related groups suggested that no standard group of indicators could advance a person's understanding of audit quality. These commenters suggested that AQIs should be voluntary, should be reported to audit committees through two-way discussions to provide context for the indicators, or should be required only at the firm level. Investors and investor-related groups recommended that indicators should be made public as they could be used to stimulate competition based on quality among audit firms, remedy the deficiency of information about audits, and give shareholders meaningful information to help them in voting on auditor selection. Some commenters suggested that engagement-level metrics are more useful than firm-level metrics. One commenter suggested that promoting competition around an implied variability in audit quality may not always be appropriate and in the public interest because audit quality should be nonnegotiable and a fundamental goal for all audits. Another commenter suggested that it was critical to define what AQIs do and do not represent so that they are used appropriately.

See

Nov. 2015 Standing Advisory Group (SAG) Briefing Paper

available at

SAG Meeting Archive,

https://pcaobus.org/news-events/events/event-details/standing-advisory-group-meeting_910.

ii. PCAOB Rulemakings To Increase Audit Transparency: Identification of the Engagement Partner and Other Audit Participants on Form AP and Auditor Communication of Critical Audit Matters

In 2015, the PCAOB adopted rules requiring information on Form AP,

Auditor Reporting of Certain Audit Participants,

regarding the engagement partner and other accounting firms that participate in audits of issuers.

The rulemaking was initially in response to the ACAP recommendation that the engagement partner should be required to sign the audit report.

As the rulemaking evolved, it also took account of stakeholder input, including IAG recommendations to identify the engagement partner and the firms, other than the firm signing the audit report, that participate in audits.

See

PCAOB Rule 3211.

See

ACAP Final Report, at VII:19.

The Board's intention was to make available information about the engagement partner and other firms that participated in the audit, saying that such information, even if not useful in every instance or meaningful to every investor, would make an overall contribution to the information available to investors in making voting and investment decisions. The Board also asserted that increased transparency should promote increased accountability in the audit process. The Form AP reporting requirements became effective in 2017, and the data gathered via Form AP has many users; the Form AP data set is frequently searched through AuditorSearch, the PCAOB's online search tool, as well as downloaded by users performing more detailed analyses.

See below.

In 2017, the PCAOB adopted AS 3101,

The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion,

which includes requirements regarding the disclosure of auditor tenure and auditor determination and communication of “critical audit matters.”

This project was also initiated in response to ACAP's recommendation that the PCAOB undertake a standard-setting initiative to consider improvements to the auditor's standard reporting model.

The rulemaking explored potential ways to increase the transparency and relevance of the auditor's report, including by requiring expanded auditor reporting regarding the audit and the company's financial statements.

In the adopting release, the Board noted ACAP's statement that the complexity of financial reporting supports improving the content of the auditor's report beyond the then-current pass/fail model to include a more relevant discussion about the audit of the financial statements.

See

AS 3101.11-.16.

See

ACAP Final Report, at VII:13.

See Concept Release on Possible Revisions to PCAOB Standards Related to Reports on Audited Financial Statements and Related Amendments to PCAOB Standards; Notice of Roundtable

(June. 21, 2011),

available at https://pcaobus.org/news-events/news-releases/news-release-detail/pcaob-issues-concept-release-on-auditor's-reporting-model_337.

After multiple rounds of Board releases and stakeholder input, the requirements took effect in 2019 and 2020.

iii. Recent PCAOB Standard-Setting and Rulemaking Activities

At the November 2022 Standards and Emerging Issues Advisory Group (SEIAG) and the October 2022 and 2023 IAG meetings, several members continued to urge the Board to take action on firm and engagement metrics. Other members stated that some firms already publish similar metrics through transparency reports and audit quality reports. Some members of the IAG and SEIAG have requested increased information at the firm and engagement levels through easily accessible and quantified metrics, potentially with accompanying context provided by the auditors.

See

Nov. 2022 SEIAG meeting,

available at https://pcaobus.org/news-events/events/event-details/pcaob-standards-and-emerging-issues-advisory-group-meeting-2022.

See

Oct. 2022 IAG meeting,

available at https://pcaobus.org/news-events/events/event-details/pcaob-investor-advisory-group-meeting

and Oct. 2023 IAG meeting,

available at https://pcaobus.org/news-events/events/event-details/pcaob-investor-advisory-group-meeting-october-2023.

In response to the Board's request for comment on the draft 2022-2026 Strategic Plan, some commenters encouraged the Board to continue to consider this topic.

Additionally, in a January 2023 comment letter on the PCAOB's proposed quality control standard, members of the IAG advocated for “a minimum requirement of eight indicators.”

These eight indicators were (i) staffing leverage; (ii) partner workload; (iii) manager and staff workload; (iv) audit hours and risk areas; (v) quality ratings and compensation; (vi) audit fees, effort, and client risk; (vii) audit firm's internal quality review results; and (viii) PCAOB inspection results.

See

comments on 2022-2026 Strategic Plan Documents,

available at https://pcaobus.org/about/strategic-plan-budget/comments-on-pcaob-draft-strategic-plan-2022-2026.

See A Firm's System of Quality Control and Other Proposed Amendments to PCAOB Standards, Rules, and Forms,

PCAOB Rel. No. 2022-006 (Nov. 18, 2022). The comment letters received in response to the proposal are available on the Board's website in Docket 046.

See

comment letter from members of the IAG,

available at https://assets.pcaobus.org/pcaob-dev/docs/defaultsource/rulemaking/docket046/4_iag.pdf?sfvrsn=1941e7c0_4.

a. QC 1000: Requirements

The Board adopted a new quality control standard for firms, QC 1000,

A Firm's System of Quality Control

(“QC 1000”),

which contains provisions that are relevant to firm reporting of firm- and engagement-level metrics. QC 1000 will become effective in December 2025.

See

A Firm's System of Quality Control and Other Amendments to PCAOB Standards, Rules, and Forms, PCAOB Rel. No. 2024-005 (May 13, 2024) (“QC Adopting Release”).

(1) Public Communication of Firm-Level or Engagement-Level Information

QC 1000 includes a quality objective that, if a firm communicates firm-level or engagement-level information with respect to the firm's audit practice, firm personnel, or engagements, such as firm or engagement metrics, to external parties, such information is accurate and not misleading and, with respect to any such metrics that are communicated

in writing, the communication explains in reasonable detail how the metrics were determined and, if applicable, how the method of determining them changed since the metrics were last communicated.

(With respect to metrics reported on Form FM and Form AP, the form itself provides the required explanation.) The final firm and engagement metrics include reporting elements that focus on the firm's responsibility to produce and report information that is accurate and not misleading, for example, an optional narrative to accompany the metrics. This element is discussed further below.

QC 1000.53e.

(2) Use of Metrics in Monitoring the Firm's QC System

Under QC 1000, in determining the nature, timing, and extent of QC system-level monitoring activities, the firm is required to take into account any metrics that the firm may use in its QC system.

QC 1000 does not require the use of any specific metrics; firms have the ability both to develop metrics on their own and to use any or all of the metrics required to be reported under Rule 2203C and Rule 3211 in their QC system, but that is not required. The Board believes these metrics would provide information that could be used in the firm's system of quality control. However, not all firms may find all metrics useful in operating or monitoring their QC system, and the Board is not mandating their use in connection with monitoring a firm's QC system at this time.

QC 1000.65c.

b. Firm Reporting

Concurrently with this rulemaking, the Board adopted certain updates to its annual and special reporting requirements to facilitate the disclosure of more complete, standardized, and timely information regarding audit firms. Among other new requirements, the updates will (i) require firms to disclose additional information on Form 2 about their fees, leadership and governance structure, and network arrangements; (ii) require, in connection with QC 1000, a one-time update to the statement on a firm's quality control policies and procedures on a new Form QCPP; and (iii) expand the scope of special reporting to include events that pose a material risk, or represent a material change, to the firm's organization, operations, liquidity or financial resources, in such a manner that it will affect the provision of audit services, as well as new cybersecurity reporting requirements.

See

PCAOB Rel. No. 2024-013.

c. Proposed Firm and Engagement Metrics

In April 2024, the Board proposed amendments to the PCAOB's rules and reporting forms to require the reporting of specified firm-level metrics on new Form FM,

Firm Metrics,

and specified engagement-level metrics on an amended and renamed Form AP,

Audit Participants and Metrics.

In the Board's proposal, it proposed a set of firm-level and engagement-level metrics across 11 areas to be publicly reported for the firms that serve as lead auditor for at least one accelerated filer or large accelerated filer.

The Board received over 45 comment letters on the proposal.

Commenters included investor-related groups, firms, firm-related groups, academics, and others.

The comment letters received on the proposal are

available at https://pcaobus.org/about/rules-rulemaking/rulemaking-dockets/docket-041/comment-letters.

Some commenters expressed concerns about the speed of rulemaking by the Board. Some commenters asked the PCAOB for more than 60 days to respond to the proposal, citing overlapping comment proposal periods, the duration of comment periods, the length and complexity of various proposals, and overlapping SEC 19b-4 filing comment periods. On the other hand, a commenter urged the Board not to delay this rulemaking because investors need a relatively standardized data set to analyze and compare over time and across companies. The Board believes that 60 days was a sufficient period for commenting on the proposal. Despite that, the Board considered comment letters that were submitted after the 60-day period closed. The Board received robust comments on the proposal, which informed the final metrics or final rules.

These comments are addressed throughout this Exhibit 1 and in the Board's adopting release (Exhibit 3).

See also below for consideration of the 2015 AQI Concept Release (including comments received) and the PCAOB IAG recommendations.

3. Overview of Existing Requirements

Under current PCAOB rules and standards, certain information about PCAOB-registered firms is already made available to investors, audit committees, and other stakeholders. The disclosure of firm- and engagement-level metrics would supplement this information. This section discusses the key PCAOB standards and rules that require certain firm- and engagement-level information to be provided to various stakeholders.

i. Available Information Related to Firms

PCAOB rules require firms to file Form 2 (Annual Report Form) to report basic information about the firm and its audit practice and Form 3 (Special Reporting Form) after the occurrence of certain events.

In addition, the PCAOB makes portions of inspection reports publicly available for firms that are subject to annual or triennial PCAOB inspections.

PCAOB Rule 2200,

Annual Report;

PCAOB Rule 2201,

Time for Filing of Annual Report;

PCAOB Rule 2203,

Special Reports;

Instructions to Form 2,

available at https://pcaobus.org/about/rules-rulemaking/rules/form_2;

Instructions to Form 3,

available at https://pcaobus.org/about/rules-rulemaking/rules/form_3.

Information reported on Forms 2 and 3 is publicly available unless a firm requests confidential treatment.

a. Form 2 and Form 3

As required by Section 102(d) of Sarbanes-Oxley and PCAOB Rule 2200, each year registered firms must file an annual report with the Board. Under PCAOB rules, firms must do so by filing Form 2. The annual reporting period runs from April 1 to March 31, and the due date for filing is June 30.

In addition to basic identifying information about the firm,

firms report on Form 2 general information about their audit practices and other business relationships. Information required to be provided on Form 2 includes:

PCAOB Rule 2201; General Instructions 3-4 to Form 2 (registered public accounting firm that has its application for registration approved by the Board in the period between and including April 1 and June 30 of any year not required to file an annual report in that year).

Instructions to Form 2, Item 1.1.

• Whether the firm issued audit reports for issuers, brokers, or dealers or played a substantial role in issuer or broker-dealer audits;

Id.,

Item 3.1. The Board's release uses the terms “issuer,” “broker,” and “dealer” as those terms are defined under Sections 2(a)(7) and 110(3)-(4) of Sarbanes-Oxley. 15 U.S.C. 7201(a)(7), 7220(3)-(4).

See also

15 U.S.C. 7211(a), (c)(5), 7213(a)(2)(B). The Board believes the proposed metrics would further the public interest and would protect investors in accordance with these provisions.

The Board believes the metrics will also assist the PCAOB in a variety of ways. Metrics will help to inform the Board's inspection activities, including in the selection of firms, engagements, and focus areas for review. For example, the final metrics could refine the selection models used to aid in predicting negative audit outcomes, enhancing the Board's risk-based inspections. They could also enrich the discussions the Board has with audit committee chairs as part of the Board's inspections process. Metrics may also inform future standard-setting activities by helping the Board to identify areas where regulatory action is needed and suggesting potential approaches. In addition, the Board expects metrics to enhance the PCAOB's ability to produce impactful research and to provide valuable information sources for the public, including academic research, helping to create new insights into the audit.

The Board's discussion of the potential benefits of the final metrics in greater detail below.

2. Public Reporting of Metrics

Many commenters on the proposal addressed the fundamental question of whether there was value in mandating a set of publicly reported metrics, expressing conflicting views. Investors and investor-related groups were generally supportive. Many other commenters, primarily firms and firm-related groups criticized the proposal. These commenters either supported public reporting of some firm-level metrics but not others while generally opposing any public reporting of engagement-level metrics, or opposed all public reporting of metrics at both the firm and engagement levels.

Among the commenters that supported the metrics proposal, several stressed the benefits of increased transparency for key stakeholders and the public overall. Several commenters generally agreed with the PCAOB's rationale for the metrics, including increasing competition among audit firms, including on the basis of audit quality; promoting auditor accountability, which will lead to greater audit quality; and providing investors with decision-useful comparable information that will assist them in making decisions about audit-related matters (

e.g.,

ratifying the appointment of the auditor or voting for reelection of Board members that serve on the audit committee). Two of these commenters asserted that investors currently lack information to make an independent and informed decision regarding ratification of the appointment of the auditor and to hold audit committee members to account in the performance of their duties. In that context, one of these commenters pointed out that most failures to ratify the appointment of the auditor occur after a financial reporting failure, and argued that metrics would provide information allowing investors to make

an ex ante, rather than ex post, evaluation of the auditor's work.

Two commenters particularly favored engagement-level metrics. One said it would enable the compilation of engagement-level data for all public company audit engagements within a specific office to compare data for competing offices within the same geographic area. In this commenter's view, metrics such as workload would provide great value to prospective employees and would improve the talent pipeline issue because firms' workload need to be competitive in the eyes of prospective employees. Another argued that engagement-level metrics are most useful to investors, using firm-level metrics to provide context. This commenter also emphasized the importance of firm-level metrics, which will provide context in evaluating engagement-level metrics and a firm's audit practice and its related system of quality control.

Several commenters said that the benefits of metrics would likely evolve over time, for example, as users are able to aggregate multiple data points, make comparisons, and observe trends. The Board agrees and believes that analyzing the metrics over time, across engagements and across firms, in the context of known good practices and indicators of audit failure, will enable the PCAOB, as well as academics and users of the metrics, to gain a new perspective on the audit and potentially deeper insights into some of the drivers of audit quality.

Many larger firms generally supported certain firm-level metrics. These commenters generally agreed that firm-level reporting could provide stakeholders with relevant information through consistent disclosure by all firms required to report. While some of the commenters raised concerns about the usefulness, comparability, and risk of misinterpretation of certain firm-level metrics; the risk that standardization of metrics limits their adaptability to change in the business and auditing environment; and more generally concerns that the costs may outweigh the benefits, commenters agreed that the proposed firm-level metrics are generally consistent with voluntary disclosures that some firms are already making in firm transparency and audit quality reports. A discussion of the comments made with regard to particular metrics is provided below.

However, firms and firm-related groups generally opposed engagement-level metrics. Some questioned whether investors would use the metrics. Others expressed concern that publicly available metrics could contribute to information overload. Many said that it would not be possible to provide sufficient context to enable users to understand the metrics, even with the firm-level metrics or narrative disclosures. Some commenters asserted that, because the underlying circumstances of engagement-level metrics are not homogeneous and users would not have necessary context, engagement-level metrics would not be comparable.

Others focused on the significance of qualitative factors such as professional judgment and the duty to exercise due care, including professional skepticism, saying that metrics were inappropriately “one size fits all” or not decision-useful because they do not capture these key concepts.

Commenters listed various types of contexts that in their view would be necessary for proper understanding of the engagement-level metrics, including variations across firms (

e.g.,

differences in operations, structures, methodologies, and resources), the unique circumstances of each engagement (

e.g.,

differences in risk areas, team compositions, and timelines), and the unique circumstances of each issuer (

e.g.,

differences in policies and resources).

Many commenters expressed concern that users would not find metrics meaningful and may even misunderstand them and reach inappropriate conclusions. Absent providing substantial context and understanding how stakeholders would use the metrics, in one commenter's view, investors may make capital allocation decisions based on a misinterpretation of a metric, resulting in a new element of volatility in the capital markets. Two commenters raised a concern that the proposal does not provide a tie between assessing audit quality and the proposed metrics. Some commenters went on to say that providing metrics in isolation without context and effective two-way communication would have very minimal, or even negative, impact on audit quality. Another commenter stated that most of the data points required as part of the proposal are currently available to the PCAOB.

One commenter expressed concern that overemphasis on metrics could lead firms to focus on consistency of the metrics to avoid the implication of weak auditing or other potential misinterpretations, which in the commenter's view could lead to commoditization of the audit and reduce incentives to innovate the audit approach. On the other hand, several other commenters argued that metrics would support more robust competition based on quality, making the audit less of a commodity.

Some commenters said that the metrics seemed particularly focused on larger firms or would be especially burdensome for smaller firms. The Board believes the final metrics call for data that will be relevant to and obtainable by firms regardless of size. The potential differential cost impacts are discussed below.

Some commenters questioned whether public reporting of metrics would undermine the authority of the audit committee. For example, one expressed concern that there would be public pressure on the audit committee to appoint auditors whose metrics were perceived to be within some acceptable range, even if the committee was satisfied with the work of the current auditor. Another commenter asserted that it is not investors' responsibility to oversee the auditor, and raised a concern that public reporting of metrics could undermine confidence in audit committees and the PCAOB, both of which have responsibilities for direct oversight of audits and audit firms and have the context to properly understand these metrics. However, an investor-related group specifically disagreed with this reasoning and asserted that this rulemaking exhibits commitment to faithfully executing the PCAOB's responsibilities and working to improve audit quality and trust in the audit market.

Several commenters opposed both firm- and engagement-level metrics. One asserted that the proposal did not provide sufficient evidence that public disclosure of the proposed metrics will have any meaningful impact on the quality of audit services. Another commenter said that the metrics were not grounded in or intended to have any nexus with audit quality, focusing instead on auditor accountability, and on that basis went beyond the PCAOB's remit. The commenter asserted that the proposed metrics would overload audit committees and investors with a large set of complex data that was not sought, needed, meaningful, or obviously usable by them, suggesting that the current voluntary approach should be maintained instead. Another expressed concern that public disclosure of the information specified in the proposals could do more harm than good, particularly in relation to an increase in litigation and reputational risk and potentially furthering the talent crisis in the profession. That commenter particularly questioned the potential value of metrics for audit committees, saying that they already have access to most of the information that would be mandated and that annual reporting would be unhelpful since evaluation of the auditor is a continuous process. One commenter who advocated delay and

further study before the Board takes further action on the metrics expressed skepticism that metrics would influence shareholder votes on ratification of the appointment of the auditor or benefit most investors, because metrics are only indirectly related to audit quality and there would not be sufficient incentive for users to engage with them.

Most of the commenters who objected to public reporting of metrics recommended alternatives, including mandatory or voluntary communication with the audit committee, particularly for engagement-level metrics. Many commenters asserted that the audit committee is the appropriate party to whom engagement-level metrics should be communicated, because the audit committee has the statutory responsibility to appoint, compensate, and replace the external auditor and is sufficiently informed to understand the context of the company, the audit, and the auditor. Commenters said that audit committees could engage in dialog with the auditor, enabling them to understand the metrics in the context of the specific audit, promoting accountability in the performance of the audit on behalf of investors. Another commenter asserted that providing information to, and allowing the assessment by, audit committees would be more likely to provide greater benefits to investors and the capital markets than public reporting, while minimizing unintended consequences (such as users reaching inappropriate conclusions), and would be consistent with the PCAOB's objective to improve audit quality. Another commenter, who questioned the value of metrics for most investors, said metrics had the potential to be quite useful for audit committees, who could use their direct access to the auditor to gain valuable context and would have the opportunity, using metrics, to communicate more about the audit process in their audit committee report. On the other hand, an investor-related group pointed out that audit committees are reliant on communications from the auditor regarding the company's audit issues and the quality of the audit; their principal tool is inquiry, not observation, which, in audit parlance, is the weakest form of audit evidence.

Many commenters that objected to publicly available metrics like the ones the Board proposed advocated a non-prescriptive, principles-based approach, whereby auditors and audit committees would discuss potential metrics and the audit committee would determine which metrics and other information it finds meaningful and when it wants to receive and evaluate them. This approach, the commenters said, would encourage more tailored metrics that could be appropriately discussed in context and could change over time, adapting to changes in the audit environment, regulation, technology and audit processes, and the information needs of audit committees and investors and would prioritize relevance rather than consistency. Some commenters specifically recommended amending AS 1301 to mandate such a discussion (for example, initially in connection with audit planning and later as part of reporting on audit results). However, one investor-related group disagreed with this principles-based approach, asserting that it would not promote comparability or accountability because a set of principles would inevitably result in qualitative rather than quantitative disclosure and the information would not be comparable between firms and engagements and over time. This commenter asserted that the standardized metrics the Board proposed would be more useful to investors.

This commenter also provided analysis of audit quality reports published by the Big 4 firms, observing that elements of the proposed firm-level metrics are already presented in those reports under a principles-based approach whereby each firm has developed its own metrics.

The commenter noted that some of these metrics are qualitative, some are quantitative, some use different definitions, and some unfavorable metrics or facts may be excluded. This commenter also asserted that because metrics voluntarily published by firms are self-defined and principles-based and are only at the firm level and not at the engagement level, they are largely unused by the investment community; they are regarded as marketing materials rather than investor information. This commenter emphasized that investors need more standardized information contextualized at the engagement-level to the company they are investing in and that are anchored to the firm-level standardized information.

This commenter provided several examples of inconsistencies in reporting metrics. For example, it stated while all Big 4 firms provide data on turnover or attrition, they are defined and calculated in different ways and any comparison among the firms is stymied.

Several commenters noted that it would be possible for audit committees to provide additional public disclosure via the audit committee report in the issuer's proxy statement,

which investors could consider in deciding whether to ratify the audit committee's selection of auditor and whether to vote for the board members who serve on the audit committee. Some of these suggested that the SEC could take action instead of, or along with, the PCAOB. Two argued that expanded audit committee disclosure would result in more relevant and decision-useful information for investors than the proposed metrics or would be a more direct way to address the information asymmetry than through this rulemaking. The other suggested that the SEC, together with the New York Stock Exchange and Nasdaq, should require inclusion of the metrics in the proxy statement to provide context for existing fee disclosures and to make investors aware of the metrics without having to search for them separately.

See

Schedule 14A.

Information required in proxy statement,

17 CFR 240.14a-101. If action is to be taken at a shareholders' meeting with respect to the election of directors, Item 7 of Schedule 14A requires the proxy statement to contain a report of the audit committee as specified in Item 407 of Regulation S-K, 17 CFR 229.407.

One firm suggested that the PCAOB gather the information underlying the metrics via inspection. However, this would defeat the objective of enhancing transparency to enable better informed decision-making by stakeholders.

Another firm expressed concern that engagement-level metrics may not be useful because they will become available only once a year, with a delay of up to 35 days after the audit is completed until Form AP is filed. However, an investor-related group disagreed with this argument indicating that the financial results for companies are delivered with the same, or a more significant delay, to investors and usefulness of the information is not simply its immediate discrete disclosure but the trends in the information within and between companies over time.

In addition, commenters raised general concerns about metrics requirements, including

• the risk that publishing metrics would involve releasing confidential or nonpublic information, which may violate confidentiality obligations imposed by the American Institute of CPAs (“AICPA”) Code of Professional Conduct or conflict with non-US laws and regulations;

• diverting the attention of the engagement team and firm resources away from performing quality audits;

• lessening competition by releasing competitively sensitive information and reducing the number of registered public accounting firms, particularly in foreign jurisdictions, that would be available to play a substantial role in a large multinational group audit;

• being burdensome and costly to compile data for each individual engagement;

• becoming a “check the box” or compliance exercise that may not improve audit quality or provide meaningful transparency to stakeholders; and

• implying that audit committees have a legal duty to consider metrics even though the PCAOB has no authority over audit committees.

The Board adopted requirements for firms to provide both firm- and engagement-level metrics, with changes from its proposal as described in further detail below. The Board continues to believe that public reporting of a mandated set of firm- and engagement-level metrics will provide stakeholders with comparable information that is not currently available, would otherwise be difficult or impossible to obtain, and will position them to make better-informed decisions. Further, the Board believes that required public disclosures will facilitate development of standardized data for consistent comparison and analysis over time, which will be more valuable than the ad hoc, individualized disclosures that some firms have made on a voluntary basis or the information that could be provided by individual firms to audit committees or investors without any basis for cross-firm comparisons. The Board believes the new data points, when analyzed together with the audited financial statements, critical audit matters, auditor tenure, and other information about the firm and the engagement on Form 2 and Form AP, will provide more information about the audit and, therefore, the reliability of the auditor's report.

The Board considered comments questioning the value of metrics, whether they will be used by investors and other stakeholders or would represent only a “check the box” compliance exercise, and whether they might contribute to information overload or have other negative consequences. Based on comments received from investors and other data provided, among other factors, the Board does not share those concerns. Investors and investor-related groups have commented throughout the course of this rulemaking that the metrics will be useful. A firm-related group commented that, in a recent investor survey it conducted, almost all of the metrics the Board proposed were regarded as “extremely helpful” by between 30% and 50% of participating investors. (The commenter did not indicate whether the survey allowed positive responses other than “extremely helpful”—for example, “helpful” or “somewhat helpful”—and, if so, what the results were inclusive of those responses.) By contrast, the Board understands—including from one commenter that argues that the voluntary approach should be maintained—that voluntarily provided metrics have not proven useful to investors. The Board believes that the value of voluntary metrics is undermined by a lack of the consistency and comparability, as well as enhanced credibility, that can be achieved through common definitions and calculations and required reporting.

The Board also noted that similar objections—that the new information would not be used or would be confusing or misleading—were raised by many of the same commenters in connection with the Board's last two rulemakings requiring disclosure of additional information about audits and auditors: Form AP reporting of the name of the engagement partner and information about other firms participating in the audit, and auditor communication of critical audit matters. In both cases, these commenter concerns appear unsubstantiated. The Form AP data set is now one of the most frequently visited areas of the PCAOB website.

Indeed, in an investor survey conducted by one commenter, 79% of respondents indicated that they often or very often navigate to AuditorSearch, the search tool for Form AP data on the PCAOB website. As for CAMs, in a recent investor survey conducted by the same commenter, over 90% of the respondents indicated that CAMs play an important role in their investment decision-making.

In addition, data aggregators, such as Audit Analytics, compile and make available data on CAMs, which suggests market demand for that information. The Board's experience suggests that contrary to concerns about irrelevance and information overload, stakeholders seek out additional information about auditors and audit engagements when it is available.

https://pcaobus.org/resources/auditorsearch

The Center for Audit Quality Critical Audit Matters Survey (July 2024) at 9.

In lieu of public reporting, the Board considered the alternative of encouraging or mandating communication of engagement-level metrics to the audit committee, as many commenters suggested. However, such an approach would not achieve the Board's goals of increasing the information about audit engagements and audit firms available to investors and other stakeholders, and fostering comparability of data through mandated reporting based on common definitions and specified calculations. The Board also believes that a non-prescriptive, principles-based approach, whereby firms would potentially develop and discuss different metrics for different audit committees, drawn from different data and based on different definitions and calculations and changing over time, could itself create significant costs and challenges for firms without necessarily contributing to the audit committee's ability to understand the audit it oversees in a broader context.

Of course, under the Board's final requirements auditors and audit committees will be free to discuss performance metrics—whether the metrics required under the Board's rules or additional or alternative metrics they develop themselves—through the kinds of discussions the commenters recommend. The Board is not requiring that auditors make metrics-specific communications at this time. However, where matters addressed by the metrics are the subject of an otherwise required communication, discussion of the metrics may be a useful part of the communication.

The Board appreciates that the audit committee is charged by statute with responsibility for oversight of the auditor, and the Board cannot, and do not purport to, impose any obligations on audit committees or imply that audit committees have any specific duties in relation to metrics. The Board assumes that audit committees will fulfill their responsibilities as they see fit; whether that entails, for example, discussion of metrics with auditors or proxy statement disclosure regarding their consideration of metrics will be for them to determine.

But the Board also notes that investors—including many investors that are themselves fiduciaries for others—have their own investment and voting decisions that they are called upon to make, like decisions about electing members of the board of directors, including those who serve on the audit committee, and ratifying the appointment of the auditor. And in the current environment, they have extremely limited access to information about the auditor's work—work that, after all, is undertaken for their benefit. By requiring public reporting of metrics, the Board is not suggesting that investors will have the ability or the responsibility to oversee the work of the auditor. However, they will have the

opportunity to gain new perspective to inform their decision-making. The Board agrees with a commenter that, far from undermining investor trust, this new transparency should enhance that trust by helping investors better understand the audit and the audit committee's oversight of it.

The Board has determined to go forward with published metrics so that investors and other stakeholders will have direct access to the metrics and so that comparative data can be accumulated that will allow comparisons to be made across different firms and different engagements. As discussed below, the Board believes it has addressed many of the challenges associated with potential lack of comparability by narrowing the metrics to a group that it believes will send relatively clear, comprehensible signals that users will be able to interpret when taken together with the other information about the issuer and the auditor that is available to them. In the Board's view, public reporting is the most practical way for comparative data to be created and disseminated. While two commenters suggested that audit committees could obtain comparative data when they consider changing auditors, the Board's understanding is that is a relatively infrequent occurrence, and in any case is not a route available to other stakeholders.

The Board also believes that gathering data and calculating the final metrics, given the subjects they address, will not be overly time-consuming or burdensome, and will not entail disclosure of confidential or otherwise protected information, as discussed below.

Regarding the concerns of possibly disclosing confidential information and competition lessening effect due to public reporting of metrics; unintended consequences, including attention diversion, litigation and reputation risks, competition lessening effect, and audit labor market impacts; and costs, see discussions below.

3. Legal Authority

Some commenters questioned the Board's statutory authority to require all or some of the proposed firm and engagement metrics. In addition, one commenter stated that the statement in the proposal that “this [rulemaking] would advance investor protection and promote the public interest by enabling stakeholders to make better informed decisions, promoting auditor accountability and ultimately enhancing capital allocation and confidence in our capital markets” is beyond the Board's rulemaking authority. Other commenters questioned the Board's authority with respect to specific aspects of the rulemaking. Two commenters questioned how the requirements could extend beyond the accounting firms' issuer and broker-dealer audit practices. One of these commenters stated that it believes including non-issuer information could be misleading to stakeholders who may mistake such disclosures as being within the PCAOB's purview and that including the non-issuer portion of a firm's audit practice appears contradictory to the Board's pursuit of clarity through its proposed PCAOB Rule 2400,

Proposals Regarding False or Misleading Statements Concerning PCAOB Registration and Oversight and Constructive Requests to Withdraw from Registration.

This commenter suggested that if the Board intends to make clear what lies within and outside its purview through proposed PCAOB Rule 2400, the rulemaking related to firm- and engagement-level metrics should reflect similar principles.

Another commenter suggested that several new requirements seem to require public production of information that is confidential or otherwise outside of or unnecessary for the Board's oversight function.

To date, the Board has not adopted proposed PCAOB Rule 2400.

In accordance with Sarbanes-Oxley, the PCAOB is endowed with regulatory powers designed to ensure transparency, uphold high professional standards, and protect investors in the auditing process. This discussion outlines the statutory basis for this rulemaking as outlined in Sections 101, 102, and 103 of Sarbanes-Oxley. In particular, here and throughout the release, the Board discussed how the final rules will increase transparency regarding audit practices, increase the comparability and accessibility of information available to investors and others, and enhance investors' ability to efficiently and effectively make investment and voting decisions, in line with the Board's statutory mandate.

Section 102 of Sarbanes-Oxley mandates that each registered firm must submit an annual report to the Board. Beyond this, Section 102 grants to the Board the authority to require more frequent and detailed reporting, empowering the Board to require registered firms to report “such additional information as the Board or the Commission may specify.”

This authority must be exercised through PCAOB rulemaking that deems the information “necessary or appropriate in the public interest or for the protection of investors.”

This statutory language supports the Board's authority to adapt its reporting requirements to the evolving needs of audit oversight, thereby enhancing investor protection and public confidence in the financial markets.

15 U.S.C. 7212(d).

15 U.S.C. 7212(b)(2)(H).

The metrics the Board adopted in its release are important for increasing transparency regarding the practices of registered firms, particularly in their audits of issuers. By mandating the disclosure of this information, the PCAOB will enable investors and other market participants to have a clearer and more comprehensive view of the operational practices of the registered firms that audit issuers. This enhanced transparency will allow investors and other market participants to make more informed decisions, contributing to the integrity and reliability of financial reporting and audit practices.

Additionally, Section 103 of Sarbanes-Oxley grants the Board authority to establish auditing standards and quality control standards “to be used by registered public accounting firms in the preparation and issuance of audit reports” as “may be necessary or appropriate in the public interest or for the protection of investors.”

Although the information the PCAOB requires from registered firms does not appear directly within audit reports, it is comfortably within the ambit of the Board's rulemaking mandate under Section 103—especially given the flexibility inherent in the statutory language.

In brief, this mandate involves establishing the procedures and practices of registered firms that promote the quality and accuracy of audit reports, which extends to

overseeing how firms report their operational conduct.

15 U.S.C. 7213(a)(1).

See Loper Bright Enters

Raimondo,

144 S. Ct. 2244, 2263 (2024) (the term “appropriate” “leaves agencies with flexibility” (citation and quotation marks omitted));

Kisor

Wilkie,

588 U.S. 558, 632 (2019) (Kavanaugh, J., concurring in the judgment) (the word “appropriate” “afford[s] agencies broad policy discretion”);

Metrophones Telecommc'ns, Inc.

Global Crossing Telecommc'ns, Inc.,

423 F.3d 1056, 1068 (9th Cir. 2005) (“Given the reach of the [FCC's] rulemaking authority under 201(b)”—which granted to the FCC the “broad power to enact such 'rules and regulations as may be necessary in the public interest to carry out the provisions of this Act' ”—“it would be strange to hold that Congress narrowly limited the Commission's power to deem a practice 'unjust or unreasonable.' ”);

Brown

Azar,

497 F. Supp. 3d 1270, 1281 (N.D. Ga. 2020) (“[W]hen an agency is authorized to 'prescribe such rules and regulations as may be necessary in the public interest to carry out the provisions of the Act,' Congress' intent to give an agency broad power is clear.”),

appeal dismissed as moot,

20 F.4th 1385 (11th Cir. 2021) (mem.).

In alignment with Section 103 of Sarbanes-Oxley, the PCAOB views the rule, form, and associated amendments requiring the metrics as fundamental auditing and quality control standards at their core. The information required by the metrics relates to practices of the firm that directly bear on the conduct of audits and ultimately the quality and accuracy of audit reports. By mandating the submission of this information to the PCAOB, the Board provides deeper transparency into the auditing practices that support issuer audits. The information required by the metrics will also support the Board's oversight and enhance the reliability of audit performance.

See, e.g.,

Mark DeFond and Jieying Zhang,

A Review of Archival Auditing Research,

58 Journal of Accounting and Economics 275, (2014) (asserting that audit quality improves financial reporting quality by increasing the credibility of the financial reports).

Finally, the Board notes that Section 101 of Sarbanes-Oxley provides ancillary authority that supports the Board's primary powers in Sections 102 and 103.

This provision enables the PCAOB to develop standards that protect investors and serve the public interest.

For example, Section 101(c)(5) empowers the Board to perform additional duties or functions that are “necessary or appropriate to promote high professional standards among, and improve the quality of audit services offered by” registered firms and their associated persons. 15 U.S.C. 7211(c)(5). This provision empowers the PCAOB to implement measures that enhance the integrity and efficacy of the auditing profession. In addition, Section 101(g)(1) provides rulemaking authority to the Board, specifying that the Board's rules, subject to the approval of the Commission, are to “provide for the operation and administration of the Board, the exercise of its authority, and the performance of its responsibilities under” Sarbanes-Oxley. 15 U.S.C. 7211(g)(1).

Some firms and firm-related groups questioned the Board's statutory authority to require the reporting of the proposed metrics on the basis that the Board's rulemaking authority should correspond directly with the type of information outlined in Sarbanes-Oxley Section 102(b)(2) for the contents of registration applications. However, this interpretation significantly misreads the reporting provisions of Sarbanes-Oxley. Sections 102(b)(2)(H) and 102(d) clearly grant to the Board broad authority to require additional information in periodic reports that it finds necessary or appropriate to serve the public interest or protect investors.

Section 102(b)(2) generally details baseline requirements for reported information and Section 102(b)(2)(H) primarily details requirements for any additional information the Board requires, providing that additional information in reports must be deemed “necessary or appropriate in the public interest.” It is incorrect to construe those provisions as imposing a rigid limitation that restricts the content of reports exclusively to the types of information specified in Section 102(b)(2)(A)-(G) for initial registration applications. Indeed, Section 102(b)(2)(H) expressly contemplates the provision of “other information” the Board may require through rulemaking. This provision shows that Congress intended to provide the Board authority to require additional information beyond that enumerated in Section 102(b).

By referencing this provision, Section 102(d) applies this broader authority to periodic reports that the Board finds necessary or appropriate to serve the public interest or protect investors. The Board's release has outlined how the disclosures mandated by the metrics will enhance transparency and bolster the PCAOB's oversight capabilities. Such enhancements are designed to ultimately improve audit quality. For example, as discussed more completely below, the final metrics will enhance (i) audit committees' ability to efficiently and effectively monitor and select auditors as well as (ii) investors' ability to efficiently and effectively make decisions about ratifying the appointment of their auditors and allocating capital. In addition, as an important indirect benefit, the final rules could further spur competition to the benefit of investors. Thus, the final rules align with the overarching objectives of Sarbanes-Oxley, and therefore are appropriate exercises of the Board's authority under Section 102.

See Navajo Nation

Dalley,

896 F.3d 1196, 1212-13 (10th Cir. 2018) (“Congress expressed its scope in broad terms, to encompass ‘any other subjects that are directly related to the operation of gaming activities.' But the key word here is ‘other.' . . . And applying the ordinary and everyday meaning of the word ‘other' . . ., it becomes patent that Congress did not intend for that clause to address the ‘subjects' covered in the preceding clauses of subsection (C)[.]” (citation omitted));

see also, e.g., Madison

Virginia,

474 F.3d 118, 133 (4th Cir. 2006) (“other Federal statute prohibiting discrimination” is a “catch-all provision”);

Meehan

Atl. Mut. Ins. Co.,

2008 WL 268805, at *7 (E.D.N.Y. Jan. 30, 2008) (“The term ‘other policies' now accomplishes the task of including all governmental activity and becomes a catch-all phrase including all other policies not already implied[.]” (citations and quotation marks omitted)).

In response to the concerns raised by firm commenters regarding the Board's use of Sarbanes-Oxley's relevant “necessary and appropriate” clauses, it is important to clarify that the Board has not claimed any implicitly delegated authority beyond the regulatory parameters established by Congress. The use of the Section 101, 102, and 103 authorities in this rulemaking is firmly grounded within the explicit mandates provided by Sarbanes-Oxley, and is consistent with the statutory limitations and directives outlined in those provisions. The Board's application of these authorities has been specifically aimed at enhancing the transparency and quality of audits of issuers and broker-dealers, which directly aligns with the Board's core mission to protect investors and the public interest. The Board has utilized the tools provided by Sarbanes-Oxley to carry out the responsibilities entrusted to it.

Other commenters raised concerns about the Board's authority to include metrics extending beyond a registered firm's issuer and broker-dealer audit practice. One of these commenters asserted that including non-issuer information could be misleading to stakeholders who may mistake such disclosures as being within the PCAOB's regulatory purview. The Board disagrees with these comments. The metrics the Board is requiring are designed to provide information that directly relates to firms' audits of issuers, and will be important for such matters as assessing auditor performance and resource allocation as it relates to issuer audits. For instance, in the Workload metric, firms are required to report not only the hours worked dedicated to issuer engagements but the entire workload of the personnel involved. This includes hours spent on non-issuer engagements, training, practice development, staff development, or other firm activities. A narrower focus, which only accounts for hours worked on issuer engagements, could provide an incomplete picture. It would fail to reflect the true extent of the auditor's commitments and how these may impact their capacity and focus on tasks in issuer audit work. Without this comprehensive view, investors and other stakeholders would lack important information to assess the potential risks over overcommitment on audit quality and auditor performance in audits of issuers. By requiring firms to report certain narrowly tailored information regarding their audit engagements and audit practices, the Board is not seeking to extend its purview to regulate those aspects of the firm's operations. Rather, in line with the Board's statutory authority, it is enhancing the transparency and the depth of information available to investors and other stakeholders concerning firms' audits of issuers.

4. Summary of the Metrics

The Board adopted a set of firm-level and engagement-level metrics across eight areas. Firm-level metrics will provide a basis for drawing comparisons between firms as well as a baseline for evaluating engagement-level metrics. Engagement-level metrics will elicit more granular information and will enable comparisons over time and across engagements both within the firm and across other firms.

Firm-level metrics will be disclosed on a new Form FM,

Firm Metrics,

and engagement-level metrics will be disclosed on a revised and renamed Form AP, together with the other engagement-specific information currently required (the name of the engagement partner and information regarding other firms participating in the audit).

Most of the metrics the Board has adopted will be presented at both the firm and the engagement level. However, two metrics will be reported only at the firm level, because the Board believes aggregated data will be most meaningful or appropriate.

The metrics are:

•

Partner and Manager Involvement.

Hours worked by senior professionals relative to more junior staff across the firm's large accelerated and accelerated filer engagements and on the specific engagement.

•

Workload.

For senior professionals who incurred hours on large accelerated and accelerated filer engagements, average weekly hours worked on a quarterly basis, including time attributable to all engagements, administrative tasks, training, and all other matters.

•

Training Hours for Audit Personnel.

Average annual training hours for partners, managers, and staff of the firm, combined, across the firm and on the engagement.

•

Experience of Audit Personnel.

Average number of years worked at a public accounting firm (whether or not PCAOB-registered) by senior professionals across the firm and on the engagement.

•

Industry Experience.

Average years of career experience of senior professionals in key industries audited by the firm at the firm level and the audited company's primary industry at the engagement level.

•

Retention of Audit Personnel (firm-level only).

Continuity of senior professionals (through departures, reassignments, etc.) across the firm.

•

Allocation of Audit Hours.

Percentage of hours incurred prior to and following an issuer's year end across the firm's large accelerated and accelerated filer engagements and on the specific engagement.

•

Restatement History (firm-level only).

Restatements of financial statements and management reports on ICFR that were audited by the firm over the past three years.

Figure 1. Firm and Engagement Metrics Reporting

Firm and engagement metrics reporting

Firm-

level

Engagement-

level

Partner and Manager Involvement

✓

Workload

✓

Training Hours for Audit Personnel

✓

Experience of Audit Personnel

✓

Industry Experience

✓

Retention of Audit Personnel

✓

Allocation of Audit Hours

✓

Restatement History

✓

The final suite of metrics focuses primarily on information about audit personnel. The Board believes these metrics will provide new insights into how engagements are staffed, including the extent of involvement of senior personnel; auditors' overall workload; retention of personnel across the firm; and levels of training, audit experience, and industry-specific expertise. The final metrics will also provide information about the extent of audit work completed prior to the issuer's year end, an aspect of the audit process that the Board believes is associated with improved audit outcomes, and about the firm's history of restatements, a key measure of audit outcomes.

This new information will allow users to draw inferences about audits and audit firms that are not possible today. Some may relate to specific metrics. For example, a heavy workload for a particular engagement team relative to the firm average or compared to peer firms may raise questions about the quality of the work performed. Conversely, a relatively high level of industry-specific experience, particularly for an engagement in an industry requiring specific accounting and auditing expertise, would be a positive signal. Other inferences may relate to combinations of metrics. For example, the personnel-related metrics, taken together, give an overall sense of how an engagement is staffed that can be compared to firm averages and to engagements for similar issuers. It is possible that the precise numerical values of metrics may be important in some cases, but in general the Board believes the metrics will be more useful to convey a sense of whether a particular engagement or firm appears fairly typical or is an outlier in one or more respects. This should provide a richer context for understanding the work of the auditor than the current environment of almost no publicly available information.

Based on the Board's oversight activities, it appears that the largest firms are already tracking data in many of these areas,

and the Board believes that all firms should be able to capture the data required by the metrics without undue burden. Many of the metrics are based on data that firms already track or will be required to track for purposes of other PCAOB requirements. For example, Partner and Manager Involvement and Allocation of Audit Hours are based on the same “total audit hours” that firms are already required to track for Form AP reporting. Training hours will reflect the same information that firms track to ensure proper licensing of their personnel. Restatement data, to the extent firms are not already tracking it, is required to be tracked under QC 1000.

In addition to required data, many firms track the experience of their personnel, as well as industry experience, for use in marketing materials and for inclusion in requests for proposals, and some firms already track staff retention and turnover metrics as part of their human capital management. Firms should be able to generate other data required by the final metrics, such as Workload,

from their existing timekeeping systems with minimal additional effort.

This point is discussed more fully below.

See

QC 1000.64g, Note to QC 1000.67e.

Below, the Board provides a detailed discussion of key terms and concepts used in the metrics, as well as a description of each final metric and its calculations.

5. Comparability

Developing comparable data regarding firms and engagements has been one of the Board's key objectives throughout this rulemaking. As noted previously, the information currently provided in firm transparency reports is not based on common definitions or methods of calculation, which prevents users from being able to make comparisons across firms or over time. The Board believes that an important benefit of mandatory reporting will be the ability of investors and other stakeholders to compare the metrics, within the same firm over time, among firms, and among engagements.

The basic approach of the Board's final rules—a required set of metrics, derived from specified calculations incorporating consistently defined terms and concepts—is designed to generate comparable data with respect to firms and engagements that are subject to the reporting requirements. One investor-related group agreed that standardized and contextualized metrics will provide investors with a consistent data set for analysis over time and for comparison between companies and firms and a set of standardized data is more valuable than the ad hoc individual measures that some firms have made on a voluntary basis.

In some cases, considering the importance of scalability, the Board has also designed the proposed metrics as percentages (

e.g.,

relative to total audit hours) or averages where the Board believes that will provide more comparability across firms and engagements than methods based on absolute amounts.

Several firms and firm-related groups expressed skepticism about whether the metrics could generate comparable data because of inherent differences across firms and engagements, either with regard to any metrics or engagement-level metrics specifically. For example, one commenter said that differences between firms and among engagements will create heterogeneity in the underlying data, so that cross-sectional differences and changes over time will be unclear and challenging to interpret, and will cause confusion. Another commenter emphasized the importance of comparability between larger and smaller firms so that investors and audit committees can interpret them appropriately.

Two commenters stated that if context, including qualitative aspects of data, is necessary to understand the metrics, that would suggest that the data are not comparable, which could mean that the metrics are not decision-useful and are at risk of misinterpretation. One commenter expressed the opposite concern, that metrics would become homogenized over time due to peer comparisons, making them considerably less useful to investors.

One commenter asserted that the Board's choices in defining terms and specifying calculations undermine the comparability of the metrics—for example, because some metrics include issuers other than accelerated or large accelerated filers, the Board's proposed industry classification taxonomy differs from the one used by the SEC, and its proposed period for measuring restatements differs from the period used by a commonly-used data provider. These issues are addressed below in the discussion of the final metrics.

With regard to firm-level metrics, several commenters expressed concern that some or all of the metrics would not be comparable across firms. They cited factors such as the size of the firm (including the number of issuer and non-issuer engagements), specialization of the firm's audit practice, strategies, priorities, investments, organizational structure and quality control system of the firm, and size of the issuer (which affects, among other things, whether an integrated audit is required).

Several commenters expressed particular concern about comparability between U.S. and non-U.S. firms because non-U.S. firms tend to have structural, jurisdictional, and cultural aspects that differ from U.S. firms. In addition, non-U.S. firms may have a relatively smaller issuer audit practice, which could skew metrics that are based on the entire practice because there may be significant differences between issuer audits and the rest of the firm's audit practice, and could increase the volatility of metrics based on the issuer practice because of its small size. One of these commenters also criticized the application of metrics to non-U.S. firms because they would not capture the qualitative benefits of being a part of a global network (

e.g.,

use of consistent policies and procedures that drive use of training, technology, consultation and other centrally available support across the network). Another commenter also noted that some non-U.S. firms may publicly report firm-level metrics on similar topics, such as workload, using different calculation methods under PCAOB and local reporting requirements, which would be costly for these firms and potentially confusing to the users.

Many commenters expressed concern that engagement-level metrics are inherently incomparable. Commenters suggested a number of factors that could affect the comparability of engagement-level metrics, some relating to the firm (

e.g.,

the firm's organizational structure, IT systems, resources, and audit methodologies), some to the individual audit engagement (

e.g.,

selected audit approaches including substantive analytical procedures or test of details, audit findings including internal control deficiencies, use of technology, first year or recuring engagement, and risk of material misstatement), and some to the issuer (

e.g.,

business structure (including the extent of centralization or decentralization and number of business units), complexity of the organizational structure and IT infrastructures, number of significant unusual transactions, and business and industry risks affecting the issuer). In addition, one commenter noted that there are significant developments (

e.g.,

in delivery models, technology, and professional rules and standards) that affect the way audits are performed each year.

The Board solicited comment on whether comparability could be enhanced by further segmenting firm-level reporting (for example, on the basis of the size of the firm or the size of the issuer) or engagement-level reporting (for example, on the basis of industry sector, region, or whether it is a first-year audit). One commenter stated that all stakeholders would benefit from a consistent calculation methodology and comparable presentation format of firm-level reporting. Several commenters indicated that more disaggregated data for engagement- or office-level reporting could be useful, though one acknowledged that this benefit would need to be weighed with the cost of requiring this data. Other commenters cited challenges associated with providing subsets of information, including that firm and issuer sizes change over time and that smaller firms' metrics could disclose individual client information. One of these asserted, however, that the reported data could be disaggregated and compared without additional data fields being collected.

The Board determined not to collect additional data fields or require additional segmentation of the metrics at this time because of the potential cost and complexity it would add to the process of compiling and reporting the metrics. Stakeholders that want to perform more detailed analysis (for

example, segmenting data based on size of the issuer, size of the firm, region, or industry sector) will be able to do so using information that is already publicly available in combination with the metrics.

The Board understands that firms differ from each other in the number and types of audits they perform and in their resources, such as the number, experience, and degree of specialization of their people as well as their access to technological resources and resources provided by networks. The Board also understands that engagements differ based on factors such as the size of the engagement, the industry of the company, the risks related to the company and the audit, whether it is a new engagement for the firm or the engagement partner.

However, the Board does not believe that such differences make useful, comparable metrics impossible. As one commenter noted, investors are experienced in using a wide array of performance metrics, such as non-GAAP measures and key performance indicators, and are able to analyze them despite a lack of perfect comparability between companies or over time. Indeed, the commenter argued that, due to the nature of the audit process and audit firms, the proposed firm and engagement metrics have a greater propensity for comparability than many companies whose financial results investors already analyze.

The Board believes it has also addressed many of the challenges associated with potential lack of comparability by narrowing the metrics to a group that should send relatively clear, comprehensible signals in a variety of different contexts. Metrics on workload, training hours, experience in public accounting, retention of personnel, and restatement history should send a clear signal, regardless of the circumstances of the firm and the engagement. Metrics on partner and management involvement and allocation of audit hours may be more influenced by those circumstances. For example, unusually high involvement by senior professionals could signal an especially complex audit or one that encountered unexpected problems; a relatively low percentage of audit hours incurred before year end could signal a poorly planned audit or simply that, due to the nature and scope of a company's business, it was unnecessary or impractical to perform many audit procedures prior to year end. The Board has limited the scope of the Partner and Manager Involvement, Workload, and Allocation of Audit Hours metrics to large accelerated filer and accelerated filer engagements to enhance the comparability of the underlying data. The metric on relevant industry experience may also be influenced by the circumstances of the firm and the engagement in that industry experience may be more important in some industries than others. However, the Board believes users will be able to interpret this metric when taken together with the other information about the issuer and the auditor that is available to them. Common definitions and consistent methodology will also contribute to comparability. Taken together, the metrics should enable users to make both broad comparisons across the full population of reporting firms and accelerated filer and large accelerated filer audits, and more targeted comparisons across smaller subgroups of similar firms and engagements, and will be a very significant improvement over the information that is currently available—ad hoc reporting by the largest firms at the firm level, and essentially no information at the engagement level.

Of course, any additional context that firms believe is necessary for proper understanding can be provided as narrative disclosure. While narrative disclosure will not make the metrics comparable, it will balance the comparability of standardized metrics disclosure with the ability to provide further context if needed. For example, a firm could provide an explanation for why a metric changed significantly from what was reported in the prior year.

6. Time Period Covered by the Metrics

Firm-level metrics are reported as of September 30, generally covering the period from October 1 of the previous year through September 30.

Specific commenter feedback regarding the reporting period is discussed in detail below. Firms are required to file Form FM on or before November 30, 61 days after the end of the reporting period, also discussed below.

For two of the metrics areas the Board proposed, Quality Performance Ratings and Compensation and Audit Firms' Internal Monitoring, firms would have reported based on their own internally established cycles. Neither of these is included in the metrics the Board adopted.

Related to the Training Hours for Audit Personnel metric, the Board understands that many firms already have defined periods or cycles that may not align with the final reporting date (

e.g.,

for which the firm tracks training data in order to comply with state continuing professional education (“CPE”) reporting requirements). Therefore, the firm is permitted to use its already-established training calendar cycle for calculation and reporting of this metric, provided that the cycle covers a 12-month period (which is expected to be consistently applied). The Board does not believe that the data will be especially sensitive related to any particular 12-month period. The Board believes allowing firms flexibility to use their internally established dates for this metric is appropriate and still provides the comparability discussed above since all firms would be reporting this metric based on a 12-month period.

For engagement-level metrics, which will be reported on Form AP, the data and information underlying the reported metrics will generally be based on the most recent period's audit. However, some engagement-level metrics relate to information about personnel on the engagement, such as Experience of Audit Personnel, and these metrics will reflect information that may not be directly related to the most recent period's audit. Specific commenter feedback regarding the reporting period and filing date of Form AP is discussed in detail below.

In addition, the time period covered by each metric also is discussed in more detail below.

7. Rounding and Use of Estimates

Many of the metrics involve the calculation of a numerical value that may result in very small fractional parts. Consistent with the proposal, firms are required to report metrics that are rounded to the nearest whole number, except where additional decimal places (no more than two) are needed to properly interpret the result or to enable comparison to prior periods.

In calculating the firm- and engagement-level metrics, actual amounts should be used, if available. However, if actual amounts are unavailable, firms are permitted to use a reasonable method to estimate the components of a calculation. This approach is consistent with existing Form AP, which allows firms to use a reasonable method to estimate certain information required in the calculation of total audit hours.

Firms are also required to document in their files the method(s) used to estimate amounts when actual amounts are unavailable.

See

Instructions to Part IV of Form AP as currently in effect. Under the amendments to Form AP adopted by the Board, this appears in General Instruction 9, as amended.

Commenters generally agreed with the proposed approaches, with one commenter agreeing that rounding and estimation should be permitted for all metrics. Other commenters stated that rounding and estimation will be

especially important for metrics related to the reporting of hours, with two of these pointing to the subjectivity involved with the proposed metrics that would require allocation of hours to specific audit areas.

One commenter stated that the PCAOB should not restrict the number of decimal places. However, the Board believes that limiting reporting to hundredths will allow for the presentation of an appropriate level of detail while ensuring comparability of presentation and avoiding the technical issues that could arise with unlimited digits.

The proposed Audit Hours and Risk Areas metric is not included in the metric that the Board adopted, as discussed further below.

8. Operational Narrative Disclosure

In order to give firms the ability to provide any context they thought necessary for an appropriate understanding of the reported metrics, the Board proposed that firms would be permitted, but not required, to provide a brief narrative disclosure (no more than 500 characters per metric) to accompany any, or all, of the firm-level and engagement-level metrics reported on Form FM or Form AP. While some commenters agreed with the proposal to provide firms with the ability to include an optional narrative to accompany the metrics, one commenter explicitly agreed with the proposed 500-character limit, one commenter asserted that the 500-character limit greatly limits the context that could be provided, and one commenter suggested revising the character limit to no more than 1,000 characters. Two commenters suggested increasing the character limit beyond 500 characters without suggesting an upper limit. Approximately half of the commenters suggested that there should be no character limit imposed on the optional narrative. A firm-related organization also suggested that the narrative be mandatory and not optional, while a firm suggested that the utility of metrics would be diminished without potentially extensive accompanying narrative.

One commenter suggested that firms can also provide a link in the narrative to their transparency reports and audit quality reports if they wish to provide further context to the metrics. One commenter stated that there should be guidelines such as the narratives being factual, directly relevant to the metric, and free from promotional or marketing language. Another commenter stated that it would provide the following narrative in Form FM, potentially with respect to every firm metric:

We do not believe any one metric or even a combination of metrics is necessarily indicative of audit quality, nor is it useful or productive to speculate on the questions reviewers of this information may have on each metric for every audit. We further discuss this metric in our Audit Quality Report, along with the measures we believe are better indications of our audit quality.

See

Letter from PricewaterhouseCoopers LLP (June 7, 2024).

Taking into consideration commenter feedback, the Board is retaining the option to provide narrative disclosure with each metric but expanding the character limit to 1,000 characters. The Board believes this character limit strikes the right balance between allowing firms the ability to provide any contextual information they believe is necessary to interpret the results of a particular metric while also managing the length of the forms and keeping them to a manageable size.

Nothing in PCAOB rules and forms, including Form FM and Form AP, provides for incorporation by reference of external documents or other materials.

In addition, in an effort to assist firms in making the optional narrative disclosures as helpful and substantive as possible, to help remind firms of their responsibility under QC 1000 to produce and report information that is accurate and not misleading, and to reduce the possibility that users will find the narrative confusing or in conflict with the required metrics, the following provision has been added as a general instruction to Form FM and a note to Part VI of Form AP to provide additional direction to those firms electing to provide an optional narrative for any metric:

“When the Firm elects to provide a brief narrative to accompany any of the Items in [the part of the form in which metrics are reported], language should be concise and focused on the reported metrics, with a view to facilitating the reader's understanding of the metrics.”

Firm and Engagement Metrics

1. General Comments

Investors and investor-group commenters were broadly supportive of the proposed metrics, saying that the metric areas would provide investors with decision-useful information about audit firms and audits. However, they expressed mixed views on certain specific metric areas. These commenters also suggested additional metric areas, including investments in both training audit professionals and in technology, and further details related to PCAOB inspection results (

e.g.,

Part I.A deficiencies). The Board has addressed these comments in the discussion of each metric area below. On the topic of implementation of the proposed metrics, one commenter requested analytical tools and research showing how investors might use metrics. The information disclosed on Form FM will be available in a searchable database on the Board's website, similar to the Form AP database, and will provide users of the information the ability to perform comparisons across engagements.

Firms and firm-related groups were broadly supportive of some of the proposed firm-level metrics. However, they generally opposed public reporting of engagement-level metrics, asserting that no amount of context around engagement-level metrics would provide an appropriate basis for public reporting. These commenters suggested that the audit committee, being deeply familiar with the company, the audit, and the independent auditor, is the only party equipped to appropriately interpret the metrics. Instead of public reporting, they suggested several alternatives, including adding a requirement for communication to the audit committee under AS 1301; expanding SEC requirements for audit committee disclosures; encouraging voluntary reporting; issuing PCAOB Spotlights, practice alerts, or guidance; and performing further outreach before adopting any requirements. These alternatives are discussed in greater detail above. One commenter suggested that the PCAOB take a proactive role in educating all users as to the proper use of reported metrics, including the need for them to be interpreted in context and making users aware of potential dangers and drawbacks associated with a mere comparison of isolated metrics between firms. The Board discussed the forms and how the data can be accessed in more detail below.

Commenters generally expressed concern that proposed metrics were not all calculated from the same data sources. Some metrics were calculated on the basis of all audit engagements, others on the basis of issuer engagements, and engagement-level metrics on the basis of large accelerated and accelerated filer engagements. Some commenters suggested that calculating firm-level metrics based solely on total audit hours on large accelerated and accelerated filer engagements may result in more comparable data among firms. The Board discussed this in greater detail below.

Other commenters recommended that the PCAOB establish criteria for determining which metric areas warrant public disclosure, so as to build in flexibility over time and minimize the risk of misinterpretation. The following

criteria were among those suggested by these commenters:

• Is the metric's relation with audit quality unambiguous?

• Can the metric be appropriately interpreted on its own, without additional context (

e.g.,

client mix or complexity—size, industry, international operations; firm's audit approach; etc.)?

• If disclosure of the metric results in behavioral change in audit firms, does research suggest the change will improve audit quality or, at least, not adversely impact audit quality?

• Will the metric require firms to develop systems, processes, and procedures that they do not already have and at a reasonable cost?

• Will the metric impose ongoing administrative burdens on engagement teams that result in a reallocation of effort away from audit quality enhancing activities?

• Will the metrics align with measures used in the system of quality control to manage the audit practice?

• Will the metrics meet the information needs of the users?

• Will the disclosure of metrics not result in the communication of proprietary information?

In responding to commenters and articulating the rationale for adopting the firm- and engagement-level metrics below, the Board considered the views of commenters, including these suggested evaluation criteria. The Board believes some of the suggested criteria would impose an unworkable framework that is inconsistent with the Board's regulatory objectives. For example, the Board does not think it is necessarily practicable to establish an “unambiguous” relationship to audit quality, as suggested, for any individual metric, nor would such an exercise be consistent with the intended uses of the metrics, which envisions their being considered as part of the total mix of information available to stakeholders. Moreover, the Board believes that imposing rigid criteria for each proposed metric imposes too high a burden and is not conducive to effective regulation. It does not permit the Board to account for facts and circumstances unique to individual metrics and their potential uses, nor does it account for the holistic manner in which the Board intends for the metrics to be used or developing information about the utility of the metrics over time.

A number of commenters recommended that the PCAOB engage in additional stakeholder outreach, sponsor pilot programs, or otherwise engage in further study and research before finalizing the metrics requirements, or even withdraw the proposal. Based on the lengthy project history described in Section II, which includes repeated input over time from the Board's advisory groups, multiple rounds of public notice and comment, study of relevant academic literature, study of voluntary firm disclosures, and consideration of actions taken in other jurisdictions, the Board does not believe further study is necessary or that the Board's investor protection mission would be served by delaying adoption of the final rules. However, the Board will monitor and determine if further implementation resources or support is appropriate for users of these metrics.

2. Key Terms and Concepts

As described below, the Board developed certain key terms and concepts that were used in calculating the proposed metrics. Where practical and relevant, these key terms and concepts align with existing definitions in PCAOB standards and rules. In other cases, the Board has developed new definitions and new descriptions of terms specifically for use in the metrics, which are not intended to inform the interpretation of other rules, standards, or forms of the PCAOB. The Board provided the key terms and concepts along with formulas for calculating each metric to drive consistency among firms and engagement teams.

One investor-related group said that the units of account (

e.g.,

hours, years of experience) or measurement used within the proposed metrics are sufficiently standardized and adaptable by firms as they are commonly used within audit practice or defined within the existing standards.

Some commenters raised concerns about the definitions and descriptions of the population used for various metrics or about not having a defined set of terms applicable to all standards and rules. Other commenters questioned whether the PCAOB had provided sufficient guidance to address potential variations in the interpretation and application of terminology used in the metrics or asserted that not having sufficient guidance would add complexity and challenges in calculating the metrics and understanding them or result in inconsistent reporting of metrics or lack of comparability across audit firms and audits engagements. Two of these commenters recommended that the PCAOB create a glossary of defined terms to support consistent use of terms throughout the standards and rules or conduct additional study to evaluate the defined terms in the proposal against terms already defined in other PCAOB standards and rules. Another commenter raised a concern that defining terms and specifying computations for each metric undermines their comparability.

Some firms offered examples of areas where they suggested that clarification would be needed, which the Board discussed below in the context of the relevant metrics. In general, however, the Board continues to believe that the use of defined terms is critical to driving consistent calculation of the metrics.

Other firms questioned why different metrics are based on different underlying data (for example, total audit hours vs. total hours worked or engagement team vs. core engagement team). In general, the Board's choice of the data on which to base a metric is tailored to the intended objective of the metric, and also takes into account the practicality and potential costs associated with gathering data and calculating the metrics. The Board does not believe that metrics based on a single data set would be as clear or as informative.

The Board addresses specific concerns raised in the discussion of each metric below. The Board has clarified certain terms and concepts used or revised the descriptions of proposed terms and concepts after consideration of the specific comments received.

i. Populations Covered by the Metrics

a. Partners and Managers (Used in All Metric Areas Except for Allocation of Audit Hours and Restatement History); Staff (Used in Training Hours for Audit Personnel)

While some of the functional roles played by individuals involved in an audit are otherwise defined and used in the Board's standards (

e.g.,

engagement partner

and EQR),

the Board proposed to clarify following additional functional roles referred to in the metrics to ensure consistent reporting by firms.

See

paragraph .A1 of AS 1201,

Supervision of the Audit Engagement

(“the member of the engagement team with primary responsibility for the audit”).

See

AS 1220,

Engagement Quality Review,

for a description of the engagement quality reviewer's role.

Partners

—Partners or persons in an equivalent position (

e.g.,

shareholders, members, or other principals) who participate in audits;

As noted in the proposing release, the Board believes this is consistent with the use of the term “partner” in the Board's auditing standards. Although the Board does not usually state expressly that partners are limited to those who participate

in audits, as a practical matter the Board's auditing standards apply only in those circumstances.

Managers

—Accountants or other professional staff commonly referred to as managers or senior managers (or persons in an equivalent position) who participate in audits; and

Staff

—Accountants or other professional staff who participate in audits and are not partners or managers.

Some engagement-level metrics differentiate between engagement partner and the other partners who participate in the audit. The Board believes the differences between the responsibilities borne by engagement partner and those of other participating partners justify presenting data for the two categories separately in those metrics. For firm-level metrics, “engagement partners” include all partners who served as the engagement partner on any audit the firm performed of an accelerated filer or large accelerated filer. Partners that are included in the metrics as an engagement partner are not included as an “other partner,” even if they served in a non-engagement partner role in other audits (in other words, partners are only counted once within any metric).

The Board adopted the definitions of partners, managers, and staff as proposed, with clarifications discussed below.

The Board solicited comment on whether the proposed definitions of partners, managers, and staff are clear and appropriate. Two commenters agreed that the proposed definitions for partners, managers, and staff are clear and appropriate, one saying that linking the definitions used in the metrics to existing definitions would help in preventing multiple definitions throughout the auditing standards. However, some commenters expressed concern that titles and roles are not consistent across firms or most firms have roles which do not clearly or obviously reconcile to the roles listed. One of these commenters also raised a concern about continuing emphasis on the engagement staffing model that currently exists, on the basis that artificial intelligence and other tools could affect the staffing of audit engagements in the future. This commenter recommended including “contractors” engaged by firms in the definition and clarifying whether the definitions are meant to be descriptions of the roles rather than legal interpretations of the roles. Another commenter recommended aligning the definitions of partners, managers and staff with the definition of engagement team, by using the phrase “who perform audit procedures” instead of “who participate in audits” to avoid inclusion of personnel who may participate in audits in an administrative or project management function, but who do not perform audit procedures. Another commenter expressed concern that audit effort associated with roles typically referred to as “national office” and “professional practice development,” especially for managers through partners, would be excluded from the definitions and calculations of the metrics.

For the definition of partners, one commenter questioned whether the definition is intended to have any alignment with ownership interests in a firm and requested clarification as to how a leadership level role such as a managing director would be classified because, in the commenter's view, that role does not appear to meet the definition of either a partner or a manager.

For the definition of managers, the same commenter requested clarification on whether the manager title is based on the person's general title in the firm because, for example, in certain cases an experienced supervisor may serve a manager capacity on a less complex engagement. Another commenter suggested adding a specific number of years of audit experience to the definition of managers because of the risk that firms could inflate percentage of audit hours incurred by managers by changing the titles of more junior professionals to increase the number of managers.

The Board adopted the definitions of partners, managers, and staff as proposed. Because there are differing legal structures and titles among firms, the Board is providing foundational definitions so that each firm can allocate its professionals in three levels: partners, managers, and staff. The Board believes that the vast majority of firms have these three levels, and that, although staffing models may change over time, these levels are likely to be retained for the foreseeable future. The Board also believes that other job titles, such as managing director, can be fit into the appropriate category based on the level of responsibility assigned to them. For example, in a firm where managing directors are given similar responsibilities as the firm's principals (for example, signing authority on audit engagements), they would be treated as partners under the Board's definition; otherwise, they would align with managers. Similarly, professionals in a firm that does not use the title “manager” would be reported as managers if they are assigned the duties that are typically carried out by managers and senior managers at firms that do use those titles. Professionals who work under the firm's direction and control and function as the firm's employees, such as secondees and contractors, may or may not have these titles but would be reported based on their level of responsibility and decision-making authority. In all cases, the determination would be made based on the responsibilities, decision-making authority, and scope of duties of the person. If necessary, firms could utilize the optional narrative disclosure to describe how the firm aligned their categories of professionals with partners, managers, or staff levels.

The Board considered adding a specified minimum number of years of audit experience in the definition of manager but determined not to. Some managers qualify for promotion with fewer years of audit experience due to other relevant education or experience. The Board was concerned that building a minimum number of years of audit experience into the definition would result in people with the responsibilities and title of manager being required to be reported as staff, making the metrics less meaningful while increasing the administrative burden associated with reporting.

The Board did not use the phrase “who performed audit procedures” in the definitions of partners, managers, and staff because use of this term would exclude professionals who do not perform audit procedures—for example, partners who only conduct engagement quality reviews

or national office personnel in connection with certain types of consultations that are not audit procedures.

Engagement quality review is not considered the performance of an audit procedure.

See

AS 1220.07 (The EQR “should not make decisions on behalf of the engagement team or assume any of the responsibilities of the engagement team.”).

Because the definitions of managers

This text is long and has been trimmed here. Open the source document for the complete record.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.