Update from across the pond: PCAOB enhances reporting for large accounting firms
The Public Company Accounting Oversight Board (PCAOB) voted 4-1 to require major accounting firms to submit detailed financial statements and standardised performance metrics, marking a significant shift toward greater transparency in the audit industry.
The new requirements, adopted on November 21, 2024, will require the nation’s largest accounting firms will be required to submit their own financial statements to the PCAOB. This requirement applies to firms issuing more than 200 audit reports annually with over 1,000 audit personnel, directly affecting six major players: Deloitte, Ernst & Young, PricewaterhouseCoopers, KPMG, BDO, and Grant Thornton.
“Sound and consistent information strengthens investor confidence and can drive audit quality,” said PCAOB Chair Erica Y. Williams, emphasising the importance of these reforms.
These firms must provide detailed financial disclosures, including information about significant ownership interests, private equity investments, and unfunded pension liabilities. The new rules also mandate that firms report fee information in actual dollar amounts rather than percentages, marking a significant shift in transparency.
The Board has also established a comprehensive framework of standardised performance metrics that firms must report publicly. These metrics encompass crucial aspects of audit practice, including the involvement of partners and managers in audits, staff workload measurements, and training hours for audit personnel. Firms must also disclose their personnel’s experience levels, both general and industry-specific, while reporting on staff retention rates and the distribution of audit hours across engagements. The framework includes requirements to report historical records of financial restatements, providing stakeholders with important context about audit quality.
Critical event reporting has been significantly strengthened under the new requirements. Firms must now report cybersecurity incidents within five business days, while material events affecting firm operations or financial resources must be disclosed within 14 days for annually inspected firms. Other firms will maintain a 30-day window for special event reporting. This tiered approach reflects the PCAOB’s recognition of varying firm sizes and capabilities while maintaining strict oversight of the largest players.
The requirements extend beyond financial and operational metrics to include detailed information about firms’ governance structures and operations. Firms must provide comprehensive information about their legal structure, ownership, internal governance frameworks, and network relationships. The rules also mandate disclosure of quality control policies and procedures, along with detailed information about cybersecurity risk management approaches.
The changes represent the most substantial overhaul of audit firm reporting requirements in recent years. While investor groups have largely supported these changes, the industry has expressed concerns about implementation costs and administrative burden. The Center for Audit Quality, representing the profession, questioned whether the benefits would justify the costs.
The new requirements, pending SEC approval, will begin taking effect in October 2027, with a phased implementation approach giving smaller firms additional time to comply. The changes aim to provide investors, audit committees, and other stakeholders with standardized, actionable data about audit firms and their practices.
This regulatory shift comes as part of a broader push for accountability in the accounting profession, following years of calls for greater transparency from investor groups and regulatory bodies.
