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On May 13^th, 2024, the Public Company Accounting Oversight Board (PCAOB) adopted a new standard designed to guide registered public accounting firms to substantially improve their quality control (QC) systems. The new standard would require all PCAOB registered firms to identify their specific risks and design a QC system that includes policies and procedures to guard against those risks.

Why This Matters :

QC has been a top modernization priority for the PCAOB, given the significant changes in the auditing environment.

The PCAOB’s current QC standards were developed and issued by the American Institute of Certified Public Accountants before the PCAOB was established in 2002.

PCAOB Chair Erica Y. Willians stated that when quality control systems operate effectively, quality audits follow, and investors are better protected.

Following are the Key Provisions of the New Standard

• The new standard strikes a balance between a risk-based approach to QC (which should drive firms to proactively identify and manage the specific risks associated with their practice) and a set of mandates (which should assure that the QC system is designed, implemented, and operated with an appropriate level of rigor).
• All PCAOB-registered firms would be required to design a QC system that complies with the new standard. Firms that perform audits of public companies or SEC-registered brokers and dealers will have to implement and operate the QC system they design, monitor the system, and take remedial actions where policies and procedures are not operating effectively – creating a continuous feedback loop for improvement.
• Those firms would be required to annually evaluate their QC system and report the results of their evaluation to the PCAOB on new Form QC, which would be certified by key firm personnel to reinforce individual accountability.
• Firms that audit above 100 issuers annually would be required to establish an External QC Function (EQCF), composed of one or more persons who can exercise independent judgment related to the firm’s QC system.

EQCF’s responsibilities should include, at a minimum, evaluating the important judgments made and the related conclusions reached by the firm when evaluating and reporting on the effectiveness of its QC system.

The new standard will apply to all PCAOB-registered firms. Subject to approval by the U.S. Securities and Exchange Commission, the new standard and related amendments will take effect on December 15, 2025.