Share via

The SEC has recently enacted a series of rules and amendments aimed at enhancing transparency in the capital market concerning securities.

One such development is the implementation of Rule 13f-2 of the Securities Exchange Act of 1934 by the SEC, which mandates institutional investment managers meeting specified equity market thresholds to disclose specific short sale data on the newly introduced Form SHO. The Commission plans to aggregate this data and subsequently make it publicly available with a time delay. Additionally, an associated amendment affects the Consolidated Audit Trail (CAT) and the reporting mechanisms for short sales.

Another regulatory measure is the adoption of Rule 10c-1a, necessitating the reporting of specific confidential information pertaining to securities loans to a Registered National Securities Association (RNSA). Part of this information will be accessible to the public, and currently, the Financial Industry Regulatory Authority (FINRA) stands as the sole RNSA in the nation.

Furthermore, the SEC has revised rules under Section 13(d)(3) and 13(g)(3), reducing the timeframe within which an investor holding more than 5% of a covered class of equity securities must publicly file either Schedule 13D or Schedule 13G.

PCAOB Offers Insights on Engagement Quality Reviews

In tandem with these developments, the Public Company Accounting Oversight Board (PCAOB), mandated by the SEC to oversee audits of public companies and SEC-registered brokers and dealers, has released a staff report. This report imparts “good practices and reminders” for auditors concerning Engagement Quality Reviews (EQRs). Notably, the report underscores that 42% of firms inspected by the PCAOB in 2022 received quality control criticism linked to the EQR process. This process entails a reviewer external to the audit engagement team assessing significant judgments made by the engagement team. PCAOB Chair Erica Y. Williams emphasized the importance of audit firms and audit committees familiarizing themselves with the EQR report to fulfill their responsibility in safeguarding investors against inadequately supported audits.

Some examples of these good practices include the following:

• Monitoring Workload and Expertise

Certain audit firms implement robust programs to monitor partner workloads and expertise, ensuring that partners assigned as EQR reviewers possess adequate time, experience, and knowledge for their assigned tasks. Criteria such as seniority, reporting lines, and other partner characteristics are considered during the selection of EQR reviewers, emphasizing their ability to competently and objectively evaluate and challenge the engagement team’s judgments. In some instances, audit firms designate EQR assistants to assist in managing the workload of EQR reviewers.

•  Involvement in Key Audit Milestones

To enhance the timeliness and quality of audit procedures, some audit firms institute milestone programs that emphasize increased involvement of EQR reviewers. These programs may include a heightened role for EQR reviewers in planning discussions and frameworks mandating the review of specific audit documentation by the EQR reviewer. Milestones tailored to the EQR process may be set, and tracking may be facilitated through shared calendars or collaborative work management programs, depending on the size and nature of the audit firm.

•  Enhanced Accountability

Certain audit firms establish accountability programs that broaden responsibility for audit quality to EQR reviewers. Such programs may involve rewarding or penalizing reviewers based on internal or external inspections’ findings of engagement deficiencies in audits where they performed an EQR.

•  New and Revised Tools and Guidance

To support both EQR reviewers and engagement teams, some audit firms develop or update tools and guidance. These resources aim to provide detailed insights into EQR requirements, facilitate a comprehensive understanding of audit conclusions, identify circumstances necessitating changes in the audit approach, and assist in organizing work efficiently. The development of such tools and guidance aligns with the specific needs and size of the audit firm.

•  Root Cause Task Force

Certain audit firms establish task forces or dedicated teams to assess potential root causes of engagement deficiencies. These evaluations may include an analysis of why EQR reviewers failed to identify significant deficiencies and recommendations for enhancing EQR performance.

 Audit Committee Considerations

Audit committees may find the following questions relevant for discussion with independent auditors:

• What policies and procedures ensure that EQR reviewers have the required competence, independence, integrity, and objectivity in line with PCAOB standards?
• Does the audit firm have industry-experienced individuals, not serving as engagement partners in the two preceding audits, eligible to serve as EQR reviewers? If not, will the auditor seek external candidates for this role?
• Were there any significant judgments discussed or challenged by the EQR reviewer, and what were the outcomes of those discussions?
• Has the auditor obtained concurring approval from the EQR reviewer before issuing the engagement report or communicating conclusions if no report is issued?

 About the PCAOB

The PCAOB, a non-profit organization established by Congress, serves the crucial role of supervising audits conducted on public companies. It ensures that audit reports are informative, accurate, and unbiased in order to protect investors’ interests. Additionally, the PCAOB extends its oversight to audits performed on brokers and dealers who are registered with the Securities and Exchange Commission, covering compliance reports submitted in accordance with federal securities laws.