The Center for Audit Quality (CAQ) recently released its paper, CAQ Approach to Audit Quality Indicators, in which it describes how it has developed a set of potential Audit Quality Indicators (AQIs) that it “believes, collectively, will provide the greatest opportunity to enhance discussions between auditors and audit committees and the most benefit to audit committees in fulfilling their responsibility relative to the oversight of the audit.”
The term audit quality indicators has been used by various stakeholder groups, including the Public Company Accounting Oversight Board (PCAOB), the International Auditing and Assurance Standards Board (IAASB), and the audit profession to describe information that relates to the quality of an audit. However, depending on the constituent, the meaning and purpose of AQIs may vary.
Considerations relating to AQIs include (1) the appropriate unit of analysis (e.g., profession level, firm level, network firm level, engagement level) for disclosure, and (2) the appropriate audience for such disclosure (e.g., investor, audit committee, etc.).
The CAQ’s paper suggests a set of potential AQIs, primarily based on engagement-level information, that can be shared with audit committees to provide additional perspective on the elements of a firm’s system of quality control as it applies to a particular audit.
The CAQ plans to subject its set of potential AQIs to pilot testing, and to solicit additional feedback through outreach efforts to assess their overall usefulness to audit committees.
In the paper, the CAQ provides its perspectives on the following:
In a recent This Week in the Boardroom with T.K. Kerstetter, chair of NYSE Governance Services – Corporate Board Member, and Cindy Fornelli, CAQ executive director, discuss the report.
According to Steven Harris, a PCAOB member, the PCAOB expects to issue a concept release related to AQIs “in the near future.”
“The [PCAOB’s] project on Audit Quality Indicators seeks to develop a portfolio of quantitative measures that provide new insight into audit quality and explore how those measures might be deployed in a manner that best promotes quality,” Harris said in a speech at American University in March. “These indicators would be designed to help audit committees, investors, and others seeking the services of auditors to evaluate a firm's potential performance.”
The PCAOB is expected to seek comment on its preliminary list of AQIs, the most helpful unit of analysis and format of reporting, as well as a proposed definition of audit quality and a framework for AQIs. For more information on the PCAOB’s views on AQIs, refer to a presentation on AQIs made at its November 2013 Standing Advisory Group Meeting
The first conflict minerals disclosures are due June 2.
On May 14, the US Court of Appeals for the DC Circuit denied the National Association of Manufacturers’ emergency motion to stay enforcement of this aspect of the Dodd-Frank Act. That followed an earlier April ruling by the same court that upheld most of the conflict minerals disclosure rule. It struck down the section that requires companies to label whether their products are “DRC (Democratic Republic of the Congo) conflict-free.” The court wrote that requiring companies to do so violated the First Amendment in that it constituted “compelled speech.”
Earlier in May the SEC issued an order staying the effective date for compliance with the portions of the conflict minerals disclosure rule that would require statements by issuers on whether their products are DRC conflict-free.
The SEC stated that staying only these portions of the rule furthers the public interest by having issuers comply with the remainder of the rule, which was mandated by Congress and upheld by the Court of Appeals.
In an April 29 public statement, Keith Higgins, director of the SEC Division of Corporation Finance, stated that public companies are still expected to file the first conflict minerals report by June 2. He also offered some guidance on the effect of the partial stay on those reports.
“No company is required to describe its products as “DRC conflict-free,” having “not been found to be ‘DRC conflict-free,’” or “DRC conflict undeterminable,” he stated. “If a company voluntarily elects to describe any of its products as “DRC conflict-free” in its Conflict Minerals Report, it would be permitted to do so provided it had obtained an independent private sector audit (IPSA) as required by the rule. Pending further action, an IPSA will not be required unless a company voluntarily elects to describe a product as ‘DRC conflict-free’ in its Conflict Minerals Report.”
[For more information on the SEC’s guidance, read PwC’s In brief: SEC issues guidance on conflict minerals disclosures. ]