The future of audit quality: audit quality indicators

Audit quality has been at the forefront of PCAOB activities since its formation in 2002 and has gained considerable interest among auditors, audit committees, and stakeholders in businesses around the world.

The concept of improving audit quality was first introduced in 2012. At the time, PCAOB activities showed that general quality improvement had been achieved since the passage of the Sarbanes-Oxley Act. But one question remained: How do we effectively and accurately measure audit quality?

In 2012, the PCAOB kicked off a long-term project to define audit quality measures, known as audit quality indicators (AQIs). In 2015, the PCAOB issued Concept Release on Audit Quality Indicators to stimulate discussion around 28 potential AQIs. The concept release provided illustrations of how each of the quality indicators could be determined at both the firm and individual engagement levels.

Since their adoption, AQIs have prompted continued debate among auditors and regulators. Nonetheless, the PCAOB continues to encourage and monitor the use of AQIs by firms, audit committees, and regulators—as well as academic research, according to recent remarks by PCAOB Board Member Jeanette Franzel.

Regulators are using audit quality indicators (AQIs)

PCAOB staff is also actively incorporating audit quality indicator information into the inspection program to drive improvements to audit quality.

—Janette Franzel, PCAOB Board Member, Innovative & Robust Audit Profession to Serve Investors and the Public Interest

The PCAOB’s inspection program has historically taken a risk-based approach to select audits for inspections. Recently, the inspection program has included some random selections of audits for inspection. Ultimately, the goal would be to develop statistically valid conclusions about audit quality across firms.

The PCAOB has also conducted root cause analyses in an attempt to identify characteristics of and differences between high-quality and deficient audits. Audit firms have been encouraged to conduct root cause analyses as part of the remediation of audit deficiencies identified through the PCAOB inspection process. The PCAOB, according to Franzel, hopes to publish a report later this year with observations from the remediation and root cause programs, including a discussion of the potential benefits of using AQIs within a firm’s system of quality control.

The future of audit quality

AQIs are gaining prominence elsewhere. For example, Ernst & Young published an audit quality report, Our commitment to audit quality: Information for audit committees, investors and other stakeholders, that included several firm-level AQIs as part of the discussion of the firm’s commitment to quality. And the Center for Audit Quality issued its External Auditor Assessment Tool as an aid to audit committees in the hiring and retention decisions of external audit firms.

All of the attention being given to AQIs reminds me of the old saying, “What gets measured, gets done.” There’s no question that determining and measuring indicators of audit quality will, ultimately, affect behavior. And I believe the PCAOB is counting on that fact to further drive audit quality into the profession. One of the first steps in the PCAOB’s efforts to focus on audit quality has been the recent release of a database Auditor SearchSM, of audit partners and issuers as reported by audit firms registered with the PCAOB.

I would not be surprised to see, in the not-too-distant future, AQIs, in one form or another, published by the PCAOB to allow for a comparison between firms. Over time, as part of audit firms' continuing focus on audit quality, AQIs will become increasingly prominent in the firm’s communications with employees, clients, and other stakeholders.

The combination of what I believe will be disclosure of AQIs by the PCAOB and individual audit firms will better enable investors and other stakeholders to evaluate the quality of firms providing audit services.

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