`[Federal Register Volume 89, Number 238 (Wednesday, December 11, 2024)]
[Notices]
[Pages 99968-100090]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-28142]



[[Page 99967]]

Vol. 89

Wednesday,

No. 238

December 11, 2024

Part II





Securities and Exchange Commission





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Public Company Accounting Oversight Board; Notice of Filing of Proposed 
Rules on Firm and Engagement Metrics and Related Amendments to PCAOB 
Standards; Notice

  Federal Register / Vol. 89 , No. 238 / Wednesday, December 11, 2024 / 
Notices  

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-101724; File No. PCAOB-2024-06]


Public Company Accounting Oversight Board; Notice of Filing of 
Proposed Rules on Firm and Engagement Metrics and Related Amendments to 
PCAOB Standards

November 25, 2024.
    Pursuant to Section 107(b) of the Sarbanes-Oxley Act of 2002 (the 
``Act''), notice is hereby given that on November 22, 2024, the Public 
Company Accounting Oversight Board (the ``Board'' or the ``PCAOB'') 
filed with the Securities and Exchange Commission (the ``Commission'') 
the proposed rules described in items I and II below, which items have 
been prepared by the Board. The Commission is publishing this notice to 
solicit comments on the proposed rules from interested persons.

I. Board's Statement of the Terms of Substance of the Proposed Rules

    On November 21, 2024, the Board adopted Firm and Engagement Metrics 
and related amendments to its rules and forms (collectively, the 
``proposed rules''). The text of the proposed rules appears in Exhibit 
A to the SEC Filing Form 19b-4 and is available on the Boards website 
at https://pcaobus.org/about/rules-rulemaking/rulemaking-dockets/docket-041, and at the Commission's Public Reference Room.

II. Board's Statement of the Purpose of, and Statutory Basis for, the 
Proposed Rules

    In its filing with the Commission, the Board included statements 
concerning the purpose of, and basis for, the proposed rules and 
discussed any comments it received on the proposed rules. The text of 
these statements may be examined at the places specified in Item IV 
below. The Board has prepared summaries, set forth in sections A, B, 
and C below, of the most significant aspects of such statements. In 
addition, the Board is requesting that the Commission approve the 
proposed rules, pursuant to Section 103(a)(3)(C) of the Sarbanes-Oxley 
Act, for application to audits of emerging growth companies (``EGCs''), 
as that term is defined in Section 3(a)(80) of the Securities Exchange 
Act of 1934 (``Exchange Act''). The Board's request is set forth in 
section D.

A. Board's Statement of the Purpose of, and Statutory Basis for, the 
Proposed Rules

(a) Purpose
    The Board has adopted a set of firm- and engagement-level metrics 
(the ``final rules'' or ``final metrics'') that certain registered 
public accounting firms (``firms'' or ``audit firms'') will be required 
to publicly report relating to their audit practices and the audits 
they lead. The Board believes these metrics will provide valuable 
additional information, context, and perspective on auditors and audit 
engagements, which can be used by investors, audit committees, and 
other stakeholders, and which will further the Board's oversight 
activities. The Board believes this will advance investor protection 
and promote the public interest by enabling stakeholders to make 
better-informed decisions, promoting auditor accountability, and 
ultimately enhancing capital allocation and confidence in our capital 
markets. The new reporting requirements will apply to firms that audit 
at least one company that is an ``accelerated filer'' or ``large 
accelerated filer'' (as those terms are defined in SEC rules).\1\
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    \1\ vSee 17 CFR 240.12b-2 (``Rule 12b-2'').
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Lack of Consistent, Comparable Data About Audits and Auditors
    Investors and audit committees cannot easily observe the services 
performed by auditors. This can limit investors' ability to make 
informed decisions about investing their capital, ratifying the 
selection of auditors, and voting for members of the board of 
directors, including directors who serve on the audit committee, and 
audit committees' ability to choose among and monitor the performance 
of auditors. At the same time, there is a lack of incentive for firms, 
acting on their own or collectively, to provide accurate, standardized, 
and decision-relevant information about their firms and the engagements 
they perform. In response to these challenges, the Board has studied 
ways to measure audit firm and audit engagement performance, primarily 
with a view to providing information useful to investors in their 
investment and proxy voting decisions, but also recognizing that 
metrics could potentially be informative to other stakeholders. In 
addition, the Board itself would benefit from having additional tools 
to use in its oversight activities, including its inspections program, 
standard-setting initiatives, and research activities.
    The Board has observed that many of the firms that issue audit 
reports for more than 100 issuers annually and audit companies that 
account for the majority of U.S. public company market capitalization 
already publicly disclose certain firm-level metrics through audit 
quality reports, transparency reports, or similar documents. However, 
these disclosures generally do not contain engagement-level 
information, which investors have indicated would be the most useful to 
them, and are inconsistent across firms and year to year, with no 
common definitions or calculations that would allow for meaningful 
comparisons. Moreover, most of the disclosures are voluntary, so firms 
are free to revise or discontinue such reporting at any time.
    In the Board's view, the current voluntary reporting regime cannot 
provide consistent, comparable information that stakeholders can rely 
on to inform their decisions over time. And it would appear that firms' 
attempts at voluntary reporting have not, in fact, satisfactorily 
addressed investor desire for additional information about audits and 
auditors. On the contrary, support from investors and investor-related 
groups for this rulemaking initiative has been consistent throughout 
its history, even as the practice of firm voluntary reporting has 
evolved and spread.
Metrics at Firm and Engagement Level
    The final rules require reporting of metrics at both the firm and 
the engagement levels. Firm-level metrics relate to aspects of the 
firm's audit practice (e.g., average experience at a public accounting 
firm of the firm's partners) and engagement-level metrics relate to 
individual audit engagements (e.g., experience at a public accounting 
firm of the engagement partner and the engagement quality reviewer 
(``EQR'') and average experience of certain other engagement team 
members). The Board is requiring firm-level metrics because it believes 
information relevant to the firm will be beneficial in providing 
context for engagement-level metrics and in evaluating the firm's audit 
practice and its related system of quality control. The Board is 
requiring engagement-level metrics because it believes that information 
will be useful in gaining a richer understanding of a particular audit 
and because investors have stressed the importance to them of 
engagement-level information to assist them in evaluating the 
performance of the auditor and the audit committee. Most metrics will 
be reported at both firm- and engagement-level. However, the final 
rules require reporting at only

[[Page 99969]]

the firm level in cases where the Board believes engagement-level data 
would not be meaningful or would be disproportionally challenging to 
collect in relation to the incremental benefit.
Final Metrics
    The Board adopted metrics in the following eight areas:
    Partner and Manager Involvement. Hours worked by senior 
professionals relative to more junior staff across the firm's large 
accelerated and accelerated filer engagements and on the specific 
engagement.
    Workload. Average weekly hours worked on a quarterly basis by 
senior professionals who incurred hours on large accelerated and 
accelerated filer engagements, including time attributable to 
engagements, administrative duties, and all other matters, both firm-
wide and on the core engagement team.
    Training Hours for Audit Personnel. Average annual training hours 
for partners, managers, and staff of the firm, combined, both firm-wide 
and on the core engagement team.
    Experience of Audit Personnel. Average number of years worked at a 
public accounting firm (whether or not PCAOB-registered) by senior 
professionals across the firm and on the engagement.
    Industry Experience. Average years of career experience of senior 
professionals in key industries audited by the firm at the firm level 
and the audited company's primary industry at the engagement level.
    Retention of Audit Personnel (firm-level only). Continuity of 
senior professionals (through departures, reassignments, etc.) across 
the firm.
    Allocation of Audit Hours. Percentage of hours incurred prior to 
and following an issuer's year end across the firm's large accelerated 
and accelerated filer engagements and on the specific engagement.
    Restatement History (firm-level only). Restatements of financial 
statements and management reports on internal control over financial 
reporting (``ICFR'') that were audited by the firm over the past three 
years.
    Firms are permitted, but not required, to accompany the metrics 
with narrative disclosure to provide additional context.
    The final suite of metrics focuses primarily on information about 
audit personnel. The Board believes these metrics will provide new 
insights into how engagements are staffed, including the extent of 
involvement of senior personnel; auditors' overall workload; retention 
of personnel across the firm; and levels of training, audit experience, 
and industry-specific expertise. The final metrics will also provide 
information about the extent of audit work completed prior to the 
issuer's year-end, an aspect of the audit process that the Board 
believes is associated with improved audit outcomes, and about the 
firm's history of restatements, a key measure of audit outcomes.
    This new information will allow users to draw inferences about 
audits and audit forms that are not possible today. Some may relate to 
specific metrics. For example, a heavy workload for a particular 
engagement team relative to the firm average or compared to peer firms 
may raise questions about the quality of the work performed. 
Conversely, a relatively high level of industry experience, 
particularly for an engagement in an industry that benefits from 
specific accounting and auditing expertise, would be a positive signal. 
Other inferences may relate to combinations of metrics. For example, 
the personnel-related metrics, taken together, give an overall sense of 
how an engagement is staffed that can be compared to firm averages and 
to engagements for similar issuers. It is possible that the precise 
numerical values of metrics may be important in some cases but, in 
general, the Board believes the metrics will be more useful to convey a 
sense of whether a particular engagement or firm appears fairly typical 
or is an outlier in one or more respects. This should provide a richer 
context for understanding the work of the auditor than the current 
environment of almost no publicly available information.
    The Board also believes that gathering data and calculating the 
final metrics, given the subjects they address, will not be overly 
costly, time-consuming, or burdensome. Based on the Board's oversight 
activities, it appears that the largest firms are already tracking data 
in many of these areas. Many of the metrics are based on data that 
firms already track or will be required to track for purposes of other 
PCAOB requirements. For example, Partner and Manager Involvement and 
Allocation of Audit Hours are based on the same time reporting required 
for Form AP purposes. Training hours will reflect the same information 
that firms track to ensure proper licensing of their personnel. 
Restatement data, to the extent firms are not already tracking it, is 
required to be tracked under QC 1000. In addition to required data, 
many firms track the experience of their personnel, as well as industry 
experience, for use in marketing materials and for inclusion in 
requests for proposals, and some firms already track staff retention 
and turnover metrics as part of their human capital management. Firms 
should be able to generate other data required by the final metrics, 
such as Workload, from their existing timekeeping systems with minimal 
additional effort.
Responding to Commenter Concerns
    After considering commenter input, the Board has made a number of 
changes from the proposal. The final rules eliminate four proposed 
metrics areas (Audit Resources--Use of Specialists and Shared Service 
Centers, Audit Hours and Risk Areas, Quality Performance Ratings and 
Compensation, and Audit Firms' Internal Monitoring) and add one new 
metric area (Training Hours for Audit Personnel). In addition, only 
firm-level reporting will be required for one area (Retention of Audit 
Personnel) that was proposed to be reported at both the firm and 
engagement level. The Board has also made revisions to simplify and 
clarify some of the other metrics and exempted firms with a small 
issuer practice from reporting on their industry experience. In 
addition, the Board has expanded the optional narrative disclosure from 
500 to 1,000 characters and has provided additional direction that the 
narrative should be concise and focused on the reported metrics, with a 
view to facilitating the reader's understanding of the metrics. The 
Board believes that these changes will address commenter concerns about 
challenges of data collection, potential sensitivity of data, and 
potential ambiguity of the metrics, and that the final suite of metrics 
will provide consistent, comparable information on auditors and audit 
engagements, giving investors, audit committees, and other stakeholders 
valuable new context and perspective.
    The Board considered comments questioning the value of metrics, 
whether they will be used by investors and other stakeholders or would 
represent only a ``check the box'' compliance exercise, and whether 
they might contribute to information overload or have other negative 
consequences. Based on the other stakeholder input received, the Board 
does not share those views. In comments provided in the Board's 
rulemaking process and surveys conducted by a firm-related group, 
investors and investor-related groups have repeatedly indicated that 
the metrics will be useful. As one investor-related group noted:

    Auditors say they want to be seen or evaluated as something 
other than a commodity business evaluated based upon price. For this 
to happen, auditors need to provide investors with information such 
that

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they can value the work of the auditor--just as they evaluate and 
value the business and the work of management.\2\
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    \2\ Letter from CFA Institute, August 30, 2024, at 17.

    The Board also notes that similar objections--that the new 
information would not be used or would be confusing or misleading--were 
raised by many of the same commenters in connection with its last two 
rulemakings requiring disclosure of additional information about audits 
and auditors: Form AP reporting of the name of the engagement partner 
and information about other firms participating in the audit, and 
auditor communication of critical audit matters (``CAMs''). In both 
cases, these commenter concerns appear unsubstantiated. The Form AP 
data set is now one of the most frequently visited areas of the PCAOB's 
website.\3\ As for CAMs, while academic studies have shown mixed 
results about the impact of CAMs, in a recent investor survey conducted 
by a firm-related group, over 90% of the respondents indicated that 
CAMs play an important role in their investment decision-making.\4\ In 
addition, data aggregators, such as Audit Analytics, compile and make 
available data on CAMs, which suggests market demand for that 
information. The Board's experience therefore suggests that, contrary 
to concerns about irrelevance and information overload, stakeholders 
seek out additional information about auditors and audit engagements 
when it is available.
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    \3\ In 2023, there were over 333,000 unique searches performed 
on AuditorSearch and the Form AP data set was downloaded over 2,000 
times. Information related to usage statistics can be found on the 
PCAOB's website (https://pcaobus.org/resources/auditorsearch).
    \4\ The Center for Audit (``CAQ'') Quality Critical Audit 
Matters Survey (July 2024) at 9.
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Filing Requirements
    Under the Board's final rules, firm-level reporting is required of 
every firm that audits at least one ``accelerated filer'' or ``large 
accelerated filer'' under SEC rules during the reporting period. 
Engagement-level reporting will be required for every audit of an 
accelerated or large accelerated filer. The thresholds will apply to 
the audits, and auditors, of companies that account for the majority of 
U.S. public company market capitalization, and the Board believes they 
will capture the situations where investment and proxy voting decisions 
will be most likely to benefit from additional information about the 
audit and the auditor.
    The final rules:
     Require reporting of firm-level metrics annually on a new 
Form FM, Firm Metrics, pursuant to a new Rule 2203C, Firm Metrics, for 
firms that issued an audit report with respect to at least one 
accelerated filer or large accelerated filer during the reporting 
period;
     Require reporting of engagement-level metrics for audits 
of accelerated filers and large accelerated filers on a revised Form 
AP, renamed ``Audit Participants and Metrics''; and
     Allow, but not require, limited narrative disclosures on 
both Form FM and Form AP to provide context and explanation for the 
required metrics.
Background
    The final rules build on other actions the Board has taken to 
provide stakeholders with additional information about registered firms 
and the audits they perform, including information about firms 
available through its registration and reporting forms, information 
about auditors and engagements on Form AP, and communication of 
critical audit matters and auditor tenure in the auditor's report. The 
Board concurrently adopted other changes to firm reporting 
requirements.\5\ The Board believes the final rules will complement 
these efforts by providing investors, audit committees, and other 
stakeholders with additional information in a consistent format and 
compiled with sufficient rigor to assist them in making decisions. For 
example, the metrics could inform investors' decision-making regarding 
whether to ratify the audit committee's selection of an auditor or to 
vote for members of the board of directors, including directors who 
serve on the audit committee, as well as potentially assisting in audit 
committee oversight, supporting continuous improvement of firms' 
quality control systems, and facilitating the Board's own oversight and 
rulemaking efforts. The Board further believes that the value of these 
metrics will likely increase over time as firm reporting practices 
develop and trends become observable.
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    \5\ See Firm Reporting, PCAOB Rel. No. 2024-013 (Nov. 21, 2024) 
(adopting amendments to reporting requirements for Form 2, Annual 
Report Form, and Form 3, Special Reporting Form).
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    As in its proposal, the Board uses the term ``firm and engagement 
metrics'' rather than ``audit quality indicators'' (``AQIs'') to 
describe the metrics that it adopted. The Board believes this avoids 
the potential misimpression that any set of metrics can comprehensively 
measure audit quality and emphasizes the Board's goal of promoting 
informed decision-making through robust disclosure requirements. Some 
commenters were critical of that change in terminology, suggesting that 
it evidenced that the Board is no longer focused on audit quality. It 
is simply a clarification. Because some of the most important elements 
of a high-quality audit, such as application of due care and 
professional skepticism, cannot be measured and quantified directly, 
the metrics employ proxies, such as years of experience, auditor 
workloads, and percentage of audit hours attributable to more senior 
members of the engagement team, which can only partially capture these 
concepts. Even though these proxies cannot provide a complete picture 
of audit quality, the Board believes they will nevertheless convey 
important information about auditors and the engagements they lead that 
stakeholders will find relevant and useful. The Board believes that 
consideration of the metrics in combination, together with any 
additional context a firm may choose to provide, will help users 
interpret the data, and that the metrics, analyzed across firms and 
over time, will yield important, currently unavailable information that 
will assist investors, audit committees, and other stakeholders in 
their decision-making, oversight, and evaluation related to audits.
    The Board developed the proposal after considering input from 
numerous sources, including the recommendations of the U.S. Department 
of Treasury's Advisory Committee on the Auditing Profession (``ACAP''), 
including the October 6, 2008 Final Report of the Advisory Committee on 
the Auditing Profession to the U.S. Department of the Treasury (``ACAP 
Final Report''); the Concept Release on Audit Quality Indicators, PCAOB 
Rel. No. 2015-005 (July 1, 2015) (``Concept Release''), and the 
comments received; the voluntary practices of firms; recommendations 
from the PCAOB's Investor Advisory Group (``IAG''); and the initiatives 
of international regulators. The Board has carefully considered this 
input and believes that the final amendments strike an appropriate 
balance between the expected benefits of the new reporting requirements 
and the associated costs of implementation and compliance.
Effective Dates
    If the Commission approves the final rules and final metrics, both 
firm-level and engagement-level reporting will be required for periods 
beginning October 1, 2027. The Board also adopted a phased 
implementation period for both

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firm- and engagement-level reporting, where firms that issue audit 
reports for more than 100 issuers will begin reporting in the first 
year that reporting is required and other firms beginning one year 
later.
(b) Statutory Basis
    The statutory basis for the proposed rules is Title I of the Act.

B. Board's Statement on Burden on Competition

    Not applicable. The Board's consideration of the economic impacts 
of the proposed rules is discussed in section D below.

C. Board's Statement on Comments on the Proposed Rules Received From 
Members, Participants or Others

    The Board released the proposed rules for public comment in PCAOB 
Release No. 2024-002 on April 9, 2024. Previously, the Board issued a 
concept release for public comment in PCAOB Release No. 2015-055 on 
July 1, 2015. The Board received over 45 comment letters in response to 
the proposing release and 50 letters in response to the concept 
release. See Exhibits 2(a)(B) and 2(a)(C). The Board has carefully 
considered all comments received. The Board's response to the comments 
it received and the changes made to the rules in response to the 
comments received are discussed below.
Background
Project History
1. Importance and Potential Benefits of Increased Information About 
Audit Firms and Engagements
    With the passage of the Sarbanes-Oxley Act of 2002 (``Sarbanes-
Oxley'') and the establishment of the PCAOB, Congress acknowledged and 
re-emphasized the auditor's important gatekeeping role.\6\ Reflecting 
that importance, the Board believes requiring audit firms to provide 
additional information about the firm and the engagements it performs 
will advance investor protection and promote the public interest by 
enabling investors to make better-informed decisions. As discussed in 
more detail below, the Board has also heard from investors and other 
stakeholders that they believe such information will be beneficial.
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    \6\ See Section 101(a) of Sarbanes-Oxley, 15 U.S.C. 7211(a); 
Senate Report No. 107-205, at 5-6 (July 3, 2002).
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    Sarbanes-Oxley also mandated new exchange requirements regarding 
the responsibilities of audit committees of listed companies, including 
requiring that audit committees be charged with responsibility for the 
appointment, compensation, and oversight of the auditor.\7\ The Board 
believes that making information available to audit committees 
regarding both the specific audit and auditor they oversee and the 
audits and auditors of their peer companies will assist them in 
carrying out this statutory mandate.
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    \7\ See Securities Exchange Act of 1934, Section 10A(m)(2), 15 
U.S.C. 78j-1(m)(2).
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    Over the years, the Board has received significant input on the 
importance and potential benefits to stakeholders of additional 
information about audits and auditors. The key elements of that input 
are summarized below.
i. ACAP Recommendations
    In 2007, the U.S. Treasury constituted the ACAP to consider and 
develop recommendations relating to the sustainability of the auditing 
profession.\8\ On October 6, 2008, ACAP published a report detailing 
recommendations intended to enhance the sustainability of a strong and 
vibrant public company auditing profession.\9\ One of the ACAP 
recommendations was that the PCAOB, in consultation with auditors, 
investors, public companies, audit committees, boards of directors, 
academics, and others, ``determine the feasibility of developing key 
indicators of audit quality and effectiveness and requiring auditing 
firms to publicly disclose those indicators'' \10\ and, assuming that 
development and disclosure of indicators of audit quality are feasible, 
that the PCAOB be required to monitor these indicators.
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    \8\ See ACAP Final Report, at IV:1.
    \9\ See ACAP's Fact Sheet: Final Report of the Advisory 
Committee on the Auditing Profession, available at https://
home.treasury.gov/news/press-releases/
hp1158#:~:text=The%20U.S.%20Treasury%20Department%20%27s%20Advisory%2
0Committee%20on,into%20three%20sections%20by%20principal%20areas%20of
%20focus.
    \10\ See ACAP Final Report, at VIII:14.
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ii. 2013 and 2017 PCAOB Investor Advisory Group Recommendations
    At its October 2013 IAG Meeting,\11\ the IAG working group on AQIs 
made recommendations for the PCAOB to prescribe informative, forward-
looking disclosures and indicators intended to measure the quality of 
audits and enhance auditor accountability. They emphasized that 
investors and audit committees generally care more about the quality 
and credibility of audit work on specific engagements--the companies in 
which they have invested or were considering investing, or the company 
on whose board of directors they served--rather than firms' more 
general efforts to improve quality. Accordingly, in addition to 
disclosures and metrics to be reported at the firm level, they also 
recommended disclosures and metrics to be reported at the engagement 
level.
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    \11\ See Oct. 2013 IAG meeting and presentations, Report from 
the Working Group: Audit Quality Indicators, available at IAG 
Meeting Archive, https://pcaobus.org/news-events/events/event-details/pcaob-investor-advisory-group-meeting_758.
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    At the October 2017 IAG meeting, an IAG working group discussed 
three topics: (i) why audit quality and AQIs matter to investors, (ii) 
the PCAOB's authority and efforts to date to enact AQIs, and (iii) 
audit quality initiatives in other jurisdictions.\12\ The 2017 working 
group also endorsed the 2013 AQI working group's recommendations.
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    \12\ See Oct. 2017 IAG meeting and presentation, available at 
IAG Meeting Archive, https://pcaobus.org/news-events/events/event-details/pcaob-investor-advisory-group-meeting_1085.
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    The recommendations provided by the 2013 and 2017 IAG working 
groups are reflected in many of the metrics the Board adopted.
2. PCAOB Initiatives
    This section provides further background and expands on the history 
of PCAOB activities related to providing additional information about 
audit firms and audits, including firm and engagement metrics.
i. 2015 AQI Concept Release
    In July 2015, the PCAOB issued the Concept Release and sought 
comment on 28 potential indicators. The indicators were organized into 
three groups:
     Audit professionals--Measures dealing with the 
availability, competence, and focus of those performing the audit.
     Audit process--Measures related to an audit firm's tone at 
the top and leadership, incentives, independence, attention to 
infrastructure, and record of monitoring and remediation.
     Audit results--Financial statements, internal control, 
going concern, communications between auditors and audit committees, 
and enforcement and litigation.
    The Concept Release discussed (i) the nature of the potential 
indicators and potential calculations, (ii) the usefulness of the 
indicators, (iii) suggestions for other indicators, (iv) potential 
users of the indicators, and (v) the approach to implementation. In 
response to the Concept Release, the PCAOB received 50 comment letters.
    Most commenters expressed support for the general idea that AQIs 
may be

[[Page 99972]]

useful.\13\ However, commenter views varied widely. Comments from firms 
and firm-related groups suggested that no standard group of indicators 
could advance a person's understanding of audit quality. These 
commenters suggested that AQIs should be voluntary, should be reported 
to audit committees through two-way discussions to provide context for 
the indicators, or should be required only at the firm level. Investors 
and investor-related groups recommended that indicators should be made 
public as they could be used to stimulate competition based on quality 
among audit firms, remedy the deficiency of information about audits, 
and give shareholders meaningful information to help them in voting on 
auditor selection. Some commenters suggested that engagement-level 
metrics are more useful than firm-level metrics. One commenter 
suggested that promoting competition around an implied variability in 
audit quality may not always be appropriate and in the public interest 
because audit quality should be nonnegotiable and a fundamental goal 
for all audits. Another commenter suggested that it was critical to 
define what AQIs do and do not represent so that they are used 
appropriately.
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    \13\ See Nov. 2015 Standing Advisory Group (SAG) Briefing Paper 
available at SAG Meeting Archive, https://pcaobus.org/news-events/events/event-details/standing-advisory-group-meeting_910.
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ii. PCAOB Rulemakings To Increase Audit Transparency: Identification of 
the Engagement Partner and Other Audit Participants on Form AP and 
Auditor Communication of Critical Audit Matters
    In 2015, the PCAOB adopted rules requiring information on Form AP, 
Auditor Reporting of Certain Audit Participants, regarding the 
engagement partner and other accounting firms that participate in 
audits of issuers.\14\ The rulemaking was initially in response to the 
ACAP recommendation that the engagement partner should be required to 
sign the audit report.\15\ As the rulemaking evolved, it also took 
account of stakeholder input, including IAG recommendations to identify 
the engagement partner and the firms, other than the firm signing the 
audit report, that participate in audits.
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    \14\ See PCAOB Rule 3211.
    \15\ See ACAP Final Report, at VII:19.
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    The Board's intention was to make available information about the 
engagement partner and other firms that participated in the audit, 
saying that such information, even if not useful in every instance or 
meaningful to every investor, would make an overall contribution to the 
information available to investors in making voting and investment 
decisions. The Board also asserted that increased transparency should 
promote increased accountability in the audit process. The Form AP 
reporting requirements became effective in 2017, and the data gathered 
via Form AP has many users; the Form AP data set is frequently searched 
through AuditorSearch, the PCAOB's online search tool, as well as 
downloaded by users performing more detailed analyses.\16\
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    \16\ See below.
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    In 2017, the PCAOB adopted AS 3101, The Auditor's Report on an 
Audit of Financial Statements When the Auditor Expresses an Unqualified 
Opinion, which includes requirements regarding the disclosure of 
auditor tenure and auditor determination and communication of 
``critical audit matters.'' \17\ This project was also initiated in 
response to ACAP's recommendation that the PCAOB undertake a standard-
setting initiative to consider improvements to the auditor's standard 
reporting model.\18\ The rulemaking explored potential ways to increase 
the transparency and relevance of the auditor's report, including by 
requiring expanded auditor reporting regarding the audit and the 
company's financial statements.\19\ In the adopting release, the Board 
noted ACAP's statement that the complexity of financial reporting 
supports improving the content of the auditor's report beyond the then-
current pass/fail model to include a more relevant discussion about the 
audit of the financial statements.
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    \17\ See AS 3101.11-.16.
    \18\ See ACAP Final Report, at VII:13.
    \19\ See Concept Release on Possible Revisions to PCAOB 
Standards Related to Reports on Audited Financial Statements and 
Related Amendments to PCAOB Standards; Notice of Roundtable (June. 
21, 2011), available at https://pcaobus.org/news-events/news-releases/news-release-detail/pcaob-issues-concept-release-on-auditor's-reporting-model_337.
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    After multiple rounds of Board releases and stakeholder input, the 
requirements took effect in 2019 and 2020.
iii. Recent PCAOB Standard-Setting and Rulemaking Activities
    At the November 2022 Standards and Emerging Issues Advisory Group 
(SEIAG) and the October 2022 and 2023 IAG meetings, several members 
continued to urge the Board to take action on firm and engagement 
metrics. Other members stated that some firms already publish similar 
metrics through transparency reports and audit quality reports. Some 
members of the IAG and SEIAG have requested increased information at 
the firm and engagement levels through easily accessible and quantified 
metrics, potentially with accompanying context provided by the 
auditors.\20\
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    \20\ See Nov. 2022 SEIAG meeting, available at https://pcaobus.org/news-events/events/event-details/pcaob-standards-and-emerging-issues-advisory-group-meeting-2022. See Oct. 2022 IAG 
meeting, available at https://pcaobus.org/news-events/events/event-details/pcaob-investor-advisory-group-meeting and Oct. 2023 IAG 
meeting, available at https://pcaobus.org/news-events/events/event-details/pcaob-investor-advisory-group-meeting-october-2023.
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    In response to the Board's request for comment on the draft 2022-
2026 Strategic Plan, some commenters encouraged the Board to continue 
to consider this topic.\21\ Additionally, in a January 2023 comment 
letter on the PCAOB's proposed quality control standard, members of the 
IAG advocated for ``a minimum requirement of eight indicators.'' \22\ 
These eight indicators were (i) staffing leverage; (ii) partner 
workload; (iii) manager and staff workload; (iv) audit hours and risk 
areas; (v) quality ratings and compensation; (vi) audit fees, effort, 
and client risk; (vii) audit firm's internal quality review results; 
and (viii) PCAOB inspection results.
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    \21\ See comments on 2022-2026 Strategic Plan Documents, 
available at https://pcaobus.org/about/strategic-plan-budget/comments-on-pcaob-draft-strategic-plan-2022-2026.
    \22\ See A Firm's System of Quality Control and Other Proposed 
Amendments to PCAOB Standards, Rules, and Forms, PCAOB Rel. No. 
2022-006 (Nov. 18, 2022). The comment letters received in response 
to the proposal are available on the Board's website in Docket 046. 
See comment letter from members of the IAG, available at https://assets.pcaobus.org/pcaob-dev/docs/defaultsource/rulemaking/docket046/4_iag.pdf?sfvrsn=1941e7c0_4.
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a. QC 1000: Requirements
    The Board adopted a new quality control standard for firms, QC 
1000, A Firm's System of Quality Control (``QC 1000''),\23\ which 
contains provisions that are relevant to firm reporting of firm- and 
engagement-level metrics. QC 1000 will become effective in December 
2025.
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    \23\ See A Firm's System of Quality Control and Other Amendments 
to PCAOB Standards, Rules, and Forms, PCAOB Rel. No. 2024-005 (May 
13, 2024) (``QC Adopting Release'').
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(1) Public Communication of Firm-Level or Engagement-Level Information
    QC 1000 includes a quality objective that, if a firm communicates 
firm-level or engagement-level information with respect to the firm's 
audit practice, firm personnel, or engagements, such as firm or 
engagement metrics, to external parties, such information is accurate 
and not misleading and, with respect to any such metrics that are 
communicated

[[Page 99973]]

in writing, the communication explains in reasonable detail how the 
metrics were determined and, if applicable, how the method of 
determining them changed since the metrics were last communicated.\24\ 
(With respect to metrics reported on Form FM and Form AP, the form 
itself provides the required explanation.) The final firm and 
engagement metrics include reporting elements that focus on the firm's 
responsibility to produce and report information that is accurate and 
not misleading, for example, an optional narrative to accompany the 
metrics. This element is discussed further below.
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    \24\ QC 1000.53e.
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(2) Use of Metrics in Monitoring the Firm's QC System
    Under QC 1000, in determining the nature, timing, and extent of QC 
system-level monitoring activities, the firm is required to take into 
account any metrics that the firm may use in its QC system.\25\ QC 1000 
does not require the use of any specific metrics; firms have the 
ability both to develop metrics on their own and to use any or all of 
the metrics required to be reported under Rule 2203C and Rule 3211 in 
their QC system, but that is not required. The Board believes these 
metrics would provide information that could be used in the firm's 
system of quality control. However, not all firms may find all metrics 
useful in operating or monitoring their QC system, and the Board is not 
mandating their use in connection with monitoring a firm's QC system at 
this time.
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    \25\ QC 1000.65c.
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b. Firm Reporting
    Concurrently with this rulemaking, the Board adopted certain 
updates to its annual and special reporting requirements to facilitate 
the disclosure of more complete, standardized, and timely information 
regarding audit firms. Among other new requirements, the updates will 
(i) require firms to disclose additional information on Form 2 about 
their fees, leadership and governance structure, and network 
arrangements; (ii) require, in connection with QC 1000, a one-time 
update to the statement on a firm's quality control policies and 
procedures on a new Form QCPP; and (iii) expand the scope of special 
reporting to include events that pose a material risk, or represent a 
material change, to the firm's organization, operations, liquidity or 
financial resources, in such a manner that it will affect the provision 
of audit services, as well as new cybersecurity reporting 
requirements.\26\
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    \26\ See PCAOB Rel. No. 2024-013.
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c. Proposed Firm and Engagement Metrics
    In April 2024, the Board proposed amendments to the PCAOB's rules 
and reporting forms to require the reporting of specified firm-level 
metrics on new Form FM, Firm Metrics, and specified engagement-level 
metrics on an amended and renamed Form AP, Audit Participants and 
Metrics. In the Board's proposal, it proposed a set of firm-level and 
engagement-level metrics across 11 areas to be publicly reported for 
the firms that serve as lead auditor for at least one accelerated filer 
or large accelerated filer.
    The Board received over 45 comment letters on the proposal.\27\ 
Commenters included investor-related groups, firms, firm-related 
groups, academics, and others.
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    \27\ The comment letters received on the proposal are available 
at https://pcaobus.org/about/rules-rulemaking/rulemaking-dockets/docket-041/comment-letters.
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    Some commenters expressed concerns about the speed of rulemaking by 
the Board. Some commenters asked the PCAOB for more than 60 days to 
respond to the proposal, citing overlapping comment proposal periods, 
the duration of comment periods, the length and complexity of various 
proposals, and overlapping SEC 19b-4 filing comment periods. On the 
other hand, a commenter urged the Board not to delay this rulemaking 
because investors need a relatively standardized data set to analyze 
and compare over time and across companies. The Board believes that 60 
days was a sufficient period for commenting on the proposal. Despite 
that, the Board considered comment letters that were submitted after 
the 60-day period closed. The Board received robust comments on the 
proposal, which informed the final metrics or final rules.\28\ These 
comments are addressed throughout this Exhibit 1 and in the Board's 
adopting release (Exhibit 3).
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    \28\ See also below for consideration of the 2015 AQI Concept 
Release (including comments received) and the PCAOB IAG 
recommendations.
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3. Overview of Existing Requirements
    Under current PCAOB rules and standards, certain information about 
PCAOB-registered firms is already made available to investors, audit 
committees, and other stakeholders. The disclosure of firm- and 
engagement-level metrics would supplement this information. This 
section discusses the key PCAOB standards and rules that require 
certain firm- and engagement-level information to be provided to 
various stakeholders.
i. Available Information Related to Firms
    PCAOB rules require firms to file Form 2 (Annual Report Form) to 
report basic information about the firm and its audit practice and Form 
3 (Special Reporting Form) after the occurrence of certain events.\29\ 
In addition, the PCAOB makes portions of inspection reports publicly 
available for firms that are subject to annual or triennial PCAOB 
inspections.
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    \29\ PCAOB Rule 2200, Annual Report; PCAOB Rule 2201, Time for 
Filing of Annual Report; PCAOB Rule 2203, Special Reports; 
Instructions to Form 2, available at https://pcaobus.org/about/rules-rulemaking/rules/form_2; Instructions to Form 3, available at 
https://pcaobus.org/about/rules-rulemaking/rules/form_3. Information 
reported on Forms 2 and 3 is publicly available unless a firm 
requests confidential treatment.
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a. Form 2 and Form 3
    As required by Section 102(d) of Sarbanes-Oxley and PCAOB Rule 
2200, each year registered firms must file an annual report with the 
Board. Under PCAOB rules, firms must do so by filing Form 2. The annual 
reporting period runs from April 1 to March 31, and the due date for 
filing is June 30.\30\ In addition to basic identifying information 
about the firm,\31\ firms report on Form 2 general information about 
their audit practices and other business relationships. Information 
required to be provided on Form 2 includes:
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    \30\ PCAOB Rule 2201; General Instructions 3-4 to Form 2 
(registered public accounting firm that has its application for 
registration approved by the Board in the period between and 
including April 1 and June 30 of any year not required to file an 
annual report in that year).
    \31\ Instructions to Form 2, Item 1.1.
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     Whether the firm issued audit reports for issuers, 
brokers, or dealers or played a substantial role in issuer or broker-
dealer audits; \32\
---------------------------------------------------------------------------

    \32\ Id., Item 3.1. The Board's release uses the terms 
``issuer,'' ``broker,'' and ``dealer'' as those terms are defined 
under Sections 2(a)(7) and 110(3)-(4) of Sarbanes-Oxley. 15 U.S.C. 
7201(a)(7), 7220(3)-(4). See also paragraphs (b)(iii), (d)(iii), and 
(i)(iii) of PCAOB Rule 1001, Definitions of Terms Employed in Rules. 
Entities that are brokers or dealers or both are sometimes referred 
to as ``broker-dealers.''
---------------------------------------------------------------------------

     Percentage of total fees billed to issuers for audit 
services, other accounting services, tax services, and non-audit 
services; \33\
---------------------------------------------------------------------------

    \33\ Instructions to Form 2, Item 3.2.
---------------------------------------------------------------------------

     For each issuer or broker-dealer for which the firm issued 
an audit report, the issuer's or broker-dealer's name, its Central 
Index Key (CIK) number and Central Registration Depository (CRD) number 
(if any), and the date of the audit report, as well as the total number

[[Page 99974]]

of firm personnel who exercised authority to sign the firm's name to an 
audit report for an issuer or broker-dealer during the reporting 
period; \34\
---------------------------------------------------------------------------

    \34\ Id., Items 4.1, 4.3.
---------------------------------------------------------------------------

     Physical address (and, if different, mailing address) of 
each firm office; \35\
---------------------------------------------------------------------------

    \35\ Id., Item 5.1.
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     Whether the firm has any memberships, affiliations, or 
similar arrangements involving certain activities related to audit or 
accounting services (including use of name in connection with audit 
services, marketing of audit services, and employment or lease of 
personnel to perform audit services), and the entities with which the 
firm has those relationships; \36\
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    \36\ Id., Item 5.2.
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     Total number of accountants, certified public accountants, 
and personnel; \37\
---------------------------------------------------------------------------

    \37\ Id., Item 6.1.
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     Relationships with certain individuals and entities with 
disciplinary or other histories (if not previously identified); \38\ 
and
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    \38\ Id., Items 7.1, 7.2.
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     Acquisitions of another public accounting firm or a 
substantial portion of another firm's personnel.\39\
---------------------------------------------------------------------------

    \39\ Id., Item 8.1
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    In addition to annual reporting on Form 2, firms are required to 
file Form 3 within 30 days after the occurrence of certain events, such 
as when the firm's legal name has changed while otherwise remaining the 
same legal entity, the firm has withdrawn an audit report on the 
financial statements of an issuer or has resigned, declined to stand 
for re-appointment, or been dismissed from an audit engagement as 
principal auditor, and the issuer has failed to comply with applicable 
Form 8-K reporting requirements for such events.\40\
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    \40\ General Instruction 3 to Form 3; Instructions to Form 3, 
Items 2.17, 2.1, 2.1-C, 3.1, 3.2.
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b. Firm Inspection Reports
    Sarbanes-Oxley authorizes the PCAOB to inspect firms for the 
purpose of assessing compliance with certain laws, rules, and 
professional standards in connection with a firm's audit work for 
issuers, brokers, and dealers. Firms that issue audit reports for more 
than 100 issuers per year are inspected annually. Firms that issue 100 
or fewer audit reports per year for issuers are generally inspected at 
least once every three years. The Board also inspects firms that play a 
substantial role in audits of issuers. Many firms registered with the 
Board perform no audit work for issuers or broker-dealers,\41\ or only 
participate in audits below the level of a substantial role, and the 
Board has not historically inspected those firms. The PCAOB provides 
each inspected firm with a report summarizing any deficiencies 
identified through the inspections process. Portions of these 
inspection reports are publicly available on the PCAOB's website.\42\ 
Recently the PCAOB introduced enhanced search tools that enable 
investors and others to better access and understand data from PCAOB 
inspection reports.\43\
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    \41\ See QC Adopting Release at 54.
    \42\ See https://pcaobus.org/oversight/inspections for 
inspection reports, basics of inspections, and inspection 
procedures. Sarbanes-Oxley provides that no portions of an 
inspection report that deal with criticisms of or potential defects 
in the quality control systems of the firm shall be made public if 
those criticisms or defects are addressed by the firm, to the 
satisfaction of the Board, no later than 12 months after the 
issuance of the inspection report. See Sarbanes-Oxley Section 
104(g)(2). Full (expanded) inspection reports are publicly available 
on the PCAOB's website when a firm fails to satisfactorily remediate 
within 12 months.
    \43\ See https://pcaobus.org/news-events/news-releases/news-release-detail/pcaob-launches-new-online-tools-to-help-users-find-and-compare-inspection-report-data for a summary of the 
enhancements, including six new search filters, including Part I.A 
deficiency rate, to help users analyze and compare more than 3,700 
inspection reports.
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ii. Available Information Related to Issuer Engagements
a. Auditor's Communications With Audit Committees
    Investors and other financial statement users are the beneficiaries 
of the audit. Audit committees protect the interests of investors by 
assisting the board of directors in fulfilling its responsibility to 
oversee the integrity of the company's accounting and financial 
reporting processes, including the audit of the company's financial 
statements--and in carrying out that duty, they also benefit other 
financial statement users. To support the audit committee in this 
crucial role, PCAOB standards and rules and SEC rules require auditors 
to provide certain firm- and engagement-level information to audit 
committees.\44\ AS 1301, Communications with Audit Committees, requires 
various communications to facilitate the audit committee's financial 
reporting oversight.\45\ Among other things, AS 1301 requires the 
auditor to communicate: (i) significant risks; \46\ (ii) critical 
accounting policies and practices, critical accounting estimates, and 
significant unusual transactions; \47\ (iii) the auditor's evaluation 
of the quality of the company's financial reporting; \48\ and (iv) 
other matters that are significant to the oversight of the company's 
financial reporting process.\49\ In addition, other PCAOB standards and 
rules and SEC rules independently require certain audit committee 
communications.\50\
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    \44\ See Auditing Standard No. 16, Communications with Audit 
Committees; Related Amendments to PCAOB Standards; and Transitional 
Amendments to AU Sec. 380, PCAOB Rel. No. 2012-004 (Aug. 15, 2012), 
at 2, available at https://assets.pcaobus.org/pcaob-dev/docs/default-source/rulemaking/docket030/release_2012-004.pdf?sfvrsn=7872effb_0.
    \45\ Id. (``Communications with the audit committee provide 
auditors with a forum separate from management to discuss matters 
about the audit and the company's financial reporting process.'').
    \46\ See AS 1301.09.
    \47\ See AS 1301.12
    \48\ See AS 1301.13.
    \49\ See AS 1301.24.
    \50\ See Appendix B of AS 1301 (listing other PCAOB standards 
and rules requiring audit committee communications); see also 17 CFR 
210.2-07; PCAOB Rule 3526, Communication with Audit Committees 
Concerning Independence.
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b. Auditor's Public Communications of Certain Information
    AS 3101 and Rule 3211 require firms to publicly disclose certain 
engagement-specific information in the auditor's report and on Form AP. 
In addition to specifying the requirements for an unqualified opinion 
on the financial statements, AS 3101 requires the auditor's report to 
describe (i) critical audit matters, which inform investors and other 
financial statement users of matters arising from the audit that 
required especially challenging, subjective, or complex auditor 
judgment; and (ii) how the auditor addressed those matters. AS 3101 
further requires the auditor's report to include a statement disclosing 
the year in which the auditor began serving consecutively as the 
company's auditor. Other standards require additional information to be 
included in the auditor's report, including AS 2415, Consideration of 
an Entity's Ability to Continue as a Going Concern, which requires an 
explanatory paragraph when the auditor concludes that there is 
substantial doubt about the entity's ability to continue as a going 
concern for a reasonable period of time.\51\
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    \51\ See AS 2415.12.
---------------------------------------------------------------------------

    PCAOB Rule 3211 requires auditors to file Form AP, which, among 
other things, provides information to investors and other financial 
statement users about the engagement partner and other accounting firms 
participating in the audit of issuers. Disclosures on Form AP provide 
increased transparency about certain audit participants. The key 
provisions include annual disclosures of (a) the name of the engagement 
partner and (b) the name and extent of participation of other 
accounting firms in the audit.\52\
---------------------------------------------------------------------------

    \52\ See Instructions to Form AP. Form AP requires different 
disclosures regarding other accounting firms that participate in an 
audit depending on their level of participation. For other 
accounting firms with individually 5% or greater participation in 
the audit, the Form AP filer must disclose the legal name of the 
other accounting firm, the city and state (or, if outside the United 
States, the city and country) of that firm's headquarters, and the 
percentage of total audit hours (either as a single number or within 
a range provided on the form) attributable to each other accounting 
firm. For other accounting firms with individually less than 5% 
participation, the filer must disclose the total number of such 
other accounting firms and the aggregate percentage (either as a 
single number or within a range provided on the form) of total audit 
hours for all such firms.

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[[Page 99975]]

    The PCAOB makes the Form AP data set available on AuditorSearch, by 
which users can conduct live searches or download the entire data set 
in a searchable, machine-readable format.\53\ Using this data, a user 
can determine, for example, the changes in engagement partner for any 
given issuer or obtain a list of all issuers for which an engagement 
partner is responsible. After identifying an engagement partner, a user 
can then compile information from other sources, including information 
about whether the partner is associated with restatements of financial 
statements, has been subject to public disciplinary proceedings, or has 
experience as an engagement partner for issuers of a particular size or 
in a particular industry. Similarly, starting from the Form AP data 
set, users may perform further research on the other accounting firms 
that participate in an audit, such as whether those firms are 
registered with the PCAOB, whether they have any publicly available 
disciplinary history, whether they have been inspected, and, if so, the 
results of those inspections.
---------------------------------------------------------------------------

    \53\ See AuditorSearch, available at https://pcaobus.org/resources/auditorsearch.
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4. Voluntary Firm Reporting
    Since the Concept Release, many of the audit firms that issue audit 
reports for more than 100 issuers and audit the majority of the market 
capitalization for issuers have been publicly disclosing certain firm-
level information discussed in the Concept Release through their audit 
quality reports, transparency reports, or other published reports. A 
firm-related group has published a framework to assist its members in 
these efforts.'' \54\ Many firms may also be developing and monitoring 
certain firm and engagement metrics to be used internally by the firm. 
In 2023, the same firm-related group published a summary analysis of 
the most recent audit quality reports issued by the eight firms 
represented on the group's governing board.\55\ The report indicated 
that firms were reporting similar firm-level quantitative metrics 
related to several areas, including audit firm inspections; training; 
use of auditor's specialists; audit report reissuances and financial 
statement restatements; measures of experience, such as tenure with the 
firm; and personnel turnover. The report further noted that some firms 
disclosed qualitative as well as quantitative information, including 
information relating to audit methodology and execution, people and 
firm culture, quality management and inspections, and technology and 
innovation.
---------------------------------------------------------------------------

    \54\ CAQ, Audit Quality Disclosure Framework (Update) (June 
2023). The framework provides that metrics ``may provide those 
overseeing the audit and other stakeholders with information and 
additional transparency into the firm's systems and processes that 
impact audit quality. However, the CAQ believes that a combination 
of metrics--taken as a whole and supplemented with robust 
discussion--may provide those overseeing the audit and other 
stakeholders with information and additional transparency into the 
firm''s systems and processes that impact audit quality.'' Id. at 4.
    \55\ See CAQ Audit Quality Reports Analysis: A Year in Review 
(Mar. 2023), available at https://www.thecaq.org/aqr-analysis-yir 
(``CAQ Report''). The eight firms on the CAQ's governing board are 
BDO USA, LLP, Crowe LLP, Deloitte & Touche LLP, Ernst & Young LLP, 
Grant Thornton LLP, KPMG LLP, PricewaterhouseCoopers LLP, and RSM US 
LLP.
---------------------------------------------------------------------------

    The Board has observed the firms that report firm-level metrics 
generally do not report engagement-level metrics.\56\ Where firm-level 
metrics are reported, the firms report different metrics, calculated in 
different ways, and using different definitions, thereby preventing 
users from making comparisons across firms.
---------------------------------------------------------------------------

    \56\ In connection with the Nov. 2022 SEIAG meeting, the Board 
staff researched various reports issued during the prior three years 
by the top 20 accounting firms (by 2022 revenue) and identified nine 
firms that disclosed firm-level metrics. See Firm and Engagement 
Performance Metrics Briefing Paper and Related Attachments from Nov. 
2022 SEIAG meeting, available at https://pcaobus.org/news-events/events/event-details/pcaob-standards-and-emerging-issues-advisory-group-meeting-2022. For each firm-level metric reported by those 
nine firms, the PCAOB staff included examples of how firms 
calculated the metric as well as the number of firms reporting that 
metric.
---------------------------------------------------------------------------

    One commenter on the Concept Release stated that many firms are 
using the 28 AQIs identified in the Concept Release at some level to 
(i) manage the firm and (ii) manage the quality of audits at the office 
level and at the engagement level. Another commenter specifically 
indicated that its audit committee reviewed the engagement-level AQIs 
identified in the Concept Release that were provided by their auditor.
    One commenter on the proposal asserted that the voluntary reporting 
firms already do through transparency and audit quality reports 
includes firm-level metrics, as well as explanations of how they are 
calculated, including changes in the calculation that could affect 
comparability, as well as context necessary for understanding the 
metrics, and would be preferable to the mandatory metrics that the 
Board proposed. On the other hand, an investor-related group presented 
an analysis of firm transparency and audit quality reports, finding 
that the measures used in transparency reports and audit quality 
reports by different firms are not consistent or comparable across 
firms in their computations, presentation and inclusion, and are not 
provided at the engagement level, which the commenter believes is the 
level at which they would be most useful. This commenter stated that 
having both firm- and engagement-level metrics enhances the metrics' 
usefulness because it provides broader context for understanding at 
both levels.
Actions in Other Jurisdictions
    Some jurisdictions outside the United States have moved forward 
with mandatory or voluntary initiatives related to the monitoring and 
disclosure of metrics. In May 2022, Accountancy Europe published a 
factsheet about recent related initiatives in Europe and elsewhere.\57\ 
The Accountancy Europe Report described initiatives conducted in 10 
countries (including the United Kingdom (U.K.), South Africa and 
Canada) by various organizations, including audit oversight bodies 
(including the U.K.'s Financial Reporting Council (FRC), Portugal's 
Securities Market Commission (CMVM), South Africa's Independent 
Regulatory Board for Auditors (IRBA), and the Canadian Public 
Accountability Board (CPAB)),\58\ professional organizations,\59\ a 
group of independent experts,\60\ and the CAQ. Additionally, the FRC in 
the U.K. issued a consultation document and a feedback statement in 
2022 on publishing AQIs for the largest U.K. audit firms,\61\ the IRBA 
in South Africa

[[Page 99976]]

requested firms auditing listed companies to submit AQI-related 
information to the IRBA,\62\ and the CPAB launched an exploratory pilot 
project to solicit feedback on AQIs' usefulness in support of broader 
national and international discussions.\63\ The primary users of the 
metrics from these initiatives were audit committees, oversight bodies, 
and professional organizations. Although many of the metrics in these 
initiatives were nonpublic, public reporting was encouraged or 
anticipated in the future for half of the initiatives.\64\ The 
Accountancy Europe Report suggested that several factors should be 
considered when selecting, evaluating, and reporting metrics and 
recommended that a combination of metrics would provide ``profound 
insight into audit quality.''
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    \57\ See Accountancy Europe, Factsheet, Audit Quality 
Indicators--A Global Overview of Initiatives (May 2022), available 
at https://www.accountancyeurope.eu/wp-content/uploads/220401-Factsheet-Audit-Quality-Indicators.pdf (``Accountancy Europe 
Report'').
    \58\ Id. Other oversight bodies in the Accountancy Europe Report 
include the Federal Audit Oversight Authority (FAOA) in Switzerland 
and the Accounting and Corporate Regulatory Authority (ACRA) in 
Singapore.
    \59\ Id. Professional organizations in the Accountancy Europe 
Report include the Institute of Public Auditors (IDW), Germany and 
The Institute of Chartered Accountants (ICAI), India.
    \60\ Id. Quartermasters, Netherlands.
    \61\ See FRC, Consultation Document: Firm-level Audit Quality 
Indicators (June 2022), available at https://media.frc.org.uk/documents/FRC_AQI_Consultation.pdf. See FRC, Feedback Statement: 
Firm-level Audit Quality Indicators Consultation (Dec. 2022), 
available at https://www.frc.org.uk/getattachment/afbf3bc4-cf15-468a-85da-afb8e5af222a/Feedback-Statement_-2022.pdf (``FRC Feedback 
Statement'').
    \62\ See IRBA 2021 Survey Report Audit Quality Indicators, 
available at https://www.irba.co.za/upload/IRBA%20AQI%20Report%202021.pdf and IRBA 2022 Survey Report Audit 
Quality Indicators, available at https://www.irba.co.za/upload/2022%20AQI%20Report.pdf.
    \63\ See CPAB Audit Quality Indicators Final Report, available 
at https://cpab-ccrc.ca/docs/default-source/thought-leadership-publications/2018-aqi-final-report-en.pdf?sfvrsn=5af68dba_12&sfvrsn=af68dba_12 (``CPAB Final Report''). 
See also CPAB Audit Quality Indicators: How to put them to work, 
available at https://cpab-ccrc.ca/docs/default-source/thought-leadership-publications/2019-aqi-put-to-work-en.pdf?sfvrsn=246de787_10.
    \64\ See Accountancy Europe Report (public reporting encouraged 
or anticipated by ACRA, CAQ, FRC, IDW, and Quartermasters).
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    In January 2023, Accountancy Europe published a position paper.\65\ 
The position paper defined key concepts related to audit quality, 
presented considerations for developing AQIs, and explained what, in 
its view, can and cannot be achieved by reporting such indicators (for 
example, the paper pointed out that all metrics have limitations, that 
metrics are not a proxy for financial reporting quality, and that user 
expectations should be managed to make them aware that metrics do not 
provide definitive results). The paper stated as part of its conclusion 
that ``[AQIs] should not be considered as an end in themselves but 
could be a useful tool to drive audit quality'' and reiterated that a 
combination of metrics would provide insight into audit quality.
---------------------------------------------------------------------------

    \65\ See Accountancy Europe, Position Paper, Key Factors to 
Develop and Use Audit Quality Indicators (Jan. 2023), available at 
https://accountancyeurope.eu/wp-content/uploads/221206-AQIs-Position-Paper_FINAL.pdf.
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    Some commenters noted that initiatives in other jurisdictions do 
not currently require public disclosure. Others suggested that the 
requirements that the Board proposed were more onerous than other 
jurisdictions and may cause reporting of different calculations for 
similar metrics in different jurisdictions. One commenter provided 
examples in other jurisdictions including providing optional guidance, 
allowing engagement-level metrics to be shared confidentially with 
audited entities, and allowing for voluntary adoption. Another 
commenter expressed its belief that the Board is attempting to justify 
individual metrics based on certain jurisdictions' use but have not 
fully considered the context in how they are being used or the process 
that has been undertaken in those jurisdictions. An additional 
commenter stated that the comparability problem between jurisdictions 
could be solved by allowing firms to voluntarily disclose the metrics 
as defined. One commenter expressed the hope that audit regulators 
globally will seek to align requirements relating to the reporting of 
metrics.
    While other jurisdictions have not historically required public 
reporting, the U.K. FRC has announced that it will begin to require 
public reporting in 2025.\66\
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    \66\ See https://www.frc.org.uk/consultations/aqis-consultation. 
In June 2025, the FRC is requiring firms that audit 20 or more 
public interest entities to publicly report ten firm-level metrics 
across five areas. These areas include (i) Performance monitoring 
and remediation, (ii) Quality monitoring, (iii) Resource planning 
and people management, (iv) Information and communication, and (v) 
Governance and leadership.
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    The Board considered the actions taken in other jurisdictions in 
developing the final metrics. While substantially all the final metrics 
are the same as, or similar to, metrics used in some other 
jurisdictions, the Board acknowledges that no other jurisdiction has 
embraced either the full set of metrics or the public reporting 
requirements the Board has adopted. However, the Board's objective in 
understanding actions in other jurisdictions was not to conform to what 
they have done but rather to consider those actions in the context of 
the Board's own rulemaking, which is addressed further below. The Board 
believes that its approach to evaluating and determining which metrics 
should be disclosed is appropriate in light of its statutory investor-
protection mission.
Discussion of the Final Rules
Overview
    As noted above, the Board considered ways to measure audit firm and 
audit performance, primarily with a view to providing information that 
investors can use in making decisions regarding their investments, such 
as ratifying the selection of the auditor and voting for members of the 
board of directors, including directors who serve on the audit 
committee. The Board also believes that firm and engagement metrics 
will benefit other stakeholders. For audit committees, metrics will 
provide additional context, including consistent comparative 
information that is not currently available, that can be used when 
deciding whether to select or retain a firm and when overseeing the 
auditor's performance. For audit firms, metrics will provide 
standardized information about themselves and their peers that can be 
used in designing, implementing, monitoring, and remediating their 
systems of quality control. The Board will also benefit from having 
additional tools to use in its inspections program and standard-setting 
initiatives.
    This rulemaking addresses the need for information by requiring 
consistent, comparable disclosures that the Board believes will provide 
insight into aspects of the firm and the engagement team conducting the 
audit, including information relating to workloads, retention, 
allocation of audit hours, experience, and restatements.
1. Purpose of the Metrics
    Investors and other stakeholders lack information that is available 
to company management. The federal securities laws seek to reduce this 
information asymmetry through various disclosure, internal control, and 
other requirements, including requirements for public companies to 
prepare and disclose financial statements accompanied by audit reports 
issued by an independent public accounting firm. Investors and other 
stakeholders also lack information available to the auditor and cannot 
observe the auditor's work or other aspects of a public company audit. 
Instead, they must rely on the audit committee, which is charged with 
overseeing the external auditor, and on other available public 
information, such as the reputation of the firm issuing the audit 
report or the name of the engagement partner. These difficulties in 
evaluating the audit and the auditor may lead to reduced accountability 
for auditors and an inefficient allocation of audit effort. Such 
allocations allow audit risk to remain insufficiently evaluated, 
ultimately risking suboptimal investment decisions, hampering the 
efficient functioning of the audit profession, and negatively affecting 
the

[[Page 99977]]

capital markets.\67\ Furthermore, while the audit committee has more 
information regarding the specific auditor it oversees, it lacks 
insight into other audit engagements and other firms; such comparable 
information would assist the audit committee in more effectively 
selecting and monitoring the auditor.
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    \67\ There is a long stream of research regarding the effects 
that information asymmetry about product features, such as quality, 
and disclosure have on markets. See, e.g., George A. Akerlof, The 
Market for ``Lemons'': Quality Uncertainty and the Market Mechanism, 
84 The Quarterly Journal of Economics 488 passim (1970); and Robert 
E. Verrecchia, Essays on Disclosure, 32 Journal of Accounting and 
Economics 97 (2001).
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    Investors and other stakeholders may seek to reduce these 
information disparities by gathering additional information about the 
firm responsible for the audit and the relevant audit engagement. As 
discussed above, the PCAOB has previously sought to facilitate those 
efforts through rules and standards requiring the disclosure of such 
information. From its inception, the Board's registration and reporting 
program has yielded important information about registered firms. 
Annual updates on Form 2 include information such as the issuers 
audited by the firm, a breakdown of fees charged to issuers, and 
network affiliations, and current reporting on Form 3 discloses 
significant events such as the withdrawal of an audit report and 
certain legal actions involving the firm or its professionals. The 
Board concurrently adopted amendments to both of those reporting forms 
to mandate the disclosure of standardized and timely information by 
firms.\68\ Firms are required to disclose on Form AP the name of the 
engagement partner and certain audit participants.\69\ The Board also 
made the auditor's report more relevant and informative by, among other 
things, requiring communication of critical audit matters and the 
tenure of the auditor.\70\ The Board intends the firm and engagement 
metrics to complement these other initiatives and to add to the mix of 
information available to investors and other stakeholders when 
evaluating the auditor and the audit.\71\
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    \68\ See PCAOB Rel. No. 2024-013.
    \69\ See PCAOB Rule 3211.
    \70\ See AS 3101.10.b, .11-.16.
    \71\ In addition to disclosures on Form AP and in the audit 
report, the Board previously required information on periodic and 
special reports to be publicly available. See Rules on Periodic 
Reporting by Registered Public Accounting Firms, PCAOB Rel. No. 
2008-004 (June 10, 2008), 28-32.
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    The Board's oversight activities have revealed that there are 
identifiable performance differences across firms and among engagement 
teams within the same firm, including variations among firms belonging 
to global networks. The Board considered such differences when 
performing regulatory functions. For example, the Division of 
Registration and Inspections uses, among other factors, information 
about the firm and the engagement to identify audit engagements for 
risk-based selections in the Board's inspections program.
    Mandating public disclosure of firm- and engagement-level metrics 
will provide investors, audit committees, and other stakeholders with 
comparable information that is not currently available and will 
otherwise be difficult or impossible to obtain. These stakeholders will 
be able to learn about both specific engagements and specific firms and 
have a basis to compare them to other engagements and other firms. The 
firms themselves could also benefit from access to information about 
their peers, both in gaining new perspective on how their practices 
compare and in potentially gaining new opportunities for competition 
based on markers that users come to associate with quality. Required 
disclosures will facilitate development of standardized data for 
consistent comparison and analysis over time, which the Board believes 
will be more valuable than the ad hoc, individualized disclosures that 
some firms have made on a voluntary basis. Mandatory public disclosure 
will also ensure that the information will be accessible to all 
stakeholders, so that any decision-useful information can be readily 
evaluated. The Board believes this information will enable investors, 
audit committees, and other stakeholders to make better-informed 
decisions.\72\
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    \72\ Under Section 102 of Sarbanes-Oxley, the Board may require 
registered public accounting firms to submit periodic and special 
reports containing financial or other information as is ``necessary 
or appropriate in the public interest or for the protection of 
investors.'' 15 U.S.C. 7212(d). Section 103 of Sarbanes-Oxley tasks 
the Board with adopting quality control and other standards to be 
used by registered firms ``in the preparation and issuance of audit 
reports . . . as may be necessary or appropriate in the public 
interest or for the protection of investors.'' 15 U.S.C. 7213(a)(1). 
See also 15 U.S.C. 7211(a), (c)(5), 7213(a)(2)(B). The Board 
believes the proposed metrics would further the public interest and 
would protect investors in accordance with these provisions.
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    The Board believes the metrics will also assist the PCAOB in a 
variety of ways. Metrics will help to inform the Board's inspection 
activities, including in the selection of firms, engagements, and focus 
areas for review. For example, the final metrics could refine the 
selection models used to aid in predicting negative audit outcomes, 
enhancing the Board's risk-based inspections. They could also enrich 
the discussions the Board has with audit committee chairs as part of 
the Board's inspections process. Metrics may also inform future 
standard-setting activities by helping the Board to identify areas 
where regulatory action is needed and suggesting potential approaches. 
In addition, the Board expects metrics to enhance the PCAOB's ability 
to produce impactful research and to provide valuable information 
sources for the public, including academic research, helping to create 
new insights into the audit.
    The Board's discussion of the potential benefits of the final 
metrics in greater detail below.
2. Public Reporting of Metrics
    Many commenters on the proposal addressed the fundamental question 
of whether there was value in mandating a set of publicly reported 
metrics, expressing conflicting views. Investors and investor-related 
groups were generally supportive. Many other commenters, primarily 
firms and firm-related groups criticized the proposal. These commenters 
either supported public reporting of some firm-level metrics but not 
others while generally opposing any public reporting of engagement-
level metrics, or opposed all public reporting of metrics at both the 
firm and engagement levels.
    Among the commenters that supported the metrics proposal, several 
stressed the benefits of increased transparency for key stakeholders 
and the public overall. Several commenters generally agreed with the 
PCAOB's rationale for the metrics, including increasing competition 
among audit firms, including on the basis of audit quality; promoting 
auditor accountability, which will lead to greater audit quality; and 
providing investors with decision-useful comparable information that 
will assist them in making decisions about audit-related matters (e.g., 
ratifying the appointment of the auditor or voting for reelection of 
Board members that serve on the audit committee). Two of these 
commenters asserted that investors currently lack information to make 
an independent and informed decision regarding ratification of the 
appointment of the auditor and to hold audit committee members to 
account in the performance of their duties. In that context, one of 
these commenters pointed out that most failures to ratify the 
appointment of the auditor occur after a financial reporting failure, 
and argued that metrics would provide information allowing investors to 
make

[[Page 99978]]

an ex ante, rather than ex post, evaluation of the auditor's work.
    Two commenters particularly favored engagement-level metrics. One 
said it would enable the compilation of engagement-level data for all 
public company audit engagements within a specific office to compare 
data for competing offices within the same geographic area. In this 
commenter's view, metrics such as workload would provide great value to 
prospective employees and would improve the talent pipeline issue 
because firms' workload need to be competitive in the eyes of 
prospective employees. Another argued that engagement-level metrics are 
most useful to investors, using firm-level metrics to provide context. 
This commenter also emphasized the importance of firm-level metrics, 
which will provide context in evaluating engagement-level metrics and a 
firm's audit practice and its related system of quality control.
    Several commenters said that the benefits of metrics would likely 
evolve over time, for example, as users are able to aggregate multiple 
data points, make comparisons, and observe trends. The Board agrees and 
believes that analyzing the metrics over time, across engagements and 
across firms, in the context of known good practices and indicators of 
audit failure, will enable the PCAOB, as well as academics and users of 
the metrics, to gain a new perspective on the audit and potentially 
deeper insights into some of the drivers of audit quality.
    Many larger firms generally supported certain firm-level metrics. 
These commenters generally agreed that firm-level reporting could 
provide stakeholders with relevant information through consistent 
disclosure by all firms required to report. While some of the 
commenters raised concerns about the usefulness, comparability, and 
risk of misinterpretation of certain firm-level metrics; the risk that 
standardization of metrics limits their adaptability to change in the 
business and auditing environment; and more generally concerns that the 
costs may outweigh the benefits, commenters agreed that the proposed 
firm-level metrics are generally consistent with voluntary disclosures 
that some firms are already making in firm transparency and audit 
quality reports. A discussion of the comments made with regard to 
particular metrics is provided below.
    However, firms and firm-related groups generally opposed 
engagement-level metrics. Some questioned whether investors would use 
the metrics. Others expressed concern that publicly available metrics 
could contribute to information overload. Many said that it would not 
be possible to provide sufficient context to enable users to understand 
the metrics, even with the firm-level metrics or narrative disclosures. 
Some commenters asserted that, because the underlying circumstances of 
engagement-level metrics are not homogeneous and users would not have 
necessary context, engagement-level metrics would not be 
comparable.\73\ Others focused on the significance of qualitative 
factors such as professional judgment and the duty to exercise due 
care, including professional skepticism, saying that metrics were 
inappropriately ``one size fits all'' or not decision-useful because 
they do not capture these key concepts.
---------------------------------------------------------------------------

    \73\ Commenters listed various types of contexts that in their 
view would be necessary for proper understanding of the engagement-
level metrics, including variations across firms (e.g., differences 
in operations, structures, methodologies, and resources), the unique 
circumstances of each engagement (e.g., differences in risk areas, 
team compositions, and timelines), and the unique circumstances of 
each issuer (e.g., differences in policies and resources).
---------------------------------------------------------------------------

    Many commenters expressed concern that users would not find metrics 
meaningful and may even misunderstand them and reach inappropriate 
conclusions. Absent providing substantial context and understanding how 
stakeholders would use the metrics, in one commenter's view, investors 
may make capital allocation decisions based on a misinterpretation of a 
metric, resulting in a new element of volatility in the capital 
markets. Two commenters raised a concern that the proposal does not 
provide a tie between assessing audit quality and the proposed metrics. 
Some commenters went on to say that providing metrics in isolation 
without context and effective two-way communication would have very 
minimal, or even negative, impact on audit quality. Another commenter 
stated that most of the data points required as part of the proposal 
are currently available to the PCAOB.
    One commenter expressed concern that overemphasis on metrics could 
lead firms to focus on consistency of the metrics to avoid the 
implication of weak auditing or other potential misinterpretations, 
which in the commenter's view could lead to commoditization of the 
audit and reduce incentives to innovate the audit approach. On the 
other hand, several other commenters argued that metrics would support 
more robust competition based on quality, making the audit less of a 
commodity.
    Some commenters said that the metrics seemed particularly focused 
on larger firms or would be especially burdensome for smaller firms. 
The Board believes the final metrics call for data that will be 
relevant to and obtainable by firms regardless of size. The potential 
differential cost impacts are discussed below.
    Some commenters questioned whether public reporting of metrics 
would undermine the authority of the audit committee. For example, one 
expressed concern that there would be public pressure on the audit 
committee to appoint auditors whose metrics were perceived to be within 
some acceptable range, even if the committee was satisfied with the 
work of the current auditor. Another commenter asserted that it is not 
investors' responsibility to oversee the auditor, and raised a concern 
that public reporting of metrics could undermine confidence in audit 
committees and the PCAOB, both of which have responsibilities for 
direct oversight of audits and audit firms and have the context to 
properly understand these metrics. However, an investor-related group 
specifically disagreed with this reasoning and asserted that this 
rulemaking exhibits commitment to faithfully executing the PCAOB's 
responsibilities and working to improve audit quality and trust in the 
audit market.
    Several commenters opposed both firm- and engagement-level metrics. 
One asserted that the proposal did not provide sufficient evidence that 
public disclosure of the proposed metrics will have any meaningful 
impact on the quality of audit services. Another commenter said that 
the metrics were not grounded in or intended to have any nexus with 
audit quality, focusing instead on auditor accountability, and on that 
basis went beyond the PCAOB's remit. The commenter asserted that the 
proposed metrics would overload audit committees and investors with a 
large set of complex data that was not sought, needed, meaningful, or 
obviously usable by them, suggesting that the current voluntary 
approach should be maintained instead. Another expressed concern that 
public disclosure of the information specified in the proposals could 
do more harm than good, particularly in relation to an increase in 
litigation and reputational risk and potentially furthering the talent 
crisis in the profession. That commenter particularly questioned the 
potential value of metrics for audit committees, saying that they 
already have access to most of the information that would be mandated 
and that annual reporting would be unhelpful since evaluation of the 
auditor is a continuous process. One commenter who advocated delay and

[[Page 99979]]

further study before the Board takes further action on the metrics 
expressed skepticism that metrics would influence shareholder votes on 
ratification of the appointment of the auditor or benefit most 
investors, because metrics are only indirectly related to audit quality 
and there would not be sufficient incentive for users to engage with 
them.
    Most of the commenters who objected to public reporting of metrics 
recommended alternatives, including mandatory or voluntary 
communication with the audit committee, particularly for engagement-
level metrics. Many commenters asserted that the audit committee is the 
appropriate party to whom engagement-level metrics should be 
communicated, because the audit committee has the statutory 
responsibility to appoint, compensate, and replace the external auditor 
and is sufficiently informed to understand the context of the company, 
the audit, and the auditor. Commenters said that audit committees could 
engage in dialog with the auditor, enabling them to understand the 
metrics in the context of the specific audit, promoting accountability 
in the performance of the audit on behalf of investors. Another 
commenter asserted that providing information to, and allowing the 
assessment by, audit committees would be more likely to provide greater 
benefits to investors and the capital markets than public reporting, 
while minimizing unintended consequences (such as users reaching 
inappropriate conclusions), and would be consistent with the PCAOB's 
objective to improve audit quality. Another commenter, who questioned 
the value of metrics for most investors, said metrics had the potential 
to be quite useful for audit committees, who could use their direct 
access to the auditor to gain valuable context and would have the 
opportunity, using metrics, to communicate more about the audit process 
in their audit committee report. On the other hand, an investor-related 
group pointed out that audit committees are reliant on communications 
from the auditor regarding the company's audit issues and the quality 
of the audit; their principal tool is inquiry, not observation, which, 
in audit parlance, is the weakest form of audit evidence.
    Many commenters that objected to publicly available metrics like 
the ones the Board proposed advocated a non-prescriptive, principles-
based approach, whereby auditors and audit committees would discuss 
potential metrics and the audit committee would determine which metrics 
and other information it finds meaningful and when it wants to receive 
and evaluate them. This approach, the commenters said, would encourage 
more tailored metrics that could be appropriately discussed in context 
and could change over time, adapting to changes in the audit 
environment, regulation, technology and audit processes, and the 
information needs of audit committees and investors and would 
prioritize relevance rather than consistency. Some commenters 
specifically recommended amending AS 1301 to mandate such a discussion 
(for example, initially in connection with audit planning and later as 
part of reporting on audit results). However, one investor-related 
group disagreed with this principles-based approach, asserting that it 
would not promote comparability or accountability because a set of 
principles would inevitably result in qualitative rather than 
quantitative disclosure and the information would not be comparable 
between firms and engagements and over time. This commenter asserted 
that the standardized metrics the Board proposed would be more useful 
to investors.
    This commenter also provided analysis of audit quality reports 
published by the Big 4 firms, observing that elements of the proposed 
firm-level metrics are already presented in those reports under a 
principles-based approach whereby each firm has developed its own 
metrics.\74\ The commenter noted that some of these metrics are 
qualitative, some are quantitative, some use different definitions, and 
some unfavorable metrics or facts may be excluded. This commenter also 
asserted that because metrics voluntarily published by firms are self-
defined and principles-based and are only at the firm level and not at 
the engagement level, they are largely unused by the investment 
community; they are regarded as marketing materials rather than 
investor information. This commenter emphasized that investors need 
more standardized information contextualized at the engagement-level to 
the company they are investing in and that are anchored to the firm-
level standardized information.
---------------------------------------------------------------------------

    \74\ This commenter provided several examples of inconsistencies 
in reporting metrics. For example, it stated while all Big 4 firms 
provide data on turnover or attrition, they are defined and 
calculated in different ways and any comparison among the firms is 
stymied.
---------------------------------------------------------------------------

    Several commenters noted that it would be possible for audit 
committees to provide additional public disclosure via the audit 
committee report in the issuer's proxy statement,\75\ which investors 
could consider in deciding whether to ratify the audit committee's 
selection of auditor and whether to vote for the board members who 
serve on the audit committee. Some of these suggested that the SEC 
could take action instead of, or along with, the PCAOB. Two argued that 
expanded audit committee disclosure would result in more relevant and 
decision-useful information for investors than the proposed metrics or 
would be a more direct way to address the information asymmetry than 
through this rulemaking. The other suggested that the SEC, together 
with the New York Stock Exchange and Nasdaq, should require inclusion 
of the metrics in the proxy statement to provide context for existing 
fee disclosures and to make investors aware of the metrics without 
having to search for them separately.
---------------------------------------------------------------------------

    \75\ See Schedule 14A. Information required in proxy statement, 
17 CFR 240.14a-101. If action is to be taken at a shareholders' 
meeting with respect to the election of directors, Item 7 of 
Schedule 14A requires the proxy statement to contain a report of the 
audit committee as specified in Item 407 of Regulation S-K, 17 CFR 
229.407.
---------------------------------------------------------------------------

    One firm suggested that the PCAOB gather the information underlying 
the metrics via inspection. However, this would defeat the objective of 
enhancing transparency to enable better informed decision-making by 
stakeholders.
    Another firm expressed concern that engagement-level metrics may 
not be useful because they will become available only once a year, with 
a delay of up to 35 days after the audit is completed until Form AP is 
filed. However, an investor-related group disagreed with this argument 
indicating that the financial results for companies are delivered with 
the same, or a more significant delay, to investors and usefulness of 
the information is not simply its immediate discrete disclosure but the 
trends in the information within and between companies over time.
    In addition, commenters raised general concerns about metrics 
requirements, including
     the risk that publishing metrics would involve releasing 
confidential or nonpublic information, which may violate 
confidentiality obligations imposed by the American Institute of CPAs 
(``AICPA'') Code of Professional Conduct or conflict with non-US laws 
and regulations;
     diverting the attention of the engagement team and firm 
resources away from performing quality audits;
     lessening competition by releasing competitively sensitive 
information and reducing the number of registered public accounting 
firms, particularly in foreign jurisdictions, that would be available 
to play a substantial role in a large multinational group audit;

[[Page 99980]]

     being burdensome and costly to compile data for each 
individual engagement;
     becoming a ``check the box'' or compliance exercise that 
may not improve audit quality or provide meaningful transparency to 
stakeholders; and
     implying that audit committees have a legal duty to 
consider metrics even though the PCAOB has no authority over audit 
committees.
    The Board adopted requirements for firms to provide both firm- and 
engagement-level metrics, with changes from its proposal as described 
in further detail below. The Board continues to believe that public 
reporting of a mandated set of firm- and engagement-level metrics will 
provide stakeholders with comparable information that is not currently 
available, would otherwise be difficult or impossible to obtain, and 
will position them to make better-informed decisions. Further, the 
Board believes that required public disclosures will facilitate 
development of standardized data for consistent comparison and analysis 
over time, which will be more valuable than the ad hoc, individualized 
disclosures that some firms have made on a voluntary basis or the 
information that could be provided by individual firms to audit 
committees or investors without any basis for cross-firm comparisons. 
The Board believes the new data points, when analyzed together with the 
audited financial statements, critical audit matters, auditor tenure, 
and other information about the firm and the engagement on Form 2 and 
Form AP, will provide more information about the audit and, therefore, 
the reliability of the auditor's report.
    The Board considered comments questioning the value of metrics, 
whether they will be used by investors and other stakeholders or would 
represent only a ``check the box'' compliance exercise, and whether 
they might contribute to information overload or have other negative 
consequences. Based on comments received from investors and other data 
provided, among other factors, the Board does not share those concerns. 
Investors and investor-related groups have commented throughout the 
course of this rulemaking that the metrics will be useful. A firm-
related group commented that, in a recent investor survey it conducted, 
almost all of the metrics the Board proposed were regarded as 
``extremely helpful'' by between 30% and 50% of participating 
investors. (The commenter did not indicate whether the survey allowed 
positive responses other than ``extremely helpful''--for example, 
``helpful'' or ``somewhat helpful''--and, if so, what the results were 
inclusive of those responses.) By contrast, the Board understands--
including from one commenter that argues that the voluntary approach 
should be maintained--that voluntarily provided metrics have not proven 
useful to investors. The Board believes that the value of voluntary 
metrics is undermined by a lack of the consistency and comparability, 
as well as enhanced credibility, that can be achieved through common 
definitions and calculations and required reporting.
    The Board also noted that similar objections--that the new 
information would not be used or would be confusing or misleading--were 
raised by many of the same commenters in connection with the Board's 
last two rulemakings requiring disclosure of additional information 
about audits and auditors: Form AP reporting of the name of the 
engagement partner and information about other firms participating in 
the audit, and auditor communication of critical audit matters. In both 
cases, these commenter concerns appear unsubstantiated. The Form AP 
data set is now one of the most frequently visited areas of the PCAOB 
website.\76\ Indeed, in an investor survey conducted by one commenter, 
79% of respondents indicated that they often or very often navigate to 
AuditorSearch, the search tool for Form AP data on the PCAOB website. 
As for CAMs, in a recent investor survey conducted by the same 
commenter, over 90% of the respondents indicated that CAMs play an 
important role in their investment decision-making.\77\ In addition, 
data aggregators, such as Audit Analytics, compile and make available 
data on CAMs, which suggests market demand for that information. The 
Board's experience suggests that contrary to concerns about irrelevance 
and information overload, stakeholders seek out additional information 
about auditors and audit engagements when it is available.
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    \76\ In 2023, there were over 333,000 unique searches performed 
on AuditorSearch and the Form AP data set was downloaded over 2,000 
times. Information related to usage statistics can be found on the 
PCAOB's website (https://pcaobus.org/resources/auditorsearch).
    \77\ The Center for Audit Quality Critical Audit Matters Survey 
(July 2024) at 9.
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    In lieu of public reporting, the Board considered the alternative 
of encouraging or mandating communication of engagement-level metrics 
to the audit committee, as many commenters suggested. However, such an 
approach would not achieve the Board's goals of increasing the 
information about audit engagements and audit firms available to 
investors and other stakeholders, and fostering comparability of data 
through mandated reporting based on common definitions and specified 
calculations. The Board also believes that a non-prescriptive, 
principles-based approach, whereby firms would potentially develop and 
discuss different metrics for different audit committees, drawn from 
different data and based on different definitions and calculations and 
changing over time, could itself create significant costs and 
challenges for firms without necessarily contributing to the audit 
committee's ability to understand the audit it oversees in a broader 
context.
    Of course, under the Board's final requirements auditors and audit 
committees will be free to discuss performance metrics--whether the 
metrics required under the Board's rules or additional or alternative 
metrics they develop themselves--through the kinds of discussions the 
commenters recommend. The Board is not requiring that auditors make 
metrics-specific communications at this time. However, where matters 
addressed by the metrics are the subject of an otherwise required 
communication, discussion of the metrics may be a useful part of the 
communication.
    The Board appreciates that the audit committee is charged by 
statute with responsibility for oversight of the auditor, and the Board 
cannot, and do not purport to, impose any obligations on audit 
committees or imply that audit committees have any specific duties in 
relation to metrics. The Board assumes that audit committees will 
fulfill their responsibilities as they see fit; whether that entails, 
for example, discussion of metrics with auditors or proxy statement 
disclosure regarding their consideration of metrics will be for them to 
determine.
    But the Board also notes that investors--including many investors 
that are themselves fiduciaries for others--have their own investment 
and voting decisions that they are called upon to make, like decisions 
about electing members of the board of directors, including those who 
serve on the audit committee, and ratifying the appointment of the 
auditor. And in the current environment, they have extremely limited 
access to information about the auditor's work--work that, after all, 
is undertaken for their benefit. By requiring public reporting of 
metrics, the Board is not suggesting that investors will have the 
ability or the responsibility to oversee the work of the auditor. 
However, they will have the

[[Page 99981]]

opportunity to gain new perspective to inform their decision-making. 
The Board agrees with a commenter that, far from undermining investor 
trust, this new transparency should enhance that trust by helping 
investors better understand the audit and the audit committee's 
oversight of it.
    The Board has determined to go forward with published metrics so 
that investors and other stakeholders will have direct access to the 
metrics and so that comparative data can be accumulated that will allow 
comparisons to be made across different firms and different 
engagements. As discussed below, the Board believes it has addressed 
many of the challenges associated with potential lack of comparability 
by narrowing the metrics to a group that it believes will send 
relatively clear, comprehensible signals that users will be able to 
interpret when taken together with the other information about the 
issuer and the auditor that is available to them. In the Board's view, 
public reporting is the most practical way for comparative data to be 
created and disseminated. While two commenters suggested that audit 
committees could obtain comparative data when they consider changing 
auditors, the Board's understanding is that is a relatively infrequent 
occurrence, and in any case is not a route available to other 
stakeholders.
    The Board also believes that gathering data and calculating the 
final metrics, given the subjects they address, will not be overly 
time-consuming or burdensome, and will not entail disclosure of 
confidential or otherwise protected information, as discussed below.
    Regarding the concerns of possibly disclosing confidential 
information and competition lessening effect due to public reporting of 
metrics; unintended consequences, including attention diversion, 
litigation and reputation risks, competition lessening effect, and 
audit labor market impacts; and costs, see discussions below.
3. Legal Authority
    Some commenters questioned the Board's statutory authority to 
require all or some of the proposed firm and engagement metrics. In 
addition, one commenter stated that the statement in the proposal that 
``this [rulemaking] would advance investor protection and promote the 
public interest by enabling stakeholders to make better informed 
decisions, promoting auditor accountability and ultimately enhancing 
capital allocation and confidence in our capital markets'' is beyond 
the Board's rulemaking authority. Other commenters questioned the 
Board's authority with respect to specific aspects of the rulemaking. 
Two commenters questioned how the requirements could extend beyond the 
accounting firms' issuer and broker-dealer audit practices. One of 
these commenters stated that it believes including non-issuer 
information could be misleading to stakeholders who may mistake such 
disclosures as being within the PCAOB's purview and that including the 
non-issuer portion of a firm's audit practice appears contradictory to 
the Board's pursuit of clarity through its proposed PCAOB Rule 2400, 
Proposals Regarding False or Misleading Statements Concerning PCAOB 
Registration and Oversight and Constructive Requests to Withdraw from 
Registration. This commenter suggested that if the Board intends to 
make clear what lies within and outside its purview through proposed 
PCAOB Rule 2400, the rulemaking related to firm- and engagement-level 
metrics should reflect similar principles.\78\ Another commenter 
suggested that several new requirements seem to require public 
production of information that is confidential or otherwise outside of 
or unnecessary for the Board's oversight function.
---------------------------------------------------------------------------

    \78\ To date, the Board has not adopted proposed PCAOB Rule 
2400.
---------------------------------------------------------------------------

    In accordance with Sarbanes-Oxley, the PCAOB is endowed with 
regulatory powers designed to ensure transparency, uphold high 
professional standards, and protect investors in the auditing process. 
This discussion outlines the statutory basis for this rulemaking as 
outlined in Sections 101, 102, and 103 of Sarbanes-Oxley. In 
particular, here and throughout the release, the Board discussed how 
the final rules will increase transparency regarding audit practices, 
increase the comparability and accessibility of information available 
to investors and others, and enhance investors' ability to efficiently 
and effectively make investment and voting decisions, in line with the 
Board's statutory mandate.
    Section 102 of Sarbanes-Oxley mandates that each registered firm 
must submit an annual report to the Board. Beyond this, Section 102 
grants to the Board the authority to require more frequent and detailed 
reporting, empowering the Board to require registered firms to report 
``such additional information as the Board or the Commission may 
specify.'' \79\ This authority must be exercised through PCAOB 
rulemaking that deems the information ``necessary or appropriate in the 
public interest or for the protection of investors.'' \80\ This 
statutory language supports the Board's authority to adapt its 
reporting requirements to the evolving needs of audit oversight, 
thereby enhancing investor protection and public confidence in the 
financial markets.
---------------------------------------------------------------------------

    \79\ 15 U.S.C. 7212(d).
    \80\ 15 U.S.C. 7212(b)(2)(H).
---------------------------------------------------------------------------

    The metrics the Board adopted in its release are important for 
increasing transparency regarding the practices of registered firms, 
particularly in their audits of issuers. By mandating the disclosure of 
this information, the PCAOB will enable investors and other market 
participants to have a clearer and more comprehensive view of the 
operational practices of the registered firms that audit issuers. This 
enhanced transparency will allow investors and other market 
participants to make more informed decisions, contributing to the 
integrity and reliability of financial reporting and audit practices.
    Additionally, Section 103 of Sarbanes-Oxley grants the Board 
authority to establish auditing standards and quality control standards 
``to be used by registered public accounting firms in the preparation 
and issuance of audit reports'' as ``may be necessary or appropriate in 
the public interest or for the protection of investors.'' \81\ Although 
the information the PCAOB requires from registered firms does not 
appear directly within audit reports, it is comfortably within the 
ambit of the Board's rulemaking mandate under Section 103--especially 
given the flexibility inherent in the statutory language.\82\ In brief, 
this mandate involves establishing the procedures and practices of 
registered firms that promote the quality and accuracy of audit 
reports, which extends to

[[Page 99982]]

overseeing how firms report their operational conduct.
---------------------------------------------------------------------------

    \81\ 15 U.S.C. 7213(a)(1).
    \82\ See Loper Bright Enters v. Raimondo, 144 S. Ct. 2244, 2263 
(2024) (the term ``appropriate'' ``leaves agencies with 
flexibility'' (citation and quotation marks omitted)); Kisor v. 
Wilkie, 588 U.S. 558, 632 (2019) (Kavanaugh, J., concurring in the 
judgment) (the word ``appropriate'' ``afford[s] agencies broad 
policy discretion''); Metrophones Telecommc'ns, Inc. v. Global 
Crossing Telecommc'ns, Inc., 423 F.3d 1056, 1068 (9th Cir. 2005) 
(``Given the reach of the [FCC's] rulemaking authority under 
201(b)''--which granted to the FCC the ``broad power to enact such 
'rules and regulations as may be necessary in the public interest to 
carry out the provisions of this Act' ''--``it would be strange to 
hold that Congress narrowly limited the Commission's power to deem a 
practice 'unjust or unreasonable.' ''); Brown v. Azar, 497 F. Supp. 
3d 1270, 1281 (N.D. Ga. 2020) (``[W]hen an agency is authorized to 
'prescribe such rules and regulations as may be necessary in the 
public interest to carry out the provisions of the Act,' Congress' 
intent to give an agency broad power is clear.''), appeal dismissed 
as moot, 20 F.4th 1385 (11th Cir. 2021) (mem.).
---------------------------------------------------------------------------

    In alignment with Section 103 of Sarbanes-Oxley, the PCAOB views 
the rule, form, and associated amendments requiring the metrics as 
fundamental auditing and quality control standards at their core. The 
information required by the metrics relates to practices of the firm 
that directly bear on the conduct of audits and ultimately the quality 
and accuracy of audit reports. By mandating the submission of this 
information to the PCAOB, the Board provides deeper transparency into 
the auditing practices that support issuer audits. The information 
required by the metrics will also support the Board's oversight and 
enhance the reliability of audit performance.\83\
---------------------------------------------------------------------------

    \83\ See, e.g., Mark DeFond and Jieying Zhang, A Review of 
Archival Auditing Research, 58 Journal of Accounting and Economics 
275, (2014) (asserting that audit quality improves financial 
reporting quality by increasing the credibility of the financial 
reports).
---------------------------------------------------------------------------

    Finally, the Board notes that Section 101 of Sarbanes-Oxley 
provides ancillary authority that supports the Board's primary powers 
in Sections 102 and 103.\84\ This provision enables the PCAOB to 
develop standards that protect investors and serve the public interest.
---------------------------------------------------------------------------

    \84\ For example, Section 101(c)(5) empowers the Board to 
perform additional duties or functions that are ``necessary or 
appropriate to promote high professional standards among, and 
improve the quality of audit services offered by'' registered firms 
and their associated persons. 15 U.S.C. 7211(c)(5). This provision 
empowers the PCAOB to implement measures that enhance the integrity 
and efficacy of the auditing profession. In addition, Section 
101(g)(1) provides rulemaking authority to the Board, specifying 
that the Board's rules, subject to the approval of the Commission, 
are to ``provide for the operation and administration of the Board, 
the exercise of its authority, and the performance of its 
responsibilities under'' Sarbanes-Oxley. 15 U.S.C. 7211(g)(1).
---------------------------------------------------------------------------

    Some firms and firm-related groups questioned the Board's statutory 
authority to require the reporting of the proposed metrics on the basis 
that the Board's rulemaking authority should correspond directly with 
the type of information outlined in Sarbanes-Oxley Section 102(b)(2) 
for the contents of registration applications. However, this 
interpretation significantly misreads the reporting provisions of 
Sarbanes-Oxley. Sections 102(b)(2)(H) and 102(d) clearly grant to the 
Board broad authority to require additional information in periodic 
reports that it finds necessary or appropriate to serve the public 
interest or protect investors.
    Section 102(b)(2) generally details baseline requirements for 
reported information and Section 102(b)(2)(H) primarily details 
requirements for any additional information the Board requires, 
providing that additional information in reports must be deemed 
``necessary or appropriate in the public interest.'' It is incorrect to 
construe those provisions as imposing a rigid limitation that restricts 
the content of reports exclusively to the types of information 
specified in Section 102(b)(2)(A)-(G) for initial registration 
applications. Indeed, Section 102(b)(2)(H) expressly contemplates the 
provision of ``other information'' the Board may require through 
rulemaking. This provision shows that Congress intended to provide the 
Board authority to require additional information beyond that 
enumerated in Section 102(b).\85\ By referencing this provision, 
Section 102(d) applies this broader authority to periodic reports that 
the Board finds necessary or appropriate to serve the public interest 
or protect investors. The Board's release has outlined how the 
disclosures mandated by the metrics will enhance transparency and 
bolster the PCAOB's oversight capabilities. Such enhancements are 
designed to ultimately improve audit quality. For example, as discussed 
more completely below, the final metrics will enhance (i) audit 
committees' ability to efficiently and effectively monitor and select 
auditors as well as (ii) investors' ability to efficiently and 
effectively make decisions about ratifying the appointment of their 
auditors and allocating capital. In addition, as an important indirect 
benefit, the final rules could further spur competition to the benefit 
of investors. Thus, the final rules align with the overarching 
objectives of Sarbanes-Oxley, and therefore are appropriate exercises 
of the Board's authority under Section 102.
---------------------------------------------------------------------------

    \85\ See Navajo Nation v. Dalley, 896 F.3d 1196, 1212-13 (10th 
Cir. 2018) (``Congress expressed its scope in broad terms, to 
encompass `any other subjects that are directly related to the 
operation of gaming activities.' But the key word here is `other.' . 
. . And applying the ordinary and everyday meaning of the word 
`other' . . ., it becomes patent that Congress did not intend for 
that clause to address the `subjects' covered in the preceding 
clauses of subsection (C)[.]'' (citation omitted)); see also, e.g., 
Madison v. Virginia, 474 F.3d 118, 133 (4th Cir. 2006) (``other 
Federal statute prohibiting discrimination'' is a ``catch-all 
provision''); Meehan v. Atl. Mut. Ins. Co., 2008 WL 268805, at *7 
(E.D.N.Y. Jan. 30, 2008) (``The term `other policies' now 
accomplishes the task of including all governmental activity and 
becomes a catch-all phrase including all other policies not already 
implied[.]'' (citations and quotation marks omitted)).
---------------------------------------------------------------------------

    In response to the concerns raised by firm commenters regarding the 
Board's use of Sarbanes-Oxley's relevant ``necessary and appropriate'' 
clauses, it is important to clarify that the Board has not claimed any 
implicitly delegated authority beyond the regulatory parameters 
established by Congress. The use of the Section 101, 102, and 103 
authorities in this rulemaking is firmly grounded within the explicit 
mandates provided by Sarbanes-Oxley, and is consistent with the 
statutory limitations and directives outlined in those provisions. The 
Board's application of these authorities has been specifically aimed at 
enhancing the transparency and quality of audits of issuers and broker-
dealers, which directly aligns with the Board's core mission to protect 
investors and the public interest. The Board has utilized the tools 
provided by Sarbanes-Oxley to carry out the responsibilities entrusted 
to it.
    Other commenters raised concerns about the Board's authority to 
include metrics extending beyond a registered firm's issuer and broker-
dealer audit practice. One of these commenters asserted that including 
non-issuer information could be misleading to stakeholders who may 
mistake such disclosures as being within the PCAOB's regulatory 
purview. The Board disagrees with these comments. The metrics the Board 
is requiring are designed to provide information that directly relates 
to firms' audits of issuers, and will be important for such matters as 
assessing auditor performance and resource allocation as it relates to 
issuer audits. For instance, in the Workload metric, firms are required 
to report not only the hours worked dedicated to issuer engagements but 
the entire workload of the personnel involved. This includes hours 
spent on non-issuer engagements, training, practice development, staff 
development, or other firm activities. A narrower focus, which only 
accounts for hours worked on issuer engagements, could provide an 
incomplete picture. It would fail to reflect the true extent of the 
auditor's commitments and how these may impact their capacity and focus 
on tasks in issuer audit work. Without this comprehensive view, 
investors and other stakeholders would lack important information to 
assess the potential risks over overcommitment on audit quality and 
auditor performance in audits of issuers. By requiring firms to report 
certain narrowly tailored information regarding their audit engagements 
and audit practices, the Board is not seeking to extend its purview to 
regulate those aspects of the firm's operations. Rather, in line with 
the Board's statutory authority, it is enhancing the transparency and 
the depth of information available to investors and other stakeholders 
concerning firms' audits of issuers.

[[Page 99983]]

4. Summary of the Metrics
    The Board adopted a set of firm-level and engagement-level metrics 
across eight areas. Firm-level metrics will provide a basis for drawing 
comparisons between firms as well as a baseline for evaluating 
engagement-level metrics. Engagement-level metrics will elicit more 
granular information and will enable comparisons over time and across 
engagements both within the firm and across other firms.
    Firm-level metrics will be disclosed on a new Form FM, Firm 
Metrics, and engagement-level metrics will be disclosed on a revised 
and renamed Form AP, together with the other engagement-specific 
information currently required (the name of the engagement partner and 
information regarding other firms participating in the audit).
    Most of the metrics the Board has adopted will be presented at both 
the firm and the engagement level. However, two metrics will be 
reported only at the firm level, because the Board believes aggregated 
data will be most meaningful or appropriate.
    The metrics are:
     Partner and Manager Involvement. Hours worked by senior 
professionals relative to more junior staff across the firm's large 
accelerated and accelerated filer engagements and on the specific 
engagement.
     Workload. For senior professionals who incurred hours on 
large accelerated and accelerated filer engagements, average weekly 
hours worked on a quarterly basis, including time attributable to all 
engagements, administrative tasks, training, and all other matters.
     Training Hours for Audit Personnel. Average annual 
training hours for partners, managers, and staff of the firm, combined, 
across the firm and on the engagement.
     Experience of Audit Personnel. Average number of years 
worked at a public accounting firm (whether or not PCAOB-registered) by 
senior professionals across the firm and on the engagement.
     Industry Experience. Average years of career experience of 
senior professionals in key industries audited by the firm at the firm 
level and the audited company's primary industry at the engagement 
level.
     Retention of Audit Personnel (firm-level only). Continuity 
of senior professionals (through departures, reassignments, etc.) 
across the firm.
     Allocation of Audit Hours. Percentage of hours incurred 
prior to and following an issuer's year end across the firm's large 
accelerated and accelerated filer engagements and on the specific 
engagement.
     Restatement History (firm-level only). Restatements of 
financial statements and management reports on ICFR that were audited 
by the firm over the past three years.

Figure 1. Firm and Engagement Metrics Reporting

------------------------------------------------------------------------
                                                           Engagement-
 Firm and engagement metrics reporting    Firm- level         level
------------------------------------------------------------------------
Partner and Manager Involvement.......         [check]          [check]
Workload..............................         [check]          [check]
Training Hours for Audit Personnel....         [check]          [check]
Experience of Audit Personnel.........         [check]          [check]
Industry Experience...................         [check]          [check]
Retention of Audit Personnel..........         [check]                X
Allocation of Audit Hours.............         [check]          [check]
Restatement History...................         [check]                X
------------------------------------------------------------------------

    The final suite of metrics focuses primarily on information about 
audit personnel. The Board believes these metrics will provide new 
insights into how engagements are staffed, including the extent of 
involvement of senior personnel; auditors' overall workload; retention 
of personnel across the firm; and levels of training, audit experience, 
and industry-specific expertise. The final metrics will also provide 
information about the extent of audit work completed prior to the 
issuer's year end, an aspect of the audit process that the Board 
believes is associated with improved audit outcomes, and about the 
firm's history of restatements, a key measure of audit outcomes.
    This new information will allow users to draw inferences about 
audits and audit firms that are not possible today. Some may relate to 
specific metrics. For example, a heavy workload for a particular 
engagement team relative to the firm average or compared to peer firms 
may raise questions about the quality of the work performed. 
Conversely, a relatively high level of industry-specific experience, 
particularly for an engagement in an industry requiring specific 
accounting and auditing expertise, would be a positive signal. Other 
inferences may relate to combinations of metrics. For example, the 
personnel-related metrics, taken together, give an overall sense of how 
an engagement is staffed that can be compared to firm averages and to 
engagements for similar issuers. It is possible that the precise 
numerical values of metrics may be important in some cases, but in 
general the Board believes the metrics will be more useful to convey a 
sense of whether a particular engagement or firm appears fairly typical 
or is an outlier in one or more respects. This should provide a richer 
context for understanding the work of the auditor than the current 
environment of almost no publicly available information.
    Based on the Board's oversight activities, it appears that the 
largest firms are already tracking data in many of these areas,\86\ and 
the Board believes that all firms should be able to capture the data 
required by the metrics without undue burden. Many of the metrics are 
based on data that firms already track or will be required to track for 
purposes of other PCAOB requirements. For example, Partner and Manager 
Involvement and Allocation of Audit Hours are based on the same ``total 
audit hours'' that firms are already required to track for Form AP 
reporting. Training hours will reflect the same information that firms 
track to ensure proper licensing of their personnel. Restatement data, 
to the extent firms are not already tracking it, is required to be 
tracked under QC 1000.\87\ In addition to required data, many firms 
track the experience of their personnel, as well as industry 
experience, for use in marketing materials and for inclusion in 
requests for proposals, and some firms already track staff retention 
and turnover metrics as part of their human capital management. Firms 
should be able to generate other data required by the final metrics, 
such as Workload,

[[Page 99984]]

from their existing timekeeping systems with minimal additional effort.
---------------------------------------------------------------------------

    \86\ This point is discussed more fully below.
    \87\ See QC 1000.64g, Note to QC 1000.67e.
---------------------------------------------------------------------------

    Below, the Board provides a detailed discussion of key terms and 
concepts used in the metrics, as well as a description of each final 
metric and its calculations.
5. Comparability
    Developing comparable data regarding firms and engagements has been 
one of the Board's key objectives throughout this rulemaking. As noted 
previously, the information currently provided in firm transparency 
reports is not based on common definitions or methods of calculation, 
which prevents users from being able to make comparisons across firms 
or over time. The Board believes that an important benefit of mandatory 
reporting will be the ability of investors and other stakeholders to 
compare the metrics, within the same firm over time, among firms, and 
among engagements.
    The basic approach of the Board's final rules--a required set of 
metrics, derived from specified calculations incorporating consistently 
defined terms and concepts--is designed to generate comparable data 
with respect to firms and engagements that are subject to the reporting 
requirements. One investor-related group agreed that standardized and 
contextualized metrics will provide investors with a consistent data 
set for analysis over time and for comparison between companies and 
firms and a set of standardized data is more valuable than the ad hoc 
individual measures that some firms have made on a voluntary basis.
    In some cases, considering the importance of scalability, the Board 
has also designed the proposed metrics as percentages (e.g., relative 
to total audit hours) or averages where the Board believes that will 
provide more comparability across firms and engagements than methods 
based on absolute amounts.
    Several firms and firm-related groups expressed skepticism about 
whether the metrics could generate comparable data because of inherent 
differences across firms and engagements, either with regard to any 
metrics or engagement-level metrics specifically. For example, one 
commenter said that differences between firms and among engagements 
will create heterogeneity in the underlying data, so that cross-
sectional differences and changes over time will be unclear and 
challenging to interpret, and will cause confusion. Another commenter 
emphasized the importance of comparability between larger and smaller 
firms so that investors and audit committees can interpret them 
appropriately.
    Two commenters stated that if context, including qualitative 
aspects of data, is necessary to understand the metrics, that would 
suggest that the data are not comparable, which could mean that the 
metrics are not decision-useful and are at risk of misinterpretation. 
One commenter expressed the opposite concern, that metrics would become 
homogenized over time due to peer comparisons, making them considerably 
less useful to investors.
    One commenter asserted that the Board's choices in defining terms 
and specifying calculations undermine the comparability of the 
metrics--for example, because some metrics include issuers other than 
accelerated or large accelerated filers, the Board's proposed industry 
classification taxonomy differs from the one used by the SEC, and its 
proposed period for measuring restatements differs from the period used 
by a commonly-used data provider. These issues are addressed below in 
the discussion of the final metrics.
    With regard to firm-level metrics, several commenters expressed 
concern that some or all of the metrics would not be comparable across 
firms. They cited factors such as the size of the firm (including the 
number of issuer and non-issuer engagements), specialization of the 
firm's audit practice, strategies, priorities, investments, 
organizational structure and quality control system of the firm, and 
size of the issuer (which affects, among other things, whether an 
integrated audit is required).
    Several commenters expressed particular concern about comparability 
between U.S. and non-U.S. firms because non-U.S. firms tend to have 
structural, jurisdictional, and cultural aspects that differ from U.S. 
firms. In addition, non-U.S. firms may have a relatively smaller issuer 
audit practice, which could skew metrics that are based on the entire 
practice because there may be significant differences between issuer 
audits and the rest of the firm's audit practice, and could increase 
the volatility of metrics based on the issuer practice because of its 
small size. One of these commenters also criticized the application of 
metrics to non-U.S. firms because they would not capture the 
qualitative benefits of being a part of a global network (e.g., use of 
consistent policies and procedures that drive use of training, 
technology, consultation and other centrally available support across 
the network). Another commenter also noted that some non-U.S. firms may 
publicly report firm-level metrics on similar topics, such as workload, 
using different calculation methods under PCAOB and local reporting 
requirements, which would be costly for these firms and potentially 
confusing to the users.
    Many commenters expressed concern that engagement-level metrics are 
inherently incomparable. Commenters suggested a number of factors that 
could affect the comparability of engagement-level metrics, some 
relating to the firm (e.g., the firm's organizational structure, IT 
systems, resources, and audit methodologies), some to the individual 
audit engagement (e.g., selected audit approaches including substantive 
analytical procedures or test of details, audit findings including 
internal control deficiencies, use of technology, first year or 
recuring engagement, and risk of material misstatement), and some to 
the issuer (e.g., business structure (including the extent of 
centralization or decentralization and number of business units), 
complexity of the organizational structure and IT infrastructures, 
number of significant unusual transactions, and business and industry 
risks affecting the issuer). In addition, one commenter noted that 
there are significant developments (e.g., in delivery models, 
technology, and professional rules and standards) that affect the way 
audits are performed each year.
    The Board solicited comment on whether comparability could be 
enhanced by further segmenting firm-level reporting (for example, on 
the basis of the size of the firm or the size of the issuer) or 
engagement-level reporting (for example, on the basis of industry 
sector, region, or whether it is a first-year audit). One commenter 
stated that all stakeholders would benefit from a consistent 
calculation methodology and comparable presentation format of firm-
level reporting. Several commenters indicated that more disaggregated 
data for engagement- or office-level reporting could be useful, though 
one acknowledged that this benefit would need to be weighed with the 
cost of requiring this data. Other commenters cited challenges 
associated with providing subsets of information, including that firm 
and issuer sizes change over time and that smaller firms' metrics could 
disclose individual client information. One of these asserted, however, 
that the reported data could be disaggregated and compared without 
additional data fields being collected.
    The Board determined not to collect additional data fields or 
require additional segmentation of the metrics at this time because of 
the potential cost and complexity it would add to the process of 
compiling and reporting the metrics. Stakeholders that want to perform 
more detailed analysis (for

[[Page 99985]]

example, segmenting data based on size of the issuer, size of the firm, 
region, or industry sector) will be able to do so using information 
that is already publicly available in combination with the metrics.
    The Board understands that firms differ from each other in the 
number and types of audits they perform and in their resources, such as 
the number, experience, and degree of specialization of their people as 
well as their access to technological resources and resources provided 
by networks. The Board also understands that engagements differ based 
on factors such as the size of the engagement, the industry of the 
company, the risks related to the company and the audit, whether it is 
a new engagement for the firm or the engagement partner.
    However, the Board does not believe that such differences make 
useful, comparable metrics impossible. As one commenter noted, 
investors are experienced in using a wide array of performance metrics, 
such as non-GAAP measures and key performance indicators, and are able 
to analyze them despite a lack of perfect comparability between 
companies or over time. Indeed, the commenter argued that, due to the 
nature of the audit process and audit firms, the proposed firm and 
engagement metrics have a greater propensity for comparability than 
many companies whose financial results investors already analyze.
    The Board believes it has also addressed many of the challenges 
associated with potential lack of comparability by narrowing the 
metrics to a group that should send relatively clear, comprehensible 
signals in a variety of different contexts. Metrics on workload, 
training hours, experience in public accounting, retention of 
personnel, and restatement history should send a clear signal, 
regardless of the circumstances of the firm and the engagement. Metrics 
on partner and management involvement and allocation of audit hours may 
be more influenced by those circumstances. For example, unusually high 
involvement by senior professionals could signal an especially complex 
audit or one that encountered unexpected problems; a relatively low 
percentage of audit hours incurred before year end could signal a 
poorly planned audit or simply that, due to the nature and scope of a 
company's business, it was unnecessary or impractical to perform many 
audit procedures prior to year end. The Board has limited the scope of 
the Partner and Manager Involvement, Workload, and Allocation of Audit 
Hours metrics to large accelerated filer and accelerated filer 
engagements to enhance the comparability of the underlying data. The 
metric on relevant industry experience may also be influenced by the 
circumstances of the firm and the engagement in that industry 
experience may be more important in some industries than others. 
However, the Board believes users will be able to interpret this metric 
when taken together with the other information about the issuer and the 
auditor that is available to them. Common definitions and consistent 
methodology will also contribute to comparability. Taken together, the 
metrics should enable users to make both broad comparisons across the 
full population of reporting firms and accelerated filer and large 
accelerated filer audits, and more targeted comparisons across smaller 
subgroups of similar firms and engagements, and will be a very 
significant improvement over the information that is currently 
available--ad hoc reporting by the largest firms at the firm level, and 
essentially no information at the engagement level.
    Of course, any additional context that firms believe is necessary 
for proper understanding can be provided as narrative disclosure. While 
narrative disclosure will not make the metrics comparable, it will 
balance the comparability of standardized metrics disclosure with the 
ability to provide further context if needed. For example, a firm could 
provide an explanation for why a metric changed significantly from what 
was reported in the prior year.
6. Time Period Covered by the Metrics
    Firm-level metrics are reported as of September 30, generally 
covering the period from October 1 of the previous year through 
September 30.\88\ Specific commenter feedback regarding the reporting 
period is discussed in detail below. Firms are required to file Form FM 
on or before November 30, 61 days after the end of the reporting 
period, also discussed below.
---------------------------------------------------------------------------

    \88\ For two of the metrics areas the Board proposed, Quality 
Performance Ratings and Compensation and Audit Firms' Internal 
Monitoring, firms would have reported based on their own internally 
established cycles. Neither of these is included in the metrics the 
Board adopted.
---------------------------------------------------------------------------

    Related to the Training Hours for Audit Personnel metric, the Board 
understands that many firms already have defined periods or cycles that 
may not align with the final reporting date (e.g., for which the firm 
tracks training data in order to comply with state continuing 
professional education (``CPE'') reporting requirements). Therefore, 
the firm is permitted to use its already-established training calendar 
cycle for calculation and reporting of this metric, provided that the 
cycle covers a 12-month period (which is expected to be consistently 
applied). The Board does not believe that the data will be especially 
sensitive related to any particular 12-month period. The Board believes 
allowing firms flexibility to use their internally established dates 
for this metric is appropriate and still provides the comparability 
discussed above since all firms would be reporting this metric based on 
a 12-month period.
    For engagement-level metrics, which will be reported on Form AP, 
the data and information underlying the reported metrics will generally 
be based on the most recent period's audit. However, some engagement-
level metrics relate to information about personnel on the engagement, 
such as Experience of Audit Personnel, and these metrics will reflect 
information that may not be directly related to the most recent 
period's audit. Specific commenter feedback regarding the reporting 
period and filing date of Form AP is discussed in detail below.
    In addition, the time period covered by each metric also is 
discussed in more detail below.
7. Rounding and Use of Estimates
    Many of the metrics involve the calculation of a numerical value 
that may result in very small fractional parts. Consistent with the 
proposal, firms are required to report metrics that are rounded to the 
nearest whole number, except where additional decimal places (no more 
than two) are needed to properly interpret the result or to enable 
comparison to prior periods.
    In calculating the firm- and engagement-level metrics, actual 
amounts should be used, if available. However, if actual amounts are 
unavailable, firms are permitted to use a reasonable method to estimate 
the components of a calculation. This approach is consistent with 
existing Form AP, which allows firms to use a reasonable method to 
estimate certain information required in the calculation of total audit 
hours.\89\ Firms are also required to document in their files the 
method(s) used to estimate amounts when actual amounts are unavailable.
---------------------------------------------------------------------------

    \89\ See Instructions to Part IV of Form AP as currently in 
effect. Under the amendments to Form AP adopted by the Board, this 
appears in General Instruction 9, as amended.
---------------------------------------------------------------------------

    Commenters generally agreed with the proposed approaches, with one 
commenter agreeing that rounding and estimation should be permitted for 
all metrics. Other commenters stated that rounding and estimation will 
be

[[Page 99986]]

especially important for metrics related to the reporting of hours, 
with two of these pointing to the subjectivity involved with the 
proposed metrics that would require allocation of hours to specific 
audit areas.\90\ One commenter stated that the PCAOB should not 
restrict the number of decimal places. However, the Board believes that 
limiting reporting to hundredths will allow for the presentation of an 
appropriate level of detail while ensuring comparability of 
presentation and avoiding the technical issues that could arise with 
unlimited digits.
---------------------------------------------------------------------------

    \90\ The proposed Audit Hours and Risk Areas metric is not 
included in the metric that the Board adopted, as discussed further 
below.
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8. Operational Narrative Disclosure
    In order to give firms the ability to provide any context they 
thought necessary for an appropriate understanding of the reported 
metrics, the Board proposed that firms would be permitted, but not 
required, to provide a brief narrative disclosure (no more than 500 
characters per metric) to accompany any, or all, of the firm-level and 
engagement-level metrics reported on Form FM or Form AP. While some 
commenters agreed with the proposal to provide firms with the ability 
to include an optional narrative to accompany the metrics, one 
commenter explicitly agreed with the proposed 500-character limit, one 
commenter asserted that the 500-character limit greatly limits the 
context that could be provided, and one commenter suggested revising 
the character limit to no more than 1,000 characters. Two commenters 
suggested increasing the character limit beyond 500 characters without 
suggesting an upper limit. Approximately half of the commenters 
suggested that there should be no character limit imposed on the 
optional narrative. A firm-related organization also suggested that the 
narrative be mandatory and not optional, while a firm suggested that 
the utility of metrics would be diminished without potentially 
extensive accompanying narrative.
    One commenter suggested that firms can also provide a link in the 
narrative to their transparency reports and audit quality reports if 
they wish to provide further context to the metrics. One commenter 
stated that there should be guidelines such as the narratives being 
factual, directly relevant to the metric, and free from promotional or 
marketing language. Another commenter stated that it would provide the 
following narrative in Form FM, potentially with respect to every firm 
metric:

We do not believe any one metric or even a combination of metrics is 
necessarily indicative of audit quality, nor is it useful or 
productive to speculate on the questions reviewers of this 
information may have on each metric for every audit. We further 
discuss this metric in our Audit Quality Report, along with the 
measures we believe are better indications of our audit quality.\91\
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    \91\ See Letter from PricewaterhouseCoopers LLP (June 7, 2024).

    Taking into consideration commenter feedback, the Board is 
retaining the option to provide narrative disclosure with each metric 
but expanding the character limit to 1,000 characters. The Board 
believes this character limit strikes the right balance between 
allowing firms the ability to provide any contextual information they 
believe is necessary to interpret the results of a particular metric 
while also managing the length of the forms and keeping them to a 
manageable size.\92\
---------------------------------------------------------------------------

    \92\ Nothing in PCAOB rules and forms, including Form FM and 
Form AP, provides for incorporation by reference of external 
documents or other materials.
---------------------------------------------------------------------------

    In addition, in an effort to assist firms in making the optional 
narrative disclosures as helpful and substantive as possible, to help 
remind firms of their responsibility under QC 1000 to produce and 
report information that is accurate and not misleading, and to reduce 
the possibility that users will find the narrative confusing or in 
conflict with the required metrics, the following provision has been 
added as a general instruction to Form FM and a note to Part VI of Form 
AP to provide additional direction to those firms electing to provide 
an optional narrative for any metric:

``When the Firm elects to provide a brief narrative to accompany any 
of the Items in [the part of the form in which metrics are 
reported], language should be concise and focused on the reported 
metrics, with a view to facilitating the reader's understanding of 
the metrics.''
Firm and Engagement Metrics
1. General Comments
    Investors and investor-group commenters were broadly supportive of 
the proposed metrics, saying that the metric areas would provide 
investors with decision-useful information about audit firms and 
audits. However, they expressed mixed views on certain specific metric 
areas. These commenters also suggested additional metric areas, 
including investments in both training audit professionals and in 
technology, and further details related to PCAOB inspection results 
(e.g., Part I.A deficiencies). The Board has addressed these comments 
in the discussion of each metric area below. On the topic of 
implementation of the proposed metrics, one commenter requested 
analytical tools and research showing how investors might use metrics. 
The information disclosed on Form FM will be available in a searchable 
database on the Board's website, similar to the Form AP database, and 
will provide users of the information the ability to perform 
comparisons across engagements.
    Firms and firm-related groups were broadly supportive of some of 
the proposed firm-level metrics. However, they generally opposed public 
reporting of engagement-level metrics, asserting that no amount of 
context around engagement-level metrics would provide an appropriate 
basis for public reporting. These commenters suggested that the audit 
committee, being deeply familiar with the company, the audit, and the 
independent auditor, is the only party equipped to appropriately 
interpret the metrics. Instead of public reporting, they suggested 
several alternatives, including adding a requirement for communication 
to the audit committee under AS 1301; expanding SEC requirements for 
audit committee disclosures; encouraging voluntary reporting; issuing 
PCAOB Spotlights, practice alerts, or guidance; and performing further 
outreach before adopting any requirements. These alternatives are 
discussed in greater detail above. One commenter suggested that the 
PCAOB take a proactive role in educating all users as to the proper use 
of reported metrics, including the need for them to be interpreted in 
context and making users aware of potential dangers and drawbacks 
associated with a mere comparison of isolated metrics between firms. 
The Board discussed the forms and how the data can be accessed in more 
detail below.
    Commenters generally expressed concern that proposed metrics were 
not all calculated from the same data sources. Some metrics were 
calculated on the basis of all audit engagements, others on the basis 
of issuer engagements, and engagement-level metrics on the basis of 
large accelerated and accelerated filer engagements. Some commenters 
suggested that calculating firm-level metrics based solely on total 
audit hours on large accelerated and accelerated filer engagements may 
result in more comparable data among firms. The Board discussed this in 
greater detail below.
    Other commenters recommended that the PCAOB establish criteria for 
determining which metric areas warrant public disclosure, so as to 
build in flexibility over time and minimize the risk of 
misinterpretation. The following

[[Page 99987]]

criteria were among those suggested by these commenters:
     Is the metric's relation with audit quality unambiguous?
     Can the metric be appropriately interpreted on its own, 
without additional context (e.g., client mix or complexity--size, 
industry, international operations; firm's audit approach; etc.)?
     If disclosure of the metric results in behavioral change 
in audit firms, does research suggest the change will improve audit 
quality or, at least, not adversely impact audit quality?
     Will the metric require firms to develop systems, 
processes, and procedures that they do not already have and at a 
reasonable cost?
     Will the metric impose ongoing administrative burdens on 
engagement teams that result in a reallocation of effort away from 
audit quality enhancing activities?
     Will the metrics align with measures used in the system of 
quality control to manage the audit practice?
     Will the metrics meet the information needs of the users?
     Will the disclosure of metrics not result in the 
communication of proprietary information?
    In responding to commenters and articulating the rationale for 
adopting the firm- and engagement-level metrics below, the Board 
considered the views of commenters, including these suggested 
evaluation criteria. The Board believes some of the suggested criteria 
would impose an unworkable framework that is inconsistent with the 
Board's regulatory objectives. For example, the Board does not think it 
is necessarily practicable to establish an ``unambiguous'' relationship 
to audit quality, as suggested, for any individual metric, nor would 
such an exercise be consistent with the intended uses of the metrics, 
which envisions their being considered as part of the total mix of 
information available to stakeholders. Moreover, the Board believes 
that imposing rigid criteria for each proposed metric imposes too high 
a burden and is not conducive to effective regulation. It does not 
permit the Board to account for facts and circumstances unique to 
individual metrics and their potential uses, nor does it account for 
the holistic manner in which the Board intends for the metrics to be 
used or developing information about the utility of the metrics over 
time.
    A number of commenters recommended that the PCAOB engage in 
additional stakeholder outreach, sponsor pilot programs, or otherwise 
engage in further study and research before finalizing the metrics 
requirements, or even withdraw the proposal. Based on the lengthy 
project history described in Section II, which includes repeated input 
over time from the Board's advisory groups, multiple rounds of public 
notice and comment, study of relevant academic literature, study of 
voluntary firm disclosures, and consideration of actions taken in other 
jurisdictions, the Board does not believe further study is necessary or 
that the Board's investor protection mission would be served by 
delaying adoption of the final rules. However, the Board will monitor 
and determine if further implementation resources or support is 
appropriate for users of these metrics.
2. Key Terms and Concepts
    As described below, the Board developed certain key terms and 
concepts that were used in calculating the proposed metrics. Where 
practical and relevant, these key terms and concepts align with 
existing definitions in PCAOB standards and rules. In other cases, the 
Board has developed new definitions and new descriptions of terms 
specifically for use in the metrics, which are not intended to inform 
the interpretation of other rules, standards, or forms of the PCAOB. 
The Board provided the key terms and concepts along with formulas for 
calculating each metric to drive consistency among firms and engagement 
teams.
    One investor-related group said that the units of account (e.g., 
hours, years of experience) or measurement used within the proposed 
metrics are sufficiently standardized and adaptable by firms as they 
are commonly used within audit practice or defined within the existing 
standards.
    Some commenters raised concerns about the definitions and 
descriptions of the population used for various metrics or about not 
having a defined set of terms applicable to all standards and rules. 
Other commenters questioned whether the PCAOB had provided sufficient 
guidance to address potential variations in the interpretation and 
application of terminology used in the metrics or asserted that not 
having sufficient guidance would add complexity and challenges in 
calculating the metrics and understanding them or result in 
inconsistent reporting of metrics or lack of comparability across audit 
firms and audits engagements. Two of these commenters recommended that 
the PCAOB create a glossary of defined terms to support consistent use 
of terms throughout the standards and rules or conduct additional study 
to evaluate the defined terms in the proposal against terms already 
defined in other PCAOB standards and rules. Another commenter raised a 
concern that defining terms and specifying computations for each metric 
undermines their comparability.
    Some firms offered examples of areas where they suggested that 
clarification would be needed, which the Board discussed below in the 
context of the relevant metrics. In general, however, the Board 
continues to believe that the use of defined terms is critical to 
driving consistent calculation of the metrics.
    Other firms questioned why different metrics are based on different 
underlying data (for example, total audit hours vs. total hours worked 
or engagement team vs. core engagement team). In general, the Board's 
choice of the data on which to base a metric is tailored to the 
intended objective of the metric, and also takes into account the 
practicality and potential costs associated with gathering data and 
calculating the metrics. The Board does not believe that metrics based 
on a single data set would be as clear or as informative.
    The Board addresses specific concerns raised in the discussion of 
each metric below. The Board has clarified certain terms and concepts 
used or revised the descriptions of proposed terms and concepts after 
consideration of the specific comments received.
i. Populations Covered by the Metrics
a. Partners and Managers (Used in All Metric Areas Except for 
Allocation of Audit Hours and Restatement History); Staff (Used in 
Training Hours for Audit Personnel)
    While some of the functional roles played by individuals involved 
in an audit are otherwise defined and used in the Board's standards 
(e.g., engagement partner \93\ and EQR),\94\ the Board proposed to 
clarify following additional functional roles referred to in the 
metrics to ensure consistent reporting by firms.
---------------------------------------------------------------------------

    \93\ See paragraph .A1 of AS 1201, Supervision of the Audit 
Engagement (``the member of the engagement team with primary 
responsibility for the audit'').
    \94\ See AS 1220, Engagement Quality Review, for a description 
of the engagement quality reviewer's role.
---------------------------------------------------------------------------

    Partners--Partners or persons in an equivalent position (e.g., 
shareholders, members, or other principals) who participate in audits; 
\95\
---------------------------------------------------------------------------

    \95\ As noted in the proposing release, the Board believes this 
is consistent with the use of the term ``partner'' in the Board's 
auditing standards. Although the Board does not usually state 
expressly that partners are limited to those who participate in 
audits, as a practical matter the Board's auditing standards apply 
only in those circumstances.

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[[Page 99988]]

    Managers--Accountants or other professional staff commonly referred 
to as managers or senior managers (or persons in an equivalent 
position) who participate in audits; and
    Staff--Accountants or other professional staff who participate in 
audits and are not partners or managers.
    Some engagement-level metrics differentiate between engagement 
partner and the other partners who participate in the audit. The Board 
believes the differences between the responsibilities borne by 
engagement partner and those of other participating partners justify 
presenting data for the two categories separately in those metrics. For 
firm-level metrics, ``engagement partners'' include all partners who 
served as the engagement partner on any audit the firm performed of an 
accelerated filer or large accelerated filer. Partners that are 
included in the metrics as an engagement partner are not included as an 
``other partner,'' even if they served in a non-engagement partner role 
in other audits (in other words, partners are only counted once within 
any metric).
    The Board adopted the definitions of partners, managers, and staff 
as proposed, with clarifications discussed below.
    The Board solicited comment on whether the proposed definitions of 
partners, managers, and staff are clear and appropriate. Two commenters 
agreed that the proposed definitions for partners, managers, and staff 
are clear and appropriate, one saying that linking the definitions used 
in the metrics to existing definitions would help in preventing 
multiple definitions throughout the auditing standards. However, some 
commenters expressed concern that titles and roles are not consistent 
across firms or most firms have roles which do not clearly or obviously 
reconcile to the roles listed. One of these commenters also raised a 
concern about continuing emphasis on the engagement staffing model that 
currently exists, on the basis that artificial intelligence and other 
tools could affect the staffing of audit engagements in the future. 
This commenter recommended including ``contractors'' engaged by firms 
in the definition and clarifying whether the definitions are meant to 
be descriptions of the roles rather than legal interpretations of the 
roles. Another commenter recommended aligning the definitions of 
partners, managers and staff with the definition of engagement team, by 
using the phrase ``who perform audit procedures'' instead of ``who 
participate in audits'' to avoid inclusion of personnel who may 
participate in audits in an administrative or project management 
function, but who do not perform audit procedures. Another commenter 
expressed concern that audit effort associated with roles typically 
referred to as ``national office'' and ``professional practice 
development,'' especially for managers through partners, would be 
excluded from the definitions and calculations of the metrics.
    For the definition of partners, one commenter questioned whether 
the definition is intended to have any alignment with ownership 
interests in a firm and requested clarification as to how a leadership 
level role such as a managing director would be classified because, in 
the commenter's view, that role does not appear to meet the definition 
of either a partner or a manager.
    For the definition of managers, the same commenter requested 
clarification on whether the manager title is based on the person's 
general title in the firm because, for example, in certain cases an 
experienced supervisor may serve a manager capacity on a less complex 
engagement. Another commenter suggested adding a specific number of 
years of audit experience to the definition of managers because of the 
risk that firms could inflate percentage of audit hours incurred by 
managers by changing the titles of more junior professionals to 
increase the number of managers.
    The Board adopted the definitions of partners, managers, and staff 
as proposed. Because there are differing legal structures and titles 
among firms, the Board is providing foundational definitions so that 
each firm can allocate its professionals in three levels: partners, 
managers, and staff. The Board believes that the vast majority of firms 
have these three levels, and that, although staffing models may change 
over time, these levels are likely to be retained for the foreseeable 
future. The Board also believes that other job titles, such as managing 
director, can be fit into the appropriate category based on the level 
of responsibility assigned to them. For example, in a firm where 
managing directors are given similar responsibilities as the firm's 
principals (for example, signing authority on audit engagements), they 
would be treated as partners under the Board's definition; otherwise, 
they would align with managers. Similarly, professionals in a firm that 
does not use the title ``manager'' would be reported as managers if 
they are assigned the duties that are typically carried out by managers 
and senior managers at firms that do use those titles. Professionals 
who work under the firm's direction and control and function as the 
firm's employees, such as secondees and contractors, may or may not 
have these titles but would be reported based on their level of 
responsibility and decision-making authority. In all cases, the 
determination would be made based on the responsibilities, decision-
making authority, and scope of duties of the person. If necessary, 
firms could utilize the optional narrative disclosure to describe how 
the firm aligned their categories of professionals with partners, 
managers, or staff levels.
    The Board considered adding a specified minimum number of years of 
audit experience in the definition of manager but determined not to. 
Some managers qualify for promotion with fewer years of audit 
experience due to other relevant education or experience. The Board was 
concerned that building a minimum number of years of audit experience 
into the definition would result in people with the responsibilities 
and title of manager being required to be reported as staff, making the 
metrics less meaningful while increasing the administrative burden 
associated with reporting.
    The Board did not use the phrase ``who performed audit procedures'' 
in the definitions of partners, managers, and staff because use of this 
term would exclude professionals who do not perform audit procedures--
for example, partners who only conduct engagement quality reviews \96\ 
or national office personnel in connection with certain types of 
consultations that are not audit procedures.
---------------------------------------------------------------------------

    \96\ Engagement quality review is not considered the performance 
of an audit procedure. See AS 1220.07 (The EQR ``should not make 
decisions on behalf of the engagement team or assume any of the 
responsibilities of the engagement team.'').
---------------------------------------------------------------------------

    Because the definitions of managers and staff are limited to 
``accountants or other professional staff,'' administrative personnel 
are not included.
    In the Board's proposal, the Board generally did not specify how to 
account for promotions within the reporting period from one level to 
another (e.g., from manager to partner),\97\ although the Board noted 
that firms would be expected to be consistent in their approach across 
metrics. The only commenter to address this issue supported the 
flexibility

[[Page 99989]]

proposed with respect to the treatment of promotions. Consistent with 
the proposal, the final rules do not impose any prescriptive 
requirements regarding the reporting of professionals whose job title 
or responsibilities change during the reporting period. However, the 
Board believes that treating such transitions inconsistently, whether 
within a metric or across metrics, would be misleading and the Board 
expects firms to report such changes in a consistent way.
---------------------------------------------------------------------------

    \97\ Note, however, that the Retention of Audit Personnel metric 
treats promotions as if they had occurred at the beginning of the 
year. See note to Item 4.6 of Form FM.
---------------------------------------------------------------------------

(1) Participate in Audits (Used in the Terms Partners, Managers, and 
Staff)
    ``Participate in audits'' is a broad concept that would include the 
work of all professionals (partners, managers, and staff) that are 
involved in the firm's audits, including tax personnel, information 
technology (``IT'') personnel, and employed specialists.
    The Board proposed the phrase ``participate in audits'' rather than 
referring to the activities of individuals assigned to a specific 
business line, such as the firm's audit practice, because some firms do 
not assign individuals to specific business lines. However, the Board 
solicited comment on whether the relevant population would be partners, 
managers, and staff of the firm's audit practice, if the firm assigns 
its professionals to specific business lines.
    Some commenters agreed with the phrase ``participate in audits'' as 
used in the proposal. One of these commenters suggested that, because 
firms have different structures, attempting to separate members of the 
engagement team based on a firm's structure could lead to less 
comparability across metrics. One firm stated that it assigns 
individuals to specific business lines, and collecting data based on 
that assigned business line would be more practical to implement versus 
the proposal's requirement to include all individuals participating in 
audits.
    Some other commenters stated that firm-level metrics should look 
only to the firm's audit practice because (i) the inclusion of other 
service lines in the metrics would impair comparability between firms 
due to the varying size and scope of non-assurance practices and (ii) 
the work of tax professionals and consultants would not improve the 
usefulness of these metrics for the purposes outlined in the Board's 
proposal. Another commenter requested clarification on how to account 
for individuals who move between audit support roles and engagement-
facing functions.
    The final definitions of ``partners,'' ``managers,'' and ``staff'' 
include the phrase, ``who participate in audits,'' as proposed. Because 
some firms do not assign partners and other professionals to a specific 
business line, the Board believes this approach is the best way to 
drive consistent reporting by firms with different organizational 
structures.
    In the proposal, the Board clarified that members of the engagement 
team who participate in audits would include every partner and manager 
who worked on any aspect of the audit, even if their involvement was 
extremely limited. The Board proposed not to provide a participation 
threshold, such as a minimum number of hours, because the Board 
believes, based on the objectives of these metrics, that the metrics 
should capture all partners, managers, and staff who participate in 
audits in any capacity. However, the Board solicited comment on whether 
the concept should include a participation threshold.
    One commenter agreed there was no need to create a minimum 
threshold for participation on the basis that it would increase the 
complexity and cost of calculating the metrics without a corresponding 
benefit. Another commenter recommended establishing a minimum threshold 
for participation because exclusion of professionals with certain firm 
roles (e.g., firm leadership, national office, or specialist line of 
service individuals with limited participation during the year in any 
specific engagement) would not reduce the reliability of the metric. 
This commenter further recommended creating a minimum threshold for 
purposes of firm-level metrics, such as individuals who spent more than 
10% of their time participating on audit engagements, and engagement-
level metrics (e.g., similar to the concept of core engagement team). 
This commenter and another commenter recommended the additional 
threshold as optional for firms to use due to cost-benefit 
considerations, particularly for smaller firms, and should only be 
considered if additional thresholds allow for simpler aggregation or 
preparation of the data.
    The Board did not adopt additional thresholds to be used for firm-
level or engagement-level metrics, except for the concept of core 
engagement team used in certain engagement-level metrics discussed 
below. The objectives of the five metrics that use ``partners, 
managers, and staff of the firm'' are to understand the firm's 
professionals who participate in audits in totality, and the Board 
believes imposing a threshold on what counts as participation would 
defeat that objective.
(2) Partners, Managers, and Staff ``of The Firm'' (Used in Workload, 
Training Hours for Audit Personnel, Experience of Audit Personnel, 
Industry Experience, and Retention of Audit Personnel)
    Because firm-level metrics provide information about the firm, in 
calculating some firm-level metrics, the Board proposed to include 
partners, managers, and staff ``of the firm,'' which refers to 
individuals participating in audits who work for the firm or work under 
the firm's direction and control and function as the firm's employees 
(e.g., secondees and contractors), regardless of whether the audits are 
performed under PCAOB standards or other auditing standards.\98\ The 
Board believes including individuals in the firm-level metrics who 
participate on any firm audit is appropriate because these metrics 
would provide information about the firm and not about specific 
engagements (for example, in the area of firm-level industry 
experience, which would be relevant across a firm's entire audit 
practice). The Board added a new section to Part III, Terminology in 
Form FM to clarify the meaning of these phrases. The Board also 
clarified that participation in audits means any involvement 
(including, for example, consultation on specific matters), and thus 
may include individuals outside the engagement team, such as national 
office personnel.
---------------------------------------------------------------------------

    \98\ This should be interpreted consistently with ``firm 
personnel,'' as defined in QC 1000.A5.
---------------------------------------------------------------------------

b. Engagement Team (Used in Partner and Manager Involvement)
    The Board proposed to provide information about partners and 
managers on the engagement team, a term defined in AS 2101, Audit 
Planning.\99\ The Board believes it is

[[Page 99990]]

appropriate to provide metrics related specifically to the engagement 
team because this would provide investors and other stakeholders with 
relevant information related to the audit as a whole, who perform audit 
procedures on the audit or assist in planning or supervising the audit.
---------------------------------------------------------------------------

    \99\ The ``engagement team'' is defined in AS 2101.A3 [as 
adopted by the Board in Planning and Supervision of Audits Involving 
Other Auditors and Dividing Responsibility for the Audit with 
Another Accounting Firm, PCAOB Rel. No. 2022-002 (June 21, 2022), to 
take effect with respect to audits of fiscal years ending on or 
after December 15, 2024] as follows (footnotes omitted):
    .A3 Engagement team--
    a. Engagement team includes:
    1. Partners, principals, and shareholders of, and accountants 
and other professional staff employed or engaged by, the lead 
auditor or other accounting firms who perform audit procedures on an 
audit or assist the engagement partner in fulfilling his or her 
planning or supervisory responsibilities on the audit pursuant to 
this standard or AS 1201, Supervision of the Audit Engagement; and
    2. Specialists who, in connection with the audit, (i) are 
employed by the lead auditor or an other auditor participating in 
the audit and (ii) assist that auditor in obtaining or evaluating 
audit evidence with respect to a relevant assertion of a significant 
account or disclosure.
    b. Engagement team does not include:
    1. The engagement quality reviewer and those assisting the 
reviewer (to which AS 1220, Engagement Quality Review, applies);
    2. Partners, principals, and shareholders of, and other 
individuals employed or engaged by, another accounting firm in 
situations in which the lead auditor divides responsibility for the 
audit with the other firm under AS 1206, Dividing Responsibility for 
the Audit with Another Accounting Firm; or
    3. Engaged specialists.
---------------------------------------------------------------------------

    One commenter suggested clarifying whether ``engagement team'' for 
purposes of this rule includes internal specialists. Another commenter 
stated that the proposal appeared to provide an alternative definition 
of partners and managers on the engagement team compared to AS 2101, 
which is aligned to other PCAOB standards, and recommended providing 
clarity as to the treatment of specialists. Another commenter expressed 
concern that the definition of ``engagement team'' under AS 2101 could 
have ramifications for the calculation of engagement-level metrics, but 
did not provide any indication of what those ramifications might be.
    The Board adopted the AS 2101 term ``engagement team,'' as 
proposed. The definition of engagement team in AS 2101 includes 
specialists who, in connection with the audit, (i) are employed by the 
lead auditor or an other auditor participating in the audit and (ii) 
assist that auditor in obtaining or evaluating audit evidence with 
respect to a relevant assertion of a significant account or disclosure. 
It excludes engaged specialists.

Figure 2. Engagement Team Members
[GRAPHIC] [TIFF OMITTED] TN11DE24.022


[[Page 99991]]


c. Core Engagement Team (Used in Workload, Training Hours for Audit 
Personnel, Experience of Audit Personnel, and Industry 
Experience)100 101 102 103
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    \100\ See AS 1210, Using the Work of an Auditor-Engaged 
Specialist.
    \101\ AS 1220 applies to those persons.
    \102\ AS 2601, Consideration of an Entity's Use of a Service 
Organization, sets forth the auditor's responsibilities with respect 
to using the work of service auditors who issue reports on the 
controls of a third-party service organization.
    \103\ Because of their roles at the company, the work of 
individuals employed or engaged by the company is not subject to 
supervision under AS 1201; they are not considered members of the 
engagement team under the adopted definition. PCAOB standards 
include requirements regarding the auditor's use of work performed 
by some of these individuals. See, e.g., AS 1105, Audit Evidence, 
Appendix A; AS 2201, An Audit of Internal Control Over Financial 
Reporting That Is Integrated With An Audit of Financial Statements; 
AS 2605, Consideration of the Internal Audit Function.
---------------------------------------------------------------------------

    For some engagement-level metrics, the Board proposed to include 
information about members of the ``core engagement team'' rather than 
the full ``engagement team,'' so as to focus the metrics on the 
individuals who make the primary decisions regarding planning and 
performance of the audit and determine the final conclusions supporting 
the auditor's opinion. With the ``core engagement team'' concept, the 
Board intends to provide more meaningful and focused data by excluding 
information about certain partners and managers with lesser 
participation. The Board also simplifies the data collection effort by 
limiting these metrics to firm personnel.
    The Board proposed that the core engagement team would include the 
engagement partner and members of the engagement team who are partners 
or employees of the firm issuing the audit report. In addition, under 
the proposal, core engagement team would include either a partner 
(excluding the engagement partner as described above) who worked ten or 
more hours on the engagement or a manager or staff who worked on the 
engagement for 40 or more hours or, if less, 2% or more of the total 
hours.\104\
---------------------------------------------------------------------------

    \104\ See below for the discussion of ``total audit hours.''
---------------------------------------------------------------------------

    Figure 3 illustrates how partners, managers, and staff used in the 
calculation of the metrics, relate to the firm, engagement team, and 
the core engagement team.

Figure 3. Relationship Between the Groups of Individuals Included in 
Metric Calculations
[GRAPHIC] [TIFF OMITTED] TN11DE24.000

    The Board solicited comments on whether the proposed definition of 
core engagement team, and the proposed participation thresholds for 
inclusion in the core engagement team, were appropriate.
    One commenter agreed that at the engagement level, metrics related 
to only the core engagement team will be more useful to investors and 
other stakeholders. Two commenters supported the proposed 10-hour 
minimum threshold for partners other than engagement partners. One of 
these

[[Page 99992]]

also supported the proposed threshold for managers and staff. This 
commenter suggested, however, that the Board includes only partners and 
employees of the lead audit firm and exclude component auditors.
    One commenter suggested aligning the definition of ``core 
engagement team'' with the ``lead auditor'' definition in amended AS 
1201 and AS 2101. Another commenter indicated that the creation of 
thresholds would conflict with other existing aspects of Form AP. This 
commenter further stated there would be challenges for firms to 
accumulate and report this data, specifically obtaining the data from 
firms that are not required to report on Form FM or Form AP and 
additional time may be needed for implementation of these metrics.
    Another commenter recommended replacing the phrase ``who worked'' 
in the proposed definition to ``who performed audit procedures'' to be 
consistent with the definitions of engagement team because this 
commenter was concerned that wording inconsistencies may cause 
confusion as to whether the same criteria apply across the various 
definitions. One commenter indicated that it is not clear on what basis 
the proposed threshold is determined and further indicated that the 
concept of core engagement team suggests that certain work in the 
engagement would be either not important or optional and recommended 
further study.
    The proposal also asked whether other individuals involved in the 
audit (e.g., individuals in the firm's national office, the EQR, 
employees of shared service centers, or individuals involved in loaned 
staff arrangements and alternative practice structures) should be 
treated differently in the metrics and, if so, how they should be 
considered in the definition of core engagement team. One commenter 
sought clarification as to whether shared service center employees 
should be included in the definition of core engagement team and 
recommended considering the nature and use of centralized services and 
how service centers continue to evolve across a changing professional 
landscape. Another commenter suggested including the EQR and 
specialists in the core engagement team but not treating them 
differently from other individuals involved in the audit. Two 
commenters recommended the definition to simply include all individuals 
who charged time to the engagement or whose cost was included within 
the engagement to minimize the cost of reporting the metrics, but one 
of the two commenters recommended excluding the quality functions such 
as the EQR to avoid any impression that they are part of the engagement 
team.
    The Board adopted the proposed definition of core engagement team 
substantially as proposed:
    1. The engagement partner and
    2. Members of the engagement team who are:
    a. Partners or employees of the registered public accounting firm 
issuing the audit report (or individuals who work under that firm's 
direction and control and function as the firm's employees); and
    b. Either of the following:
    i. A partner (excluding the engagement partner) who reported ten or 
more hours on the engagement; or
    ii. Managers and staff who reported 40 or more hours on the 
engagement or, if less, 2% or more of the total audit hours.
    As suggested by two commenters, the Board reformatted the 
presentation of core engagement team to clarify that the engagement 
partner is part of the core engagement team. In addition, the Board 
modified the descriptions of core engagement team members by 
substituting ``who reported'' for ``who worked'' to make clear that the 
basis for determining whether hours thresholds have been reached is 
time reported in the firm's timekeeping system. The Board did not align 
the definition of ``core engagement team'' with the ``lead auditor'' 
definition because including information from all of the partners and 
managers of the firm, rather than just those with significant 
participation in the engagement, would potentially skew or dilute the 
data, making the metrics less meaningful.
    As the Board proposed and the Board adopted, the term core 
engagement team excludes other auditors. As a result, there will be no 
need to obtain data from other auditors, and the definition will not 
encompass firms that are not required to file Form AP. Under current 
reporting requirements for Form AP, the lead auditor has to accumulate 
all of the hours worked on issuer engagements.\105\ While it will 
require some disaggregation of this data, the Board does not believe 
reporting the data for the engagement team for Partner and Manager 
Involvement and total audit hours for Allocation of Audit Hours will 
create a significant challenge for firms. Regarding individuals at 
shared service centers, if partners or managers employed by a shared 
service center meet the definition of core engagement team, they will 
be included. As further discussed below, the Board did not include the 
EQR in the definition of the ``core engagement team''; the core 
engagement team is a subset of the engagement team, and the EQR is not 
a part of the engagement team.
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    \105\ See discussion of ``total audit hours'' used for Form AP 
reporting below.
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Figure 4. Core Engagement Team Members

[[Page 99993]]

[GRAPHIC] [TIFF OMITTED] TN11DE24.003


[[Page 99994]]


d. Engagement Quality Reviewer (Used in Experience of Audit Personnel 
and Industry Experience)
    The objective of the EQR is to perform an evaluation of the 
significant judgments made by the engagement team and the related 
conclusions reached in forming the overall conclusion on the engagement 
and in preparing the engagement report, if a report is to be issued, in 
order to determine whether to provide concurring approval of 
issuance.\107\ The EQR must possess the level of knowledge and 
competence related to accounting, auditing, and financial reporting 
required to serve as the engagement partner on the engagement under 
review.\108\ While reporting on specific hours spent by the EQR or 
including the EQR's time in engagement-level metrics may have a 
negligeable quantitative impact, the Board believes reporting on EQR's 
competency for two of the engagement-level metric areas will be 
important and valuable for stakeholders.
---------------------------------------------------------------------------

    \107\ See AS 1220.02.
    \108\ See AS 1220.05.
---------------------------------------------------------------------------

    Because the EQR is not a member of the engagement team as defined 
in AS 2101, EQRs were not included in the proposed metrics when the 
proposed metrics required disclosure of the engagement team's 
information unless the disclosure of EQRs was specifically called out 
in the proposed metric area. Therefore, the Board solicited comment 
about whether EQRs should be added to any of the proposed metrics, 
separately or together with a group such as the engagement team.
    Some commenters agreed that EQRs should be excluded from the 
engagement-level metrics. These commenters indicated not to add them as 
a separate category because the EQR is not a part of the engagement 
team as defined by AS 2101 and the inclusion of the EQR would be 
inconsistent with AS 2101.
    One commenter suggested that the EQR should be included in the 
metrics but presented separately, to ensure that there is no impression 
that the EQR is not independent. One commenter recommended including 
EQR in firm-level metrics because firms generally do not assign 
partners to solely perform engagement quality reviews and firm-level 
metrics should include all partners with no requirement to allocate 
their time spent between the roles of an engagement partner and an EQR. 
Two investor-related commenters generally supported including EQR hours 
in the metrics. Another commenter questioned the rationale for not 
including metrics relating specifically to engagement quality 
reviewers, despite the fact that they are not part of the engagement 
team.
    In the final requirements, EQRs are included in the two experience-
related metrics (Experience of Audit Personnel and Industry 
Experience), where the Board believes that the information would be 
significant to users. EQRs are not included in other metrics, primarily 
due to their quantitatively insignificant impact on the metrics and to 
avoid any confusion regarding whether they are part of the engagement 
team. For metrics that depend on total audit hours (i.e., Partner and 
Manager Involvement and Allocation of Audit Hours), this approach also 
aligns with the reporting required for purposes of Form AP, from which 
EQRs are excluded.

ii. Total Audit Hours (Used in Partner and Manager Involvement and 
Allocation of Audit Hours)

    For several metric areas, the Board proposed to use ``total audit 
hours,'' which would be the same as the hours used to compute the 
extent of participation in an audit of other accounting firms in Form 
AP.\109\ Total audit hours include hours attributable to: (1) the 
financial statement audit; (2) reviews pursuant to AS 4105, Reviews of 
Interim Financial Information; and (3) the audit of ICFR pursuant to AS 
2201.\110\
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    \109\ See Part IV of Form AP.
    \110\ ``Total audit hours'' [as amended and adopted by the Board 
in PCAOB Rel. No. 2024-005, to take effect on December 15, 2025] 
exclude the hours incurred by: (1) the engagement quality reviewer; 
(2) specialists engaged, not employed, by the firm; (3) accounting 
firms in performing the audit of entities in which the issuer has an 
investment that is accounted for using the equity method; (4) 
internal auditors, other company personnel, or third parties working 
under the direction of management or the audit committee who 
provided direct assistance in the audit of internal control over 
financial reporting; and (5) internal auditors who provided direct 
assistance in the audit of the financial statements.
---------------------------------------------------------------------------

    Under the proposal, some firm-level metrics were based on total 
audit hours across all issuer engagements while others were based on 
specific subsets of total audit hours (e.g., partner and manager 
hours). The Board also clarified that some engagement-level metrics 
would also use a subset of total audit hours (e.g., those incurred by 
partners and managers, on certain areas of the audit, or within stated 
time periods before or after the issuer's year end).
    The Board adopted the definition of total audit hours as proposed.
    Two commenters criticized the use of hours in metrics. One 
expressed concern that basing metrics on hours would encourage 
stakeholders to focus on time spent rather than on whether the work was 
effective, and potentially exacerbate the notion that auditors should 
reduce the hours spent on an engagement. The other, while generally not 
objecting to the use of the hours in specific metrics, asserted that 
many firms have moved away from the burden of time reporting and that 
there is no incentive to track time on fixed fee engagements. The Board 
continues to believe that basing certain metrics on audit hours is 
appropriate. It will allow firms to leverage systems already in place 
for purposes of Form AP reporting and human capital management. 
Moreover, the Board is not aware of any alternative method of tracking 
auditor work that is commonly accepted by firms and could be 
implemented without the creation of entirely new systems.
    Commenters responding to the specific questions in the proposal on 
total audit hours generally expressed support for using Form AP hours 
for the total audit hours in the metrics. A few commenters recommended 
including engagement quality review hours in total audit hours. A 
commenter stated that hours from shared service centers should be 
excluded from both the partner and manager involvement metrics. A few 
commenters asked that the Board either include or exclude certain 
specialist hours in total audit hours. Two commenters suggested that 
hours spent on quarterly reviews should either be excluded or 
disaggregated, one stating that otherwise the metric area related to 
allocation of audit hours would generally show that most hours were 
incurred before year end. Another commenter requested clarification as 
to whether hours spent on quarterly reviews are included or excluded 
from total audit hours, stating that if excluded, firms may need to 
implement more detailed time tracking mechanisms or estimations of time 
between quarterly review and year-end audit procedures.
    In general, as required for Form AP, total audit hours is comprised 
of the hours of the lead auditor, other accounting firms participating 
in the audit with whom the principal auditor does not divide 
responsibility for the audit, and nonaccounting firm participants that 
assist the principal auditor or other accounting firms. Consistent with 
the calculation of total audit hours for Form AP, total audit hours 
exclude hours incurred by certain persons and entities. In addition, 
existing Form AP includes reviews performed pursuant to AS 4105 because 
these reviews are an integral part of the overall audit process. The 
Board

[[Page 99995]]

continues to believe that using total audit hours, as already defined 
by Form AP and collected by firms, will provide an appropriate and 
cost-effective basis for calculating metrics.
    Commenters, mostly firms and firm-related groups, noted that 
several metric areas use total audit hours, which includes information 
from other auditors. According to these commenters, referring to such 
metrics as ``firm-level metrics'' is misleading, and they recommended 
the firm-level metrics be limited to data related solely to the firm 
filing the Form FM and exclude information from other accounting firms. 
The Board is retaining the label of ``firm-level metrics'' for the 
metric areas in question as the Board believes it is important to 
include all of the relevant information for the lead auditor's 
engagements. In addition, the Board believes this information will 
provide key insights into the way that engagements are conducted by the 
firm that is the lead auditor.
iii. Terms Used in Metrics
    In addition to the terms discussed above, many of the terms used in 
the metrics are defined elsewhere in the Board's standards and rules. 
Other terms will be defined specifically for use in the metric 
calculations and may differ from the way such terms are used elsewhere 
in PCAOB rules and standards.\111\ Terms that are used in only one 
metric are discussed in greater length below, in the context of 
discussing the relevant metric. The Board has italicized the 
terminology in the final calculations.
---------------------------------------------------------------------------

    \111\ For example, the Board adopted the definition of 
``partner'' to include only persons who participate in audits. While 
the Board believes that is consistent with the use of that term in 
the Board's auditing standards (see footnote above), it is narrower 
than the use of the term in connection with registration and 
reporting requirements.
---------------------------------------------------------------------------

3. Metric Descriptions and Calculations
    This section describes the firm-level and engagement-level 
performance metrics the Board adopted. The Appendix provides 
illustrative examples to show how metrics would be calculated based on 
specific facts and circumstances presented therein.
a. Partner and Manager Involvement
    Partners and managers are responsible for oversight of the 
engagement team, which includes less experienced staff. Spending time 
to oversee the work of the audit staff is critical to the engagement. 
Included in this oversight is the engagement partner's responsibility 
to exercise due professional care related to supervision and review of 
the audit, including evaluating whether significant findings or issues 
are appropriately addressed and determining that the significant 
judgments and conclusions on which the auditor's report is based are 
appropriate and supported by sufficient appropriate audit 
evidence.\112\ Less extensive supervision raises the risk of less 
effective audit procedures. With a lower ratio of senior engagement 
team time to staff time, the risk may be greater that partners and 
managers may not be devoting sufficient time to supervise and review 
staff work and evaluate audit judgments. Academic research also 
suggests that greater partner or manager involvement in the audit is 
positively associated with proxies for the quality of the audit.\113\
---------------------------------------------------------------------------

    \112\ See General Responsibilities of the Auditor in Conducting 
an Audit and Amendments to PCAOB Standards, PCAOB Rel. No. 2024-004 
(May 13, 2024), as adopted by the Board and approved by the SEC, to 
take effect with respect to audits of fiscal years beginning on or 
after December 15, 2025, at 8-11 (describing responsibilities of 
engagement partners under existing PCAOB standards) and 17 
(describing clarification for the existing responsibilities of 
engagement partners); see also, e.g., In the Matter of Melissa K. 
Koeppel, CPA, PCAOB File No. 105-2011-007, at 78 (Dec. 29, 2017) 
(concluding that, as the individual with final responsibility for 
the audit, the engagement partner must act with due professional 
care to ensure that the audit team performs all required audit 
procedures).
    \113\ See, e.g., a research paper, Joshua Khavis, Mengtian Li, 
and Brandon Szerwo, Manager Staffing Leverage at the Audit Office 
and Audit Quality, available at https://papers.ssrn.com/sol3/.cfm?abstract_id=4856541; a study using Korean data, Suyon Kim, 
Does Engagement Partners' Effort Affect Audit Quality? With a Focus 
on the Effects of Internal Control System, 9 Risks 225, (2021); a 
study using Japanese data, Sarowar Hossain, Kenichi Yazawa, and Gary 
S. Monroe, The Relationship Between Audit Team Composition, Audit 
Fees, and Quality, 36 AUDITING: A Journal of Practice and Theory 
115, (2017); and Agnes WY Lo, Kenny Z. Lin, and Raymond MK Wong, 
Does Availability of Audit Partners Affect Audit Quality? Evidence 
from China, 37 Journal of Accounting, Auditing & Finance 407, 
(2022).
---------------------------------------------------------------------------

    The proposal set forth requirements for firms to calculate firm-
level and engagement-level metrics for the percentage of total audit 
hours incurred by partners and managers. As described in the proposal, 
this metric area could provide users with information regarding each 
firm's oversight of their engagements and the supervision of less 
experienced engagement team members. The Board adopted this metric area 
substantially as proposed, with one modification discussed in more 
detail below.
    Commenters generally agreed with requiring public reporting of the 
proposed firm-level metrics for Partner and Manager Involvement. 
Investor-related commenters stated that disclosure of hours worked by 
senior professionals relative to more junior staff across the firm and 
on the engagement is valuable. One investor-related group noted that 
information regarding the hours worked by senior professionals who have 
more experience in making judgments and evaluating estimates relative 
to more junior staff provides important insights into the oversight, 
supervision, and review of the engagement team. One commenter agreed 
that the proposed metrics would provide useful information to 
investors, audit committees, or other stakeholders because it would 
provide a salient indicator of audit quality. Another commenter agreed 
that the firm-level metric is clear and appropriate because it provides 
an indication of the level of involvement of partners and managers in 
the firm's audit engagements. At the same time, a few commenters were 
concerned that the engagement-level metric could be misunderstood 
because the level of supervision and review should vary based on the 
nature of the company (e.g., size and complexity), the nature of the 
work assigned to engagement team members, the risks of material 
misstatement, and the knowledge, skill, and ability of each engagement 
team member. Further, a commenter stated that the engagement-level 
metric would not provide meaningful information without contextual 
information obtained through a discussion with the audit committee.
    The Board solicited comment on whether data for partners and 
managers should be presented separately, including whether there should 
be a separate calculation for the engagement partner. Two commenters 
expressly supported this disaggregation, one stating that because the 
engagement partner is the person signing the opinion, it would appear 
to be more consistent to separate this data. The other commenters on 
this topic said that further disaggregation of the involvement of 
partners and managers is not warranted and could create unnecessary 
complexity. For example, a commenter stated that segregation of 
involvement by levels in the firm does not provide incremental value 
and would dilute or potentially mischaracterize what can be inferred 
from this metric (e.g., disaggregation of the engagement partner role 
is not likely to be meaningful due to the engagement partner's ability 
to have assistance). Two commenters expressed concern that adding up 
partner and manager data and calculating these metrics for all issuer 
engagements could be very time consuming and unnecessarily increase

[[Page 99996]]

compliance costs. Another commenter expressed concern that further 
breakdown by role could lead to more inconsistencies in reporting 
across engagements (e.g., differences in how firms are structured, such 
as a managing director role). Commenters also recommended further study 
by the PCAOB.
    The Board notes, in response to commenter concerns about the need 
for further study, there is extensive academic literature on this topic 
and widespread support among investor-related groups (see above 
discussion). The Board does not believe that adding up partner and 
manager data and calculating and reporting these metrics will 
unnecessarily increase compliance costs as firms are already required 
to track these hours in aggregate for purposes of Form AP reporting. 
While the Board acknowledges the importance of the engagement partner's 
role, as this person is primarily responsible for the engagement as 
evidenced by the fact that they sign the opinion and is required to be 
identified on Form AP, the Board continues to believe that the 
aggregation of partner and manager involvement and reporting of one 
percentage provides a more holistic picture of the overall supervision 
and review of the audit engagement. The Board agrees with most 
commenters who said that further disaggregation of the involvement of 
partners and managers is not warranted.
    Some commenters, mostly firms and firm-related groups, suggested 
excluding hours from other accounting firms and focusing only on the 
involvement of partners and managers of the reporting firm. These 
commenters were concerned that in situations where accounting firms 
outside the lead auditor's network are involved, both the firm- and 
engagement-level metrics would require information from outside the 
lead auditor's system of quality control. Another commenter requested 
that firms should present partner and manager involvement across high-, 
medium-, and low-risk engagements. According to this commenter, it 
would enhance comparability across firms.
    The Board believes the metric area on partner and manager 
involvement could be less informative or even potentially misleading if 
it were based only on the lead auditor, rather than the entire 
engagement team (including other auditors). Moreover, since relevant 
data in aggregated form is already collected for purposes of Form AP 
reporting, it is subject to existing quality controls over firm 
reporting. The Board does not believe the additional administrative 
burden of reporting partner and manager hours will be significant. As 
to the suggestion to present partner and manager involvement across 
different engagement risk profiles, the Board notes there is no 
requirement in PCAOB standards or rules for such categorization and no 
established framework for differentiating among engagements in that 
way. Therefore, the Board does not believe this suggestion would yield 
comparable information. However, firms will have the ability to provide 
context in an optional narrative disclosure if they believe information 
as to relative risk profiles is helpful in interpreting the metric.
    The Board adopted the firm- and engagement-level metrics for 
partner and manager involvement substantially as proposed. The Board 
believes they will provide useful information to assist in 
understanding hours worked by senior professionals relative to more 
junior staff and gauging the associated risks.
    However, the final requirements have been modified in one respect, 
to narrow the population of engagements covered by firm-level 
reporting. Considering comments received expressing concern with the 
potential lack of comparability across different types of issuers, the 
Board has limited firm-level reporting to only engagements for 
accelerated filers and large accelerated filers--that is, the 
engagements for which engagement-level reporting is required--rather 
than all issuer engagements. The Board believes this narrower scope 
will yield better alignment between firm- and engagement-level metrics 
and more comparable information across engagements. Additionally, this 
modification should further reduce data collection and reduce the 
administrative burden associated with calculating and reporting these 
metrics.
    (See Exhibit A, ``Partner and Manager Involvement.'')

b. Workload

    The Board believes that in general, the greater the workload, the 
greater the likelihood that members of the engagement team may have 
insufficient time to appropriately perform the necessary audit 
procedures and make the appropriate judgments that an audit requires.
    Professionals may become less effective when working long 
hours,\114\ and such an environment may affect the level of due 
professional care they exercise. For example, a heavy workload may 
create pressure on the audit staff to focus too much on efficiency in 
executing auditing procedures rather than on ensuring the effectiveness 
of those procedures or on supervising less experienced engagement team 
members.
---------------------------------------------------------------------------

    \114\ See, e.g., Julie S. Persellin, Jaime J. Schmidt, Scott D. 
Vandervelde, and Michael S. Wilkins, Auditor Perceptions of Audit 
Workloads, Audit Quality, and Job Satisfaction, 33 Accounting 
Horizons 95, 101 (2019) and Brant E. Christensen, Nathan J. Newton, 
and Michael S. Wilkins, How Do Team Workloads and Team Staffing 
Affect the Audit? Archival Evidence from U.S. Audits, 92 Accounting, 
Organizations and Society 101225, (2021).
---------------------------------------------------------------------------

    The Board believes heavy workloads could prevent an engagement 
partner from providing adequate and focused attention to an audit 
engagement. The information provided by the metrics at the engagement 
level may help audit committee members and other stakeholders 
understand the various activities competing for an engagement partner's 
time.
    Studies find that excessive audit partner workloads can have 
negative impacts on audit effectiveness, although the literature also 
suggests that partners may be less affected than more junior 
staff.\115\
---------------------------------------------------------------------------

    \115\ See, e.g., Seokyoun Hwang and Philip Keejae Hong, 
Auditors' Workload and Audit Quality under Audit Hour Budget 
Pressure: Evidence from the Korean Audit Market, 26 International 
Journal of Auditing 371, (2022); John Goodwin and Donghui Wu, What 
is the Relationship Between Audit Partner Busyness and Audit 
Quality?, 33 Contemporary Accounting Research 341, (2016); 
Persellin, et al., Auditor Perceptions.
---------------------------------------------------------------------------

    The proposal set forth requirements for firms to calculate firm-
level and quarterly engagement-level workload metrics for (i) 
engagement partners and (ii) other partners, managers, and staff. The 
Board proposed separate reporting for engagement partners at both the 
firm and engagement level, as they have primary responsibility for the 
audit. At the engagement level, the Board proposed limiting reporting 
to the core engagement team, which the Board believes would be more 
useful to investors and other stakeholders than information regarding 
the entire engagement team (some of whom may have extremely limited 
participation in the audit).
    The proposed calculations for workload at both the firm and 
engagement levels included all working hours incurred during the 
relevant periods: hours incurred on issuer and non-issuer engagements 
as well as on training, practice development, staff development, or 
other firm activities.\116\
---------------------------------------------------------------------------

    \116\ Hours worked for purposes of the proposed metrics excluded 
hours that were not considered working hours (e.g., paid time off 
and holiday time).
---------------------------------------------------------------------------

    The Board adopted this metric area substantially as proposed, with 
modifications discussed in more detail below.

[[Page 99997]]

    Some commenters agreed with requiring firm- and engagement-level 
metrics in this area, stating that the proposed workload metrics ensure 
there is appropriate attention and focus on audit engagements. One 
commenter asserted that the proposed firm-level metric is significantly 
less complicated than the engagement-level metric and should be 
sufficient for assessing a firm's capacity to accept new clients. 
However, the same commenter expressed concern that the proposed 
engagement-level metric is very complicated and would take considerable 
effort for firms to compile and calculate for every engagement. 
Further, the commenter expressed concern that the cost of calculating 
this metric likely exceeds any benefit. Another commenter stated that 
just having higher workload during peak months does not necessarily 
impact audit quality.
    While some firms and firm-related groups generally expressed 
support for public disclosure of the firm-level workload metrics, they 
also expressed concerns with the metrics or requested modifications be 
considered for firm-level workload calculations. Some firms and firm-
related groups questioned what benefits stakeholders would gain from 
the information. Commenters suggested that alternative measures, such 
as an annual utilization metric as reported in firms' audit quality 
reports, may be more meaningful to reflect how a firm is measuring and 
monitoring the activities competing for their professionals' time.\117\ 
Further, some of these commenters expressed concern about the effort 
involved in collecting, analyzing, and reporting the data for average 
weekly hours on a quarterly basis.
---------------------------------------------------------------------------

    \117\ One example of a utilization metric reported in firms' 
audit quality reports is ``average annual hours worked by audit 
professionals over 40 hours per week.''
---------------------------------------------------------------------------

    The Board continues to believe that disclosing the firm-level 
workload metrics quarterly as opposed to annually will provide a 
comparative basis for the engagement-level metrics. At the engagement 
level, the Board believes that information for members of the core 
engagement team will be especially useful to investors and other 
stakeholders for the quarter in which the auditor's report is issued, 
usually the busiest time of the year for the auditor. The Board also 
believes that a workload metric based on actual hours worked (i.e., 
productivity) versus a utilization metric based on a standard number of 
work hours (e.g., a 40-hour week, including time off) will provide more 
useful information.
    The Board solicited comment on hours worked, including whether the 
proposed term should be changed. Some commenters expressed support for 
including all hours worked including time spent on audits and time 
spent on activities other than audits. One commenter expressed concern 
that many firms do not require detailed recording of ``non-chargeable'' 
time, so the disclosure of hours worked will be a rough estimate at 
best for some firms. This commenter expressed a view that the benefits 
of the workload metrics would not justify the burden of asking firm 
professionals to spend more time and energy tracking all of their 
``non-chargeable'' time. Another commenter suggested that the Board 
break out training and development from the rest of the hours worked. 
Further, a commenter stated that a clearer definition of the proposed 
term ``hours'' is required if this metric is to be used. For example, 
firms may be inconsistent on how they report hours spent on travel for 
work purposes. A commenter stated the proposed metrics exclude time 
off, which is a key component of workload and may vary significantly 
between levels. By excluding time off or leaves of absences, this 
commenter expressed concern that the workload metric would not provide 
consistent and comparable information.
    The Board continues to believe it is important to capture the sum 
of hours that are incurred on engagements and hours spent on training, 
practice development, personnel development, or other firm activities 
in the workload metrics, while excluding holiday or other paid time off 
(i.e., when individuals would not be working). The Board believes the 
potential additional administrative burden of including ``non-
chargeable'' time for partners and managers on issuer engagements 
(firm-level workload metric) will not be burdensome based on the 
Board's understanding that many firms track this time already. 
Disaggregating the hours worked, as suggested by one commenter, will 
further complicate the workload metrics. Finally, the Board believes 
the definition of hours worked is sufficiently clear and does not 
require further explanation for certain types of non-engagement hours.
    Firms and firm-related groups stated that because the proposed 
workload metrics were based on the definitions of partner, manager, and 
staff, which determination is based on ``participation in the audit,'' 
it was not clear whether and where certain individuals should be 
included in this metric as they move between audit support and 
engagement-serving functions (e.g., individuals who provide tax 
reporting and compliance services to other clients). One commenter 
stated that including these individuals would dilute the value that 
could be derived from metrics related to workload, as peak periods for 
these other services and activities would mask meaningful trends in the 
workload of other members of the engagement team whose primary 
responsibility is performing audit work.
    At the engagement level, the Board does not believe the commenter's 
concern is relevant because the individuals in question are not likely 
to be part of the core engagement team (see above for discussion of the 
definition). At the firm level, the Board believes the workload of 
these individuals will still be relevant as they presumably shift 
between engagement work and non-engagement work as needed. Further, 
trying to figure out a systematic approach for excluding these 
individuals will only add to the administrative burden of gathering the 
data and calculating and reporting the metrics.
    Other commenters requested that the Board reconsider the inclusion 
in the workload metrics of partners and professional staff who do not 
work on issuer audits. One expressed concern that comingling statistics 
associated with professionals who do not participate in any way on the 
firm's issuer audits would be contrary to the stated objective of 
``advancing investor protection and promoting the public interest by 
enabling stakeholders to make better-informed decisions . . .'' Another 
stated that the metric as proposed would encompass individuals who work 
on engagements other than issuer audits (e.g., audits of non-issuer 
employee benefit plans or governmental entities), who may have a 
different ``busy season'' than individuals working on issuer audits. As 
a result, this metric may show a relatively consistent average weekly 
hour throughout the year across the firm, even though specific 
individuals may have more variability in their schedules.
    The Board streamlined the workload metrics in some respects, in 
part based on commenter input. To provide a more useful metric, the 
Board is limiting the firm-level metric to partners and managers who 
participate in accelerated filer and large-accelerated filer 
engagements for which the firm issued an audit report. The Board 
believes this will provide information that will be comparable to the 
engagement level information. The Board excluded staff from the firm- 
and engagement-level

[[Page 99998]]

calculations in order to focus the metric area on the more senior 
members of the engagement team--those individuals determining that the 
significant judgments and conclusions on which the auditor's report is 
based are appropriate. In addition, this will also lessen the 
administrative burden of gathering the data and calculating and 
reporting the metrics.
    Some commenters found the proposed requirement to segregate 
engagement partners from other partners in the proposed calculations to 
be impractical to implement and not a meaningful distinction in the 
metric. A commenter pointed out that segregating the roles may create a 
practical challenge in calculating the metrics, as in practice a large 
portion of partners generally fill both roles. Another commenter 
asserted that because the proposal provided no justification for 
distinguishing between ``engagement partners'' and ``other partners,'' 
the distinction between engagement and non-engagement partners should 
be eliminated for purposes of calculating the firm-level workload 
metric.
    The Board adopted a firm-level metric that does not require 
differentiating between engagement partners and other partners in 
reporting on workload because the Board questions whether useful 
information could be derived from that distinction, given that many 
partners serve in both capacities. In addition, the Board understands 
it may be a difficult and manual process to identify and track the 
distinction between the types of partners. As stated above, the Board 
continues to believe it is important for firms to disclose their 
engagement partners' workloads at the engagement level. Overall, the 
Board believes the modifications will improve or maintain the value of 
the information provided by this metric area compared to the proposal, 
while reducing the administrative burden associated with gathering data 
and calculating and reporting the metrics.
    (See Exhibit A, ``Workload.'')
c. Training Hours for Audit Personnel
    The professional development training auditors receive should 
enhance their competence and therefore their ability to perform 
effective audits. Competence encompasses having the knowledge, skill, 
and ability to perform assigned activities in accordance with 
applicable professional and legal requirements and the firm's policies 
and procedures.\118\ Training is a critical aspect of developing 
auditor competence.
---------------------------------------------------------------------------

    \118\ See PCAOB Rel. No. 2024-004, at 8-9 (describing competence 
to perform an audit under existing PCAOB standards).
---------------------------------------------------------------------------

    Licensing requirements for continuing education for public 
accountants to obtain and retain certification speak to the 
relationship between quality and appropriate training and 
education.\119\ Additionally, QC 1000 mandates certain training 
requirements, including with respect to ethics and independence.\120\
---------------------------------------------------------------------------

    \119\ See paragraph .08 of AS 1000, General Responsibilities of 
the Auditor in Conducting and Audit.
    \120\ See QC 1000.50 (``The firm should design, implement, and 
maintain policies and procedures regarding licensure such that the 
firm and firm personnel hold licenses or other qualifications 
required by the relevant jurisdiction(s) under applicable 
professional and legal requirements.''). See also QC 1000.34(e) and 
PCAOB Rel. No. 2024-005, at 151-52 (describing mandatory training 
under PCAOB standards).
---------------------------------------------------------------------------

    While the Board did not propose a training metric, the Board's 
proposal solicited comment on training as a potential additional 
metric. Commenters on the topic all agreed about the importance of 
training to the development of auditors. One commenter included 
training hours per professional as one of six metrics they believed 
would increase technical excellence, and other commenters suggested an 
alternative training metric focused on the percentage of revenue firms 
spend on training. Other commenters highlighted challenges to defining 
a training metric that would provide decision-useful information. One 
commenter stated that training is important for development and 
building awareness, but on-the-job training is invaluable, yet not 
measurable. One commenter suggested that training metrics may not be 
informative given they would be quantitative and not qualitative and 
also suggested that these concerns would be best addressed through the 
implementation of QC 1000 and related standards.
    The Board believes there are benefits to having firms report 
information regarding training. Indeed, academic research provides 
evidence that certain proxies for auditor training are positively 
associated with some proxies for audit quality, although the results 
vary depending on the type of training \121\ The Board also observes 
that almost all of the firms that provide voluntary reporting include 
their average training hours as well as information about their 
policies and procedures regarding training, which appears to emphasize 
the value those firms place on the development of their professionals 
as well as the potential informativeness of an hours-based quantitative 
measure. The Board's research also indicates that at least eight other 
jurisdictions include training as a firm-level metric.\122\
---------------------------------------------------------------------------

    \121\ See below for additional discussion on the academic 
literature.
    \122\ See Accountancy Europe Report at 6, 7, 8, 11, 12, 13, and 
14 for IDW (Germany), Quartermasters (Netherlands), CMVM (Portugal), 
CPAB (Canada), ICAI (India), ACRA (Singapore), and IRBA (South 
Africa). See also FRC Feedback Statement, at 18.
---------------------------------------------------------------------------

    The Board recognizes that quantitative measures such as the number 
of professional development training hours cannot capture qualitative 
factors, such as the skill of trainers, the quality and relevance of 
training content, whether the training is in a specialized area 
specific to the trainee, and the degree of trainee engagement, that 
contribute to the effectiveness of training. However, the average 
number of training hours per audit professional provides an indication 
of the importance the firm places on the training of its professionals. 
In addition, given that the metrics are presented as a suite of metrics 
and are not expected to be considered in isolation, providing some 
visibility into firm's commitments and efforts to promote the 
development of their professionals through ensuring they receive 
adequate training will provide an additional data point for 
consideration in that context.
    Metrics the Board considered in this area, both at the firm level 
and the engagement level, include (i) the average total number of CPE 
hours per professional; (ii) average number of CPE hours received by 
audit professionals in specified fields of study, such as (a) 
accounting and auditing and (b) ethics and independence; and (iii) CPE 
compliance rates at the firm or specific to engagement teams. In 
consideration of the importance of training to the development of audit 
professionals and the impracticality of measuring training through 
qualitative means, the Board adopted metrics for average annual 
professional development training hours \123\ for audit partners, 
managers, and staff, both firm-wide and for the core engagement team. 
These metrics will create visibility into training at both the firm and 
engagement level, using

[[Page 99999]]

data that the Board believes will be readily accessible to firms.
---------------------------------------------------------------------------

    \123\ Professional development training hours are training hours 
for credit in support of obtaining or maintaining a professional 
accounting license in a jurisdiction in which the auditor is 
licensed or pursuing a license. For example, in the United States, 
professional development training hours would be synonymous with CPE 
credits as defined by the National Association of State Boards of 
Accountancy (NASBA). In some jurisdictions, including the United 
States, a training hour may be less than 60 minutes. If a 
jurisdiction does not impose training requirements in support of 
professional licensure, professional development training hours are 
hours of training associated with acquiring and maintaining 
professional competence.
---------------------------------------------------------------------------

    The Board considered the suggested alternative of a training metric 
focused on the percentage of a firm's revenue invested in training. 
However, the Board believes that any approach based on the costs of 
training would be difficult to implement. For example, some firms 
develop their own training, some firms purchase training, and other 
firms may reimburse their professionals for third-party training. Also, 
firms may develop training for non-audit professionals within the 
organization and then subsequently provide that training to audit 
professionals, further adding to the complexity of suggested cost-based 
training metrics. By contrast, the Board expects that firms will 
generally already be tracking training hours as part of monitoring 
ongoing compliance with CPE requirements, which should ease 
implementation of the hours-based metrics the Board adopted. The Board 
believes that the difficulties associated with measuring costs would 
outweigh the advantages of a cost-based metric, as compared to the 
hours-based approach.
    (See Exhibit A, ``Training Hours for Audit Personnel.'')
iv. Experience of Audit Personnel
    The auditor's years of experience at a public accounting firm can 
provide useful information about how the auditor staffs the audit. 
Academic studies show that auditor experience is related to improved 
audit effort and skill, through both pre-client and client-specific 
experience,\124\ and through behavioral adaptations associated with 
managing their clients.\125\ At the firm level, an experience metric 
can provide information regarding the ``bench depth'' of firm personnel 
and the ability of the firm to staff its engagements. At the engagement 
level, the engagement team's years of experience can provide useful 
information about the depth of experience of the engagement team for 
that particular engagement.
---------------------------------------------------------------------------

    \124\ See, e.g., Wuchun Chi, Linda A. Myers, Thomas C. Omer, and 
Hong Xie, The Effects of Audit Partner Pre-Client and Client-
Specific Experience on Audit Quality and on Perceptions of Audit 
Quality, 22 Review of Accounting Studies 361, 363 (2016).
    \125\ See, e.g., G. Bradley Bennett and Richard C. Hatfield, The 
Effect of the Social Mismatch Between Staff Auditors and Client 
Management on the Collection of Audit Evidence, 88 The Accounting 
Review 31, (2012).
---------------------------------------------------------------------------

    The Board proposed firm-level reporting of the average years of 
experience at a public accounting firm of the firm's engagement 
partners, partners other than engagement partners, and managers; and 
engagement-level reporting of the years of experience at a public 
accounting firm of the engagement partner and the EQR, as well as the 
average years of experience of other partners and managers on the core 
engagement team. Both metrics captured all experience at a public 
accounting firm, whether or not the firm was registered with the PCAOB, 
and included audits of issuers and non-issuers, as well as non-audit 
work.
    Some commenters agreed in concept with firm- and engagement-level 
metrics for experience, stating that they agreed that auditor's years 
of experience at a public accounting firm may provide useful 
information about how the auditor staffs the audit. One of these 
commenters broadly supported both metrics but suggested a number of 
potential refinements, discussed below. One commenter suggested that an 
employee experience metric could identify firms that are more likely to 
have a firm culture that contributes to audit quality. Another 
commenter suggested that a metric depicting years of experience after 
CPA licensing would provide insight into whether a firm has more 
experienced professionals.
    Several commenters generally supported the firm-level experience 
metric, while objecting to all proposed engagement-level metrics, 
including the experience metric. One of these commenters stated that 
the proposed firm-level metric met its criteria of being readily 
interpretable, aligning with measures used by the firm in its system of 
quality control, having broad linkage to audit quality, having minimal 
unintended consequences, and meeting the information needs of users.
    Some commenters asserted that proposed experience metrics, both at 
the engagement and firm levels, were not useful or meaningful, saying 
that there is great potential for misunderstanding and misuse with 
little value to be derived. Another said that the emphasis on years of 
experience overlooks the centrality of technology in the future.
    Some commenters raised questions about the professionals covered by 
the metrics. Two commenters suggested that the firm-level metric cover 
only individuals who have been assigned to issuer audits, one of whom 
said that firms may use different personnel on issuer audits than non-
issuer audits, so a metric that includes personnel regardless of 
whether they work on issuer audits would not provide an accurate view 
of personnel that may be staffed on an issuer audit. One commenter 
questioned whether it was appropriate to provide engagement-level 
reporting regarding the experience of the EQR, because it might imply 
that the EQR was part of the engagement team.
    Commenters also questioned the appropriate level of disaggregation 
for reporting. One commenter described the requirement to segregate 
engagement partners from other partners as impractical to implement and 
not a meaningful distinction in the metric. Another suggested further 
disaggregation, with partner and manager experience reported separately 
and data broken down by industry.
    Commenters reacted to the proposal to count only experience in 
public accounting as relevant. One agreed that experience metrics 
should be limited to audit experience. Several others suggested that 
experience in addition to years worked at a public accounting firm, 
such as industry experience or time spent working at a relevant 
regulator, should be included. For example, one said that limiting 
relevant experience exclusively to auditing experience could 
potentially overlook the comprehensive skill set that individuals gain 
from various roles throughout their career. Two commenters said that 
context is needed to understand metrics depicting experience, as the 
depth of experience and whether it is current may differ considerably. 
Some commenters expressed concern about the challenges of gathering 
data regarding experience, particularly if the experience metric is not 
limited to time spent at the individual's current firm.
    Commenters also raised issues with the calculation of the proposed 
metric. One remarked that the experience metrics provided an incentive 
to have a number of very experienced partners provide modest assistance 
in order for their experience to be included in, and significantly 
improve, the metric. This commenter suggested that requiring a weighted 
average for this metric would act as a deterrent. One commenter 
expressed that the calculation did not address how to treat personnel 
role changes at the firm level.
    One commenter suggested that further outreach was needed to 
determine the ability to prepare such information and for investors and 
audit committees to understand how such firm-level metrics would be 
used in decision making.
    After considering commenter input, the Board adopted the firm- and 
engagement-level metrics with the modifications described below. While 
the Board appreciates that there are limits to the information an 
experience metric can provide, the Board believes that it is and will 
continue to be a useful element in a suite of metrics, even in the 
context of technological advances and other changes in the audit 
market.

[[Page 100000]]

    The Board considered whether, as some commenters suggested, the 
firm-level experience metric should be narrowed to cover only 
professionals who worked on an issuer audit in the most recent year. 
However, the Board does not believe that approach would increase the 
information value of the metric, because individuals may participate in 
issuer audits in some years but not others, so it would cover only a 
portion of the total talent pool. Such an approach would also add 
significant complexity to the calculation, as well as variability year 
over year. Accordingly, the Board concluded that it would be more 
appropriate for firms to report the experience of all audit 
professionals, as proposed.
    The Board also considered whether to eliminate engagement-level 
reporting of the experience of the EQR, based on commenter concern that 
this could imply that the EQR is a member of the engagement team. 
However, the Board does not believe that concern is well founded. There 
is nothing in Form AP to support such an implication, and the Board's 
standards are clear that the EQR is not a member of the engagement 
team. Because of the significance of the EQR role, the Board continues 
to believe that EQR experience is important and should be separately 
reported.
    The Board is eliminating the requirement to provide separate firm-
level reporting of the experience of engagement partners. Instead, the 
final rules require firm-level reporting of (i) the average experience 
of all partners in aggregate, both those who serve as engagement 
partners and those who do not, and (ii) the average experience of all 
managers in aggregate. After considering commenter responses, the Board 
is concerned that separate reporting of engagement partner experience 
may not add significant information value but will increase the 
complexity and administrative burden associated with the metric. The 
Board believes these metrics, with all partners in aggregate, will also 
serve as a useful baseline for comparison of the engagement-level 
reporting of engagement partner and EQR experience. The Board has also 
separated the partner and manager experience metrics at the engagement 
level for consistency and comparability with the firm-level metrics.
    The Board considered broadening the scope of relevant experience 
beyond public accounting but decided to adopt that aspect of the metric 
as proposed. The Board notes that the commenters who recommended a 
broader scope had inconsistent recommendations as to what would 
constitute relevant experience (e.g., experience in a financial 
accounting role, previous experience at a regulator, etc.), reflecting 
the difficulty of arriving at an agreed-upon view of the non-audit 
experience that would be relevant and should be included. The Board 
believes a metric focused on experience in public accounting will be 
better focused and would avoid that difficulty.
    Several commenters raised concerns about the ability to track the 
historical information called for by the metric, some implying that the 
experience metric should be limited to experience with the individual's 
current firm. The Board is concerned that such a limited metric could 
be misleading, as it would understate the experience of anyone who 
changed jobs. Moreover, the Board believes that firms could readily 
capture the information from current personnel and otherwise during the 
hiring and onboarding process, and the information would therefore 
generally be available to firms without a significant ongoing 
administrative burden.
    The Board noted the questions commenters raised about how to 
calculate averages, including how to treat partial years of experience 
and whether the average at the engagement level should be calculated on 
a weighted basis to reflect the extent of participation in the audit. 
As to partial years of experience, firms will be free to report in 
whole years on a rounded basis or, if they wish, more precisely. While 
the Board appreciates that it may be possible to make staffing changes 
in an effort to manage this or other metrics, the Board believes that 
calculating the experience metric for the other partners and managers 
as a weighted average would add unnecessary complexity. The Board also 
considered that the risk of managing the engagement-level experience 
metrics is minimized by other considerations, such as industry or other 
specialized experience needs, that go into staffing decisions. In 
addition, the Board expects that comparisons of trends in the reported 
metrics over time will provide balance.
    The Board also notes that, if a firm believed additional 
information or context would be required for a reader to understand the 
metrics provided, the firm could provide it as narrative.
    (See Exhibit A, ``Experience of Audit Personnel.'')
v. Industry Experience
    As part of the planning activities of an audit, auditors have a 
responsibility to gain an understanding of the company's business. 
These activities include gaining an understanding of matters affecting 
the industry in which the company operates, such as financial reporting 
practices, economic conditions, laws and regulations, and technological 
changes.\126\ Experience in a particular industry helps an auditor 
understand the industry's operating practices, the critical accounting 
issues confronting companies in that industry, the risks of material 
misstatement of the financial statements specific to industry factors, 
and any industry-specific audit procedures.
---------------------------------------------------------------------------

    \126\ See AS 2101.07.
---------------------------------------------------------------------------

    Understanding the experience of firms' audit personnel across 
industries is an important factor in assessing the firm's capacity and 
resources to perform audits of issuer engagements that benefit from 
specific industry knowledge. The Board believes industry experience 
metrics will assist in gaining that understanding.\127\
---------------------------------------------------------------------------

    \127\ QC 1000.38a.(2)(d) requires firms to establish quality 
objectives that address the firm's judgments about the extent to 
which the firm has or can obtain resources to perform the engagement 
as part of its acceptance and continuance of engagements.
---------------------------------------------------------------------------

    Importantly, academic literature has long identified auditor 
industry specialization as related to the effectiveness of audits.\128\ 
One study that examines the impact of auditor industry specialization 
on the assessment of audit risk and in audit planning found that 
auditors with industry-specific knowledge improved the auditor's 
assessment of differential audit risk and the quality of their audit 
planning decisions.\129\
---------------------------------------------------------------------------

    \128\ See, e.g., W. Robert Knechel, Vic Naiker, and Gail 
Pacheco, Does Auditor Industry Specialization Matter? Evidence from 
Market Reaction to Auditor Switches, 26 Auditing: A Journal of 
Practice and Theory 19, (2007); Steven Balsam, Jagan Krishnan, and 
Joon S. Yang, Auditor Industry Specialization and Earnings Quality, 
22 Auditing: A Journal of Practice and Theory 71, (2003); and Allen 
T. Craswell, Jere R. Francis, and Stephen L. Taylor, Auditor Brand 
Name Reputations and Industry Specializations, 20 Journal of 
Accounting and Economics 297 (1995).
    \129\ See Kin-Yew Low, The Effects of Industry Specialization on 
Audit Risk Assessments and Audit-Planning Decisions, 79 The 
Accounting Review 201, 202 and 214 (2004).
---------------------------------------------------------------------------

    Investor-related commenters were generally supportive of industry 
experience metrics stating they believe that it is critical for 
auditors to have an elevated level of industry-specific knowledge. One 
investor-related group stated that experience in a particular industry 
helps an auditor understand that industry's operating practices, 
critical accounting issues faced in that industry, the risks of 
material misstatement of the financial statements specific to industry 
factors, and any industry specific audit procedures. Another commenter 
suggested that further guidance on the classification of

[[Page 100001]]

industries would be helpful and also suggested that weighting current 
experience should be considered. One commenter suggested that the 
metric be disaggregated between partners and managers.
    While most firm and firm-related commenters opposed industry 
experience metrics, one firm commenter stated that they understand in 
principle why industry metrics may be perceived as meaningful. Some 
commenters stated that the proposed industry experience metrics were 
not useful due to issues with comparability and complexity. Some 
commenters believed that the industry metrics gave rise to the 
potential for confusion and misunderstanding, in part because any 
classification system could group together very different types of 
issuers that could result in inappropriate comparisons.
    One commenter suggested that the proposed metric does not address 
the issue that not all audits require specific industry experience and 
that audit quality is enhanced when an engagement team includes 
personnel with diverse experiences. Another commenter stated that 
metrics depicting experience would need context to be meaningful.
    After considering commenter input, the Board has retained industry 
experience metrics, but simplified them from the proposal. The changes 
include limiting the scope for reporting at the firm level and limiting 
the requirements for reporting at the engagement level to the 
engagement partner, the engagement quality reviewer and certain members 
of the core engagement team among other changes further discussed 
below. At a high level, the Board believes this addresses the concerns 
of commenters regarding complexity, certain data collection concerns, 
the potential for confusion and misunderstanding, and also provides for 
more comparable information.
a. Thresholds
    The Board proposed that the metrics would count partners who have 
at least five years of experience throughout their careers in a 
particular industry and managers who have at least three years of such 
experience.\130\ For determining what counted as a year's experience, 
the Board proposed a minimum threshold of 250 hours, or 25% of hours 
worked, focused on an industry in a given year.
---------------------------------------------------------------------------

    \130\ A note to the calculations clarifies that industry 
experience is accumulated throughout an individual's career (i.e., 
aggregates experience obtained at all career levels). When 
determining whether an individual has experience in a specific 
industry the following may be taken into account: (i) industry 
experience may be, but is not required to be, exclusive to 
experience on audit engagements, or exclusive to experience gained 
at an accounting firm, but must be relevant, and (ii) industry 
experience can be acquired in non-consecutive years. Relevant 
experience includes experience in accounting or auditing roles and 
other specializations, such as experience that is related to fair 
value estimates in the industry. See Note 2 to Item 4.5 of Form FM, 
Note 1 to Item 6.5 of Form AP.
---------------------------------------------------------------------------

    The proposed instructions for reporting the metric included 
qualitative considerations to assist in determining whether an 
individual had experience in a specific industry, including 
consideration that industry experience may be, but is not required to 
be, exclusive to experience on audit engagements, or exclusive to 
experience gained at a public accounting firm, but must be relevant, 
which includes experience in accounting or auditing roles and other 
specializations, such as experience that is related to fair value 
estimates in the industry. The instructions also clarified that 
industry experience may be acquired in non-consecutive years.
    One commenter expressly agreed with the proposed requirement of 250 
hours or 25% of the auditor's time as being a reasonable criterion for 
a year of qualifying industry experience. However, several other 
commenters criticized the proposed threshold. Some of the concerns 
raised included tracking the information throughout the career of 
professionals, particularly at the global network level; obtaining 
historical data; complying with the proposed 250 hour or 25% 
thresholds; and maintaining documentation to support the metrics. 
Another commenter expressed that the thresholds were not meaningful as 
different individuals may perform the same tasks in different amounts 
of time. This commenter also expressed that without research supporting 
the thresholds, it is not possible to recommend how much industry 
experience would be necessary. While one commenter acknowledged the 
proposal allowed self-reporting as an option, they had concerns about 
the ability of personnel to accurately determine whether they worked 
250 hours or more in a specific industry going back many years, 
potentially decades, and encouraged qualitative thresholds for 
determining industry experience.
    One commenter agreed with the proposed 3- and 5-year thresholds for 
measuring industry experience and also suggested adding an additional 
threshold of 10-years at the partner level. Other commenters raised 
other concerns with the proposed reporting requirements. Some 
commenters disagreed with the proposal to count managers with three 
years of experience and partners with five years of experience. Among 
these commenters, some expressed that it would unfairly exclude some 
partners and managers, could be a disadvantage to smaller firms, could 
be time consuming to compile data to support, and should not include 
individuals with de minimis involvement. Commenters that responded to 
the question of whether industry experience should be limited to audit 
experience or rather should include all relevant experience agreed with 
the proposal to include all relevant experience. They also agreed that 
it need not be consecutive years.
    Several additional commenters voiced concern about whether industry 
experience was required to be recent. Two commenters claimed that the 
Board's recently adopted quality control standard acknowledges that 
there is no right level of industry experience,\131\ and each audit may 
require different background and experience.
---------------------------------------------------------------------------

    \131\ QC 1000.47 requires firms to design, implement, and 
maintain policies and procedures such that their personnel obtain 
and maintain the competence to fulfill their respective assigned 
engagement roles, including an understanding of, among other things, 
the industry in which the company operates and its relevant 
characteristics.
---------------------------------------------------------------------------

    After considering commenter feedback, the Board retained the 3- and 
5-year thresholds for determining whether partners and managers should 
be included in the industry experience metrics. The Board has also 
retained the threshold of 250 hours or 25% of hours worked as the 
baseline to determine whether a year qualifies as industry experience 
but recast it as a general expectation rather than a requirement to 
allow firms to exercise reasonable judgment. At the firm level, once 
the 3- or 5-year industry experience threshold has been attained, 
partners and managers should be included in the metrics until or unless 
a firm determines, in its reasonable judgment, that the particular 
industry experience is no longer relevant. At the engagement level the 
Board has simplified the reporting requirements by limiting the metrics 
to the years of experience of the engagement partner, the EQR, and 
members of the core engagement team. The metrics will not include a 
requirement to determine the industry experience of other partners and 
managers who participated in the audit who are not members of the core 
engagement team. The Board believes these changes will appropriately 
address commenter concerns about potential difficulties in gathering 
and verifying data while continuing to allow

[[Page 100002]]

firms to take into account matters like experience in related 
industries, the nature of non-audit experience, and whether experience 
is recent or remote in time. In addition, consistent with the proposal, 
the final rules do not specify how the relevant information should be 
accumulated. Because experience may be obtained in different ways at 
different points throughout a professional's career, there are many 
ways in which information could be accumulated to support the firm's 
judgment, including personnel self-reporting or a firm's own time-
keeping system.
b. Industry Classification
    The proposal set forth requirements for firms to provide 
information regarding partner and manager experience in particular 
industries. In order for firms to use a consistent approach to industry 
identification, the Board proposed the Industry Classification 
Benchmark (ICB), operated and managed by FTSE Russell. The ICB is used 
by global stock exchanges, including the London Stock Exchange, 
Euronext, and NASDAQ OMX, to categorize listed companies. Based on the 
ICB classification system, firms would have selected from among a total 
of 31 possible industry classifications.\132\
---------------------------------------------------------------------------

    \132\ See FTSE Russell Industry Classification Benchmark (ICB), 
available at https://www.lseg.com/en/ftse-russell.
---------------------------------------------------------------------------

    Several commenters agreed that the proposed index was an 
appropriate reference for industry classification. One commenter 
acknowledged that there was a potential for imprecision when reporting 
on large conglomerate companies that operate in many different 
industries, but stated their belief that using the ICB rather than the 
legacy Standard Industrial Classification (SIC) codes is a better 
strategy from the outset of the creation of the metrics. This commenter 
also expressed their understanding that there could be some imprecision 
at the margins. On the other hand, several commenters stated that it 
would be inconsistent with other reporting required by the SEC using 
the SIC codes or the North American Industrial Classification system 
(NAICS). Some commenters stated that firms do not necessarily align 
with the industries proposed. One commenter pointed out that the ICB 
listing does not include public sector or government and asked whether 
these should be omitted from the reporting requirements.
    Commenters responding to the proposal's question about whether 
reporting should be expanded to allow for industries in addition to an 
issuer's primary industry stated that industry reporting for large 
issuers is complex, some stating that changes over time from mergers 
and other activities would add to the complexity. Some commenters also 
stated that the proposed industry metrics would provide challenges with 
respect to data collection.
    In response to these concerns and after further considering recent 
voluntary public reporting by firms,\133\ the Board has expanded the 
classification taxonomy and added flexibility. With respect to the 
proposed industry classification listing, the final requirements 
continue to provide a listing from which to select industries for 
reporting purposes, but have been revised to include certain additional 
industries such as agriculture and forestry and government and public 
services categories to facilitate reporting for firms that have large 
practices in these industries or sectors. In addition, for certain 
industry groupings, such as finance and health care, an ``other'' sub-
grouping has been added to provide flexibility while maintaining a 
level of comparability at the overall industry level. Firms are also 
permitted to specify additional industries for reporting in the event 
that the listing does not include an industry that accurately 
represents the industries that they serve.
---------------------------------------------------------------------------

    \133\ Consideration was given to recent Transparency Reports and 
information available on public firm websites.
---------------------------------------------------------------------------

    The taxonomy the Board adopted is as follows:
    [Form FM and Form AP will provide drop-down menus for industry 
classifications]
Industry Classification
1 Agriculture and Forestry
    1.1 Agriculture and Forestry
2 Automotive
    2.1 Automotive: Manufacturing
    2.2 Automotive: Retail
3 Basic Resources
    3.1 Basic Resources: Chemicals
    3.2 Basic Resources: Industrial Materials
    3.3 Basic Resources: Industrial Metals and Mining
4 Construction and Materials
    4.1 Construction and Materials
5 Consumer Products and Services
    5.1 Consumer Products and Services
6 Energy
    6.1 Energy: Alternative Energy
    6.2 Energy: Oil, Gas, and Coal
    6.3 Energy: Other Energy and Transportation
7 Finance
    7.1 Finance: Banks (Excluding Investment Banking and Brokerage 
Services)
    7.2 Finance: Investment Banking and Brokerage Services
    7.3 Finance: Finance and Credit Services
    7.4 Finance: Insurance
    7.5 Finance: Real Estate
    7.6 Finance: Other
8 Government and Public Services
    8.1 Government and Public Services: Government
    8.2 Government and Public Services: Public Services
9 Health Care
    9.1 Health Care: Health Care Providers
    9.2 Health Care: Pharmaceuticals and Biotechnology
    9.3 Health Care: Medical Equipment and Services
    9.4 Health Care: Other
10 Industrial Goods and Services
    10.1 Industrial Goods and Services: Aerospace and Defense
    10.2 Industrial Goods and Services: General
11 Technology, Media, and Telecommunication
    11.1 Technology, Media, and Telecommunication: Media
    11.2 Technology, Media, and Telecommunication: Technology Hardware 
and Equipment
    11.3 Technology, Media, and Telecommunication: Telecommunication
    11.4 Technology, Media, and Telecommunication: Other
12 Trades and Services
    12.1 Trades and Services: Travel and Leisure
    12.2 Trades and Services: Retail
    12.3 Trades and Services: Wholesale
    12.4 Trades and Services: Other
13 Utilities
    13.1 Utilities: Electricity
    13.2 Utilities: Gas, Water, and Multi-utilities
    13.3 Utilities: Waste and Disposal Services
14 Other Industry [specify]
    14.1 [Industry]
    The Board acknowledges that its taxonomy does not align with issuer 
reporting using SIC or NAICS codes. As discussed in the Board's 
proposal, the Board rejected those systems, as well as others, based on 
several considerations, including that the SIC system has not been 
updated since the 1980s, the NAICS system uses a production-oriented 
and North America-centric structure that would not be appropriate as 
applied to many issuers, and that none of the alternative systems the 
Board considered would provide a basis for a meaningful metric. For 
example,

[[Page 100003]]

the SIC code system, in addition to being dated, is highly fragmented, 
employing more than 440 different industry classifications as listed on 
the SEC's website.\134\ The Board believes this fragmentation would 
dramatically impair the utility of the metrics, particularly because 
there is no logical hierarchy by which industries with a need for 
similar accounting or auditing specializations can be grouped together. 
By comparison, the Board believes that the curated taxonomy that the 
Board developed and refined in consideration of the ICB system most 
closely aligns with the industries that firms generally disclose in 
their transparency reporting and will provide the most relevant basis 
for comparison among firms.
---------------------------------------------------------------------------

    \134\ See https://www.sec.gov/search-filings/standard-industrial-classification-sic-code-list.
---------------------------------------------------------------------------

c. Metrics
    The firm-level metrics provide information related to the firm's 
industry specialization and the engagement-level metrics provide 
information related to experience in the issuer's primary industry of 
engagement partners and engagement quality reviewers. The following 
sections discuss the proposed metrics, comments received, responses to 
those comments, and the final requirements for firm- and engagement-
level metrics.
(1) Firm-Level Metrics
    At the firm level, having industry experience may provide a group 
of professionals who can both work on engagements and advise members of 
engagement teams when additional technical, industry-specific knowledge 
is needed. Firm-level industry experience may indicate that the firm 
has specific industry-based audit knowledge, industry-specific tools 
related to risk assessment, and industry-specialized methodologies for 
accounting and auditing. As a firm-level metric, the Board proposed 
that firms report, for each industry that represents at least 10% of 
the firm's revenue from audit services, the number of partners and 
managers who have accumulated five or more years or three or more 
years, respectively, of industry experience throughout their careers. 
The Board also proposed to allow firms to provide the same information 
for additional industries voluntarily. As discussed above, the proposed 
reporting instructions specified a minimum threshold number of years of 
industry experience for reporting and how those years were to be 
calculated.
    Some commenters questioned the proposed 10% of revenue threshold 
for identifying the firm's top industries. One commenter stating that 
considering both the proposed threshold and the fact that the proposed 
index is not inclusive of all industries in which the firm earned 
revenue from audit services, the calculation would be problematic or 
would result in the exclusion of those industries. Another commenter 
questioned what period the 10% was meant to be measured over and 
whether it was meant to be aligned with the firm's fiscal year or 
another period. One firm commenter expressed concern that the proposed 
metric would require it to compile data for industries in which it did 
not perform any issuer audits. This commenter, and another, suggested 
an alternative of calculating the metric based on 10% of a firm's 
issuer audit practice rather than its overall audit practice. Other 
commenters suggested that the metric be narrowed to a firm's issuer 
audit practice, particularly in light of the proposed 10% of the firm's 
revenue from audit services threshold. One of these commenters 
additionally suggested that the metric include only partners who serve 
on issuer audits.
    In the Board's proposal, the Board solicited comment on 
alternatives to the 10% threshold, such as requiring firms to disclose 
their top five or top ten industries by revenue from audit services. 
One commenter stated that this approach would be more practical and 
clearer for stakeholders.
    Some commenters suggested potential alternative approaches. One 
commenter suggested requiring public disclosure of industry expertise 
at the firm level based on the percentage of a firm's issuer clients 
according to the industry marked on those issuers' SEC filings. Another 
suggested reporting the number of entities under audit in a certain 
industry rather than partner and managers with years of experience. 
Other commenters suggested that, rather than focusing on the percentage 
of revenue and using the ICB listing, each firm should be allowed to 
list the industries, presumably not limited to the proposed ICB 
listing, and to choose the number of industries, for which they have 
specific expertise and report on those.
    Several commenters suggested that further study or outreach was 
needed to determine the ability to prepare such information and for 
investors and audit committees to understand how such firm-level 
metrics would be used in decision-making.
    After considering the comments received, the Board simplified firm-
level reporting of industry experience in several ways:
     The Board is limiting reporting requirements to firms that 
issued five or more audit reports for accelerated filers and large 
accelerated filers during the reporting period, combined. The Board 
believes this will reduce the chances that a firm's top industries will 
not include the industries represented in its issuer audit practice, 
resulting in a more meaningful data set, while also alleviating 
compliance burdens on firms with a small issuer practice.\135\
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    \135\ Based on PCAOB staff's analysis performed on the data 
obtained from Audit Analytics, Standard & Poor's, and publicly 
available data from the PCAOB's Registration, Annual and Special 
Reporting (RASR), available at https://rasr.pcaobus.org. For the 
two-year period ended September 30, 2023, the Board expects that 
approximately 50 firms will be required to report this metric each 
year.
---------------------------------------------------------------------------

     Rather than requiring reporting with respect to industries 
that account for at least 10% of the firm's revenue from audit 
services, the Board is requiring firms to report the top five industry 
sectors based on such revenue, regardless of the percentage of revenue 
they represent. The Board believes this will address commenter concerns 
regarding potential complexities of the calculation. The Board has also 
clarified the instructions to provide that the determination is based 
on revenue for the firm's most recently completed fiscal year. While 
this means that the top five industries will be measured over a 
different period than the years of experience, the Board believes that 
consequences of that misalignment are likely to be immaterial, while it 
will simplify data collection and align it with the firm's business 
cycle. The Board has also provided the ability for firms to report 
additional industries if the Board's list does not include an 
appropriate industry grouping.
    While the Board considered commenter suggestions to limit the 
metric to firm revenue from issuer audits rather than revenue from all 
audit services, the Board continues to believe that the metric is more 
relevant if it includes all audit services. The information it provides 
offers a user of the information a view to the firm's entire audit 
practice, not just its issuer audit practice, which informs users of 
the depth of industry experience of the firm's people. The Board 
believes this information is more relevant than the number of issuers a 
firm audits in a particular industry because, in absence of an 
understanding of the specific issuer population, that data may be less 
easily interpreted.
(2) Engagement-level Metrics
    At the engagement level, industry experience provides professionals 
with

[[Page 100004]]

an understanding of risks unique to the industry and industry-specific 
auditing and accounting considerations. The proposed engagement-level 
metrics required disclosure of the years of experience in the issuer's 
primary industry for the engagement partner and the engagement quality 
reviewer. In addition, the Board proposed that the number of partners 
(excluding the engagement partner) and managers on the engagement team 
with experience in the issuer's primary industry also be disclosed.
    Commenters raised questions with respect to personnel to be 
included in the engagement-level industry metrics. One commenter 
suggested that industry experience metrics be limited to the core 
engagement team, suggesting that including the EQR implies that the EQR 
is part of the engagement team, when they are not. This commenter, and 
some others, suggested that industry experience should be limited to 
recent experience. A commenter stated that these metrics should be 
limited to the engagement partner and the EQR, while another commenter 
stated that partners, other than the engagement partner, and managers, 
should be disaggregated.
    As discussed above, many commenters had concerns with the 
calculations, including the thresholds to be used in the calculations. 
In response to these concerns, the Board has limited reporting to the 
engagement partner and the engagement quality reviewer, and other 
partners (excluding the engagement partner) and managers on the core 
engagement team. The Board has eliminated the proposed reporting for 
other firm partners and managers who are not members of the core 
engagement team. The Board believes, given the key roles played by the 
engagement partner and the EQR, and other partners and managers on the 
core engagement team that this will focus the metric on the most 
salient information.
    (See Exhibit A, ``Industry Experience.'')
vi. Retention of Audit Personnel
    The retention rate and the headcount change inform the overall 
readiness, availability, and ability of the firm to conduct effective 
and efficient audits. While some turnover is expected within audit 
firms,\136\ a comparatively high rate of turnover or higher-than-
expected turnover could adversely affect audits.\137\ It could diminish 
the available pool of talent who have the appropriate competency. It 
may take time and resources for the firm to replace the competency 
lost, likely through effective recruiting and further training. 
Academic literature consistently finds the same conclusion: turnover 
negatively affects audit quality, more so at longer-tenured engagements 
than newer engagements.\138\
---------------------------------------------------------------------------

    \136\ See, e.g., Kris Hardies, A Survival Analysis of 
Organizational Turnover in the Auditing Profession, 97 MAB 5 (2023).
    \137\ See Christophe Van Linden, Marie-Laure Vandenhaute, and 
Aleksandra Zimmerman, Audit Firm Employee Turnover and Audit 
Quality, Working Paper, Vrije Universiteit Brussel, SSRN (2023).
    \138\ See, e.g., Joshua Khavis and Brandon Szerwo, Audit-
Employee Turnover, Audit Quality, and the Auditor-Client 
Relationship, SSRN Electronic Journal, (2023); Linden, et al., Audit 
Firm Employee Turnover and Audit Quality; W. Robert Knechel, Juan 
Mao, Baolei Qi, and Zili Zhuang, Is There a Brain Drain in Auditing? 
the Determinants and Consequences of Auditors Leaving Public 
Accounting, 38 Contemporary Accounting Research 2461 (2021); and 
Brant E. Christensen, et al., How Do Team Workloads and Team 
Staffing Affect the Audit? Archival Evidence from U.S. Audits. The 
Board notes that SSRN does not peer review its submissions.
---------------------------------------------------------------------------

    The proposal set forth requirements for firms to calculate the 
average annual retention rate and the average annual headcount change 
of partners and managers both at the firm- and engagement-level.
    At the firm level, the Board also proposed to require disclosing 
the average number of partners and managers to provide context for the 
retention and headcount change metrics. For example, a 67% retention 
rate at a larger firm (200 departures out of 600 professionals) would 
involve a different level of employee continuity and hence imply a 
different magnitude of possible impact on the firm's human resource 
management, than at a smaller firm (e.g., one departure out of three 
professionals) because this larger firm will likely need to replace 200 
professionals while the smaller firm will only need to replace one 
professional assuming all things are consistent.
    At the engagement level, the Board also proposed to require 
disclosing the average tenure on the engagement for partners and 
managers to quantify the overall continuity of the engagement team 
members. Average annual retention rate is a year-over-year metric, but 
tenure would provide overall engagement-level experience as an 
important component to understand the experience of the engagement team 
on the specific audit.
a. Firm-Level Reporting
    The annual retention rate measures the percentage of firm personnel 
continuously employed for the reporting period to demonstrate the 
continuity of firm personnel. The average annual headcount change 
measures changes in the firm's overall headcount of managers or 
partners, giving an indication of the firm's success in replacing 
professionals who left roles performing audits and the overall 
availability of firm personnel. The annual retention rate and the 
annual headcount change are closely related; however, the annual 
retention rate would measure the ``same people'' within the firm, while 
the annual headcount change would measure the ``same number of 
people.'' The annual retention rate measures whether the same 
individuals are still holding their positions at the firm while the 
annual headcount change is focused on the change in the number of 
individuals serving in those positions. Changes in annual headcount 
over time could result from a variety of reasons, for example, changes 
in a firm's human resource strategy (e.g., greater use of technological 
resources, shifting more work to shared service centers), or a downturn 
in the economy.
    Commenters generally supported the proposed firm-level metrics. 
Some said they were sufficiently objective or straightforward and easy 
to interpret. One of these commenters also indicated that some firms 
already published similar metrics in firm audit quality reports and 
another commenter indicated that these metrics allow for some 
comparisons and may help a user in better understanding a firm. Two 
investor-related groups agreed with the proposal that a comparatively 
high rate of turnover or higher-than-expected turnover could adversely 
affect the audit, while another commenter indicated that staff turnover 
reporting is directionally supporting audit quality improvement through 
better continuity year-over-year. One of these commenters also stated 
that retention metrics will add to the mix of information provided in 
the final metrics without drawing a specific inference as to an 
``ideal'' retention rate, considering the need to strike a balance 
between maintaining continuity of the engagement team members and 
introducing new personnel who will take a ``fresh look'' at the audit. 
Another commenter stated that a benefit of the headcount change metric 
is that it will provide context for the retention metric. A commenter 
stated if a firm reports favorable employee retention metric, the 
firm's culture is ideal to contribute to higher audit quality. One 
commenter supported the firm-level metrics and acknowledged the 
importance of assessing the readiness and availability of the firm for 
conducting effective audits, but requested the Board determine how the 
metrics correlate

[[Page 100005]]

with audit quality before requiring public reporting.
    One commenter supported firm-level reporting of this metric area, 
but expressed concern that users could misinterpret the average annual 
headcount change metric due to unfamiliarity with the distinction 
between the turnover rate and headcount change. This commenter urged 
the PCAOB to host a roundtable discussion or pilot test to determine 
how audit committees or investors may interpret and use this 
information. Another commenter agreed that the turnover at various 
levels could have an impact on audit quality.
    Two commenters did not support the firm-level reporting of these 
metrics. While one commenter agreed with the proposed calculation and 
description of the metrics, this commenter was concerned that it could 
be misconstrued and present firms with a competitive disadvantage for 
recruiting talent without providing context (e.g., turnover due to 
changes in firm structure, shifting industry concentration, 
performance, ethical, or independence issues). Another commenter 
claimed the metric was convoluted and would be at the risk of 
misinterpretation.
    Additionally, two other commenters raised a concern; one of them 
questioned whether these metrics would be meaningful or of value to 
investors and whether firms would be sufficiently consistent in 
calculating the metrics to make them worthwhile and another questioned 
that the inclusion of all the firm's managers and partners may make 
this metric meaningless for firms whose issuer audit practice is small 
in relation to the total practice and recommended more outreach 
regarding the usefulness for stakeholders.
    Regarding the description and calculation of these metrics, several 
commenters asked questions or suggested refinements. One commenter 
questioned how the metrics would be calculated in a case of voluntary 
partner rotation. Another commenter recommended clarifying whether 
``other service lines within the firm'' includes ``other accounting 
services'' as defined by PCAOB Rule 1001(o)(i). Additionally, one 
commenter recommended renaming the description of the average annual 
headcount change to align with the calculation to avoid confusion; as 
proposed, it would provide current year headcount as a percent of the 
prior year headcount, not a change as a percent of the prior year. This 
commenter also suggested clarifying the meaning of ``holding the same 
position,'' used in the retention calculation and ``transferred out of 
audit practice,'' and ``continuously employed during the 12-month 
period'' used in the illustrative example of the firm's average annual 
retention rate calculation. One commenter suggested disaggregating 
partners and managers.
    Three commenters did not support separately reporting senior or all 
staff level annual retention and annual headcount change metrics.
    Taking into account commenter feedback, the Board adopted the 
retention metric as proposed and adopted the headcount change metric 
with some modifications.
    As noted above, academic literature consistently supports that 
turnover negatively affects audit quality. The Board believes the 
retention metric is objective, provides important data, and is already 
publicly reported by a number of firms in their audit quality or other 
reports. This metric was also generally supported by commenters from 
the different constituencies, including firm, firm-related groups, 
investor-related groups, and others. Since this or similar metrics are 
already reported by firms, the Board does not believe there will be a 
disadvantage in recruiting, difficulty in consistently reporting of 
this metric, or a risk of misinterpretation. Firms could also use the 
expanded narrative disclosures to provide context, if necessary.
    The Board also continues to believe the inclusion of all partners 
and managers who participate in audits, not a subset of partners and 
managers who serve issuer engagements, is appropriate because the 
retention rate and the headcount change inform the overall readiness, 
availability, and ability of the firm to conduct an effective and 
efficient audit. While this metric area provides historical 
information, the Board believes historical data signals impact on the 
firm's near-future staffing needs and ability to conduct effective 
audits due to the time it takes to hire and train additional resources. 
Firms with sufficient overall headcount could reallocate staffing due 
to a possible staffing shortage on issuer engagements.
    The Board does not believe that partner rotation, whether mandatory 
or voluntary, is likely to affect firm-level reporting of this metric, 
as the rotating partner will likely continue to participate in audits 
in the subsequent year (albeit on different engagements). The term used 
in the calculation ``holding the same position'' means that a partner 
remains as a partner and a manager remains as a manager of the firm 
during the reporting period. The term ``continuously employed within 
the 12 months'' means the individual is continuously employed by the 
firm throughout the 12 months, without departing to another employment.
    The Board revised the average annual headcount change calculation 
to address concerns raised by commenters, specifically that users may 
misunderstand this metric as a turnover rate and that the calculation 
should align with the title. The Board believes that the revision will 
help a user's understanding of the metric and align with the title of 
this metric by reporting the headcount change as a percentage of prior 
year. For example, using the illustrative example in the proposal,

Firm A had 204 managers and 200 managers as of October 1, 20X0 and 
September 30, 20X1, respectively. Under the revised calculation, the 
average annual headcount change will be -2% based on (200-204)/204 = -
1.96%.

    The Board believes this change will help users understand that the 
average annual headcount change of -2% means a 2% decrease in headcount 
from prior reporting year end to current reporting year end. This 
information is often used as a human resource management metric.
    Lastly, regarding the description and the calculation of the 
proposed average number of the firm's partners and managers, one 
commenter indicated that they are clear and appropriate. Another 
commenter indicated that it would help to provide context for the 
retention metric but use a simple average of the count at the beginning 
and end of the year. This commenter also agreed with treating the 
promotions to another level of seniority as if they occurred at the 
beginning of the year.
    Based on commenters' feedback on firm-level reporting of average 
number of managers and partners, the Board adopted this metric as 
proposed because comments received agreed with the proposed description 
and calculation and this metric will help provide context for retention 
and headcount change metrics. The proposed calculation provided a 
simple average of the number of partners or managers as of the previous 
reporting period end and the current reporting period end so that the 
numbers at the end of each reporting period will be used consistently 
in the calculation. Because the proposed calculation was not 
significantly different from using the simple average of the count at 
the beginning and end of the year, as suggested by a commenter, the 
Board adopted the calculation as proposed.

[[Page 100006]]

b. Engagement-Level Reporting
    For the engagement-level reporting, commenters generally did not 
support metrics in this area, while several commenters supported both 
firm- and engagement-level reporting. Many commenters who did not 
support such metrics cited the lack of context in the metrics itself or 
difficulties in explaining a wide range of factors that caused the 
engagement-level turnover (e.g., mandatory partner rotation, personal 
issues (i.e., family or medical leave, or relocations), firm's 
strategic resources management (i.e., scheduling conflicts, resource 
constraints, independence issues, or need for additional expertise)). 
Some commenters also cited the difficulty in interpreting the 
information, the risk of misinterpretation, misuse and misleading 
users, and even potentially being punitive to engagement teams and 
issuers. Others offered further reasons for not including this metric, 
which included difficulty in tracking and having consistent reporting 
on Form AP to make these metrics worthwhile. One commenter indicated 
the possibility of being detrimental to audit quality if these metrics 
incentivize firms to manage to achieve certain metrics, based on the 
commenter's view that engagement staffing should be based on identified 
risks of material misstatement of the issuer. This commenter and 
another commenter further expressed concerns that the engagement-level 
retention rate for smaller engagement teams will be significantly more 
sensitive to any turnover relative to the retention rate for larger 
engagement teams because the size of engagement teams tends to vary 
with the size of the engagement.
    Two commenters also indicated that this metric is unnecessary 
because engagement resource management is already covered by the firm's 
quality control system. One commenter indicated that the engagement 
partner is responsible for determining the sufficiency and 
appropriateness of engagement resources and prior year information will 
not be relevant in evaluating the quality of an engagement team in the 
current year. Another commenter emphasized that properly managed 
turnover will increase audit quality to reduce familiarity biases.
    Some commenters believe these metrics will be more relevant to the 
audit committee or audit committee and management or should be provided 
only to the audit committee to allow for robust discussions. One 
commenter only supported disclosure of the engagement-level tenure 
metric to the audit committee because it will provide meaningful 
information to assist audit committees in exercising their duties to 
oversee the auditor; however, this commenter did not support other 
retention metrics as the engagement team staffing is a firm-level 
decision with factors that are not engagement specific or local laws 
and regulations that the firms may not be able to disclose.
    One commenter indicated that these metrics should be considered in 
conjunction with other metrics reported rather than presuming a 
specific correlation with audit quality or auditor's independence, 
indicating as an example that there are specific legal and ethical 
mandatory rotation of key audit partners requirements in Europe. 
Another commenter asked various questions in the calculation of the 
engagement-level metrics for inclusion or exclusion of certain specific 
conditions (e.g., whether there is a time limit in how far back a 
partner or manager's tenure to be included).
    Based on comments received, the Board did not adopt the engagement-
level reporting of these metrics at this time, primarily due to some of 
the challenges described by commenters including difficulty in 
providing context (including some information that is not permitted for 
public disclosure), consistent reporting, and interpreting this metric 
area at the engagement level, due to, for example, sensitivity of 
engagement-level turnover on smaller engagements compared to larger 
engagements because turnover will have more direct and significant 
impact to engagement-level reporting due to the relatively smaller size 
of the managers and partners involved in each engagement.
    (See Exhibit A, ``Retention of Audit Personnel.'')
vii. Allocation of Audit Hours
    At the engagement level, the Board believes performing audit 
procedures prior to the issuer's year end will allow the engagement 
team to identify significant issues in a timely manner and provide the 
engagement team with the opportunity to address those issues earlier. 
The Board also believes it will enable engagement teams to have the 
resources available to appropriately respond to significant issues 
identified after year end. Discussing this metric with the audit 
committee could provide the audit committee with information regarding 
aspects of the engagement's performance. Academic literature suggests 
that allocation of a greater proportion of total hours to earlier audit 
phases, prior to a company's year end, is associated with a lower 
likelihood of restatements \139\ and late Form 10-K filings and also 
decreased total audit hours.\140\
---------------------------------------------------------------------------

    \139\ Daniel Aobdia, Preeti Choudhary, and Noah Newberger, The 
Economics of Audit Production: What Matters for Audit Quality? An 
Empirical Analysis of the Role of Midlevel Managers within the Audit 
Firm, The Accounting Review (2024).
    \140\ Brant E. Christensen, Nathan J. Newton, Michael S. 
Wilkins, Archival Evidence on the Audit Process: Determinants and 
Consequences of Interim Effort, 38 Contemporary Accounting Research 
2 (2021).
---------------------------------------------------------------------------

    As proposed, the firm-level and engagement-level metrics related to 
allocation of audit hours would have required firms to report the 
percentage of total audit hours incurred both prior to the issuer's 
year end and following the issuer's year end, separately.
    Several commenters supported the reporting of this metric as 
proposed (i.e., at both the firm and engagement level), while some 
commenters only supported required reporting of this metric at the firm 
level. Of those commenters that supported reporting this metric at only 
the firm level, two commenters requested the following clarifications 
regarding various elements of the calculation:
     Whether the period being reported at the firm level should 
be based on audit reports dated from 10/1--9/30 or based on engagements 
with a fiscal year-end from 10/1--9/30. This commenter expressed 
concern that if the proposal's intention was the latter, significant 
challenges with the proposed 11/30 reporting period for Form FM should 
be anticipated.
     How this metric would be applied to an initial public 
offering (``IPO'') engagement where the audit covers up to three years 
where often the work doesn't follow the traditional audit cycle or 
timeline.
    A commenter expressed concern that because the reporting period for 
Form FM is different than the engagement period for which total audit 
hours are calculated for Form AP, this will create a challenge with 
data collection and validation for different periods. This commenter 
also expressed concern that this metric requires the use of total audit 
hours, which relies on information from other auditors. The commenter 
recommended that the Board consider whether the use of other auditor 
information is necessary to meet the Board's objective. One commenter 
expressed concern that the firm-level metric would not be comparable 
due to changes in circumstances of specific issuers because while 
individual issuer circumstances may not be significant enough to move 
the metrics for larger

[[Page 100007]]

firms, for smaller firms individual issuer circumstances could impact 
the overall results. As an example, for a smaller firm with an issuer 
that had a large acquisition during the fourth quarter, that would lead 
to a significant shift of hours after the end of the year.
    As described above, the reporting period for firm-level metrics 
reported on Form FM will generally be the 12-month period ended 
September 30 in each year. When reporting this metric, the firm could 
use the information reported at the engagement level on Form AP for 
this metric to calculate the firm-level metric for reporting on Form 
FM. For multi-year audit engagements, including IPO engagements, 
because the audited financial statements would be included in one 
auditor's report, it is not possible to identify one particular year-
end that a firm should use that would not skew the reported metric. 
Therefore, the Board excluded multi-year audits from the required 
reporting of this metric. Given the commenter concerns raised around 
the collection and data validation of this metric for all issuer 
engagements, the Board has modified the firm-level description and 
calculation of this metric area to include only those accelerated filer 
and large accelerated engagements that will be reported at the 
engagement level. The Board believes this narrower scope will yield 
better alignment between firm- and engagement-level metrics and more 
comparable information across engagements. Related to commenter 
concerns about the collection of information from other auditors, Form 
AP currently requires firms to collect information regarding the hours 
of other auditors in calculating total audit hours. Total audit hours 
collected for Form AP already includes hours related to the quarterly 
reviews, so those hours would also be included in the numerator and 
denominator for this metric, see also discussion above.
    Some commenters stressed the importance of providing narrative 
context in relation to the reporting of this metric, for example:
     One commenter (that only supported reporting at the firm 
level) asserted that reported metrics may be misleading without proper 
narrative disclosure to provide the necessary context to users. This 
commenter elaborated that circumstances beyond the auditor's control 
may influence the allocation of overall audit hours, and users should 
be cautioned against making presumptions that a higher proportion of 
hours after the issuers' year ends is a signal of lower quality.
     One commenter expressed the view that comparability of 
these metrics can be highly dependent on factors such as industry, type 
of audit (i.e., financial statement audit or integrated audit), and 
transaction timing and volume, among others and that stakeholders will 
need appropriate context to interpret the significance of these 
metrics. This commenter also stated that there is a risk that 
stakeholders may be biased towards inferring that a quantitative metric 
for allocation of audit hours is a proxy for audit quality, which 
further supports the need for sufficient appropriate context to 
interpret the results.
    The Board agrees that allowing firms to provide a narrative 
disclosure will be important in certain situations to help users 
understand the context of a specific metric. See additional discussion 
related to this optional narrative disclosure above.
    Several commenters, firms and firm-related groups, disagreed with 
the proposal to report this metric at the engagement level publicly and 
instead suggested that this metric would be more effectively addressed 
via dialogue with the audit committee. These commenters expressed the 
following views:
     For the engagement-level metrics to achieve the Board's 
stated objectives, such metrics would best be delivered through 
effective two-way communication between the auditor and the audit 
committee to provide the relevant and necessary context.
     Even if offered the opportunity to provide narrative 
context, auditors may not be inclined to provide a full explanation as 
to why hours allocation may have skewed to after year end for a 
particular issuer, as doing so might disclose confidential information 
about the issuer's preparedness for the audit or other facts, which 
might result in disputes.
     There are a variety of factors that influence the 
allocation of hours before or after the entity's year-end which are 
beyond the control of the auditor and may drive a disproportionate 
allocation of hours before or after the entity's year-end in a given 
audit, including those related to the entity entering into transactions 
and changes in the entity's operations or systems.
    Other commenters disagreed with the proposal to report this metric 
entirely. These commenters expressed the following concerns:
     The timing of audit procedures (and resulting hours) is 
primarily a function of audit strategy decisions based on the 
assessment of a company's ICFR and inadequate ICFR may require most 
hours to be incurred after the balance sheet date. This commenter 
stated that more hours incurred after the balance sheet date may, in 
fact, indicate a proper evaluation of ICFR and higher audit quality and 
therefore this metric would provide little insight into audit quality.
     This metric is not directly related to audit quality. The 
timing of the engagement procedures depends on many variables, 
including the nature of the audit areas, specific risks on an 
engagement, the effectiveness of interim and roll-forward procedures, 
the availability of staff, when the client is available, the client's 
specific financial reporting systems, and internal controls. This 
commenter stated that this information could potentially be misleading 
or misinterpreted.
     This metric seems somewhat arbitrary and may provide 
misleading information for those smaller engagements where a higher 
proportion of the work is performed post-year end.
     It is unclear whether the metric is meaningful because it 
might be impacted by among other factors, macro-economic trends, 
company controls and activities, and use of shared service centers and 
more generally, may require too much explanation to provide meaningful 
comparisons.
     This metric would not be comparable between larger firms 
and other firms and could have unintended consequences. In an audit of 
a smaller reporting company, it is frequently impracticable to perform 
much work prior to an issuer's year end, both out of concerns for 
efficiency and because small companies, who might have an outsourced 
finance function, cannot support significant interim work.
     Since most companies have a calendar year end, firms have 
strong incentives to perform work as of an interim date to move hours 
outside of the traditional busy season. A firm's ability to shift work 
to an interim period is dependent upon a variety of factors, many of 
which are unrelated to audit quality.
    The Board considered commenter feedback, and in particular 
commenter concerns related to the fact that particular facts and 
circumstances surrounding an engagement could significantly skew a 
firm's reported metric when compared to other firms that may have a 
different portfolio of issuer engagements. While the Board understands 
that each engagement is affected by the specific facts and 
circumstances, the Board continues to believe that users of this 
information will benefit from understanding how audit hours are 
allocated on engagements, supplemented by

[[Page 100008]]

narrative disclosure to provide context, as needed.
    At the engagement level, it may be more relevant for a firm to 
provide a narrative disclosure to explain the particular facts and 
circumstances related to the current reporting period's metric for this 
area. One firm stated that ``Pulling work forward, where feasible and 
appropriate, enables engagement teams more time to focus on areas of 
highest risk in the audit.'' Based on the Board's oversight activities, 
the Board agrees with this statement, and the Board believes that this 
information will be beneficial to users at both the firm level and the 
engagement level. As with all the metrics, the Board encourages the 
auditor and audit committee to have a robust dialogue.
    The proposal asked whether a different, more granular, metric would 
be more appropriate, for example allocation of audit hours devoted to 
each phase of the audit--planning, quarterly reviews, interim field 
work, final field work up until report release date, and post-report 
release date until audit documentation completion date. Most commenters 
who commented on this question did not agree that a different, more 
granular, metric would be more appropriate. Views provided by these 
commenters included the following:
     A more granular metric devoted to different phases of an 
engagement would be very challenging to measure and interpret as the 
audit is an iterative process. In addition, audit procedures may be 
performed to meet more than one specific objective and thus may relate 
for instance to both planning and execution phases of the engagement.
     It will be costly to assemble the information to report 
and such additional time spent on data reporting diverts very important 
time during the audit and creates an unnecessary dilemma for engagement 
teams as to whether it is more important to comply with audit quality 
standards or reporting requirement rules.
    The Board agrees with these commenters that a more granular metric 
is not necessary to achieve the objectives of this metric and did not 
modify the proposed metric to make it more granular.
    Other than clarifying that multiyear audits are outside the scope 
of the reporting requirement and revising the scoping of the firm level 
metric to limit it to only those accelerated filers and large 
accelerated filers of the firm, the Board adopted this metric as 
proposed.
    (See Exhibit A, ``Allocation of Audit Hours.'')
viii. Restatement History
    Restatements for errors (e.g., not for changes in accounting 
principles) are generally considered a signal of potential difficulties 
in at least parts of a firm's audit practice. Academic literature 
suggests that restatements provide the cleanest empirical measure of 
audit failure.\141\ Overall, the Board believes the academic literature 
supports a measure that accumulates the pattern of restatements for 
firms, as this would provide a strong measure against which other 
metrics may be identified in the future.
---------------------------------------------------------------------------

    \141\ See, e.g., DeFond and Zhang, A Review of Archival Auditing 
Research.
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    The proposed firm-level metric set forth requirements for firms to 
report information related to restatements,\142\ including both 
revision restatements (sometimes referred to as ``little r'' 
restatements) \143\ and reissuance restatements (sometimes referred to 
as ``Big R'' restatements) \144\ of audited financial statements for 
all issuer engagements of the firm. The proposal also included 
reporting of reissuance restatements of management's report on 
ICFR.\145\ The Board adopted this metric area with several 
modifications discussed in more detail below.
---------------------------------------------------------------------------

    \142\ The term ``restatements'' has the same meaning as defined 
in the FASB Accounting Standards Codification (``FASB ASC'') Topic 
250, Accounting Changes and Error Corrections; see also, 
``retrospective restatement'' as defined in IFRS Accounting Standard 
(IAS) 8, Accounting Policies, Changes in Accounting Estimates and 
Errors. The phrase ``error in previously issued financial 
statements'' has the same meaning as defined in the FASB ASC 250; 
see also ``prior period errors'' as defined in IAS 8.
    \143\ A ``revision restatement'' of audited financial statements 
was described in the proposal as ``when an immaterial error in 
previously-issued audited financial statements, that is material to 
the current period financial statements, is corrected by an issuer 
in the current period comparative financial statements by restating 
the prior period information and disclosing the revision.''
    \144\ A ``reissuance restatement'' of audited financial 
statements was described in the proposal as ``when a material error 
in previously-issued audited financial statements, report on 
management's assessment of the effectiveness of ICFR, or both, is 
identified and disclosed by an issuer in a filing with the SEC 
(e.g., on Form 8-K Item 4.02, Non-Reliance on Previously Issued 
Financial Statements or a Related Audit Report or Completed Interim 
Review).''
    \145\ A ``reissuance restatement of management's report on 
ICFR'' was described in the proposal as ``When a material error in a 
previously-issued report on management's assessment of the 
effectiveness of internal control over financial reporting is 
identified and disclosed by an issuer in a filing with the SEC.''
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    The proposal asked whether the proposed descriptions of revision 
restatement and reissuance restatement were clear and appropriate. The 
two commenters on this question agreed that the proposed descriptions 
were clear and appropriate. The descriptions were adopted with 
modifications: (i) in addition to referring to restatements identified 
and disclosed by the issuer in a filing with the SEC, the final 
description of reissuance restatement also refers to circumstances in 
which the firm is required to file a notice pursuant to Item 2.1 of 
Form 3,\146\ and (ii) the final description of revision restatement was 
revised to improve the alignment with the description used by the SEC 
in its adopting release for exchange listing ``clawback'' rules \147\ 
and to clarify that the restated financial information and the 
disclosure appear in a filing with the SEC. The revisions to the 
description of reissuance restatement ensure that the data set is 
complete because it captures circumstances where the issuer fails to 
comply with its reporting obligations. The revisions to the description 
of revision restatement avoid potential misalignment with the SEC's 
characterization of little r restatements and also provide a clear 
trigger (SEC filing) for when a restatement is included in the metrics.
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    \146\ Item 2.1 applies when a firm:
    has withdrawn an audit report on an issuer's financial 
statements, or withdrawn its consent to the use of its name in a 
report, document, or written communication containing an issuer's 
financial statements, and the issuer has failed to comply with a 
Commission requirement to make a report concerning the matter 
pursuant to Item 4.02 of Commission Form 8-K.
    \147\ See Listing Standards for Recovery of Erroneously Awarded 
Compensation, SEC Rel. No. 34-96159 (Oct. 26, 2022) at 28 
(``restatements that correct errors that are not material to 
previously issued financial statements, but would result in a 
material misstatement if (a) the errors were left uncorrected in the 
current report or (b) the error correction was recognized in the 
current period'').
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    Accordingly, the descriptions of reissuance restatement and 
revision restatement in the final rules provide as follows (footnotes 
omitted):
    Reissuance restatement: When a material error in previously-issued 
financial statements is identified and disclosed by an issuer in a 
filing with the SEC (e.g., on Form 8-K Item 4.02, Non-Reliance on 
Previously Issued Financial Statements or a Related Audit Report or 
Completed Interim Review) or the firm is required to file a notice 
pursuant to Item 2.1 of Form 3.
    Revision restatement: When an error in previously-issued financial 
statements that did not result in a reissuance restatement, but would 
give rise to a material misstatement if (a) the error was left 
uncorrected in the current report or (b) the error correction was 
recognized in the current period, is corrected and disclosed by an 
issuer in a filing with the SEC.

[[Page 100009]]

    The proposed metric included only restatements that related to 
corrections of errors and excluded all other restatements, including 
those resulting from changes in accounting principles. The proposed 
metric also excluded corrections in the current period financial 
statements of errors that were not material to the previously-issued 
financial statements and are not material to the current period 
financial statements (e.g., a voluntary restatement or an out-of-period 
adjustment), because these are not restatements as described in this 
rulemaking. One commenter suggested that the metric should explicitly 
exclude restatements resulting from stock splits and similar activities 
that result in non-error restatements. As proposed, the metric 
addressed only restatements for errors, and the Board does not believe 
it is necessary to list specific types of non-error restatements.
    Commenters generally supported the reporting of a restatement 
metric, including all of the investors and investor-related groups that 
addressed the topic. Some pointed out that firm transparency or audit 
quality reports often include a similar metric.
    However, two commenters questioned the usefulness of the proposed 
metric and asserted that such a metric alone could provide only limited 
insight into the quality of public oversight over issuers and auditors. 
One commenter stated that this information was already publicly 
available, and it did not appear necessary to require firms to report 
it but if it were reported, a streamlined metric that merely reported 
on the total number of restatements for the year would be preferable. 
One commenter, who generally supported the proposed metric, stated that 
it should only include those audits where the auditor withdrew and 
amended the opinion.
    Some commenters generally supported the proposed metric but 
suggested changes to various elements discussed in more detail below, 
including:
     Removing revision restatements from the proposed required 
reporting.
     Counting multi-year restatements as one restatement, not 
separately.
     Reducing the number of reporting periods to be reported 
from five to three.
     Not requiring engagement-level reporting.
    One aspect of the proposal that did not draw comment, and which the 
Board adopted as proposed, was the proposed reporting of reissuance 
restatements of management's report on ICFR, together with reporting of 
the number of issuer engagements for which the firm initially issued an 
audit report expressing an opinion on ICFR.\148\ Firms are required to 
report those reissuance restatements of management's report on ICFR 
that disclose an additional material weakness or additional elements to 
a previously disclosed material weakness for all issuer engagements.
---------------------------------------------------------------------------

    \148\ Under Sarbanes-Oxley, the auditor is required to attest to 
management's assessment of the effectiveness of the company's 
internal control only for companies that qualify as ``large 
accelerated filers'' or ``accelerated filers,'' other than 
``emerging growth companies.'' See Section 404 of Sarbanes-Oxley, 15 
U.S.C. 7262.
---------------------------------------------------------------------------

a. Revision and Reissuance Restatements
    The proposed metric set forth requirements for firms to include 
information related to both reissuance restatements and revision 
restatements for all issuer engagements of the firm in the firm's 
required reporting. Three commenters agreed specifically with this 
aspect of the required reporting with one commenter stating that 
providing information related to revision restatements gives a holistic 
picture of the firm's audit performance, reliability of the financial 
statements, and transparency from the fact that all restatements are 
reported and not just reissuance restatements.
    The other commenters on this aspect of the proposal, all firms or 
firm-related groups, disagreed with the proposed requirement to include 
revision restatements in the metric. They expressed the following 
concerns:
     Such restatements are not material to the prior periods 
and to report them suggests an inappropriate level of importance to 
information deemed immaterial.
     These types of restatements are not currently separately 
tracked by some smaller firms, given that revision restatements are not 
material to the year to which they relate, thus are not necessary or 
useful to decision-making.
     Requiring the disclosure of these instances in the same 
context as reissuance restatements could inappropriately suggest that 
there are potential implications for the quality of the audit 
performed.
    The Board continues to believe that the restatement history metric 
should include all restatements for errors, both revision restatements 
and reissuance restatements. As noted above, several commenters were 
supportive of the Board's proposed scope, including all the investors 
and investor-related groups that addressed the issue. The Board 
believes that this scope will provide a more complete picture of the 
extent to which financial statements audited by the firm contain errors 
that subsequently have to be corrected.
    The Board also believes that its reporting requirements should not 
distinguish between revision restatements and reissuance restatements 
in a way that may create inappropriate incentives for auditors and 
issuers as they make materiality determinations with respect to 
previous period errors. The SEC addressed this concern in its 
rulemaking regarding exchange listing ``clawback'' rules, which also 
apply to both revision restatements and reissuance restatements.\149\
---------------------------------------------------------------------------

    \149\ See SEC Rel. No. 34-96159 at 35-6 (in connection with 
including both revision restatements and reissuance restatements in 
its clawback rules, stating that ``this construction of the 
statutory language addresses concerns that issuers could manipulate 
materiality and restatement determinations to avoid application of 
the compensation recovery policy''). See also Assessing Materiality: 
Focusing on the Reasonable Investor When Evaluating Errors (Mar. 9, 
2022), available at https://www.sec.gov/newsroom/speeches-statements/munter-statement-assessing-materiality-030922, (observing 
that some materiality analyses appear to be biased toward supporting 
an outcome that an error is not material to previously-issued 
financial statements, resulting in ``little r'' revision 
restatements).
---------------------------------------------------------------------------

    The Board understands that revision restatements and reissuance 
restatements do not necessarily convey the same information, 
particularly as to the performance of the auditor. As the Board 
proposed, revision restatements will be reported on a separate line 
from reissuance restatements, which will enable users to analyze the 
two different types separately.
    In the final metric, both revision restatements and reissuance 
restatements will be measured based on disclosure in an SEC filing. 
Reissuance restatements will also include circumstances in which the 
issuer is required to make an SEC filing under Form 8-K Item 4.02 \150\ 
and fails to do so, which triggers a requirement for the firm to file a 
notice pursuant to Item 2.1 of PCAOB Form 3. Disclosure in an SEC 
filing could take a variety of forms, such as checking the box on the 
cover page of Form 10-K and Form 20-F to indicate correction of error 
in a previously issued financial statement, as one commenter suggested; 
filing a Form 8-K in response to Item 4.02; or simply including 
restated prior period information in a periodic report or registration 
statement. The Board believes that measuring restatements based on SEC 
filings will provide an objective point of reference that will enable 
firms to track the relevant data.

[[Page 100010]]

The Board notes that one commenter asserted that some smaller firms do 
not currently track revision restatements. As mentioned above, under QC 
1000 firms are required to track restatement data (i.e., both types of 
restatements) in order to design engagement monitoring activities and 
determine whether engagement deficiencies exist. In addition, given the 
public availability of the data and the ease with which the SEC's 
electronic data gathering analysis and retrieval (``EDGAR'') database 
can be searched, the Board does not believe that gathering the data 
will be overly burdensome, regardless of whether it is a firm's current 
practice to do so
---------------------------------------------------------------------------

    \150\ See Form 8-K Item 4.02, Non-Reliance on Previously Issued 
Financial Statements or a Related Audit Report or Completed Interim 
Review.
---------------------------------------------------------------------------

b. Multi-Year Audit Restatements
    The proposal contemplated that, in the case of multi-year audits 
where one auditor's report covers the audits of multiple years of 
financial statements, the metric would treat every year that is 
restated as a separate restatement. While one commenter supported the 
proposed treatment of these types of audit restatements, firms and 
firm-related groups stated that multi-year restatements should be based 
only on the initial year audited, and should not be counted separately 
for each year. These commenters expressed concern that, as proposed, 
the metric would reduce understandability and comparability as it would 
misalign with how the audit was classified when reporting the metrics 
in the initial year the audit report was issued, creating the potential 
for a misleading multiplier effect. One firm stated that some 
restatements may be triggered by a distinct issue in one year, which 
may or may not be material to other years presented, but those other 
years are still corrected in the restatement process. Another firm 
expressed concern about the potential complexity and difficulty of the 
proposed reporting. A firm-related group suggested that, as an 
alternative, the multi-year-audit restatements might instead be covered 
by providing total years impacted by restatements as a supplementary 
metric.
    The Board considered commenter input on this issue, but the Board 
continues to believe that the most accurate and appropriate 
presentation of multi-year audit restatements is to count each year 
that is restated as a separate restatement when reporting this metric. 
If a firm has additional context related to a multi-year audit 
restatement that it believes will assist users in properly interpreting 
the metric, the firm could describe it as optional narrative 
accompanying the metric.
c. Number of Reporting Periods to Present
    The proposal provided that this metric would be reported for the 
current reporting period and each of the preceding four years, for a 
total of five years.\151\ One firm agreed with the proposal, stating 
that the five-year period strikes a balance between providing 
sufficient historical context to identify trends and patterns in audit 
quality and restatements and it also maintains the current relevance.
---------------------------------------------------------------------------

    \151\ Based on an internal evaluation of restatement patterns 
covering the period from Q1 2008 to Q2 2018 by the PCAOB's Office of 
Economic Risk and Analysis, 98% of restatements during this period 
were announced with a delay of approximately five years or less and 
about 80% of the restatements were announced with a delay of three 
years or less.
---------------------------------------------------------------------------

    The other commenters on this aspect of the metric, all firms and 
firm-related groups, disagreed with the proposal and instead suggested 
that firms be required to report the current period and each of the two 
preceding years, for a total of three years. These commenters offered 
the following rationales:
     Three years would be consistent with an issuer's reporting 
of periods in an annual report in accordance with SEC rules and 
regulations.
     It would be better to require firms to report three years 
because it will greatly reduce the burden on terminated firms to track 
the restatements of their former audit clients (e.g. newly implemented 
monitoring and communication protocols with successor audit firms and 
previously audited companies). Since issuers are required to present 
three years of income statements in the financial statements included 
in Form 10-K, they will need to obtain consents from former auditors 
for those prior periods. As a result, terminated firms will be made 
aware of any restatements when requested to provide consents.
     Five years is unnecessarily long given this information is 
readily available via the SEC's EDGAR system.
    The Board considered the comments received and determined to limit 
the metric to three years, rather than the five years initially 
proposed. As commenters have pointed out, this will better align with 
SEC requirements regarding financial statement presentation and may 
therefore reduce any potential efforts or costs associated with 
implementation. While the change may result in some reissuance 
restatements falling outside the reporting period, the Board believes 
that focusing on more current information will provide users with a 
more relevant metric.
d. Engagement-level Reporting
    The proposal stated that since restatements are disclosed in the 
financial statements, the Board was not proposing to require that firms 
report this metric at the engagement level. Commenters who expressed 
views on this aspect of the proposal agreed with this view stating that 
this information is already publicly available from the SEC. One firm 
supported engagement-level reporting of this metric explaining that it 
could lead to deeper accountability to assess the performance of audit 
teams by linking the restatements to the responsible engagement team, 
and it would result in promoting higher standards of audit quality. 
Taking into account commenter feedback, the Board continues to believe 
that reporting restatement information at the engagement level is 
unnecessary because it is already publicly available in a searchable 
format for any particular issuer through the SEC's EDGAR filing system. 
Conversely, for users to aggregate restatement information for all of a 
firm's issuer engagements could require significant time and effort, 
which is why the Board only adopted this metric at the firm level. 
Engagement-level reporting is not required under the final rules.
e. Other Commenter Feedback
    Other commenter suggestions included:
     Predecessor and successor auditor. Under the proposal, the 
restatement metric would apply with respect to audit reports 
``initially issued by the firm.'' As a result, restatements would be 
included in the metric of the firm that issued the original audit 
report on the financial statements or on the audit of ICFR, regardless 
of whether the firm had itself identified the error or continued to 
serve as the issuer's auditor. Firms, in particular those that resign 
from the engagement or are otherwise replaced, would need to monitor 
whether previously-issued audited financial statements, reports on 
management's assessment of the effectiveness of ICFR, or both, are 
subsequently restated for at least three years. Two commenters that 
addressed this aspect of the metric agreed with the treatment provided 
under the proposal, and the Board adopted it as proposed.
     Prospective reporting upon effective date. Several 
commenters suggested that if the Board proceeded with the proposal to 
include revision restatements in the required reporting for this 
metric, prospective reporting upon implementation would be more 
practicable. As discussed above, under

[[Page 100011]]

QC 1000 firms are required to track restatement data in order to design 
engagement monitoring activities and determine whether engagement 
deficiencies exist, therefore firms will already have been tracking 
this information upon the effective date of the requirements in this 
rulemaking.
    (See Exhibit A, ``Restatement History.'')
Reporting
1. Thresholds for Required Reporting
    The Board proposed to apply the same threshold for both firm-level 
and engagement-level reporting, focused on auditors and audit 
engagements for issuers that qualify as accelerated filers or large 
accelerated filers under SEC rules. The Board proposed that firm-level 
reporting would be required of every firm that audits at least one 
company that has self-identified as an accelerated filer or large 
accelerated filer by checking the box on an SEC filing (or, because 
Form 40-F does not contain such a check box, at least one Form 40-F 
filer that meets the criteria to be an accelerated filer or large 
accelerated filer under SEC rules) \152\ during the reporting period. 
The Board also proposed that engagement-level reporting would be 
required for every audit of such an accelerated or large accelerated 
filer.
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    \152\ See Exchange Act Rule 12b-2, 17 CFR 240.12b-2. Generally, 
under Rule 12b-2, a large accelerated filer is an issuer that meets 
certain reporting conditions and has a public float (aggregate 
worldwide market value of voting and non-voting common equity held 
by nonaffiliates) of $700 million or more. An accelerated filer is 
generally an issuer that meets the same reporting conditions; has a 
public float of $75 million or more, but less than $700 million; and 
had revenue of $100 million or more in the most recent fiscal year 
for which audited financial statements are available.
---------------------------------------------------------------------------

    The Board believes the proposed threshold would focus the reporting 
requirements on the firms and engagements in which investors and other 
stakeholders have the greatest interest in additional information, and 
that establishing the same threshold for firm- and engagement-level 
reporting would foster comparability across both issuers and firms and 
provide richer context for the evaluation of engagement-level 
information. The proposal also contemplated that firms that were not 
subject to the reporting requirements could choose to report 
voluntarily.
    This approach excludes engagement-level information about audits of 
non-issuers, including broker-dealers, and of issuers that are not 
accelerated filers or large accelerated filers under SEC rules. These 
include, for example, investment companies; \153\ employee stock 
purchase, savings, and similar plans that are required to file reports 
with the SEC on Form 11-K; \154\ and many smaller reporting 
companies.\155\ It also excludes firm-level information about firms 
whose PCAOB practice was limited to such audits.\156\
---------------------------------------------------------------------------

    \153\ Section 3(a)(1) of the Investment Company Act of 1940, 15 
U.S.C. 80a-3(a)(1), defines an ``investment company'' as an issuer 
which (A) is or holds itself out as being engaged primarily, or 
proposes to engage primarily, in the business of investing, 
reinvesting, or trading in securities; (B) is engaged or proposes to 
engage in the business of issuing face-amount certificates of the 
installment type, or has been engaged in such business and has any 
such certificate outstanding; or (C) is engaged or proposes to 
engage in the business of investing, reinvesting, owning, holding, 
or trading in securities, and owns or proposes to acquire investment 
securities having a value exceeding 40 per centum of the value of 
such issuer's total assets (exclusive of Government securities and 
cash items) on an unconsolidated basis. Audits of business 
development companies (BDCs) that met the criteria to be an 
accelerated filer or large accelerated filer would be included.
    \154\ See Exchange Act Rule 15d-21, 17 CFR 240.15d-21.
    \155\ See Regulation S-K, Item 10(f)(1), 17 CFR 229.10(f)(1).
    \156\ Firms that do themselves not serve as lead auditor for an 
accelerated filer or large accelerated filer but play a substantial 
role in audits led by other firms would also not be subject to the 
proposed reporting requirements. See PCAOB Rule 1001(p)(ii) for the 
definition of ``play a substantial role in the preparation or 
furnishing of an audit report.''
---------------------------------------------------------------------------

i. Firm- and Engagement-Level Reporting Thresholds
    The Board solicited comment on whether the proposed reporting 
thresholds for firm- and engagement-level were appropriate. Investors 
and investor-related groups generally supported the proposed thresholds 
for both firm- and engagement-level reporting. They agreed that the 
proposed requirements would appropriately apply to the audits, and 
auditors, of companies that account for the majority of the U.S. public 
company market capitalization, and would capture the situations where 
investment and proxy voting decisions would be most likely to benefit 
from additional information about the audit and auditor. One firm-
related group broadly agreed with the thresholds for both firm- and 
engagement-level reporting because it believes different reporting 
requirements are not warranted. Another firm-related group also agreed 
with the proposed reporting thresholds as appropriately targeting the 
largest companies having a significant impact on the market 
capitalization of issuers. Two commenters recommended extending the 
reporting requirements to all PCAOB-registered firms, either 
immediately or over time.
    On the other hand, all firms and a firm-related group that 
commented on the firm-level reporting threshold objected to it, 
generally suggesting instead that firm-level reporting should be 
required of firms that are annually inspected by the PCAOB, with some 
recommending voluntary reporting by smaller firms. One commenter 
suggested reporting only for annually inspected firms that audit at 
least one accelerated filer or large accelerated filer. Another 
commenter recommended that firm-level reporting should be required only 
of firms with 25 or more large accelerated and accelerated filer 
engagements, saying that firms with a small number of large accelerated 
and accelerated filer engagements would not produce meaningful metrics 
with sufficient anonymity as their metrics can be unduly influenced by 
a single engagement. Some of these commenters asserted that requiring 
reporting only from annually-inspected firms would balance scalability 
concerns with the need for investor protection, as it would still 
capture a large majority of the U.S. public company market 
capitalization. One commenter stated that the issuer portfolio at firms 
with less than 100 issuers is not sufficiently like those firms 
inspected by the PCAOB annually to provide valuable comparisons and 
another commenter expressed concern about issuers that frequently move 
above or below the accelerated or large accelerated filer 
thresholds.\157\ One commenter added that there is precedent to use an 
alternative threshold based on firms that issue audit reports for more 
than 100 issuers, such as PCAOB's annual inspection and QC 1000.18 
requirements.
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    \157\ Based on the PCAOB staff's analysis performed on the data 
obtained from Audit Analytics, Standard & Poor's, and publicly 
available data from the RASR, available at https://rasr.pcaobus.org. 
In the four-year period ended September 30, 2022, on average, 
approximately 4% of filers that reported on Form 10-K and Form 20-F 
and had not previously self-identified as either a large accelerated 
filer or accelerated filer newly self-identified as either a large 
accelerated or accelerated filer each year.
---------------------------------------------------------------------------

    Several commenters also raised concerns about the cost of metrics 
reporting and stated that requiring reporting only from annually-
inspected firms will better support the cost to comply with the 
proposed requirements and alleviate related unintended consequences, 
particularly greatly reducing the burden for smaller firms and firms in 
foreign jurisdictions.
    Another commenter supported requiring reporting only from annually-
inspected firms because it would alleviate concerns about privacy and 
confidentiality, particularly for firms

[[Page 100012]]

outside the United States that issue a limited number of large 
accelerated or accelerated filer auditor reports annually and are 
subject to laws and regulations in those areas, because firm-level 
metrics may effectively result in the disclosure of engagement-level 
information. They further noted that such a threshold may avoid 
redundant reporting burdens for these firms and disclosure of 
confidential information of specific issuers, but still achieve the 
objectives of reporting firm level metrics as ``firm-level reporting 
would consist only of summary data'' as proposed.
    For the engagement-level reporting threshold, because firms 
objected to any public reporting of engagement-level metrics, most 
firms did not comment further on the threshold for engagement-level 
reporting except for offering some other suggestions. See below for 
other comments received.
    The Board adopted the thresholds for both firm-level and 
engagement-level reporting with one change. Firm-level reporting will 
be required of every firm that audits at least one company that has 
self-identified as an ``accelerated filer'' or ``large accelerated 
filer'' by checking the box on an SEC filing during the reporting 
period. Engagement-level reporting will be required for every audit of 
such an accelerated or large accelerated filer.
    The final threshold does not refer to Form 40-F filers that meet 
the definition of ``accelerated filer'' or ``large accelerated filer'' 
under SEC rules, which were included in the proposal, based on the 
Board's understanding that such companies are not regarded as 
accelerated filers or large accelerated filers. Companies that file 
both Form 40-F and another SEC annual reporting form, and that check 
the box to self-identify as an accelerated filer or large accelerated 
filer on that other form, will still be included.
    The Board continues to believe that requiring reporting for 
auditors and audits of large accelerated filers and accelerated filers 
is the most appropriate approach. As stated in the proposal, the Board 
estimated that the firm-level reporting requirements will apply to 
approximately 210 firms,\158\ including 22 of the top 25 U.S. firms by 
total firm revenue,\159\ and all of the 2022 PCAOB annually inspected 
firms that continue to audit issuers,\160\ and that the proposed 
engagement-level reporting requirements would apply to approximately 
3,400 issuer audits, representing 99% of the total market 
capitalization of issuers reporting on Form 10-K and Form 20-F.\161\
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    \158\ The data was obtained from Audit Analytics, Standard & 
Poor's, and publicly available data from the RASR, available at 
https://rasr.pcaobus.org. Firms that issued audit opinions for 
issuers that met the large accelerated or accelerated filer 
definition in the 12 months ended September 30, 2023, were included 
in this number. Large accelerated filer or accelerated filer status 
was based on the most recently filed quarterly or annual report as 
of February 10, 2024.
    \159\ See Accounting Today, 2024 Top 100 Firms + Accounting's 
Regional Leaders (March 2024), for a listing of the top 25 U.S. 
Firms. Based on staff analysis, the three firms in the top 25 firms 
that would be excluded from the reporting requirements are Aprio, 
LLP; Carr, Riggs & Ingram LLC; and Citrin Cooperman & Company, LLP.
    \160\ See the 14 firms listed as 2022 Annually Inspected Firms, 
available at https://pcaobus.org//inspections/basics-of-inspections. 
B F Borgers CPA PC was removed for the purpose of this analysis as 
its registration withdrawal is currently pending.
    \161\ The data was obtained from Audit Analytics, Standard & 
Poor's, and publicly available data from the RASR, available at 
https://rasr.pcaobus.org. Large accelerated filers and accelerated 
filers were included in this number. Large accelerated filer or 
accelerated filer status was based on the most recent quarterly or 
annual filing as of February 10, 2024. Market capitalization was 
calculated as of December 31, 2023. Because in some instances 
multiple audit reports were issued in the same year, the total 
number of audit reports issued during the same time period using the 
same data source would be approximately 3,500.
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    The Board analyzed the other reporting thresholds suggested by 
commenters based on the same data. Coverage would be significantly 
reduced if the Board required reporting only from annually inspected 
firms: 13 firms,\162\ including 12 of the top 25 U.S. firms by total 
revenue compared to 22 firms.\163\ Similarly, if only annually 
inspected firms were required to provide engagement-level reporting, it 
would apply to approximately 2,700 issuer audits, representing 83% of 
the total market capitalization of issuers reporting on Form 10-K and 
Form 20-F. If only firms with 25 or more large accelerated or 
accelerated filers were required to report, then firm-level reporting 
would apply to 11 firms, including 9 of the top 25 U.S. firms by total 
revenue, and engagement-level reporting would apply to approximately 
2,800 issuer audits, representing 84% of the total market 
capitalization of issuers reporting on Form 10-K and Form 20-F.
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    \162\ From the 14 firms listed as 2022 Annually Inspected Firms 
as described above, B F Borgers CPA PC was removed for the purpose 
of this analysis as its registration withdrawal is currently 
pending.
    \163\ See Accounting Today, 2024 Top 100 Firms + Accounting's 
Regional Leaders (March 2024), for a listing of the top 25 Firms. 
Based on staff analysis, two annually inspected firms (B F Borgers 
CPA PC and Cohen & Company, Ltd.) were not included in the top 25 
firms.
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    In addition to the significant coverage decreases, limiting metrics 
reporting to annually inspected firms would exclude non-US firms that 
audit a small number of non-US based issuers with substantial market 
capitalizations. If the Board ranks firms based on the market 
capitalization of the issuers they audit, the top 30 firms audited 94% 
of the total market capitalization of accelerated filer and large 
accelerated filer issuers. However, only five of these top 30 firms are 
annually inspected. The remaining 25 firms are all non-U.S., and all 
but one of them audited large accelerated filers averaging at least $10 
billion in market capitalization. Similarly, limiting metrics reporting 
to firms with 25 or more large accelerated or accelerated filers would 
result in only six of the top 30 firms (ranked based on the total 
market capitalization of the issuers firms audit) reporting the 
metrics, and would exclude most non-U.S. firms that audit non-U.S. 
based issuers with substantial market capitalizations.
    The Board considered applying the reporting requirements to all 
registered firms, as one commenter suggested. However, the Board 
continues to believe that investors and other stakeholders have the 
greatest interest in additional information regarding large accelerated 
and accelerated filers and the firms that audit them, and the comments 
supporting the proposal that the Board received from investors and 
investor-related groups tend to confirm that view. For that reason, the 
Board believes that requiring metrics reporting for all registered 
firms could impose costs that are not justified in light of the 
anticipated benefits.
    Regarding the concerns of privacy or possibly disclosing 
confidential or otherwise protected information, particularly for firms 
outside the United States, the Board is not aware of any specific 
issues and no commenter identified any particular requirements that 
would conflict with the disclosure of the metrics the Board adopted. 
See below for further discussion of privacy and confidentiality issues.
ii. Other Commenter Feedback
    The Board solicited comment on whether smaller firms should have 
different reporting requirements than larger firms. In addition to 
comments described above, several commenters recommended having 
different reporting requirements for smaller firms than for larger 
firms.
    In addition, two firms requested clarification or application 
guidance regarding the treatment of issuers that change filer status 
into an accelerated or large accelerated filer during the reporting 
period. These commenters recommended allowing these issuers to have one 
full year of implementation

[[Page 100013]]

period after the changes in filer status. The Board notes that firm-
level reporting will be required of all firms that issued an audit 
report for at least one large accelerated filer or accelerated filer 
during the reporting period, and that engagement-level reporting will 
be required in connection with each audit report issued for a large 
accelerated filer or accelerated filer. Accordingly, the relevant date 
to determine large accelerated filer or accelerated filer status will 
be the date the audit report is issued. Because SEC requirements 
regarding becoming a large accelerated filer or accelerated filer 
include at least six months lag time,\164\ the Board does not believe 
that an additional transition period would be necessary under the 
Board's rules.
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    \164\ Under the SEC definitions of ``large accelerated filer'' 
and ``accelerated filer,'' the determination that an issuer has 
become a large accelerated filer or accelerated filer is generally 
based on the public float as of the end of the issuer's second 
fiscal quarter, to take effect as of the end of the fiscal year. See 
Exchange Act Rule 12b-2(3), 17 CFR 240.12b-2(3). The Board notes 
that issuers that are eligible to use the requirements for smaller 
reporting companies under the revenue test in paragraph (2) or 
(3)(iii)(B) of the SEC's ``smaller reporting company'' definition 
could cease to be accelerated filers based on a determination made 
at or after the fiscal year end. However, since metrics requirements 
would not apply in such a case, the Board does not believe any 
transition period is necessary.
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    The Board solicited comment on whether the Board should require 
engagement-level metrics for audits of investment companies (other than 
BDCs that are accelerated filers or large accelerated filers) or non-
accelerated filers. Several commenters supported excluding one or more 
categories of such entities from metrics reporting because the proposed 
metrics would be less likely to assist in investment and voting 
decisions. On the other hand, one commenter recommended including 
publicly traded ``closed end'' investment companies, registered open 
end investment companies, and broker-dealers that are publicly traded 
on the basis that some mutual fund investors ratify the appointment of 
the auditor and audit committees presumably approve for the auditor for 
these companies.
    As proposed, the Board is not requiring engagement-level reporting 
on these investment companies and non-accelerated filers. For audits of 
investment companies, the Board continues to believe that the arguments 
underpinning requests for additional information about audits and 
auditors will not apply, or apply with the same force, in these 
situations, where shareholder ratification of the appointment of the 
auditor may not be typical and the metrics would be less likely to 
assist in investment and voting decisions. Regarding the reporting of 
non-accelerated filers, as discussed above, these issuers have 
significantly smaller market capitalization per issuer on average, and 
the Board is concerned that the benefits associated with such reporting 
would not justify the costs.
2. Reporting of Firm-Level Metrics (Form FM)
    The Board proposed that firms report their firm-level metrics 
annually on a new Form FM, Firm Metrics. Of those commenters that 
support reporting firm-level metrics, some also explicitly expressed 
support for reporting annually on Form FM. One commenter recommended 
that Form FM be amended to explicitly include the definitions of the 
metrics and metric formulas to provide pertinent information to enhance 
the context and understandability for users.
    The proposal asked whether, rather than reporting on Form FM, firms 
should report firm-level metrics, as of March 31 on Form 2, which is 
due on June 30. One commenter stated that the firm-level metrics could 
be reported on Form 2 to simplify the reporting for firms and 
consolidate the information. One commenter did not support reporting 
firm-level metrics on Form 2 stating that between issuer filings 
through March 31 and the performance of procedures on the first quarter 
filings through May, firms are exceptionally busy through the middle of 
May each calendar year. Another commenter questioned whether the 
information, being reported only annually, would be too old to assist 
decision-making.
    Taking into account commenter feedback, the Board continues to 
believe that reporting firm-level metrics publicly on a new Form FM 
filed by November 30 will provide investors and other stakeholders with 
timely and useful information about auditors and will provide a basis 
of comparison for the engagement-level metrics, where applicable. The 
Board does not believe that Form 2 would be the appropriate place to 
report the firm-level metrics because the due date of Form 2, June 30, 
falls after the general timing of shareholder meetings (typically April 
through June for issuers with a calendar fiscal year) and this 
information would generally arrive too late to be considered in 
deciding how to vote on ratification of the appointment of the auditor. 
The Board believes audit committees would also benefit from having this 
information earlier, since it could be useful when determining whether 
to reappoint the auditor.\165\ While firm metrics would be reported 
only once a year, the Board believes that the information they convey 
would still be useful, both to investors (who otherwise have access to 
extremely limited information about the auditor) and to audit 
committees (who may benefit from standardized firm-wide information 
that helps put their engagement in context).
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    \165\ See Letter from Center for Audit Quality (Aug. 1, 2024) at 
3 (``The majority [59%] of audit committee members surveyed agree 
some standard information about auditors should be considered when 
making their selection and performing their oversight 
responsibilities'').
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    The information disclosed on Form FM will be available in a 
searchable database on the Board's website, similar to the Form AP 
database. As noted above, in addition to the required firm-level 
metrics, firms will have the option to provide a brief narrative to 
accompany each metric. In response to the commenter that emphasized the 
importance of including all definitions and metric formulas in Form FM, 
the Board has expanded Part III of Form FM, Terminology, to include all 
of the definitions used in the metrics, not just those used in multiple 
metrics. As proposed, the formula for each required metric is included 
in Part IV, Metric Calculations, Reporting and Discussion of Form FM.
    The proposal provided that the reporting period for Form FM would 
generally be the 12-month period ended September 30 in each year \166\ 
and filed on or before November 30, 61 days after the end of the 
reporting period.
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    \166\ Exceptions to the proposed reporting period of firm-level 
metrics reported on Form FM included the proposed metrics for 
Quality Performance Ratings and Compensation and Audit Firms' 
Internal Monitoring. The proposal stated that ``[these] proposed 
firm-level metrics relate to activities for which firms may already 
have defined periods or cycles that may not align with [the Board's] 
proposed reporting date. In these cases, [the Board] proposes that 
the time period covered by the metrics may be tailored to a firm's 
existing processes and procedures.'' Neither of these metrics are 
included in the metrics the Board adopted. However, the Board 
adopted a metric related to the Training Hours for Audit Personnel 
metric which will permit firms to use an already-established 
training calendar cycle for calculation and reporting of this 
metric, which may not align with the Form FM reporting period.
---------------------------------------------------------------------------

    Some commenters expressed support for the proposed reporting period 
ending on September 30. One of these commenters also suggested that 
consideration be given to allowing firms to pick a reporting period 
based on their firm's cycles. A few commenters expressed concern with 
the reporting date of September 30 and instead suggested firms be 
permitted to choose their own timing for Form FM. These commenters 
expressed the following views:

[[Page 100014]]

     The reporting date for firm-level metrics should not 
matter to investors, therefore the PCAOB should consider firm input as 
to the date that best aligns with their internal processes.
     Concern about the amount of work firms will be required to 
do on this new form along with the QC 1000 requirements and the 
relationship with information reported on Form 2 on a different time 
period. This commenter suggested that the Board should undertake a 
comprehensive review of all reporting requirements, systems, reporting, 
and dates.
     Concern that small- and mid-sized firms will be 
particularly burdened with having to evaluate the quality control 
system under the newly adopted quality control standard, support the 
annual inspection, and assemble data for reporting in Form FM all at 
the same time.
    The Board does not believe that permitting firms to choose their 
own timing for Form FM would ultimately serve the users of the metrics, 
because of the enhanced comparability that a common measurement date 
and measurement period provide. In particular, audit committees, who 
may seek to consider comparative metrics when determining which audit 
firm to appoint, would not be served by using potentially outdated or 
non-comparable data from a firm. The proposed reporting date aligns 
with the date the firm is required to evaluate its QC system under QC 
1000, which was adopted by the Board and approved by the SEC on 
September 9, 2024. While the Board understands that this date will 
cause some firms to have additional PCAOB reporting responsibilities 
simultaneously, the Board continues to believe that this timing is 
preferable since it is prior to the calendar year end and the 
traditional busy period for many firms, which the Board believes would 
reduce potential resource or time constraints and further benefit 
firms.
    Two commenters supported the proposed November 30 due date of Form 
FM. One commenter, who supported the proposed November 30 due date, 
specifically found it helpful that the date aligned with QC 1000. Some 
firms expressed concern that the proposed due date would create 
challenges going forward for firms to support their annual inspections, 
evaluate the quality control system, and assemble data for reporting in 
Form FM all at the same time. One commenter suggested that the due date 
for Form FM should be three months from the end of the reporting 
period, or December 31. Another commenter expressed concern that a 61-
day period may not be sufficient to allow firms to accurately and 
completely collect, assemble, and report the metrics and instead 
suggested that firms should be permitted to choose their own filing 
date. One commenter, who supported the proposed reporting date of 
September 30, suggested the PCAOB consider a longer period of time in 
which to submit Form FM in the initial years after the effective date.
    The Board believes the 61-day period will provide sufficient time 
for firms to accumulate data and calculate the metrics and report to 
the PCAOB. In addition, as discussed above, the Board has reduced the 
scope of the following metric areas in particular: (i) Partner and 
Manager Involvement, Workload, and Allocation of Audit Hours, to 
include only large accelerated filer and accelerated filer engagements; 
and (ii) Industry Experience, to limit the reporting to those firms 
that issued five or more audit reports for accelerated filers and large 
accelerated filers, combined, during the reporting period. All of these 
changes should further reduce the reporting effort and help to address 
commenter concerns. A benefit of aligning the Form FM reporting period 
and filing deadline with QC 1000 is that some firms, if they choose, 
could also use these metrics in their monitoring and remediation 
process as part of the QC system, enabling the firm to use comparable 
information underlying both reporting obligations for Form QC and Form 
FM. Under the final rules, as proposed, reporting on Form FM is due on 
or before November 30, 61 days after the end of the reporting period. 
In addition, see discussion of the effective date below.
    Form FM was adopted with the following modifications:
     Making conforming revisions to reflect the changes to 
metrics discussed above.
     Related to the optional narrative, (i) expanding the 
character limit to 1,000 characters and (ii) adding additional 
instructions for firms that elect to provide the optional narrative 
(discussed above).
     Rearranging instructional language within the form and 
expanding Part III of Form FM to include all terminology used in the 
metrics (discussed above).
     Removing references to 40-F filers (see above).
    Together with new Form FM, the Board also proposed a new reporting 
rule, PCAOB Rule 2203C, which did not draw comment and was adopted 
substantially as proposed, and making conforming changes to Rules 2205 
and 2206. The text of PCAOB Rule 2203C; Form FM, together with the form 
instructions; and the conforming amendments are included below.
3. Reporting of Engagement-Level Metrics (Form AP)
    The Board proposed to require firms to report engagement-level 
metrics on Form AP, along with the already required disclosure of the 
name of the engagement partner and information about other firms 
involved in the audit.\167\ The Board believes that Form AP provides an 
established mechanism for conveying engagement-level information that 
is familiar to investors and other stakeholders.\168\ Reporting on Form 
AP will allow access to the engagement-level metrics in a centralized 
location and will allow for the dissemination of the metrics through 
already established data channels. Form AP is also downloadable, which 
will provide users of the information the ability to perform 
comparisons across engagements, including analyses of the entire Form 
AP data set.
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    \167\ See PCAOB Rule 3211. PCAOB Rule 3211 requires the filing 
of a report on Form AP regarding an audit report the first time the 
audit report is included in a document filed with the SEC. In the 
event of any change to the audit report, including any change in the 
dating of the report, PCAOB Rule 3211 requires the filing of a new 
Form AP the first time the revised audit report is included in a 
document filed with the SEC. If the auditor's report is reissued and 
dual-dated, the firm is required to file a new Form AP that would 
reflect the most updated information of the proposed engagement-
level metrics (e.g., total audit hours as of the latest audit report 
date based on the cumulative total audit hours). For most audits, 
Form AP is due within 35 days after an audit report is first 
included in an issuer SEC filing. The entire Form AP data set 
(updated daily) and data dictionary are available to download in CSV 
format under the section, ``Download the entire data set,'' at 
https://pcaobus.org/resources/auditorsearch.
    \168\ Information related to usage statistics can be found on 
the PCAOB's website (https://.org//auditorsearch).
---------------------------------------------------------------------------

    The Board proposed adding a new section to Form AP for firms to 
report the required metrics. As noted above, in addition to the 
specific engagement-level metrics, the Board proposed that the firm 
would be able to provide an optional narrative description to accompany 
each metric. As proposed, the firm would have been able to provide up 
to 500 characters as part of their narrative description to provide 
context to facilitate the reader's understanding of the metric. To 
reflect Form AP's broader content, the Board also proposed to rename it 
``Audit Participants and Metrics.'' The text of the Form AP amendments 
and the form instructions are included below.
    Commenters who supported public reporting of engagement-level 
metrics generally agreed with reporting on Form AP. However, several 
commenters

[[Page 100015]]

disagreed with public reporting of engagement-level metrics. The Board 
has addressed these comments above. One commenter suggested that the 
reporting date should be changed to November to align to the audit 
committee's considerations of reapproving a firm and when considering 
the following year's audit plan. Additionally, one commenter voiced 
their concern that there is mixed evidence on the influence of Form AP 
disclosures on decision-making.
    The Board adopted the requirement as set forth in the proposal to 
report engagement-level metrics on Form AP and rename the form Audit 
Participants and Metrics. Correspondingly, the Board has retitled PCAOB 
Rule 3211 as Audit Participants and Metrics and made a conforming 
amendment to AS 3101.20. The Board made certain amendments to the 
requirements for reporting on Form AP as follows:
     Conforming revisions to reflect the changes to include the 
metrics discussed above.
     Related to the optional narrative, (i) expanding the 
character limit to 1,000 characters and (ii) adding additional 
instructions for firms that elect to provide the optional narrative.
    Form AP's deadline of 35 days after the issuance of the auditor's 
report already takes into account the timing of the proxy vote for most 
issuers.
4. Amendments to Form FM and Form AP
    As is required for other PCAOB forms, the Board proposed that firms 
be required to amend Form FM or Form AP to correct inaccurate 
information or provide omitted information that should have been 
included.\169\
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    \169\ The requirements for amendment of Form FM are similar to 
those that apply to Form 2. See https://pcaobus.org/about/rules-rulemaking/rules/form_2; see also, e.g., Staff Questions and Answers 
Annual Reporting on Form 2, at Q34, available at https://assets.pcaobus.org/pcaob-dev/docs/default-source/registration/rasr/documents/staff_qa-annual_reporting.pdf?sfvrsn=5e7259ff_0.
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    Some commenters requested that the Board consider adopting some 
level of materiality or de minimis threshold for the proposed metrics 
reporting and specifically address how firms should consider whether to 
amend their reporting when differences arise. These commenters 
expressed the following views:
     Although a materiality concept, on its own, will not 
eliminate the challenges currently identified and those that are 
unknown, it may help reduce confusion to investors and other 
stakeholders resulting from the need to report amendments caused by 
immaterial changes in estimates and unintentional errors and to help 
avoid unnecessary penalties for materially correct reporting.
     The risk of enforcement for minor, unintentional errors in 
reporting may also play a role in public accounting firms' decision to 
cease auditing public companies.
     Guidance would be essential for implementing any final 
standard effectively to balance the costs of compiling and reporting 
the information and this guidance should extend to the evaluation of 
differences that may arise in the disclosure of participating firms on 
Form AP.
     The proposal should be amended for the application of 
materiality thresholds based on reasonable assurance.
     The Board should consider revisions to PCAOB Rule 3211 to 
add materiality thresholds based on reasonable assurance and clarify 
whether the current guidance regarding amendments would extend to all 
metrics as well as how routine corrections and re-allocations of time 
entries and other matters affecting metrics reported on Forms FM are 
expected to be handled.
     If the PCAOB does not adopt a materiality threshold for 
Form FM, firms may need to consider which controls need to operate at a 
level of absolute assurance, which the firm stated would add 
significant effort and cost.
     The final rule should include a safe harbor for reporting 
that includes unintentional and immaterial deviations from an otherwise 
accurate reflection of a metric.
     The amendments should include a mechanism for revisions 
and a statute of limitations, such as reporting of time, should be 
included in the final rule. The Board believes that the reference to 
statute of limitations is intended to request a specified period after 
filing beyond which no amendments would be required for corrections.
    One investor-related group indicated that they would not object if 
the PCAOB established a de minimis threshold for unintentional 
inaccuracy in reporting metrics. Another commenter recommended that the 
PCAOB establish a de minimis threshold for unintentional inaccuracy 
that applies to all firm reporting, not just in relation to the 
proposal.
    The Board did not adopt a materiality or de minimis threshold in 
connection with the obligation to amend forms to correct information 
that was incorrect at the time the report was filed or to provide 
information that was omitted from the report and was required to be 
provided at the time the report was filed. Historically, the Board has 
not established, and has not found necessary, materiality or de minimis 
thresholds in connection with form amendments. As a commenter 
acknowledged, a materiality or de minimis threshold will not 
necessarily eliminate challenges commenters have identified or those 
that have yet to be identified in connection with potential 
corrections. Indeed, the Board believes that implementing a materiality 
or de minimis threshold would introduce unnecessary complexity and 
uncertainty to the form amendment process and, further, would 
potentially threaten, or be perceived to threaten, the accuracy and 
reliability of reported information, thereby undermining the intended 
purpose of the amendments.
    Similarly, the Board has not historically provided, or believed 
necessary, a safe harbor provision for unintentional errors and such a 
provision would potentially compromise the accuracy and reliability of 
reported information. Likewise, the Board has not historically 
provided, or believed necessary, a ``statute of limitations'' to limit 
the time period for which amendments would be necessary, and such a 
provision could potentially compromise the value of the forms in 
conducting historical research. In the inspection and enforcement 
context, the Board can exercise its discretion on a case-by-case basis.
    Consistent with existing Form AP guidance, no amendments to Form FM 
or Form AP would be needed solely to reflect changes in the metrics 
that would result from differences between reasonably estimated data 
and actual data, in the event such information becomes available after 
the filing deadlines of the forms. As discussed above, in calculating 
both firm- and engagement-level metrics, actual data is required to be 
used, if available. If actual data is unavailable, firms may use a 
reasonable method to estimate such data. For example, if a firm used a 
reasonable method to estimate hours worked by partners and managers at 
the end of a reporting period, and those partners and managers 
subsequently submit timesheets for that period that include additional 
hours worked above the estimate used by the firm on Form FM or Form AP, 
the firm would not be expected to file an amended report for any 
deviations.
    At present, the Board believes applying the existing Form AP 
guidance is appropriate and sufficient for the final rules. The Board 
will monitor for issues connected to form amendments and

[[Page 100016]]

consider updates to implementation guidance as appropriate. Addressing 
issues as they arise through implementation guidance--as opposed to 
establishing a materiality or de minimis threshold in the adopting 
release or through a rule amendment--will help ensure that any guidance 
is informed by, and better tailored to, issues raised by experience 
under the final rules rather than speculative concerns. The Board 
believes monitoring for the need for guidance is a better solution than 
implementing a materiality or de minimis threshold in the adopting 
release or through rule amendment.
    Lastly, regarding the comment that the amendments should include a 
``mechanism for revisions,'' the Board is not aware of any deficiencies 
in the current mechanism for amending forms and believes it suffices.
5. Inclusion of Metrics in the Audit Report
    In addition to the proposed reporting on Form FM and Form AP, the 
Board solicited comment on whether some or all of the firm-level and 
engagement-level metrics, together with any additional narrative that 
the firm may choose to provide, should also be included in the audit 
reports the firm issues for audits of large accelerated filers and 
accelerated filers. While some commenters supported inclusion of the 
metrics in the audit report, many commenters disagreed with this 
approach citing that, for example, it could potentially detract from 
the clarity and purpose of the report, could result in delays in the 
issuance of audit reports, and amendments to the audit report for 
corrections to metrics could create unnecessary burden for issuers and 
confusion for investors.
    Taking into account commenter feedback, including both the 
potential benefits and unintended consequences, the Board did not 
require inclusion of the metrics in the audit report at this time.
6. Confidential Treatment and Conflicts With Non-U.S. Law
i. Requests for Confidential Treatment Not Permitted
    The primary objective of the Board's rulemaking is to enhance 
public transparency regarding audits and auditors, which inherently 
involves the disclosure of new information. The Board did not propose 
to allow firms to request confidential treatment for the proposed 
metrics but requested comment on this approach and specifically 
requested that commenters identify any laws that realistically might 
prevent a firm from disclosing the information required by the metrics. 
In response, firms and firm-related groups expressed general concern 
about the potential for conflicts or focused on the proposed disclosure 
of engagement-level metrics, such as hours worked per week on an 
engagement, engagement team tenure, and experience by industry, and the 
percentage of hours contributed by specialists and shared service 
centers. However, the Board disagrees with the assertion that all 
previously undisclosed information should be considered sensitive by 
default. The information called for by the metrics does not pertain to 
proprietary methodologies or operational strategies that could give 
competitive advantages if disclosed. Rather, the information called for 
is descriptive of the audit process itself. The Board believes that 
general claims of sensitivity, absent specific legal prohibitions or 
clear practical ramifications, are not sufficient to outweigh the 
benefits of increased transparency. The Board's rulemaking is guided by 
the goal of deepening the public's understanding of audit practices in 
audits of issuers, consistent with the Board's statutory 
responsibilities.
    Some firms and firm-related groups raised concerns regarding the 
potential antitrust implications of disclosing detailed metrics about 
engagement staffing and workload allocations. One of these commenters 
referenced the Supreme Court's ruling in United States v. Container 
Corporation of America,\170\ which highlights the competitive risks 
associated with the exchange of confidential information among 
competitors, particularly in concentrated industries. However, it is 
important to distinguish between the exchange of information directly 
among competitors--which may indeed raise antitrust issues--and this 
rulemaking's mandate for public disclosure. The information that the 
PCAOB is requiring firms to disclose is not shared privately among 
competing firms but is made publicly available to all stakeholders, 
including investors, audit committees, and the general public. This 
type of disclosure is fundamentally different from the scenarios 
associated with anti-competitive behavior under antitrust laws.\171\ In 
light of these factors, the Board believes the metrics do not 
contravene the antitrust laws, and the public benefit of these 
disclosures outweighs any theoretical competitive risks suggested by 
the commenters.
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    \170\ 393 U.S. 333 (1969).
    \171\ The purpose of these disclosures is to enhance 
transparency and accountability in the audits of issuers, allowing 
investors and other stakeholders to make informed decisions and hold 
auditors accountable. This aligns with the Board's statutory mission 
to protect investors and the public interest, rather than to 
facilitate or enable competitive positioning among firms. 
Furthermore, the disclosure of such information by a regulatory 
authority for the purposes of transparency and accountability does 
not fall under the purview of antitrust concerns, as it does not 
facilitate collusion or the sharing of competitively secret 
information in a manner that would distort market dynamics. Instead, 
it ensures that all market participants and stakeholders have access 
to the same information.
---------------------------------------------------------------------------

    Two commenters raised concerns regarding Section 105(b)(5) of 
Sarbanes-Oxley, which protects information prepared or received by or 
specifically for the Board in connection with a PCAOB inspection or 
investigation. It is important to note that Section 105(b)(5) 
specifically protects only information that is prepared or received by 
or specifically for the Board in connection with a PCAOB inspection or 
investigation. The metrics the Board has required, however, are not 
prepared or received under such confidential circumstances. These 
metrics are intended for public disclosure to enhance transparency 
across the audits of issuers and to provide stakeholders--including 
investors, audit committees, and the general public--with important 
insights into audit practices. Therefore, requiring the public 
disclosure of these metrics does not violate the provisions of Section 
105(b)(5).
    Additionally, one firm and a firm-related group raised concerns 
regarding the AICPA Code of Professional Conduct,\172\ which provides 
that a member in public practice shall not disclose confidential client 
information without the specific consent of the client. It is important 
to differentiate the information required by the metrics from the 
client-specific confidential information covered under the AICPA Code. 
The metrics require information such as workload data, staffing 
allocations, and experience levels of personnel involved in audits of 
issuers. This information does not include confidential client 
information or specific details about client engagements that would be 
protected under the AICPA Code. Instead, it focuses on the operational 
aspects of registered firms and the audits they perform that are 
important for the public to understand and assess the audits of 
issuers. The objective of this rulemaking is to enhance transparency 
and accountability within the audits of

[[Page 100017]]

issuers, and the information required by the metrics supports this goal 
without requiring auditors to breach their confidentiality obligations 
to clients.\173\
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    \172\ See, e.g., AICPA Code of Professional Conduct 1.700.001 
(``A member in public practice shall not disclose any confidential 
client information without the specific consent of the client'').
    \173\ Similarly, some firms raised concerns about optional 
narrative disclosures, particularly regarding the need to maintain 
client confidentiality and protect commercially sensitive 
information. The Board has carefully designed the required metrics 
to avoid such issues. The Board expects firms to tailor their 
optional narrative responses in a similar manner, should they choose 
to provide them. This will enable firms to meet the transparency 
objectives of Forms FM and AP without compromising client 
confidentiality or disclosing sensitive commercial information.
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    Finally, although some firms raised generalized concerns about 
potential conflicts with foreign laws, they did not provide specific 
examples that would justify prohibiting the public disclosure of the 
information in the metrics or warranting its confidential treatment. As 
discussed more fully below, the Board does not believe that any law, 
whether foreign or domestic, provides a reasonable basis for 
withholding the information in the metrics from public disclosure.
    As such, the Board did not permit firms to request confidential 
treatment for the metrics. This approach is consistent with the Board's 
belief that these metrics will provide valuable additional information, 
context, and perspective on audit firms and audit engagements, which 
can be used by investors, audit committees, and other stakeholders.
    However, the Board is mindful of the Board's obligation to protect 
information that is confidential under applicable laws relating to the 
confidentiality of proprietary, personal, or other sensitive 
information. To balance these concerns, the final metrics have been 
specifically designed to exclude information that could reasonably 
qualify for confidential treatment protection, such as personally 
identifiable, methodological, or client-specific information. 
Additionally, the Board provides firms the option to include a 
narrative description with each metric to explain or contextualize the 
disclosures, allowing firms to clarify any potentially misleading 
information that could be viewed as sensitive.
    By adopting this approach, the Board believes that prohibiting 
confidential treatment requests on Forms FM and AP will further the 
public interest while adhering to the Board's obligation to protect 
certain categories of firm information.
    In light of the objectives of this rulemaking, the Board decided 
not to permit confidential treatment for the metrics required on Forms 
FM and AP.
ii. Assertions of Conflicts With Non-U.S. Law
    The Board did not propose to allow firms the opportunity to assert 
conflicts with non-U.S. laws on either proposed Form FM or Form AP, as 
proposed to be amended. The proposal acknowledged that there may be 
certain limitations with respect to the data or information about a 
firm, its personnel, or the performance of the firm's engagements that 
a firm may communicate publicly because it may conflict with a non-U.S. 
law, and asked commenters to describe any such laws and the proposed 
metrics to which it was realistically foreseeable that they would 
apply.
    Some commenters disagreed with the proposal not to allow firms to 
assert conflicts. One commenter strongly urged the Board to maintain 
the well-established rulemaking history that recognizes and respects 
non-U.S. firms' distinct legal obligations and preserves the right for 
firms to assert a conflict of law. The Board is committed to 
cooperation and reasonable accommodation in its oversight of registered 
non-U.S. firms, and in the past has generally provided non-U.S. firms 
the opportunity to at least preliminarily withhold some information 
from its existing forms on the basis of an asserted conflict with non-
U.S. laws. However, the Board has not provided for firms to assert such 
a conflict with respect to all information required by those PCAOB 
forms. Moreover, the Board notes that the Board has never permitted 
such withholding of information for Form AP. In addition, even where 
the Board has allowed registered firms to assert legal conflicts in 
connection with other forms, that accommodation does not entail a right 
for a firm to continue to withhold the information if it is 
sufficiently important.\174\
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    \174\ See Improving the Transparency of Audits: Rules to Require 
Disclosure of Certain Audit Participants on a New PCAOB Form and 
Related Amendments to Auditing Standards, PCAOB Rel. No. 2015-008 at 
37; PCAOB Rel. No. 2008-004 at 37-38 n.38 (``Rule 2207(e) preserves 
the Board's authority to obtain information by preserving the 
possibility that, in an appropriate case involving sufficiently 
important information that is not otherwise forthcoming (e.g., 
through cooperation with non-U.S. regulators), the Board can 
ultimately put the firm to the choice of providing the information 
or being subject to a sanction for violating the Board's rules.'').
---------------------------------------------------------------------------

    Other commenters suggested there were potential conflicts between 
reporting of the proposed metrics and current laws:
     One commenter strongly recommended the Board consult with 
others, including the International Forum of Independent Audit 
Regulators (IFIAR), to determine whether any law would prohibit a firm 
from providing information requested in the proposal and further 
diminish comparability (or increase the risk of misuse) of affected 
metrics.
     A commenter also asserted that there are laws in various 
jurisdictions (e.g., France and Switzerland) that could have a 
significant impact on cross-border transfer of data and the 
comparability of such data.
     Other commenters stated that firms with a small number of 
relevant issuer engagements, for example, disclosure of certain 
engagement-level metrics may lead to breach of confidentiality for 
client information, issues with disclosure of commercially sensitive 
information (e.g., time spent) or disclosure of personal data in breach 
of regulations, and potentially violate laws and regulations within 
some non-U.S. jurisdictions. (e.g., General Data Protection Regulation 
(``GDPR'')).\175\
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    \175\ See Regulation (EU) 2016/679. The GDPR was passed by the 
European Union and became effective on May 25, 2018. The complete 
text of the regulation is available at https://eur-lex.europa.eu/eli/reg/2016/679/oj. Section 1 of Article 2 of the GDPR applies to 
``processing of personal data wholly or partly by automated means 
and to the processing other than by automated means of personal data 
which form part of a filing system or are intended to form part of a 
filing system.''
---------------------------------------------------------------------------

     A commenter stated that based on their understanding from 
non-U.S. firms (although the commenter firm itself is not a non-U.S. 
firm) some of the proposed new required disclosures go beyond what non-
U.S. regulators require and may lead to violations of local laws 
resulting from disclosure of information that non-U.S. auditors are 
required to keep confidential under professional secrecy obligations 
and/or laws and regulations governing disclosure of personal 
information.
     Another commenter stated that the proposed expansion of 
mandatory disclosures directly increases the likelihood that a non-U.S. 
firm may be legally barred from providing the relevant information.
    One commenter encouraged the Board to include a specific provision 
that acknowledges that any required disclosure by a firm would need to 
comply with applicable local laws and regulations, while another stated 
that allowing firms to assert conflicts with non-U.S. laws would still 
require those firms to obtain legal opinions to support withholding the 
information.
    One of those commenters stated that information published where 
only one engagement is performed will be clearly identifiable to an 
individual engagement, which they asserted may breach personal data 
requirements

[[Page 100018]]

under legislation such as GDPR. However, neither this commenter nor any 
other articulated how any of the required metrics could reveal 
information allowing any individual to be directly or indirectly 
identified in contravention of GDPR or similar laws.
    In considering whether to allow the opportunity to assert 
conflicts, the Board considered both whether it is realistically 
foreseeable that any law would prohibit providing the required 
information and, even if it were realistically foreseeable, whether 
allowing a firm preliminarily to withhold the information is consistent 
with the Board's broader responsibilities and the particular regulatory 
objective.\176\ The comments provided on this subject have not 
identified with sufficient specificity a realistically foreseeable 
likelihood that a law would prohibit providing the required 
information. The concerns that were mentioned were expressed in very 
general and hypothetical terms. Moreover, with respect to the 
suggestion that the Board consult with IFIAR, the Board notes that 
PCAOB staff did advise a number of its non-U.S. counterparts regarding 
the proposal with a view to facilitating their participation in the 
Board's notice and comment process if they so chose, and none submitted 
comment letters.
---------------------------------------------------------------------------

    \176\ See PCAOB Rel. No. 2015-008 at 37; PCAOB Rel. No. 2008-004 
at 36.
---------------------------------------------------------------------------

    In addition, the Board continues to believe that allowing a firm 
preliminarily to withhold the required information is inconsistent with 
the Board's broader responsibilities and the particular regulatory 
objective of this rulemaking, namely public transparency.\177\ This is 
the case notwithstanding that firms, as a commenter observed, have to 
provide a legal opinion regarding a conflict of law under the Board's 
rules relating to asserted conflicts. Accordingly, the Board did not 
permit assertions of conflicts for Form AP or Form FM in the final 
amendments.\178\
---------------------------------------------------------------------------

    \177\ Id.
    \178\ If an actual conflict were to materialize, the Board would 
have tools to address it. For example, Section 106(c) of Sarbanes-
Oxley authorizes the Board to, subject to the approval of the 
Commission, exempt any foreign public accounting firm, or any class 
of such firms, from any provision of the rules of the Board.
---------------------------------------------------------------------------

    With respect to the commenter suggestion that the Board includes a 
specific provision that acknowledges that any required disclosure by a 
firm would need to comply with applicable local laws and regulations, 
the Board believes such a provision could be construed as tacit 
permission to withhold information without complying even with the 
existing requirements under the Board's rules related to the assertion 
of conflicts. Given that this would be an even more permissive 
framework than currently exists for withholding information where 
assertions of conflicts are permitted under the Board's rules, the same 
analysis applies with more force to this suggestion.
    The Board believes its notice and comment process, together with 
its oversight experience, sufficiently inform this policy choice.
7. Structure of Metrics Data
    Several commenters suggested that data on Form AP and Form FM be 
filed using eXtensible Business Reporting Language (``XBRL'') to be 
consistent with SEC registrant filings. The Board notes that the data 
on Form AP will continue to be downloadable and machine-readable. 
However, making a change to require reporting using XBRL would 
introduce additional costs for all firms that file Form AP. Therefore, 
reporting on Form AP and Form FM will be done using the same platform 
as the Board's other reporting forms (currently, the Board's web-based 
RASR system which uses XML and, in the future, potentially new means of 
information exchanges as the PCAOB continues to modernize its reporting 
technology aimed at simplifying and automating data collection, 
processing, and interoperability).
Documentation
    For firm- and engagement-level metrics, the Board proposed that the 
firm would be required to retain documentation in sufficient detail to 
enable an experienced auditor, having no previous connection with the 
determination of the metrics, to understand the calculations, the data 
on which they are based, and the method used to estimate data when 
actual amounts were unavailable. This is similar to the ``experienced 
auditor'' threshold specified in AS 1215, Audit Documentation.
    The Board solicited comment on whether the proposed documentation 
requirement was clear and appropriate. One commenter agreed that the 
documentation requirement was clear and appropriate, while another 
commenter recommended further clarifications. The commenter recommended 
explicitly referring to AS 1215 as the commenter believed there were no 
explicit documentation requirements within Proposed Rule 2203C and Form 
FM instructions related to firm-level metrics.
    The Board adopted the proposed documentation requirement as 
proposed. The Board described the documentation requirement for Form FM 
in General Instruction 7 that the firm should retain documentation in 
sufficient detail to enable an experienced auditor, having no previous 
connection with the determination of the metrics, to understand the 
computations of amounts, the amounts on which they are based, and the 
method(s) used to estimate the amounts when actual amounts were 
unavailable.\179\ The Board believes this is sufficient to introduce 
the concept of ``experienced auditor'' into the documentation 
requirement for Form FM, similar to the ``experienced auditor'' 
threshold specified in AS 1215. Existing Form AP included a similar 
documentation requirement and under the amendments to Form AP that the 
Board has adopted, this requirement appears in General Instruction 10, 
as amended.
---------------------------------------------------------------------------

    \179\ Rule 2203C requires that firms file Form FM by following 
the instructions on Form FM.
---------------------------------------------------------------------------

Additional Firm and Engagement Metrics Considered
    In addition to the firm and engagement metrics the Board adopted, 
the Board considered and solicited comment on a number of (i) proposed 
metrics included in Section III.B.2 of the proposal and (ii) potential 
additional metrics included in Section III.E of the proposal. The Board 
determined not to adopt these additional firm and engagement metrics at 
this time. The additional metrics are discussed below.
1. Proposed Firm and Engagement Metrics
i. Audit Resources--Use of Auditor's Specialists and Shared Service 
Centers
    The proposal included metrics relating to the use of auditor's 
specialists \180\ and shared service centers (``SSCs''),\181\ which 
were intended to

[[Page 100019]]

help users gain a greater understanding of the use of these audit 
resources, including the frequency with which firms use specialists and 
SSCs on their engagements at the firm level generally and, at the 
engagement level, to provide the context required to understand the 
extent of the use of auditor's specialists and SSCs on a particular 
issuer engagement.
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    \180\ A specialist, as used in this context, includes both 
auditor-employed specialists, as defined in AS 1201.C1, and auditor-
engaged specialists, as described in AS 1210.01. Under those 
definitions, a specialist is a person possessing special skill or 
knowledge in a particular field other than accounting or auditing. 
Specialists would generally not include members of the engagement 
team whose specialization is in the fields of either IT or income 
taxes (tax) because IT and tax are specialized areas of auditing and 
accounting. However, if IT or tax specialists are employed or 
engaged in a capacity other than specialized auditing and accounting 
as part of the issuer engagement, it may be appropriate to include 
them as specialists.
    \181\ A shared service center is described as an associated 
entity of a firm, set up by a network of accounting firms, that, 
among other things, supplies those firms with personnel to assist in 
the performance of audits, and that is not itself an other 
accounting firm. See PCAOB, Staff Guidance: Form AP, Auditor 
Reporting of Certain Audit Participants, and Related Voluntary Audit 
Report Disclosure Under AS 3101, The Auditor's Report on an Audit of 
Financial Statements When the Auditor Expresses an Unqualified 
Opinion, (updated July 1, 2024) (``Staff Guidance on Form AP''), at 
n. 24, available at https://assets.pcaobus.org/pcaob-dev/docs/default-source/standards/documents/07-01-2024-transparency-implementation-guidance.pdf?sfvrsn=b9753eb_2.
---------------------------------------------------------------------------

    At the firm level, the proposal set forth requirements for firms to 
provide the percentages of issuer engagements that used auditor's 
specialists and shared service centers, respectively. At the engagement 
level, the proposal provided that firms would report the percentage of 
total audit hours provided by auditor's specialists and by shared 
service centers for each audit the firm performed of an accelerated 
filer and large accelerated filer.
    Commenters on the proposed use of audit resources metrics who 
generally opposed the disclosure of the metrics stated that the 
information was unlikely to be readily interpretable or useful because 
of comparability challenges. In contrast, one commenter found the 
proposed descriptions for the resource metrics to be appropriate. Some 
commenters who supported these metrics noted that challenges with 
comparability might be able to be overcome through use of the proposed 
voluntary narrative. Some commenters, who were not generally supportive 
of the proposed Audit Resources metrics, suggested that if they were 
adopted they should be limited to firms' issuer audit practices.
a. Use of Auditor's Specialists
    Some commenters were generally supportive of the firm-level metric 
for specialists. One commenter stated it would be supportive of 
disclosure of the specialist metrics with modifications to disclose the 
percentage of hours incurred by specialists on issuer audit 
engagements. Another commenter suggested disaggregating time among 
independent specialists, auditor-affiliated specialists, and 
management-affiliated specialists, and breaking down the specialist 
metrics by industry.
    Among the commenters that were not supportive of the specialist 
metrics, several concerns were raised including concerns with the 
proposed method for calculating auditor-engaged specialists' hours when 
actual hours were not available, the lack of visibility to the hours 
incurred by specialists, the need to rely on information from other 
auditors, challenges with comparability and data collection, and the 
overall complexity of the proposed metrics. One commenter suggested 
that the engagement-level metric for specialists would be inconsistent 
with other Form AP instructions and may be misleading. Some commenters 
responded that the amount of specialist involvement on an engagement 
and overall at the firm level is highly contextual and the relationship 
to audit quality is not one dimensional. One commenter refuted the 
objective of providing investors a basis for discussion with management 
with respect to the use of specialists, stating that investors almost 
never take advantage of the opportunity to ask questions.
    Alternative approaches for specialist metrics were also suggested 
by commenters. One suggested an alternative approach for engagement-
level specialist metrics such as utilization metrics and qualitative 
descriptions, supported by narrative disclosures to provide necessary 
context and clarity. This commenter also suggested an alternative firm-
level metric for specialists based on the average percentage of usage 
of specialists across all of the firm's engagements, potentially 
covering only engagements where specialist hours exceeded a minimum 
percentage of total audit hours. Two commenters suggested the Board add 
an additional metric disclosing the percentage of audit hours incurred 
by specialists on issuer audit engagements (as a percentage of the 
total audit hours on issuers). Another commenter also suggested that 
using hours worked rather than the number of engagements as the basis 
for the calculation would provide more useful information at the firm 
level. This commenter also suggested disclosure of the use of 
specialists, and their hours on a CAM-by-CAM basis, as well as overall.
    Two commenters responded to the question in the Board's proposal 
about including thresholds for resource metrics. One stated that 
including de minimis amounts would result in implementation challenges. 
The second, however, made the opposite argument, stating that including 
all specialist and SSC hours in audit resource metrics without a 
threshold would ensure that the metric remains straightforward and 
inclusive of all relevant contributions and provide a more complete 
picture of a firm's audit processes and resource utilization. Most 
commenters that responded to the question as to whether resource 
metrics should be further disaggregated, e.g., by industry, replied 
that this would be overly burdensome without added value. However, 
another commented that use of auditor specialists would be more helpful 
if broken down by industry.
b. Use of Shared Service Centers
    Some commenters were supportive of SSC metrics. One of them stated 
that the use of SSCs was growing but not well understood, and that 
narrative context would be necessary.
    Other commenters raised multiple questions with respect to SSCs. 
Several of these were in relation to the definition of an SSC, which 
was proposed to be consistent with the definition used in Form AP, 
stating that there are many different approaches to the use of other 
resources than what is encompassed in that definition, which could lead 
to misunderstanding and lack of comparability. One of these commenters 
stated that the work of SSCs is dependent on the structure and 
resources of each firm and its SSCs and the specific needs of the 
individual engagement. Another commenter stated that the definition 
proposed a shared service center encompassed only those centers that 
are set up by a ``network'' of accounting firms and would not encompass 
an outsourcing center set up by a single firm. This commenter suggested 
the definition be revised to encompass all services that are not under 
the direct supervision of the engagement partner. Some commenters were 
concerned that SSC metrics would be misinterpreted as indicating that 
greater SSC hours indicated lower quality. Some commenters supported 
evaluation of the use of SSCs at the engagement level, but did not 
support publicly disclosing this information. Another commenter said 
that, given that engagement team members routinely work remotely, there 
should not be a difference between that arrangement and SSCs and, as a 
result, the metric would not be meaningful. This commenter also stated 
that it would not be meaningful to provide an explanation of work 
performed at an SSC because it is all ultimately the responsibility of 
the audit partner.
    The Board has taken commenter input, as well as observations from 
PCAOB oversight activities and the relevant academic literature, into 
account, and have determined not to adopt the proposed firm- and 
engagement-level audit resources metrics at this time. In doing so, the 
Board recognized, as discussed above,

[[Page 100020]]

that several commenters suggested there would be challenges relative to 
comparability and data collection, and there would also be the 
potential for misunderstanding by users of the information. As the 
Board stated in the proposal, these are highly contextual measurements 
because the use of the work of specialists is generally performed to 
satisfy needs specific to an industry or issuer and the use of the work 
of SSCs is dependent on the structure and resources of both the firm 
and the SSC, as well as the specific needs of individual engagement 
teams. The Board acknowledges that the nature and uses of SSCs continue 
to expand. As they do, the Board expects to continue to study and focus 
inquiries in this area to better understand the impact of SSCs on audit 
quality, firm economics, and engagement staffing models. The Board 
anticipates these efforts will inform future consideration of whether 
additional guidance or other regulatory action is warranted.
ii. Audit Hours and Risk Areas
    The proposed engagement-level metric would have required firms to 
calculate the time incurred by all partners and managers on the 
engagement team in auditing the areas of significant risks,\182\ 
critical accounting policies and practices,\183\ and critical 
accounting estimates,\184\ in aggregate, as a percentage of total audit 
hours incurred by partners and managers on the engagement team. Because 
a firm-level metric would have been heavily influenced by the mix of 
companies that a firm audits, the Board did not propose to require 
firms to report this metric at the firm level.
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    \182\ As defined in paragraph .A5 of AS 2110, Identifying and 
Assessing Risks of Material Misstatement (``risk of material 
misstatement that requires special audit consideration'').
    \183\ As defined in AS 1301.A4 (``A company's accounting 
policies and practices that are both most important to the portrayal 
of the company's financial condition and results, and require 
management's most difficult, subjective, or complex judgments, often 
as a result of the need to make estimates about the effects of 
matters that are inherently uncertain.'').
    \184\ As defined in AS 1301.A3 (``An accounting estimate where 
(a) the nature of the estimate is material due to the levels of 
subjectivity and judgment necessary to account for highly uncertain 
matters or the susceptibility of such matters to change and (b) the 
impact of the estimate on financial condition or operating 
performance is material.'').
---------------------------------------------------------------------------

    Two commenters supported this metric as proposed, while several 
other commenters generally supported this metric with revisions; 
suggestions included reporting the absolute number of audit hours as 
well as the percentage, and adding time spent on performing fraud 
procedures. Another commenter, an investor-related group, supported 
this metric as proposed, but further suggested reporting the total 
audit hours incurred by staff on the engagement team in the areas of 
significant risks, critical accounting policies and practices, and 
critical accounting estimates because these areas are considered the 
most significant for the audit. This commenter also suggested reporting 
hours by specialists, senior professionals, and staff in connection 
with critical audit matters.
    Many other commenters criticized the proposed metric. These 
commenters provided the following reasons as the basis for their 
decision not to support this metric:
     The metric does not consider the evolving role of 
technology in the audit and the use of technology can significantly 
contribute to audit effort.
     Risk assessment is an iterative process throughout the 
audit which means that identifying significant risks and critical 
accounting policies, practices, and accounting estimates may change 
during an audit, resulting in changes in how auditors track their time 
for reporting under this metric.
     An individual's hours charged to auditing a particular 
account balance may include work performed that is unrelated to an 
identified significant risk.
     The nature of the audit procedures performed could include 
overlap with other areas of the audit depending on discussions held and 
procedures performed.
     Tracking time at the granular level needed to accurately 
capture hours for significant risks and critical accounting policies, 
practices, and accounting estimates would require additional resources, 
including time and costs, that are not directly associated with audit 
quality.
     Reporting this information would require coordination 
across firms for audits involving other auditors, who may be using 
different systems to track the underlying information.
     Since the risk of management override of controls is a 
presumed risk in all audits, how should it be considered since the 
response is pervasive to the audit.
    Several commenters, including firms, stated that firms are not 
currently tracking this information, or they believe that firms are not 
currently tracking this information. One commenter added that although 
they do not believe firms are currently tracking this information, it 
should be possible to extract this data from internal monitoring 
systems with considerable time and complexity.
    Commenter views were divided on whether the metric should be 
revised to also include engaged specialist hours given that, under the 
proposal, the definition of engagement team includes employed 
specialists, but not engaged specialists. Some commenters agreed that 
this metric should include engaged specialist hours, while other 
commenters did not.
    Taking into account commenter feedback as well as the fact that 
firms' approach to identifying and classifying significant risks can 
vary greatly, the Board was concerned that the potential for 
misinterpretation of this metric and the costs associated with 
establishing systems to collect the necessary data may not be 
justified. The Board did not adopt the metric related to audit hours 
and risk areas at this time.
iii. Quality Performance Ratings and Compensation
    The proposal set forth firm-level reporting requirements for firms 
to calculate (i) the distribution of quality performance ratings across 
partners and (ii) a comparison of average annual compensation 
adjustments (as a percentage of the average adjustment received by the 
highest rated group) for partners in each quality performance rating 
category over a one-year period.
    Overall, some commenters supported this metric area, agreeing with 
the proposed rationale that comparing the relationship between internal 
firm quality performance ratings and changes in compensation levels 
could provide evidence of the extent of any correlation between quality 
performance ratings and compensation, and thereby provide an important 
signal of the value of a quality commitment for the firm.
    However, other commenters did not support this metric area or 
expressed concerns because of the number of difficulties in reporting 
and using the metric. Commenters raised the possibility of a lack of 
comparability or consistency (e.g., differences in firm's structure, 
strategies and systems used in performance evaluations, and definition 
of compensation, and inclusion of non-equity partner and directors in 
the calculation), resulting in potential misuse of the metrics or 
providing no or limited value to stakeholders. Many also pointed to 
variability in firms' quality performance rating systems both across 
firms and within the firm over time. Some commenters also indicated 
that there are many factors that firms consider in determining 
compensation, and that firms use mechanisms to drive accountability of 
partners that would

[[Page 100021]]

not be taken into account in the metrics calculation, resulting in no 
direct one-on-one relationship between the compensation adjustments and 
performance ratings. Some commenters expressed a number of concerns 
about the definition of compensation, as well as the treatment of non-
equity partners.
    Several commenters expressed concerns about confidential 
information. One commenter specifically cited the risk of disclosing 
confidential business information that is proprietary and protected 
from disclosure under Sarbanes-Oxley Section 102(e). Another commenter 
indicated (i) the possibility of identifying specific partners' 
compensation at smaller firms and (ii) the disclosure of this metric 
area may be prohibited by laws and regulations outside of the United 
States. A commenter also said that PCAOB registered firms are for-
profit entities that should have flexibility in designing a 
compensation strategy that is tailored to their business model and 
needs.
    Instead of the proposed metrics, several commenters suggested 
disclosing firms' policies related to partner compensation and 
performance ratings, including how partner audit quality is measured 
and how that measurement influences compensation. Some of these 
commenters said that disclosing these policies would demonstrate the 
firms' quality commitment and the value it places on quality while 
alleviating the comparability and confidentiality concerns and meeting 
the objective of this proposed metric. Some commenters stated that 
qualitative disclosures related to performance management and 
compensation policies are already disclosed in the firms' annual 
transparency reports. One commenter indicated the complexity of the 
performance measurement goes beyond mechanical calculation. Another 
commenter indicated that the metric is not useful as it is an 
unambiguous indicator of audit quality and likely focuses on matters 
unrelated to audit quality.
    Two commenters explicitly supported the exemption granted to firms 
that are not within the scope of the SEC's partner rotation rule. One 
commenter questioned whether this metric would relate to all issuer 
audit engagements or all audit engagements and another indicated that 
combining issuer and non-issuer information would conflict with 
proposed PCAOB Rule 2400. Furthermore, a commenter indicated that this 
metric encompasses all partners of the firm and would not be useful 
when the issuer audit practice is a small portion of the overall firm 
operations.
    While there was some support from commenters, the Board did not 
adopt this metric area at this time, primarily due to the challenges 
described by commenters (e.g., lack of comparability and variability in 
establishing a firm's quality rating system) and the ambiguity in 
relation to audit quality, which may be difficult to overcome for this 
metric area to be meaningful for stakeholders. Because this rulemaking 
project is focused on requiring certain firms to report certain 
quantitative metrics that will foster comparability, the Board is also 
did not adopt the alternatives suggested by various commenters that the 
firms disclose policies regarding the partner compensation and 
performance ratings.
iv. Audit Firms' Internal Monitoring
    The proposal set forth firm-level requirements for firms to 
calculate the percentage of issuer engagements that were selected for 
internal monitoring in the firm's most recently completed cycle (i.e., 
the number of completed issuer engagements internally monitored, 
divided by the number of total issuer engagements) and the percentage 
of those issuer engagements with engagement deficiencies.\185\
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    \185\ The term ``engagement deficiency'' as used in the proposal 
is defined in QC 1000.A4 (``An instance of noncompliance with 
applicable professional and legal requirements by the firm, firm 
personnel, or other participants with respect to an engagement of 
the firm, or by the firm or firm personnel with respect to an 
engagement of another firm'').
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    At the engagement level, the proposal set forth requirements for 
firms to disclose whether a previous engagement was selected for 
internal monitoring in the most recently completed monitoring cycle, 
the year-end date of the engagement subject to review, whether any 
engagement deficiencies were identified, and the nature of those 
deficiencies. The nature of the engagement deficiencies would be one of 
the following: (i) financial statement line item, (ii) disclosure, or 
(iii) other noncompliance with applicable professional or legal 
requirements.\186\ The Board also proposed that certain details be 
provided about the engagement deficiency, including the area of 
noncompliance and the type of deficiency.
---------------------------------------------------------------------------

    \186\ The term ``applicable professional and legal 
requirements,'' as used in this rulemaking, has the same meaning as 
defined in QC 1000.A2.
---------------------------------------------------------------------------

    Some commenters, primarily investor-related, expressed support for 
both the proposed firm- and engagement-level metrics. One investor-
related commenter suggested that Part I.A deficiencies be included 
separately in addition to the proposed requirements. Other commenters 
stated the proposed metrics would provide useful information into 
understanding firms' monitoring procedures and outcomes, facilitating 
comparisons regarding the quantity and types of engagement deficiencies 
detected, while one commenter stated that the monitoring and 
remediation process was an essential component of firms' quality 
management systems and agreed that providing a certain level of 
transparency in this area could be useful for interested stakeholders.
    The firm-level metric was generally supported by some firm and 
firm-related commenters. One noted that it reports certain of this 
information in its transparency reports. Another highlighted that its 
internal monitoring was broader in scope, including targeted monitoring 
of its team's use of certain tools or technologies, adding that may be 
inconsistent with the PCAOB's intent with respect to firm-level 
reporting. Some of these commenters suggested reducing the scope by 
requiring reporting of only PCAOB Inspection Report Part I.A inspection 
findings. Another suggested reporting the percentage of compliant 
internal reviews rather than deficient engagements.
    Conversely, several firm commenters were opposed to the proposed 
internal monitoring metrics at the firm level. The concerns raised by 
these commenters included noting that differences in monitoring 
programs would render the information provided inconsistent and 
uninformative and also that it could be disadvantageous to smaller 
firms that may have more variability in their internal monitoring year 
over year. In addition, several firm and firm-related commenters 
disagreed with the deficiencies required to be disclosed in the 
proposed firm-level metrics being aligned to QC 1000. One stated that 
presentation of such a broad range of deficiencies into a single metric 
without distinction could lead a user to inappropriately conclude that 
the firm had significant quality issues, which could in turn negatively 
impact their confidence in the reliability of the firm's audit reports. 
Another commenter expressed their belief that firm-level public 
reporting of internal inspection findings could be a disincentive for 
finding deficiencies. This commenter also stated that firms should be 
allowed to request confidential treatment for metrics related to 
internal monitoring.
    At the engagement level, virtually all firm commenters objected to 
the proposed internal monitoring metrics.

[[Page 100022]]

Specific objections raised included those related to confidentiality 
concerns, comparability challenges, and the potential for confusion or 
misunderstanding. Several commenters expressed concerns that the 
proposed metrics risked undermining internal inspection programs if 
they cause firms to move from broad monitoring processes to align more 
closely with PCAOB inspections in response to the proposed 
requirements. One commenter stated that once these metrics become 
public, firms could come under pressure from various constituencies to 
report results that are within a perceived acceptable range. Another 
commenter voiced concern that firms could be incentivized to alter 
their internal monitoring processes in a manner inconsistent with the 
objectives of the proposal. Some commenters suggested that an 
alternative could be to require communication with an issuer's audit 
committee.
    Taking commenter input into account, the Board determined not to 
adopt the proposed firm- and engagement-level internal monitoring 
metrics at this time.
2. Potential Additional Firm and Engagement Metrics
    In the Board's proposal, it discussed three particular areas--
training, access to technical resources, and investment in audit 
infrastructure--that it did not propose to require for reporting but, 
in light of the significance of these areas, for which the Board 
solicited specific commenter input.
    All of these potential metrics related to aspects of a firm's 
ongoing investment in audit quality, which the Board believes is 
critically important. However, in working to develop metrics in these 
areas, the Board encountered challenges in defining what to measure and 
how to measure it, questions about whether metrics would be informative 
and appropriately free from bias, and concerns about potential 
unintended consequences. After considering commenter feedback, the 
Board adopted a modified metric related to training, which is discussed 
in detail above. However, the Board did not adopt metrics in the areas 
of access to technical resources or investments in audit 
infrastructure, as discussed further below.
    In addition to the metrics the Board considered, as noted above, 
some commenters on the proposal suggested a metric for PCAOB Part I.A 
deficiencies. The Board's response to this suggestion is discussed 
further below.
i. Access to Technical Resources
    The Board solicited comment on possible firm-level metrics relating 
to the relative size of a firm's central personnel (or other resources 
engaged by the firm) available to provide engagement teams with advice 
on complex, unusual, or unfamiliar issues and the extent to which such 
resources were used in the firms' engagements. Metrics that were 
considered at the engagement level focused on consultations that were 
performed with professionals outside of the engagement team on 
difficult or contentious matters.
    Commenters who responded to questions about the potential metric 
for access to technical resources largely agreed with the 
considerations and conclusions in the proposal. Some of those 
commenters replied that the metrics would not be useful, be difficult 
to measure, not be comparable, and could be seen as being biased 
towards larger firms. One commenter mentioned that arguments could be 
made for or against many metrics, but they broadly agreed access to 
[technical] resources should be dropped. One commenter expressed that 
it would be difficult to define national office in a way that was 
meaningful.
    After considering these comments, and in light of the Board's 
original analysis, the Board did not adopt a metric related to access 
to technical resources.
ii. Investment in Audit Infrastructure
    Metrics the Board considered in relation to investment in audit 
infrastructure were primarily at the firm level and were focused on the 
expenditures that firms self-identified as being in support of audit 
quality either in total or on a per headcount basis.
    Commenters generally stated that such a metric would be very facts 
and circumstances dependent, such that meaningful comparisons could not 
be made. One commenter suggested that investment in infrastructure was 
best discussed with an in-depth understanding of the circumstances to 
obtain appropriate context. Another suggested that the data would be 
stale by the time it was reported, adding to its lack of usefulness. 
One commenter mentioned that arguments could be made for or against 
many metrics, but they broadly agreed investment in audit 
infrastructure should be dropped. However, one commenter stated that 
they would support a metric that provides the percentage of firm 
revenues invested in technology accessible by audit teams. Similarly, 
another commenter supported including a metric that provides the 
percentage of firm revenues invested in technology and stated they 
believe this metric could offer useful information to investors about 
the firm's ability to adapt to future challenges.
    After considering commenter feedback, the Board did not adopt a 
requirement to disclose a metric on investment in audit infrastructure.
    The Board considered the commenters that supported a metric related 
to revenue invested in technology, but weighing the challenges 
presented by doing so, specifically with respect to comparability and 
concerns in potential bias with respect to smaller firms, the Board 
continues to believe the unintended consequences and the costs would 
not be justified by the benefits such a metric might provide.
iii. PCAOB Part I.A Deficiencies
    Some commenters recommended requiring a metric which the Board did 
not include as a potential additional metric in the proposal--a 
percentage of the PCAOB Part I.A deficiencies relative to ``the total 
inspections.'' The commenters acknowledged that this information is 
already publicly available. However, they suggested that including this 
percentage with other required metrics would highlight its importance 
and provide valuable information. One of the commenters went on to 
state that increasing the visibility of the PCAOB's inspection results 
would increase the importance of the results of the inspection process 
to audit firms, which they believe will lead to an improvement in 
overall audit quality.
    After considering commenter feedback, the Board did not adopt a 
requirement to disclose a metric for PCAOB Part I.A deficiencies. 
Principally, the Board has concerns that the time lag implicit in such 
a metric would be potentially confusing. The other metrics would report 
as of September 30 or for the 12 months then ended, but a metric based 
on PCAOB inspection results would relate to audits conducted one or 
more years previously and may reflect issues that have long since been 
remediated.\187\ In the Board's view, presenting data on inspection 
findings from previous years together with a suite of other metrics 
that all relate to the current period may confuse users. Of course, 
inspection reports, including discussion of Part I.A.

[[Page 100023]]

deficiencies, will continue to be available on the PCAOB website.\188\
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    \187\ The PCAOB inspects audits completed in the prior year, and 
the ensuing reports have historically been released a year or more 
after the inspection is completed.
    \188\ See, e.g., PCAOB charts illustrating much of the data in 
the U.S. global network firms (``GNFs'') and U.S. annual non-
affiliated firms (``NAFs'') inspection reports, available at https://pcaobus.org/oversight/inspections/global-network-firms-inspection-data and https://pcaobus.org/oversight/inspections/non-affiliated-firms-inspection-data, respectively. GNFs are the member firms of 
the six global accounting firm networks (BDO International Ltd., 
Deloitte Touche Tohmatsu Ltd., Ernst & Young Global Ltd., Grant 
Thornton International Ltd., KPMG International Ltd., and 
PricewaterhouseCoopers International Ltd.). NAFs are both U.S. and 
non-U.S. accounting firms registered with the Board that are not 
GNFs. Some of the NAFs belong to international networks.
---------------------------------------------------------------------------

Effective Date
    For firm-level metrics, the Board proposed an effective date 
beginning October 1 of the year after approval by the SEC, with the 
first reporting period ending the following September 30. The Board 
also proposed a phased implementation period:
     Firms that issued audit reports with respect to more than 
100 issuers in the calendar year preceding the effective date would 
begin reporting firm-level metrics in the first year; and
     All other firms would begin reporting firm-level metrics 
one year later.
    For engagement-level metrics, the Board also proposed a phased 
implementation period:
     Firms that issued audit reports with respect to more than 
100 issuers in the calendar year preceding the effective date--for 
audits of companies with fiscal years beginning on or after October 1 
of the year after the year in which SEC approval is obtained; and
     All other firms--for audits of companies with fiscal years 
beginning on or after October 1 two years after the year in which SEC 
approval is obtained.
    The Board solicited comment on whether the proposed effective date 
would provide challenges for auditors and how these challenges should 
be addressed. The Board also solicited comment on whether the phased 
implementation period would be appropriate and whether the phased 
implementation should be based on the number of issuer audit reports 
issued or some other basis.
    One investor-related group suggested that extending the 
implementation period would allow smaller firms to adapt incrementally, 
ensuring they are not disproportionately affected by the new 
requirements. This commenter further suggested that the Board could 
identify and make certain metrics optional for smaller firms without 
making all the metrics optional.
    Primarily, firms and firm-related groups recommended extending the 
proposed effective date. While many firms did not provide a specific 
implementation time period, other than stating that more time is 
needed, other firms recommended an effective date at least three years 
after the SEC's approval, and others recommended at least two years 
after the SEC's approval. Some commenters specifically stated that 
additional time (i.e., one more year) would be needed for smaller 
firms. Another commenter recommended an effective date of at least 
three years after the SEC's approval, if adopted as proposed, or 
shorter if engagement-level metrics will be communicated to the audit 
committee, rather than reported publicly, as proposed. These commenters 
provided reasons for extending the implementation period including more 
time to implement systems or system changes, develop processes, train 
professionals, and accumulate and test data and calculations. Some 
commenters specifically emphasized the need for more time to make 
changes in the global network firms or other firms who are 
participating in the audit that may or may not have the same systems or 
policies. Other commenters stated that more time would be needed to 
implement this rulemaking because of other recently adopted standards.
    The Board considered these comments and provided additional time 
before the reporting rules become effective. The final rules will 
become effective beginning October 1 of two years after approval by the 
SEC, with the first reporting period ending the following September 30 
with a phased implementation period:
     Firms that issued audit reports with respect to more than 
100 issuers in the calendar year in which the effective date occurs 
will begin reporting firm-level metrics in the first year reporting is 
required; and
     All other firms would begin reporting firm-level metrics 
one year later.
    If approved by the SEC, the effective date of the firm-level 
metrics will be October 1, 2027. For firms that issued audit reports 
with respect to more than 100 issuers in 2027, the first reporting 
period would end on September 30, 2028, with the first Form FM due by 
November 30, 2028. For all other firms, the first reporting period 
would end on September 30, 2029, with the first Form FM due by November 
30, 2029.
    For engagement-level metrics, the Board is also adopting a phased 
implementation period:
     Firms that issued audit reports with respect to more than 
100 issuers in the calendar year preceding the effective date--for 
audits of companies with fiscal years beginning on or after October 1 
of two years after the approval by the SEC; and
     All other firms--for audits of companies with fiscal years 
beginning on or after October 1 of three years after the approval by 
the SEC.
    If approved by the SEC, reporting of engagement-level metrics would 
start for firms that issue audit reports with respect to more than 100 
issuers in 2026 for the audits of companies with fiscal years beginning 
on or after October 1, 2027. For other firms, it will start with audits 
of companies with fiscal years beginning on or after October 1, 2028. 
The reporting will be on Form AP, which is generally due 35 days after 
the issuance of the auditor's report.
    As discussed in earlier sections, the Board adopted a smaller 
number of firm- and engagement-level metrics than proposed. 
Specifically, the Board adopted [ten] eight metrics areas (as opposed 
to 11 proposed metric areas), which should reduce the administrative 
burden and cost of calculating and reporting the metrics. Therefore, 
the Board believes that the smaller number of metrics, the extension of 
the effective date, and the phased implementation should provide 
sufficient time for firms, including smaller firms, to implement new or 
enhanced systems and processes, train professionals, and conduct 
internal testing and reporting before reporting of the metrics.

D. Economic Considerations and Application to Audits of Emerging Growth 
Companies

    The Board is mindful of the economic impacts of its standard 
setting. This economic analysis describes the economic baseline, need, 
and expected economic impacts of the final rules, as well as 
alternative approaches considered. Because there are limited data to 
quantitatively estimate the economic impacts of the final rules, much 
of the Board's economic analysis is qualitative. However, where 
feasible, the economic analysis incorporates quantitative information, 
including analysis of internal PCAOB data, publicly available data, and 
results from academic literature.
Baseline
    This section establishes the economic baseline against which the 
impact of the final rules can be considered. Important components of 
the baseline, specifically a discussion of current firm- and 
engagement-level disclosure

[[Page 100024]]

requirements, voluntary reporting practices, and actions in other 
jurisdictions relevant to the final rules are described above. Below, 
the Board highlights information presented above most relevant to the 
economic baseline and provides additional academic references and 
statistics.
    Current PCAOB rules and standards do not require registered firms 
to publicly disclose firm or engagement-level information like the 
final metrics. As discussed above, firms are currently required to 
publicly disclose some information related to the firm and its 
engagements in a variety of PCAOB forms (e.g., Form AP, Form 2).\189\ 
Usage statistics suggest that the public actively seeks out the 
information contained in these forms. For example, PCAOB usage 
statistics show that during calendar year 2023, there were close to 7.4 
million page views, and just over 23,000 unique visitors, for PCAOB's 
RASR Web service that provides public access to firm filings, including 
Forms 1, 2, 3, 4, and AP.\190\ Additionally, in 2023 there were over 
333,000 unique searches performed on AuditorSearch, the PCAOB's online 
search tool, and the Form AP data set was downloaded over 2,000 
times.\191\
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    \189\ The Board concurrently adopted new reporting requirements 
for registered firms. See PCAOB Rel. No. 2024-013.
    \190\ The RASR database can be found on the PCAOB's website 
(https://rasr.pcaobus.org/.aspx). The usage statistics underestimate 
actual public interest because investors, researchers, auditors, 
audit committees, and issuer management may source PCAOB information 
through external third-party data service providers--such as 
Ideagen's Audit Analytics. However, they also overestimate actual 
public interest to some extent because the usage statistics include 
internal PCAOB users.
    \191\ Information related to usage statistics can be found on 
the PCAOB's website (https://pcaobus.org/resources/auditorsearch).
---------------------------------------------------------------------------

    In addition to the information that the firm makes public through 
required form filings, the PCAOB provides firm-level public disclosure 
through firm inspection reports.\192\ For the 2023 calendar year, firm 
inspection reports were downloaded approximately 113,000 times. 
Academic research suggests that audit committees use the information 
contained in PCAOB inspection reports.\193\ Additionally, some academic 
research suggests that PCAOB inspection reports provide useful 
information to investors.\194\ However, some research suggests that 
institutional investors may not be aware of or find value in PCAOB 
inspection reports.\195\ One commenter noted that the proposal did not 
provide information on who was accessing the website information or why 
they were accessing it. The PCAOB does not collect information on who 
is accessing the website information (e.g., IP addresses) or why they 
are accessing it.
---------------------------------------------------------------------------

    \192\ Firm inspection reports can be found on the PCAOB's 
website (https://pcaobus.org/oversight/inspections/firm-inspection-reports).
    \193\ See, e.g., Daniel Aobdia, The Impact of the PCAOB 
Individual Engagement Inspection Process--Preliminary Evidence, 93 
The Accounting Review 53 (2018) (finding that ``the client is more 
likely to switch auditor'' when offices or partners receive a Part I 
auditing deficiency).
    \194\ See, e.g., Andrew Acito, Amir Amel-Zadeh, James Anderson, 
William L. Anderson, Daniel Aobdia, Francois Brochet, Huaizhi Chen, 
Jonathan T. Fluharty-Jaidee, Martin Schmalz, Manyun Tang, and Scott 
Jinzhiyang Wang, Market-Based Incentives for Optimal Audit Quality, 
SSRN Electronic Journal (2024) (finding that when PCAOB inspection 
reports can be easily linked to the issuer being audited, issuers 
whose audit was not found to be deficient significantly outperform 
issuers whose audit was found to be deficient); Nemit Shroff, Real 
Effects of PCAOB International Inspections, 95 The Accounting Review 
399 (2020) (finding, using a sample of foreign companies, that 
companies enjoy greater access to capital when their auditor's PCAOB 
inspection report does not include Part I deficiencies). The Board 
notes that SSRN does not peer review its submissions.
    \195\ See, e.g., Center for Audit Quality, Perspectives on 
Corporate Reporting, the Audit, and Regulatory Environment 
Institutional Investor Research Findings, (Nov. 2023) (``CAQ 2023 
Survey'') (finding that most institutional investors interviewed 
were unaware of PCAOB inspections reports, and to the extent 
investors were aware, found the report results to be expected) and 
Clive Lennox and Jeffrey Pittman, Auditing the Auditors: Evidence on 
the Recent Reforms to the External Monitoring of Audit Firms, 49 
Journal of Accounting and Economics 84 (2010) (finding that 
companies do not perceive that the PCAOB's disclosed inspection 
reports are valuable for signaling audit quality).
---------------------------------------------------------------------------

    In addition to PCAOB information, investors and audit committees 
may be able to obtain information related to audit quality from auditor 
legal proceedings--e.g., pursuant to SEC enforcement actions.\196\ 
However, due to the investigation and litigation process, engagement-
specific information may be publicly available only after a substantial 
lag. Furthermore, academic researchers have also used a variety of 
publicly available firm and engagement-level proxies for audit quality 
including audit firm size, issuer restatements, and industry 
specialization.\197\ One commenter noted that the auditor's tenure with 
the company is available in the auditor's report and audit fee 
information is available in the company's proxy statement.
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    \196\ See, e.g., the SEC's Accounting and Auditing Enforcement 
Releases available at https://www.sec.gov/divisions/enforce/friactions.
    \197\ See, e.g., Daniel Aobdia, Do Practitioner Assessments 
Agree with Academic Proxies for Audit Quality? Evidence from PCAOB 
and Internal Inspections, 67 Journal of Accounting and Economics 144 
(2019); Jere R. Francis, A Framework for Understanding and 
Researching Audit Quality, 30 AUDITING: A Journal of Practice & 
Theory 125 (2011); and DeFond and Zhang, A Review of Archival 
Auditing Research.
---------------------------------------------------------------------------

    As discussed above, some large U.S. audit firms voluntarily 
publicly disclose certain firm-level information through their firm 
transparency reports--e.g., general discussions of turnover rates, 
independence policies and practices, or aggregated staff headcounts. 
PCAOB staff reviewed the most recent audit quality report for each of 
the eight firms considered in the CAQ Report. As these firms' audit 
quality reports generally do not provide quantitative engagement-level 
information, the PCAOB staff's analysis focused on whether they provide 
quantitative firm-level information substantially similar to the final 
firm-level metrics.
    Overall, the PCAOB staff's analysis indicates that voluntary firm 
reporting addresses many of the areas included in the final metrics, 
though in most instances more narrowly. The reports generally provide 
quantitative information related to staff training and retention, which 
the Board believes is substantially similar to the final metrics for 
Training Hours for Audit Personnel and Retention of Audit Personnel, 
respectively. However, the Board notes that the reports that include a 
retention metric define it in different ways and report it at different 
levels of aggregation. The reports generally provide quantitative 
information related to staffing leverage. However, the quantitative 
information is generally at the head-count level and no report accounts 
for audit hours, as the final Partner and Manager Involvement metrics 
require. Half of the reports provide quantitative information related 
to the frequency of restatements which are similar to the final 
Restatement History metric. However, in these cases, the reports do not 
indicate whether the reported restatements include reissuance 
restatements, revision restatements, or both. Some other reports 
provide quantitative information related to the frequency of 
restatements associated with PCAOB-inspected engagements only. Half of 
the reports provide quantitative information related to years of 
experience. However, the quantitative information does not include 
managers' experience as the final Experience of Audit Personnel metric 
requires. Some reports provide metrics similar to the final Workload 
metric. However, in these cases, the calculations may differ from the 
final Workload metric in important ways (e.g., they are limited to the 
busy season only or include more staff than required) and it is unclear 
whether the calculations include the same types of hours required under 
the final rules (e.g., PTO hours). The reports generally do not provide 
quantitative information related to the allocation of audit hours

[[Page 100025]]

and no report provides quantitative information related to industry 
experience. However, the Board notes that these firms generally provide 
information related to the industries they serve on their websites 
which is similar to the component of the firm-level industry expertise 
metric that identifies the five top industries of the firm's audit 
practice.
    One commenter said that, though only a small portion of firms 
voluntarily disclose metrics, these firms cover most U.S. public 
companies. The Board acknowledges that this point implies that most 
audit committees and investors have some information about topics 
covered by the final metrics. However, PCAOB staff found that the 
existing disclosures are not uniform or comparable across firms. 
Furthermore, PCAOB staff found that firms generally do not voluntarily 
publicly report engagement-level metrics and one investor group said 
that the firms' transparency reports are seen as marketing material 
rather than investor information. One commenter emphasized that firms 
already publish transparency reports and urged the PCAOB to analyze 
firms' current transparency reporting practices and solicit feedback 
from investors, audit committees, and other stakeholders on their 
contents. The Board performed such an analysis as described above and 
has addressed comments on the economic baseline that the Board received 
from stakeholders as part of the Board's notice and comment process. 
The limitations of voluntary firm transparency reports, along with the 
related academic literature, are further discussed below.
    Audit committees can receive other information through sources not 
available to the public. Auditing standards and PCAOB and SEC rules 
require specific communications from auditors to audit committees 
regarding a variety of matters related to the audit engagement. For 
example, under AS 1301, the auditor is required to communicate to the 
audit committee inter alia (i) all critical accounting policies and 
practices to be used; (ii) a description of the process management used 
to develop critical accounting estimates; and (iii) significant risks 
identified during the auditor's risk assessment process.\198\ Moreover, 
audit committees may obtain information under other disclosure 
requirements--e.g., reporting under Section 10A of the Exchange Act, 
where the auditor must report to the issuer's board of directors, in 
certain situations, related to illegal acts at an issuer.\199\ In 
exercising their oversight responsibilities, audit committees may also 
request more firm- or engagement-specific information from their 
auditor. For example, audit committees may seek information from the 
auditor about PCAOB inspections, including information not contained in 
the PCAOB's public inspection reports.\200\ Audit committees may also 
request information from other audit firms as part of a request for 
proposal if they are considering engaging a new auditor.
---------------------------------------------------------------------------

    \198\ See above for additional discussion related to auditor 
communications with audit committees. See also Section 10A(k) of the 
Exchange Act, 15 U.S.C. 78j-1(k) and 17 CFR 210.2-07.
    \199\ See, e.g., Section 10A of the Exchange Act, 15 U.S.C. 78j-
1.
    \200\ See Information for Audit Committees About The PCAOB 
Inspection Process, PCAOB Rel. No. 2012-003 (Aug. 1, 2012).
---------------------------------------------------------------------------

    Audit firms, partners, and engagement teams have developed 
reputations based on the public and non-public information discussed 
above, as well as audit committees' direct experience with them. 
Through surveys and interviews with audit committee members, one study 
concluded that the firm's reputation for industry experience and the 
audit partner's accessibility, ability to address accounting issues on 
a timely basis, and ability to liaise with the firm's national office 
are the key characteristics that audit committees consider when 
selecting an auditor.\201\ This finding suggests that audit committees 
currently receive and use information like some of the final metrics 
(e.g., Industry Experience and Workload).
---------------------------------------------------------------------------

    \201\ See Elizabeth D. Almer, Donna R. Philbrick, and Kathleen 
H. Rupley, What Drives Auditor Selection?, 8 Current Issues in 
Auditing A26, A27 (2014).
---------------------------------------------------------------------------

    The Board believes many firms internally track some information 
related to the final metrics. One commenter on the Concept Release 
stated that they believe that many firms are using the 28 AQIs 
identified in the Concept Release at some level to (i) manage the firm 
and (ii) manage the quality of audits at the office level and at the 
engagement level. Three U.S. GNFs stated in their comments on the 
Concept Release that they track some of the proposed metrics discussed 
in the Concept Release for monitoring purposes. Information gathered by 
PCAOB staff in 2018 and 2019 pursuant to PCAOB oversight activities 
indicate that U.S. GNFs generally had identified and were tracking 
performance metrics at both the firm and engagement level. At the firm 
level, U.S. GNFs generally tracked PCAOB inspection history, 
restatements, voluntary turnover rates/retention rates, partner to 
staff ratios/professionals by level, average partner workload, and 
investment in audit quality. At the engagement level, U.S. GNFs 
generally tracked distribution of engagement hours during the year, 
partner workload and utilization, partner years of experience (by 
industry, level, or issuer), engagement leverage, engagement milestone 
compliance, involvement in pre-issuance review programs, and use of IT 
and other specialists. One firm tracked audit hours performed at SSCs. 
However, several commenters representing firms and firm-related groups 
explained that they do not currently track information in a form that 
will be required for several of the metrics. For example, one commenter 
said that firms have no internal tracking of personnel's total 
experience prior to joining the firm. One commenter said that smaller 
and medium-sized firms do not track the industry experience of audit 
personnel. Though this information suggests that a significant amount 
of information is collected by the U.S. GNFs at both the firm and 
engagement levels, one academic study suggests that partners seldom use 
metrics related to audit quality when evaluating the quality of their 
work or the work of their colleagues.\202\
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    \202\ See, Marion Brivot, M[eacute]lanie Roussy, and Maryse 
Mayer, Conventions of Audit Quality: The Perspective of Public and 
Private Company Audit Partners, 37 Auditing: A Journal of Practice & 
Theory 51, 68 (2018).
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    Commenters noted that the PCAOB already has access to information 
about audit firms. One commenter suggested that the Board describe the 
information currently requested from firms. The PCAOB requests a 
variety of information from firms to inform its inspections process, 
which focuses on evaluating whether firms are in compliance with PCAOB 
standards. Some of the information is related to some of the final 
metrics. However, the information is generally not comparable across 
firms, engagements, and time; the quality of the information is 
inconsistent; and the information is generally not available for all 
firms and engagements.\203\
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    \203\ The Board believes this is driven, in part, by variation 
in firms' approaches to quality control and how they record 
information. The Board notes that, under Section 105(b)(5) of 
Sarbanes-Oxley, this information is only available for PCAOB 
regulatory use.
---------------------------------------------------------------------------

    To better understand the adequacy of currently available 
information or need for additional disclosures, one commenter suggested 
that the Board consider data on: (i) attendance at annual shareholder 
meetings; (ii) votes on auditor ratification; or (iii) passive

[[Page 100026]]

versus active investors. The Board was unable to identify any data 
sources regarding attendance at annual meetings. However, the Board 
notes that shareholder votes are typically cast electronically by proxy 
and not in-person at annual meetings.\204\ Moreover, anecdotal evidence 
suggests that attendance, particularly among retail investors, is 
generally low.\205\ This may reflect the fact that material information 
relevant to investor decision-making is typically provided through the 
proxy statement and annual report, rather than being newly disclosed at 
the annual meeting. The Board does not believe this provides strong 
evidence for or against the adequacy of currently available data or 
investors' information preferences. Regarding votes on auditor 
ratification, the Board's economic analysis is informed by and cites 
several academic studies on shareholder voting to ratify the 
appointment of the auditor. Additionally, data from Audit Analytics 
suggests that the proportion of investors opposing ratification, while 
still infrequent, has been increasing.\206\ Overall, the research 
suggests that investors, primarily institutional investors, use 
information related to audit performance. In cases where they do not, 
the Board believes this is more likely driven by the costs of gathering 
and understanding the information rather than a lack of demand.\207\ 
Regarding passive versus active investors, research suggests that 
household direct holdings comprise roughly 50% of U.S. equity capital 
with the remaining 50% held by ETFs, passive mutual funds, active 
mutual funds, or hedge funds.\208\ Among funds, roughly 50% are 
actively managed.\209\ Based on the Board's review of academic 
literature and the Board's consideration of costs, the Board believes 
that individual retail investors will be less likely to use the final 
metrics than institutional investors.\210\ Therefore, this research 
suggests that investors who are more likely to use the final metrics 
will use the final metrics to inform their capital allocation decision-
making own or manage roughly 25% of U.S. equity capital. However, the 
Board notes that, by investing in proportion to the market value of a 
company, passive investors freeride on the decisions of the active 
investors, thus amplifying the effects of improved decision-making of 
the more active investors who are more likely to use the final 
metrics.\211\ Also, one audit committee chair said at the September 26, 
2024 IAG meeting (``September 2024 IAG meeting'') that passive 
investors take corporate governance very seriously. Similarly, an 
investor group commenter said that passive portfolio managers' 
stewardship counterparts will use the information in their voting 
decisions. As such, in contrast to capital allocation decision-making, 
the final metrics may inform passive funds' governance-related 
decision-making.
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    \204\ See, e.g., Broadridge, 2023 Proxy Season Key Stats and 
Performance Ratings, (2023) (reporting that, of the votes Broadridge 
processed, 97% of shares were voted electronically by retail and 
institutional shareholders).
    \205\ See, e.g., Yaron Nili and Megan Wischmeier Shaner, Virtual 
Annual Meetings: A Path Toward Shareholder Democracy and Stakeholder 
Engagement, SSRN Electronic Journal (2022) (discussing how 
``[m]eaningful participation at the yearly gathering of corporate 
shareholders has become a relic of the mid-twentieth century'' and 
``[l]ow retail investor attendance and participation is a well-
documented problem in public corporations'') and cites therein. The 
Board notes that SSRN does not peer review its submissions.
    \206\ See WSJ, Investor Votes Against Big Companies' Auditors 
Climb, (June 18, 2024).
    \207\ See below for additional discussion.
    \208\ See Nicolae Garleanu and Lasse Heje Pedersen, Active and 
Passive Investing: Understanding Samuelson's Dictum, 12 The Review 
of Asset Pricing Studies 389 (2020).
    \209\ See John Rekenthaler, Index Funds Have Officially Won, 
Morningstar (Feb. 13, 2024).
    \210\ See below.
    \211\ See, e.g., Jeffrey L. Coles, Davidson Heath, and Matthew 
C. Ringgenberg, On Index Investing, 145 Journal of Financial 
Economics 665 (2022) (discussing how ``[p]assive investors are 
necessarily freeriding on the research and effort exerted by active 
managers'') and Ruggero Jappelli, Dynamic Asset Pricing with Passive 
Investing, unpublished working paper (2024) (finding that ``the 
effect of standardized unexpected earnings on abnormal returns is 
significantly amplified by the wealth passively tracking the 
stock'').
---------------------------------------------------------------------------

    One commenter suggested that the prevalence of Part I.A 
deficiencies is an important reason for the proposal and recommended 
that the Board provide an analysis of the causes of Part I.A 
deficiencies to help stakeholders assess the benefits of the final 
rules. Part I.A deficiency trends are available in PCAOB Rel. No. 2024-
005.\212\ Firms have recently indicated to PCAOB staff that unusually 
high staff turnover and use of less experienced staff may have 
contributed to rising auditing deficiencies. PCAOB inspection staff 
also found that utilization of individuals with specialized skill or 
knowledge and significant, timely, and detailed supervision and review 
were good practices.\213\ The final metrics will reflect several of 
these aspects of the audit (e.g., Partner and Manager Involvement). 
However, based in part on other comments the Board received on the 
proposal, the Board is not adopting metrics related to the use of 
specialists.\214\
---------------------------------------------------------------------------

    \212\ See PCAOB Rel. No. 2024-005, at 315.
    \213\ See Spotlight: Staff Update and Preview of 2022 Inspection 
Observations (July 2023) (``2022 Inspection Observations Preview''), 
at 4, available at https://pcaobus.org/resources/staff-publications.
    \214\ See above for additional discussion on the Board's 
decision not to adopt the proposed use of auditor's specialists 
metric.
---------------------------------------------------------------------------

    One commenter said that to the extent investors need additional 
information to inform their voting decisions, the audit committee has 
the ability to provide that information in their report in the proxy 
statement, including a summary of the metrics they used to assess the 
auditor. However, another commenter said that proxy statements provide 
little information to shareholders on which they can base their 
decision to ratify the appointment of the auditor and no information 
related to the quality of the audit or the audit firm is required to be 
disclosed on the proxy statement.
    One commenter said that several Form AP studies were excluded from 
the Board's baseline.\215\ The Board recognizes that some of these 
analyses detect little impact of prior PCAOB disclosure rules. The 
Board notes that Section IV.C.1.i. of the proposal described how the 
benefits of prior PCAOB disclosure rules vary by rule and analysis. 
Referring to an academic article, the same commenter suggested that the 
baseline section had not provided ample research to show that investors 
would use the proposed metrics.\216\ The proposal and the discussion 
below refer to the article cited by the commenter as well as several 
others regarding how investors may respond to the metrics.
---------------------------------------------------------------------------

    \215\ The Board discussed this comment including the studies 
referred to below.
    \216\ See J. Owen Brown and Velina K. Popova, How Do Investors 
Respond to Disclosure of Audit Quality Indicators?, 38 AUDITING: A 
Journal of Practice & Theory 31, 47 (2019).
---------------------------------------------------------------------------

    Lastly, as discussed above, PCAOB staff estimates that 
approximately 210 firms will be subject to the final firm-level 
disclosure requirements, including 22 of the top 25 U.S. firms by 2023 
total firm revenue and all of the 2022 annually inspected firms that 
continue to audit issuers. Approximately 50 firms will be required to 
report the final firm-level Industry Experience metrics. Approximately 
3,400 issuer audits will be subject to the final engagement-level 
disclosures, covering approximately 99% of the total market 
capitalization of issuers reporting on Form 10-K and Form 20-F.
Need
    This section discusses the economic problem to be addressed and 
explains how the final rules address it. In general, two observations 
suggest that there is an economic need for the final rules:

[[Page 100027]]

     Investors and audit committees cannot easily observe the 
services performed by auditors. This restricts (i) audit committees' 
ability to more efficiently and effectively monitor and select auditors 
as well as (ii) investors' ability to more efficiently and effectively 
ratify the appointment of the auditor and allocate capital. As a 
result, there is a risk that auditors will not supply an efficient 
level of assurance to the market.\217\
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    \217\ An efficient allocation of resources occurs when total 
surplus is maximized. Total surplus is maximized when the good or 
service in question is supplied until the marginal benefit is equal 
to the marginal cost. See N. Gregory Mankiw, Principles of Economics 
146-148 (6th edition 2008).
---------------------------------------------------------------------------

     Furthermore, there are currently insufficient incentives 
for firms to fully meet the market demand for accurate, standardized, 
and decision-relevant information.\218\ There is also a challenge 
coordinating firms on a system of comparable disclosures. As a result 
of the lack of incentives and coordination challenges, the Board 
believes auditors are not supplying the market with additional 
information even when doing so would be efficient. Indeed, information 
about audit engagements and firms that would allow (i) audit committees 
to more efficiently and effectively monitor and select auditors and 
(ii) investors to more efficiently and effectively ratify the 
appointment of the auditor and allocate capital, as sought by the 
market, is often limited or difficult to obtain.
---------------------------------------------------------------------------

    \218\ Given the considerations discussed below, it appears 
reasonable to assume that this lack of incentive for firms to 
provide such information is likely to cause the apparent undersupply 
of information, rather than the cost of providing the information 
being greater than the social benefit.
---------------------------------------------------------------------------

    The final rules will help address these problems in two primary 
ways:
     First, the final rules will require certain firms to 
publicly report specified metrics relating to certain audits and their 
audit practices. Through this disclosure, the final metrics will aid 
investor and audit committee decision-making.
     Second, the final rules will impose standardized 
calculations and require regular public reporting of those metrics. The 
resulting comparability will further aid investor and audit committee 
decision-making.
    Importantly, the Board notes that the final metrics are not 
intended to be used in isolation to ascertain audit quality at an audit 
firm or for an audit engagement because audit quality is driven by a 
complex array of factors beyond those that can be addressed by metrics. 
The Board believes investors' and audit committees' ability to use the 
metrics is likely to increase over time as users are able to aggregate 
multiple data points, make comparisons, and observe trends.
1. Problem To Be Addressed
i. Allocative Inefficiency in the Market for Audit Services
    The auditor has a responsibility to obtain reasonable assurance 
about whether the issuer's financial statements are free of material 
misstatement. Reliable financial statements help investors evaluate 
issuers' performance and monitor management's stewardship of investor 
capital. However, because audits possess many of the attributes of a 
credence good, investors find it challenging to evaluate the quality of 
the services provided by auditors.\219\ As a result, the lack of 
transparency into the audit process could enable auditors to act on 
their private incentives and under-audit (i.e., deploy insufficient 
auditor resources) or over-audit (i.e., undertake procedures that do 
not efficiently contribute to forming an opinion on the financial 
statements).\220\ In effect, there is a risk that auditors will not 
supply an efficient level of service to the market. While the Board 
acknowledges that audit quality is difficult to observe, the PCAOB is 
able to obtain insights into audit quality through inspection of firms' 
compliance with auditing standards. The results of recent PCAOB 
inspections indicate that room for improvement exists.\221\
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    \219\ See Daniel Aobdia, Saad Siddiqui, and Andres Vinelli, 
Heterogeneity in Expertise in a Credence Goods Setting: Evidence 
from Audit Partners, 26 Review of Accounting Studies 693 (2021) 
(finding evidence consistent with audits being credence goods).
    \220\ See, e.g., Monika Causholli and W. Robert Knechel, An 
Examination of the Credence Attributes of an Audit, 26 Accounting 
Horizons 631, 632, 633 (2012) (discussing how audits have attributes 
of a credence good, namely the outcome of an audit is unobservable 
and the auditor is best informed regarding how much effort is 
necessary to perform the audit).
    \221\ See, e.g., Spotlight Staff Update and Preview of 2022 
Inspection Observations (July 2023), available at https://pcaobus.org/resources/staff-publications (discussing the 
``concerning trend'' in ``the percentage of audit engagements 
reviewed that are expected to be included in Part I.A of an 
inspection report''). One commenter said that many audit quality 
studies reveal that audit quality is improving, deficiencies are 
narrowly focused, and financial statement restatements are down. The 
Board notes that the commenter did not provide support for these 
assertions. By contrast, and as stated here and in the proposal, the 
PCAOB has pointed to a concerning trend in auditing deficiencies. 
Indeed, the trend appears to be continuing in the aggregate. See, 
e.g., Spotlight Staff Update on 2023 Inspection Activities (Aug. 
2024), available at https://pcaobus.org/resources/staff-publications. Furthermore, while the incidence of restatements has 
been decreasing since 2013, there was an uptick in 2022. See, e.g., 
Center for Audit Quality, Financial Restatement Trends in the United 
States: 2013-2022, (June 2024). The Board notes that the uptick in 
restatements could increase further because some financial 
statements that have not yet restated may do so in the future.
---------------------------------------------------------------------------

    One commenter agreed with the characterization of the audit as a 
credence good. Several commenters agreed that investors and other 
stakeholders cannot easily observe services performed by auditors, 
which limits their ability to make informed decisions about investing 
capital, ratifying the selection of auditors, and voting for members of 
the board of directors, including directors who serve on the audit 
committee. Several commenters said that the audit has become 
commodified and that firms compete primarily on cost due to a lack of 
information on audit quality. One commenter said that this results in 
audit firms ``squeezing'' professional staff for productivity.
    The issuer's board of directors is generally required to establish 
an audit committee that is statutorily entrusted to appoint, 
compensate, and oversee the work of the auditor.\222\ One commenter 
said that audit committees of accelerated and large accelerated filers 
are composed entirely of independent directors.\223\ However, similar 
to investors--though to a lesser degree--audit committees cannot easily 
observe the services performed by auditors. Moreover, audit committees 
may focus on the interests of current shareholders rather than the 
broader public interest (e.g., market confidence, potential future 
shareholders, or investors in other issuers). Furthermore, there are 
risks that the audit committee may not monitor the auditor effectively. 
For example, the auditor may seek to satisfy the interests of 
management rather than investors if management is able to exercise 
influence over the audit committee's supervision of the auditor.\224\ 
One commenter said that

[[Page 100028]]

audit committee members are incentivized to ingratiate themselves to 
management and that this does not serve investors who need to hold the 
audit committee accountable. Such circumstances can lead to a de facto 
principal-agent relationship between company management and the 
auditor. Also, as one panelist said during the September 2024 IAG, 
there is a wide range of financial expertise among audit committees and 
audit committee chairs.
---------------------------------------------------------------------------

    \222\ Companies whose securities are listed on national 
securities exchanges are generally required to constitute an audit 
committee. See Section 301 of Sarbanes-Oxley; Section 10A(m)(2) of 
the Exchange Act. As an additional safeguard, the auditor is also 
required to be independent of the audit client. See 17 CFR 210.2-01; 
see also PCAOB Rule 3520, Auditor Independence.
    \223\ Pursuant to Exchange Act Section 10A(m)(1) and Exchange 
Act Rule 10A-3, the listing rules of national securities exchanges 
generally require that all members of a listed company's audit 
committee be independent. See, e.g., New York Stock Exchange Listing 
Manual Section 303a.06; Nasdaq Rule 5605(c). Companies that do not 
have securities listed on an exchange are not subject to such a 
requirement.
    \224\ See, e.g., Joshua Ronen, Corporate Audits and How to Fix 
Them, 24 Journal of Economic Perspectives 189 (2010) (explaining 
that audit committee members are paid by the company and can be 
dependent on top company management for a variety of benefits, 
including referrals as a possible member on the board of directors 
and audit committees of other companies); Liesbeth Bruynseels and 
Eddy Cardinaels, The Audit Committee: Management Watchdog or 
Personal Friend of the CEO?, 89 The Accounting Review 113 (2014) 
(finding that companies whose audit committees have ``friendship'' 
ties to the CEO purchase fewer audit services and engage more in 
earnings management); Cory A. Cassell, Linda A. Myers, Roy 
Schmardebeck, and Jian Zhou, The Monitoring Effectiveness of Co-
Opted Audit Committees, 35 Contemporary Accounting Research 1732 
(2018) (finding that the likelihood of a financial statement 
misstatement is higher and that absolute discretionary accruals are 
larger when audit committee co-option, as measured by the proportion 
of audit committees who joined the board of directors after the 
current CEO's appointment, is higher); and Nathan Berglund, Michelle 
Draeger, and Mikhail Sterin, Management's Undue Influence over Audit 
Committee Members: Evidence from Auditor Reporting and Opinion 
Shopping, 41 AUDITING: A Journal of Practice & Theory 49 (2022) 
(finding that greater management influence over audit committee 
members is associated with a lower propensity of the auditor to 
issue a modified going concern opinion to a distressed company under 
audit and with increased opinion shopping behavior).
---------------------------------------------------------------------------

    As a result, investors have an important, albeit indirect, role 
overseeing the work of both the auditor and the audit committee. 
Indeed, while the audit committee more directly oversees the auditor, 
most publicly traded companies allow investors to vote to ratify the 
appointment of the auditor. This mechanism allows investors to voice 
their preferences on auditor selection.\225\ At the September 2024 IAG 
meeting, one investor said that shareholders have an important role 
holding both auditors and audit committees to account. By contrast, 
another IAG member said that investors should not oversee the audit 
because that is the role of the audit committee and one commenter said 
that the proposal would challenge the legal structure of corporate 
governance. However, a lack of transparency into the audit process may 
leave investors unable to make well-informed decisions when voting on 
selections made by the audit committee or on re-election of audit 
committee members to the board of directors.\226\ Figure 5 illustrates 
oversight relationships pertinent to the final rules. The dotted line 
indicates that investors' oversight relationship with the auditor is 
less direct than the audit committee's oversight relationship.
---------------------------------------------------------------------------

    \225\ Shareholder ratification of the appointment of the auditor 
is not statutorily required in the U.S. and in many cases the 
ratification vote is non-binding. One commenter agreed with this 
point. The commenter also suggested that it is rare for shareholders 
to not ratify the audit committee's selection. However, according to 
Audit Analytics, accessed on Mar. 1, 2024, in 2023, ratification 
votes were held by 2,802 distinct companies included in the Russell 
3000 index, which comports with other estimates that indicate 
between 80 and 95 percent of companies hold votes on ratification 
proposals as part of their proxy voting process. See also ACAP Final 
Report, at VIII.20 (finding that 95 percent of S&P 500 companies and 
70-80 percent of smaller companies put ratification proposals to an 
annual shareholder vote) and Lauren M. Cunningham, Auditor 
Ratification: Can't Get No (Dis)Satisfaction, 31 Accounting Horizons 
159, 161 (2017) (finding that more than 90 percent of a sample of 
Russell 3000 companies voluntarily include a ratification vote on 
the ballot). The Board notes that broker discretionary voting is 
permitted on ratification proposals and ratification proposals may 
be used as a mechanism by some companies to achieve a quorum to 
conduct an annual meeting as a result of brokers exercising 
discretionary votes. Although the ratification vote is in many cases 
non-binding, it can still be impactful as it sends a signal of 
shareholder views. Academic studies show that non-binding votes in 
other settings can pressure boards to reconsider its policies and 
are considered by proxy advisors in setting their recommendation for 
board members. See, e.g., Yonca Ertimur, Fabrizio Ferri, and Stephen 
R. Stubben, Board of Directors' Responsiveness to Shareholders: 
Evidence from Shareholder Proposals, 16 Journal of Corporate Finance 
53 (2010) (finding a ``positive relation between the percentage of 
votes cast in favor of the [non-binding] proposal and the likelihood 
of implementation.''); and Aiyesha Dey, Austin Starkweather, and 
Joshua White, Proxy Advisory Firms and Corporate Shareholder 
Engagement, 37 Review of Financial Studies (3877 (2024) (showing 
that when non-binding Say-On-Pay voting support falls below 70 
percent, managers respond by increasing shareholder engagement). The 
ability to vote on ratification of the appointment of the auditor is 
recognized by investor groups as an important element of corporate 
governance. See, e.g., Council of Institutional Investors, Policies 
on Corporate Governance, (Sept. 11, 2023) at 2.13f available at 
https://www.cii.org/corp_gov_policies.
    \226\ The IAG indicated in their comment letter regarding 
proposed QC 1000 that investors need information to make better 
decisions when voting to ratify the appointment of the auditor and 
the election to the board of directors of the Chair or members of 
the audit committee.
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Figure 5. Oversight Relationships Pertinent to the Final Rules
[GRAPHIC] [TIFF OMITTED] TN11DE24.002


[[Page 100029]]


ii. The Market for Information Related to Auditors and Their 
Engagements is Inefficient
Supply-Side Problems
    Some basic economic theories suggest that high-quality firms should 
have an incentive to voluntarily disclose information to the extent it 
allows them to differentiate themselves from low-quality 
competitors.\227\ However, economic theory also suggests that there may 
be countervailing incentives that limit voluntary disclosure in 
practice. For example, firms may be deterred by the costs they would 
incur privately, such as how their competitors could leverage the 
disclosures to capture market share.\228\ There may also be no 
mechanism for firms to credibly disclose certain non-verifiable or 
difficult to verify information, which can lead to the failure of such 
information markets to exist entirely.\229\ There could also be a 
status-quo bias whereby a firm prefers to continue a non-disclosure 
policy despite investors' calls for additional information.\230\ 
Limited competition for the largest issuers could also reduce the 
largest firms' incentives to voluntarily disclose information. Finally, 
firms may tend to underprovide information due to: (i) the positive 
externalities \231\ conferred by comparable and uniform public 
disclosures (i.e., firms may not directly benefit from some of the 
value provided to investors and audit committees); and (ii) the 
challenges of coordinating on a single comparable and uniform reporting 
framework.\232\
---------------------------------------------------------------------------

    \227\ See, e.g., Kip W. Viscusi, A Note on ``Lemons'' Markets 
with Quality Certification, 9 The Bell Journal of Economics 277 
(1978).
    \228\ See, e.g., id.; Oliver Board, Competition and Disclosure, 
57 The Journal of Industrial Economics 197 (2009) (finding that 
companies may be reluctant to voluntarily disclose in competitive 
markets); and Daniel A. Bens, Philip G. Berger, and Steven J. 
Monahan, Discretionary Disclosure in Financial Reporting: An 
Examination Comparing Internal Firm Data to Externally Reported 
Segment Data, 86 The Accounting Review 417 (2011) (finding that 
companies provide fewer segment disclosures due to proprietary costs 
or competitive concerns).
    \229\ See Akerlof, The Market for ``Lemons.''
    \230\ There are a variety of reasons why individuals may choose 
the status quo outcome in lieu of an unknown outcome, including 
aversion to the uncertainty inherent in moving from the status quo 
to another option. For additional discussion on status quo bias, see 
William Samuelson and Richard Zeckhauser, Status Quo Bias in 
Decision Making, 1 Journal of Risk and Uncertainty 7 (1988).
    \231\ See Mankiw, Principles of Economics 196 (``An externality 
arises when a person engages in an activity that influences the 
well-being of a bystander but neither pays nor receives any 
compensation for that effect . . . . If it is beneficial, it is 
called a positive externality.'').
    \232\ See, e.g., Anat R. Admati and Paul Pfleiderer, Forcing 
Firms to Talk: Financial Disclosure Regulation and Externalities, 13 
The Review of Financial Studies 479 (2000) (discussing how 
individual firms ``internalize less than fully the social value of 
the information they release'') and George Loewenstein, Cass R. 
Sunstein, and Russell Golman, Disclosure: Psychology Changes 
Everything, 6 Annual Review of Economics 391, 397 (2014).
---------------------------------------------------------------------------

    Auditors could in principle supply information to investors and 
audit committees individually depending on their unique preferences. 
However, the costs to the firm to do so would grow with the number of 
interested investors and audit committees and the extent of information 
they would request. By contrast, under the final rules, the costs to 
produce the final metrics will not grow with the number of interested 
users.
Demand-Side Problems
    While investors may seek to acquire information from the issuer, 
they could incur significant private costs in doing so.\233\ At the 
September 2024 IAG meeting, one investor said that her asset management 
firm is generally denied meetings with audit committee chairs of U.S. 
issuers. Further, the company may need to publicly disclose information 
provided on a selective basis.\234\ Indeed, at the September 2024 IAG 
meeting, several audit committee chairs said audit committees are 
reluctant to meet with shareholders individually due to the risk of 
violating disclosure laws. Hence the potential benefits of the 
information to an individual investor would be dissipated because all 
other investors would have the same information and any informational 
advantage would be lost. This would further reduce individual 
investors' incentives to obtain the information. A free-rider problem 
thus exists among investors in which the costs incurred by one or more 
investors to convince firms to disclose information would not be shared 
by all investors who benefit from the disclosure.\235\ As a result, 
economic theory suggests there should be an under-provision of such 
information relevant to investors.
---------------------------------------------------------------------------

    \233\ See, e.g., Nickolay Gantchev, The Costs of Shareholder 
Activism: Evidence from a Sequential Decision Model, 107 Journal of 
Financial Economics 610 (2013).
    \234\ See Regulation Fair Disclosure, 17 CFR 243.100(b)(1)(iv).
    \235\ See Mankiw, Principles of Economics 220 and 222 (``A free 
rider is a person who receives the benefit of a good but avoids 
paying for it . . . . A free-rider problem arises when the number of 
beneficiaries is large and exclusion of any one of them is 
impossible.'').
---------------------------------------------------------------------------

    As discussed above, audit committees are already privy to certain 
information about their auditors beyond what is publicly available. In 
particular, audit committees could request the final metrics from their 
auditors or other tendering auditors. However, that information would 
not necessarily be comparable with other engagements or other firms. 
Requesting comparable information from multiple auditors could be 
burdensome or even impracticable. As a result, while the audit 
committee can use information from their auditor to better understand 
their current engagements, the audit committee likely has a limited 
view as to how other engagements--such as those of their peers--might 
be conducted. Furthermore, less effective audit committees may not be 
aware of the information and therefore would not request it in the 
first instance. If audit committees were aware of the information and 
made such a request, some audit firms may resist providing it to avoid 
the costs of gathering the information and potential negative 
reputational effects. Firms could also manipulate the information. As 
one commenter said, the audit committee's principal tool is that of 
inquiry, not observation, and inquiry, in audit parlance, is the 
weakest form of audit evidence.
Evidence
    Due in part to the problems discussed above, there is currently 
limited information available to investors specifically related to 
audit engagements. Indeed, investors know the least about the audit 
engagement, as they are less involved in the issuer's operations 
compared to management, the board of directors, and the audit 
committee--and are even further removed from the audit process. Over 
the last decade and a half, there have been sustained requests from 
investors for increased transparency into the audit process. As 
discussed above, investor-related groups have requested increased 
disclosures at the firm and engagement levels--notably in the form of 
easily accessible and quantifiable metrics, potentially with 
accompanying context provided by the auditor. Furthermore, the ACAP 
Final Report recommended that the PCAOB, in consultation with auditors, 
investors, public companies, audit committees, boards of directors, 
academics, and others, ``determine the feasibility of developing key 
indicators of audit quality and effectiveness and requiring auditing 
firms to publicly disclose those indicators.'' \236\
---------------------------------------------------------------------------

    \236\ See ACAP Final Report, at VIII:14.
---------------------------------------------------------------------------

    There would likely be a significant cost to investors to conduct an 
exhaustive search of all existing publicly available information 
related to audit performance. For example, gathering the information 
could require an investor to process various types of

[[Page 100030]]

data from various sources. Only the largest institutional investors 
likely have the economies of scale to profitably gather this 
information.\237\ Further still, the presence of significant block 
holdings by diversified, passive investment-style funds, which often do 
not hold board seats, means that such information may not be provided 
by audit firms to a significant control group in cases where the fund 
managers do not hold a board seat.\238\ Even proxy advisors rely upon 
relatively limited publicly available information in making voting 
recommendations, which investors may then rely upon in their own 
decision-making.\239\ Due to the lack of information currently 
available, it may be several financial reporting cycles before audit 
committees and investors accumulate enough information (e.g., through 
restatements, CAMs, audit committee communications, other public events 
bearing on the auditor's reputation) to be able to effectively judge 
the auditor's performance and act accordingly. Compared to investors, 
audit committees are better able to accumulate information in less time 
due to their ability to more easily request and receive information 
from their auditor.
---------------------------------------------------------------------------

    \237\ Some research suggests that institutional investors are 
better-informed than retail investors. See, e.g., Cory A. Cassell, 
Tyler J. Kleppe, and Jonathan E. Shipman, Retail Shareholders and 
the Efficacy of Proxy Voting: Evidence from Auditor Ratification, 
Review of Accounting Studies 75 (2022) and cites therein.
    \238\ See, e.g., Amir Amel-Zadeh, Fiona Kasperk, and Martin C. 
Schmalz, Mavericks, Universal, and Common Owners--The Largest 
Shareholders of U.S. Public Firms, SSRN Electronic Journal, (2022). 
The Board notes that SSRN does not peer review its submissions.
    \239\ See, e.g., Cunningham, Auditor Ratification 163.
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    As described in the baseline, a small group of auditors voluntarily 
disclose some firm-level information through firm transparency 
reports.\240\ However, many smaller firms do not voluntarily release 
transparency reports and for those that do provide such information, 
the metrics are not uniform or comparable across firms.\241\ One 
commenter provided several examples of how firms' voluntary reporting 
is not comparable across firms. Furthermore, PCAOB staff found that 
firms generally do not voluntarily report engagement-level metrics 
publicly. Some research on audit firm transparency reporting in foreign 
jurisdictions suggests that the information is not useful while other 
research finds that disclosure requirements improve audit quality for 
impacted firms.\242\ Some academic studies find that, because the 
information contained in transparency reports is relatively 
unregulated, the disclosures and contextual discussion lack uniformity 
and comparability across or within audit firms.\243\ Pointedly, audit 
firms could alter the methodology and construction of any metric they 
voluntarily choose to disclose. A lack of uniformity means that the 
voluntary disclosures have limited comparative value, inhibiting their 
usefulness in allowing investors to evaluate the efficacy of their 
auditors.
---------------------------------------------------------------------------

    \240\ Audit firm transparency reports are voluntary and 
unregulated disclosures, as they are not required by PCAOB standards 
or applicable U.S. law. Consequently, audit firms can disclose 
metrics of their own choosing and construction. In practice, as 
discussed in above, audit firms that do publish transparency reports 
include the disclosure of metrics that are required in reports 
pursuant to disclosure rules in other jurisdictions, such as in the 
European Union (i.e., EU--No 537/2014 Article 13), or similarly 
adopted domestic requirements in the U.K. under the FRC's authority 
(i.e., the Companies Act of 2006, and Statutory Auditors and Third 
Country Auditors Regulations of 2016).
    \241\ Some research suggests that lack of comparability can be a 
problem even when disclosures are required. See, e.g., Thomas 
Bourveau, Maliha Chowdhury, Anthony Le, and Ethan Rouen, Human 
Capital Disclosures, SSRN Electronic Journal (2023) (finding that, 
after the SEC adopted principles-based human capital disclosure 
requirements in 2020, the resulting human-capital disclosures lacked 
comparability). The Board notes that SSRN does not peer review its 
submissions.
    \242\ See, e.g., FRC, Transparency Reporting: AQR Thematic 
Review, (Sept. 2019) (finding that surveyed investors and audit 
committee chairs are either unaware of or perceive limited use in 
audit firm transparency reporting in the U.K.) Rogier Deumes, Caren 
Schelleman, Heidi V. Bauwhede, and Ann Vanstraelen, Audit Firm 
Governance: Do Transparency Reports Reveal Audit Quality?, 31 
AUDITING: A Journal of Practice & Theory 193, 194 (2012) (finding 
that EU audit firm transparency reporting is not associated with 
proxies for audit quality); and Shireenjit K. Johl, Mohammad Badrul 
Muttakin, Dessalegn Getie Mihret, Samuel Chung, and Nathan Gioffre, 
Audit Firm Transparency Disclosures and Audit Quality, 25 
International Journal of Auditing 508 (2021) (finding that a 
requirement for audit firm transparency reporting in Australia led 
to an improvement in audit quality for the impacted entities).
    \243\ See, e.g., Sakshi Girdhar and Kim Klarskov Jeppesen, 
Practice Variation in Big-4 Transparency Reports, 31 Accounting, 
Auditing & Accountability Journal 261 (2018) (finding that ``the 
content of transparency reports is inconsistent and the transparency 
reporting practice is not uniform within the Big-4 networks'').
---------------------------------------------------------------------------

    Two commenters said that the proposal cited no studies 
demonstrating that there is a lack of information about auditors and 
their engagements or evidence that the market is seeking additional 
information. One commenter said that without sufficient dialogue with 
investors, audit committees, and firms, it is unclear whether there are 
information gaps in what is already provided and whether there is any 
opportunity to expand or enhance what is already done today to meet 
their expectations. The proposal discussed evidence related to the lack 
of information despite a market demand, including several studies 
related to the decision-relevance of current voluntary firm 
transparency reporting.\244\ The proposal also discussed the demand 
from various investor groups for additional information related to the 
quality of firms and their engagements.\245\ Investor-related groups' 
support for the proposal provides additional evidence that there is an 
information gap and demand for information like the final metrics. 
Indeed, one commenter said that existing information, including firms' 
transparency reports, is insufficient and largely unused by the 
investment community because it is seen as marketing material rather 
than substantive, actionable data. According to the commenter, the lack 
of information leads audit committee members to prefer Big 4 auditors 
to protect or validate their decision-making in an environment where 
the audit and auditor are credence goods. The Board notes that 
transparency reports may also be unused because the information lacks 
standardization.
---------------------------------------------------------------------------

    \244\ See Proposing Release at 132-134.
    \245\ See Proposing Release at Section IV.B.1.
---------------------------------------------------------------------------

    One commenter said that the proposal appeared to acknowledge that 
there is a lack of market demand for the proposed metrics. To the 
contrary, as discussed in the proposal and again above, given the 
considerations of benefits discussed below, the Board believes the lack 
of incentive for firms to provide such information is likely the cause 
of the apparent undersupply of information rather than a lack of market 
demand.\246\ That is, the Board believes the limited availability of 
information is more likely due to the supply and demand-side problems 
discussed above rather than a lack of market demand. By contrast, two 
commenters agreed that certain aspects of the market create limited 
incentives to provide sufficient information to users of the financial 
statements regarding audit quality. One commenter said that some 
research suggests that investors want more information on the inputs to 
audit production.\247\
---------------------------------------------------------------------------

    \246\ See Proposing Release at n. 212.
    \247\ See Brant E. Christensen, Steven M. Glover, Thomas C. 
Omer, and Marjorie K. Shelley, Understanding Audit Quality: Insights 
from Audit Professionals and Investors, 33 Contemporary Accounting 
Research 1648 (2016).
---------------------------------------------------------------------------

2. How the Final Rules Address the Need
i. Mandatory Disclosure of Metrics
    The final rules address the need by requiring mandatory public 
disclosure of metrics relating to auditors and audit

[[Page 100031]]

engagements. Under the final rules, auditors will have the opportunity 
to discuss the context of their metrics. The final rules could thus 
reduce opacity in the audit market and reduce frictions in the 
information market, thereby enhancing (i) audit committees' ability to 
efficiently and effectively monitor and select auditors as well as (ii) 
investors' ability to efficiently and effectively make decisions about 
ratifying the appointment of their auditors and allocating capital. The 
final metrics will quantify various aspects of firms' audit practice as 
a whole and engagements performed. As described above, the collective 
history of these final metrics will be publicly available. Moreover, as 
noted above, the final metrics will be subject to requirements designed 
to ensure their accuracy, including certification by the firm and 
specific quality control requirements.
    Investors and audit committees could use the final metrics to 
better understand how their auditor has conducted their engagement and 
how that compares to how other engagements were conducted.\248\ This 
should improve their decision-making. Some commenters agreed that the 
information about auditors and their engagements required by the 
metrics would provide value to the decision-making process for 
stakeholders. For example, the final metrics should help audit 
committees engage in active discussions with their current auditors 
regarding the audit process and interview candidate auditors when or if 
a replacement auditor is desired.\249\ Audit committee disclosures 
indicate that some audit committees consider a variety of public and 
nonpublic information when engaging their auditor.\250\ The Board 
believes the information could also inform investors' auditor 
appointment ratification decisions. Research finds that investors are 
more likely to challenge auditor appointments when they have access to 
information that calls into question the quality or independence of the 
firm, which suggests that, in some cases, investors will use 
standardized information across firms and over time to make better 
decisions.\251\ Referring to academic research, one commenter said that 
investors do react to audit outcomes, audit behavior, and regulatory-
induced disclosures in the audit report. However, the commenter also 
noted that: (i) the results are nuanced and context-specific; and (ii) 
mixed for non-professional investors.\252\ Furthermore, investor-
related groups have indicated that they use the information contained 
in Form AP. This suggests that they are familiar with Form AP and may 
be interested in reviewing additional information provided there. 
However, citing academic research, one commenter noted that the 
influence of Form AP on investor decision-making is mixed.\253\
---------------------------------------------------------------------------

    \248\ See, e.g., Christensen, et al. Understanding Audit Quality 
(finding that surveyed investors believe information similar to 
several of the final metrics [i.e., the sufficiency of engagement 
team staffing, having well-trained auditors on the engagement team, 
having auditors on the engagement team with appropriate expertise, 
and the lack of financial statement restatements] impacts audit 
quality).
    \249\ See, e.g., AICPA, Hiring a Quality Auditor 9, (2018) 
(discussing how audit committees should obtain all necessary 
information from the auditor).
    \250\ See, e.g., CAQ, 2023 Audit Committee Transparency 
Barometer, 15-18 (2023) (presenting examples of audit committee 
disclosures that summarize the information the audit committee 
considered when appointing the auditor).
    \251\ See, e.g., Paul Tanyi, Dasaratha Rama, and Kannan 
Raghunandan, Shareholder Ratification of Auditors after PCAOB 
Censures, SSRN Electronic Journal (2021) (finding that first-time 
PCAOB censures of the largest accounting firms are associated with a 
higher percentage of shareholders not voting to ratify the 
appointment of the firm after the censure); Suchismita Mishra, K. 
Raghunandan, and Dasaratha V. Rama, Do Investors' Perceptions Vary 
with Types of Nonaudit Fees? Evidence from Auditor Ratification 
Voting, 24 Auditing: A Journal of Practice and Theory 9 (2005) 
(finding that the SEC's requirement for companies to disclose 
partitioned information about tax and other non-audit fees paid to a 
company's independent audit firm had a positive association with the 
proportion of votes against ratifying the appointment of the firm in 
2003); Paul N. Tanyi, Dasaratha V. Rama, and K. Raghunandan, Auditor 
Tenure Disclosure and Shareholder Ratification Voting, 35 Accounting 
Horizons 167 (2021) (finding that in the case of companies with long 
[short] auditor tenure, the proportion of shareholder votes against 
ratifying the appointment of the auditor increased [decreased] after 
PCAOB mandated public disclosure of auditor tenure). The Board notes 
that research also indicates that retail investors may not 
necessarily use information regarding an audit firm in their 
decisions to vote on a proposal to ratify the appointment of the 
firm. See, e.g., Cassell, et al., Retail Shareholders (finding that, 
on average, shareholder votes against ratifying the appointment of 
the firm are not associated with audit failures but are associated 
with investment performance). However, the same study also suggests 
that non-retail investors are relatively better informed. One 
commenter said it would be useful to know whether the PCAOB had 
found any evidence of shareholders responding to the persistently 
high rates of Part I.A deficiencies. One study finds some evidence 
that shareholders vote against auditor ratification when their 
auditors receive unfavorable PCAOB inspection reports. However, the 
study finds the relationship only for the subset of companies where 
corporate governance is weak. See Myungsoo Son, Hakjoon Song, and 
Youngkyun Park, PCAOB Inspection Reports and Shareholder 
Ratification of the Auditor, 17 Accounting and the Public Interest 
107 (2017). The Board notes that SSRN does not peer review its 
submissions.
    \252\ See Robert W. Knechel, Gopal V. Krishnan, Mikhail Pevzner, 
Lori B. Shefchik, and Uma K. Velury, Audit Quality: Insights From 
the Academic Literature, 32 Auditing: A Journal of Practice & Theory 
385, 387-388 (2013); DeFond and Zhang, A Review of Archival Auditing 
Research; Peter Carey and Roger Simnett, Audit Partner Tenure and 
Audit Quality, 81 The Accounting Review 653 (2006); Allison K. Beck, 
Robert M. Fuller, Leah Muriel, and Colin D. Reid, Audit Fees and 
Investor Perceptions of Audit Characteristics, 25 Behavioral 
Research in Accounting 71 (2013); W. Brooke Elliott, Jessen L. 
Hobson, and Brian J. White, Earnings Metrics, Information 
Processing, and Price Efficiency in Laboratory Markets, 53 Journal 
of Accounting Research 555 (2015); Christensen, et al., 
Understanding Audit Quality; Eric T. Rapley, Jesse C. Robertson, and 
Jason L. Smith, The Effects of Disclosing Critical Audit Matters and 
Auditor Tenure on Nonprofessional Investors' Judgments, 40 Journal 
of Accounting and Public Policy 106847 (2021); and Sarah Judge, 
Brian M. Goodson, and Chad M. Stefaniak, Audit Firm Tenure 
Disclosure and Nonprofessional Investors' Perceptions of Auditor 
Independence: The Mitigating Effect of Partner Rotation Disclosure, 
41 Contemporary Accounting Research 1284 (2024).
    \253\ See Jenna J. Burke, Rani Hoitash, and Udi Hoitash, Audit 
Partner Identification and Characteristics: Evidence from US Form AP 
Filings, 38 Auditing: A Journal of Practice & Theory 71 (2019); 
Lauren M. Cunningham, Chan Li, Sarah E. Stein, and Nicole S. Wright, 
What's in a Name? Initial Evidence of US Audit Partner 
Identification Using Difference-in-Differences Analyses, 94 The 
Accounting Review 139 (2019); Marcus M. Doxey, James G. Lawson, 
Thomas J. Lopez, and Quinn T. Swanquist, Do Investors Care Who Did 
the Audit? Evidence from Form AP, 59 Journal of Accounting Research 
1741 (2021); Jeffrey Pittman, Sarah E. Stein, and Delia F. 
Valentine, The Importance of Audit Partners' Risk Tolerance to Audit 
Quality, 40 Contemporary Accounting Research 2512 (2023).
---------------------------------------------------------------------------

    By making the final metrics public and therefore available to all 
potential beneficiaries, the final rules should help ameliorate the 
positive externality problem associated with public disclosure.\254\ 
Moreover, because these final metrics will be public, the increased 
reputational risk they bring for auditors may, in turn, create 
incremental incentives for auditors that will be subject to the final 
requirements to maintain their reputation, or face a loss of business, 
thereby increasing accountability.\255\ Public disclosure also 
addresses investors' free-rider problem by eliminating the need for a 
private actor to force firms to disclose.\256\ One commenter said there 
are several mechanisms already in place to hold auditors accountable 
and questioned whether accountability could be further improved. The 
Board acknowledges that such mechanisms are in place (e.g., PCAOB 
inspections). However, the Board believes the final rules will 
complement existing accountability mechanisms. For example, the final 
rules may enhance the PCAOB inspections approach.\257\ Another

[[Page 100032]]

commenter suggested that the Board consider firm incentives related to 
legal liability, damage to reputation through restatement and 
deficiencies, and PCAOB sanctions. The Board acknowledges that these 
forces create some incentive for firms to keep audit quality above a 
certain threshold. However, restatements are relatively rare events and 
PCAOB sanctions are sporadic. Furthermore, PCAOB inspections are 
constrained by existing PCAOB rules and standards. One commenter said 
that while enforcement actions and inspection reports provide valuable 
data, their extended delays often diminish their relevance for key 
stakeholders.
---------------------------------------------------------------------------

    \254\ See discussion above.
    \255\ Two investor groups generally agreed with this benefit.
    \256\ For additional discussion of the role of mandatory 
disclosure as a regulatory tool, see, e.g., Admati and Pfleiderer, 
Forcing Firms to Talk; and John C. Coffee, Jr., Market Failure and 
the Economic Case for a Mandatory Disclosure System, 70 Virginia Law 
Review 717 (1984).
    \257\ See below for additional discussion on the benefits to the 
PCAOB's inspection program.
---------------------------------------------------------------------------

    Several commenters said that investors are not making use of 
existing information that is similar to the proposed metrics, 
suggesting that they would not make use of the proposed metrics either. 
As support, two commenters referred to comments made during the 
November 2, 2022 meeting of the PCAOB SEIAG.\258\ Citing a survey of 
institutional investors, another commenter said that most institutional 
investors are either unfamiliar with or unaware of firms' current audit 
quality reports.\259\ Another commenter questioned whether investors 
who are not fully utilizing the information contained in inspection 
reports would also not use the proposed metrics. Citing a market 
research report, one commenter noted that shareholders play a limited 
role in practice when ratifying the appointment of the auditor.\260\ At 
the September 2024 IAG meeting, one investor said that the average 
investor is not engaging with the audit process or audit committees.
---------------------------------------------------------------------------

    \258\ One commenter referred to a discussant on the panel who 
made the following statement: ``My experience has been that 
investors don't read the firm-level [PCAOB inspection] report. A lot 
of them don't know they necessarily exist, right.'' Another 
commenter did not refer to a specific discussant and referred to the 
Nov. 2, 2023 meeting of the PCAOB SEIAG. However, the Board believes 
the commenter intended to refer to the Nov. 2, 2022 PCAOB SEIAG 
meeting because firm and engagement metrics were not a topic of 
discussion during the Nov. 2, 2023 meeting.
    \259\ See CAQ 2023 Survey. The survey was comprised in 
interviews with 38 institutional investors working at companies with 
a minimum of $500M in assets under management. The participants were 
portfolio managers or investment analysts at buy side firms or 
research directors or similar roles at sell side firms. The survey 
did not describe how the participants were found or the questions 
that were asked.
    \260\ See Glass Lewis, 2024 Benchmark Policy Guidelines--United 
States, (2024).
---------------------------------------------------------------------------

    The Board appreciates these statements and research findings and 
notes that they are consistent with some of the research cited in the 
proposal and above.\261\ However, the Board notes that the CAQ 2023 
Survey also finds that almost all surveyed institutional investors 
assess audit quality by considering the firm's reputation, years of 
experience, people, and technological resources. Apart from 
technological resources, the final metrics will provide investors with 
related information.\262\ The surveyed institutional investors also 
expressed an interest in learning more about auditor communications to 
audit committees through disclosures. The Board believes audit 
committee members likely do occasionally request information like the 
final metrics from their auditor. Indeed, one audit committee chair 
said at the September 2024 IAG meeting that he requested information on 
industry specialization from his auditor. A majority of the surveyed 
institutional investors indicated that metrics related to the lead 
engagement partner's background, engagement team tenure, and specialist 
experience or related information would be useful. The survey also 
states that engagement-level metrics were of greater interest to the 
surveyed institutional investors than firm-level metrics because they 
are specific to a company, objective, and measurable. The final metrics 
will provide investors with engagement-level metrics. Collectively, the 
Board believes this information supports the Board's view that 
investors, particularly institutional investors, will find the final 
metrics useful and indeed an improvement in the quality of information 
over the limited information currently available.
---------------------------------------------------------------------------

    \261\ See Proposing Release at Section IV.B.2.
    \262\ See below for a discussion of alternative metrics 
considered related to the use of technical resources.
---------------------------------------------------------------------------

    One commenter suggested that the PCAOB consider how much 
information investors will have about auditors compared to the amount 
of information they will have about issuers. The Board does not believe 
that such a comparison is relevant to the economic analysis and the 
commenter did not explain how it would be relevant. The Board 
acknowledges that, in some cases, the final metrics could provide 
investors information about certain aspects of audit firms and their 
engagements that they might not have about issuers. However, the Board 
notes that, on balance, there is considerably more public disclosure 
available regarding issuers than audit firms.
    Many commenters representing firm or industry groups were skeptical 
that investors could effectively use the information. One commenter 
said that publication of metrics alone does not guarantee that 
investors will use or be aware of them. Two commenters said that the 
metrics' relationship to audit quality may not be clear. Several 
commenters noted that, unlike audit committees, investors would not be 
able to have a two-way conversation directly with auditors to 
appreciate the full context of the firm and its audit. One commenter 
questioned whether investors or audit committees would find the 
information useful. One commenter noted some of the proposed firm-level 
metrics (e.g., Partner and Manager Involvement, Workload) would be 
useful to audit committees but expressed doubt that others (e.g., Use 
of Auditor's Specialists, Allocation of Audit Hours, Experience of 
Audit Personnel) would be useful. However, the commenter believed some 
of the proposed metrics (e.g., Experience of Audit Personnel, Industry 
Experience) could be useful at the engagement level. Several commenters 
suggested that some or all of the proposed metrics would be useless 
without context. Citing academic research that was also cited in the 
proposal, one commenter said that retail investors would rely on the 
proposed metrics only if they were clearly trending over time.\263\ One 
commenter expressed concern that investors and audit committees could 
have trouble utilizing the proposed metrics because there is a lack of 
benchmarks, and it will be unclear to them how the proposed metrics 
relate to audit quality. Two commenters said that tracking metrics 
would become a compliance exercise and therefore would not transmit 
useful information for stakeholders. One commenter said that there are 
qualitative benefits of being a part of a GNF that cannot be properly 
captured or measured through the proposed metrics.
---------------------------------------------------------------------------

    \263\ See Brown and Popova, How do Investors Respond.
---------------------------------------------------------------------------

    While most investors will not have the same context as audit 
committees, the Board believes that many investors, particularly 
institutional investors, do have sufficient context to make effective 
use of the final metrics. Indeed, investors have access to much of the 
contextual information that some commenters felt was critical, such as 
the firm's size, the issuer's size, network membership, or the issuer's 
industry. Many companies have robust shareholder engagement programs, 
where managers and/or board members communicate directly with 
shareholders.\264\ These programs could

[[Page 100033]]

raise investors' awareness of the metrics, provide an opportunity for 
two-way conversation, and encourage them to vote on corporate 
governance matters or raise concerns outside of the voting process. 
Furthermore, even if investors decline to participate in outreach 
efforts or no shareholder engagement program exists, proxy advisory 
firms can use the information to inform their voting recommendations on 
both auditor ratification and audit committee members.\265\ Thus, the 
final metrics can still inform shareholder voting.\266\ Two investor 
groups agreed with the Board's view that investors would use the 
proposed metrics to make better decisions about ratifying the 
appointment of their audit firm and allocating capital. Several other 
commenters said that the metrics would be beneficial to investors and 
other users of the audit report.
---------------------------------------------------------------------------

    \264\ See, e.g., Ali Kakhbod, Uliana Loginova, Andrey Malenko, 
and Nadya Malenko, Advising the Management: A Theory of Shareholder 
Engagement, 36 Review of Financial Studies 1319 4 (2023) and cites 
therein (discussing how communication between management and 
shareholders has become increasingly prevalent).
    \265\ Proxy voting guidelines do not currently appear to 
reference audit quality, but do refer to poor accounting practices. 
See, e.g., ISS, United States Proxy Voting Guidelines Benchmark 
Policy Recommendations, (Jan. 2024), 16 (listing ``poor accounting 
practices'' as a factor influencing its voting recommendations on 
members of the audit committee.)
    \266\ Research shows that proxy advisor recommendations 
influence shareholder voting outcomes. See, e.g., Nadya Malenko, and 
Yao Shen, The Role of Proxy Advisory Firms: Evidence from a 
Regression-Discontinuity Design, 29 Review of Financial Studies 3394 
(2016) (finding ``that the recommendations of proxy advisory firms 
are a major factor affecting shareholder votes.'').
---------------------------------------------------------------------------

    The Board also notes that auditors will be able to provide 
investors with context through optional narrative disclosure. 
Commenters had mixed views on the usefulness of the proposed narrative 
disclosure. Some commenters believed the narrative disclosure would 
allow firms to provide context necessary for appropriate understanding 
and would allow firms to communicate critical context that may be 
beneficial. However, several commenters believed it would not be 
sufficient. The Board recognizes that the optional narrative 
disclosures may not capture all relevant context. In such cases, firms 
could provide additional voluntary disclosure (e.g., through their 
transparency or quality reports).\267\
---------------------------------------------------------------------------

    \267\ See above for a discussion on the optional narrative 
disclosure, including commenters' views and how the final rules 
address commenters' views.
---------------------------------------------------------------------------

    One commenter suggested the Board had ignored significant work 
conducted by the CAQ over the past decade regarding AQIs. The commenter 
referred specifically to three reports published by the CAQ (the ``2014 
CAQ Report,'' ``2016 CAQ Report,'' and ``2023 CAQ Report'').\268\ The 
Board has reviewed each report. The 2014 CAQ Report and 2016 CAQ Report 
summarize the results of stakeholder outreach and therefore inform the 
Board's understanding of the need for standard setting and how the 
final metrics address the need. The 2023 CAQ Report opines on 
transparency reporting best practices.
---------------------------------------------------------------------------

    \268\ See Center for Audit Quality, Approaches to Audit Quality 
Indicators, (Apr. 2014) (``2014 CAQ Report''); Center for Audit 
Quality, Audit Quality Indicators: The Journey and Path Ahead, (Jan. 
2016) (``2016 CAQ Report''); and Center for Audit Quality, Audit 
Quality Disclosure Framework (Update), (June 2023) (``2023 CAQ 
Report''). By ``AQI,'' the 2014 CAQ Report and 2016 CAQ Report are 
referring to measures that may provide further insight into audit 
quality, as outlined in a PCAOB briefing paper presented to the 
PCAOB's Standing Advisory Group Meeting on May 15-16, 2013. See 
PCAOB, Discussion--Audit Quality Indicators (May 15-16, 2013), 
available at https://pcaobus.org/news/events/documents/05152013_sagmeeting/audit_quality_indicators.pdf. Most of the final 
metrics are very similar to an AQI discussed therein.
---------------------------------------------------------------------------

    Based on outreach to various stakeholders, the 2014 CAQ Report 
expresses optimism that AQIs can be useful to audit committees and help 
promote audit quality. For example, the report concludes that 
communication of engagement-level AQIs can help the audit committee 
evaluate the actions taken or untaken by their auditor and help 
maintain or increase audit quality. This is consistent with the 
benefits related to audit committee monitoring of their auditor 
discussed below. It also emphasizes the importance of context, which 
the Board acknowledged in the proposal and discuss below in this 
subsection. The report suggests a flexible approach to the 
communication of metrics. The Board acknowledges this suggestion is in 
tension with the adopted approach that specifies calculations for each 
metric.\269\ However, for the reasons discussed in this subsection and 
highlighted below, the Board believes that the current voluntary or 
flexible approach would not sufficiently address the need for 
comparable information.
---------------------------------------------------------------------------

    \269\ See below for additional discussion on the Board's 
decision to standardize the calculation of the metrics.
---------------------------------------------------------------------------

    In the 2016 CAQ Report, the CAQ expressed a belief that reliable, 
quantitative metrics related to the audit can: (i) inform audit 
committees about matters that may contribute to the quality of an audit 
and (ii) help audit committees make decisions related to auditor 
appointment or reappointment as well as the selection of lead 
engagement partners. Based on the result of a pilot study with audit 
committees, and in addition to the findings summarized by the 
commenter, the report found that participants: (i) generally supported 
discussion of AQIs with the engagement team; (ii) felt that key aspects 
of audit quality cannot be quantified such as professional skepticism; 
(iii) acknowledge growing interest from investors regarding how audit 
committees are fulfilling their responsibilities; and (iv) recognized 
that AQIs can help audit committees oversee the quality of the external 
audit.
    The Board's economic analysis is largely consistent with these 
views, in particular the Board's discussion of improved monitoring of 
both the auditor and the audit committees below. However, participants 
in the CAQ's pilot study also: (i) expressed a preference for a 
flexible approach to AQI communication; (ii) noted that they already 
have access to the information they need; and (iii) cautioned that 
public disclosure of engagement-level metrics could lead to unintended 
consequences such as benchmarking behavior or excessive focus on 
measurable metrics. The Board acknowledges that there may be some 
benefits to a more flexible approach to audit committee communications. 
However, the Board believes a completely flexible approach could result 
in audit committees having insufficient information or information with 
limited utility, limit PCAOB oversight, limit comparability of metrics, 
and exacerbate other unintended effects (e.g., manipulation of the 
metrics).\270\ The proposal acknowledged that audit committees can 
already seek to obtain information like the final metrics from their 
incumbent auditors and the Board acknowledges this again below. Several 
commenters agreed that audit committees already have access to 
information about auditors and their engagements. Finally, the Board 
notes that the proposal also discussed the potential unintended 
consequences raised by participants in the pilot study, and the Board 
discussed them again below.
---------------------------------------------------------------------------

    \270\ See below for additional discussions on the Board's 
decision to standardize the calculation of the metrics and on the 
potential for auditors to manipulate their metrics.
---------------------------------------------------------------------------

    Two factors limit the relevance of the 2014 CAQ Report and 2016 CAQ 
Report. First, the reports contemplate voluntary communications by 
auditors to audit committees rather than mandatory public disclosure. 
Second, the auditing environment has evolved significantly since then. 
For example, investors and audit committees now have access to Form AP 
information and CAMs.
    One commenter suggested that audit committees have access to 
relevant

[[Page 100034]]

comparable data by reference to information firms are already currently 
required to disclose pursuant to PCAOB rules (e.g., Form 2). The 
proposal acknowledged the availability of this information and the 
Board acknowledges it again above. However, as described above and 
discussed further below, the final metrics will make new relevant 
information available in a way that is much more accessible and 
comparable than existing information sources. The commenter also said 
that audit committees can seek relevant data from potential new audit 
firms. The proposal acknowledged this and the Board discussed this 
topic again below. Importantly, the Board notes that audit committees 
may have trouble obtaining comparable information from potential new 
auditors. One commenter suggested that audit committees would likely 
prefer to obtain information through conversation with their auditor 
directly rather than refer to a database of metrics. Under the final 
rules, audit committees will be free to request the final metrics or 
any other related information from their auditor directly.
    One commenter performed a survey of audit committee chairs of large 
U.S. public companies. The commenter did not indicate the number of 
participants, how participants were selected, demographic information, 
or the questions they were asked. The participants said that they 
already receive or have access to most of the information in the 
proposal as part of the audit process and any other information would 
likely not be valuable to them. The Board discussed this limitation 
along with important caveats in the proposal and discusses it again 
below. The Board also notes that, at the same time, participants also 
expressed desire for additional information on artificial 
intelligence.\271\ Participants also opined on the extent to which 
investors would use the information. First, some participants said 
information like the proposed metrics is rarely requested by or 
discussed with investors. The Board discussed in the proposal and above 
the challenges investors face obtaining information through this 
channel. The Board also discussed above how investors may be less vocal 
because they do not believe it is possible to obtain useful information 
in the current environment. The Board also notes that commenters 
representing a broad array of investors, investment managers, investor 
advocates, and other financial reporting experts said that the metrics 
would be useful. Second, some participants noted that the information 
would only be available to investors annually and therefore would be 
stale. The Board acknowledges that investors will have access to the 
metrics on an annual basis. The Board believes that requiring firms to 
disclose the metrics on a more continuous basis would require a 
significantly greater investment in time and resources by the firms. 
The Board also notes that a broad range of commenters generally agreed 
that audit committees will find most or all of the information useful, 
especially engagement-level metrics.
---------------------------------------------------------------------------

    \271\ The Board's decision not to include a metric related to 
the use of technical resources is explained in Section IV.D.3.iv.d 
of the proposal and below.
---------------------------------------------------------------------------

    One commenter representing a firm-related group performed a survey 
of audit committee members by way of its member firms. The same 
commenter also commissioned a third party to perform an investor 
survey.\272\ Each survey provides information related to the need for 
and potential benefit of the proposed metrics. The Board discussed each 
survey below.
---------------------------------------------------------------------------

    \272\ See Letter from Center for Audit Quality (Aug. 1, 2024) 
available at https://pcaobus.org/about/rules-rulemaking/rulemaking-dockets/docket-041.
---------------------------------------------------------------------------

    The audit committee members survey involved 242 participants. The 
participating audit committee members sit on audit committees of a 
range of companies by size and industry sector. The commenter did not 
completely describe the basis on which audit committees were invited to 
participate in the survey. The commenter did provide the survey 
questions. Fifty-nine percent of participants said the information 
available to them to fulfill their external auditor oversight 
responsibilities meets all of their needs. Thirty-six percent said the 
information meets most of their needs and the remaining 5% said the 
information meets less than most of their needs. These results suggest 
that most audit committees believe the current information environment 
is sufficient. However, the results do not imply that additional 
information cannot be useful to audit committee members. Indeed, 27% of 
the surveyed audit committee members seek more information about how 
their audit engagement is being performed, about the audit firm, or 
about other audit firms. Furthermore, some participants may have been 
reluctant to say that the information available to them to fulfill 
their responsibilities does not meet most or all of their needs because 
it would imply they are not fulfilling their responsibilities. Other 
results of the survey are largely consistent with information presented 
in the proposal and above. For example, 78% of participants agreed that 
there could be unintended consequences and 73% said there would be 
challenges interpreting the proposed metrics. Eighty-two percent of 
participants said they had concerns about data specific to their audit 
being available publicly; however, the specific concerns were not 
raised and, by contrast, only 40% were concerned that the proposed 
mandatory reporting could increase director liability. Fifty-nine 
percent of participants agreed that some standard information about 
auditors should be considered. Eighty percent of participants said they 
rarely or never use PCAOB Form AP and 78% said they rarely or never use 
PCAOB registrations data; rather, the quality of conversation with the 
auditor is the top way audit committees evaluate the quality and 
reliability of the audit. Finally, 90% of participants said that PCAOB 
standards and rules are well-suited or have mostly kept up with change. 
Use of technology in the audit was more commonly ranked than firm and 
engagement metrics as an area where the audit committee would like to 
see the PCAOB modernize its auditing standards. The Board notes that 
the PCAOB recently adopted amendments to auditing standards related to 
auditors' use of technology-assisted analysis and recently proposed a 
standard related to auditors' use of substantive analytical 
procedures.\273\ The Board also notes that, while informative to the 
PCAOB generally, such comparisons are less relevant to the economic 
analysis of the final rules.
---------------------------------------------------------------------------

    \273\ See Amendments Related to Aspects of Designing and 
Performing Audit Procedures that Involve Technology-Assisted 
Analysis of Information in Electronic Form, PCAOB Rel. No. 2024-007 
(June 12, 2024); Proposed Auditing Standard--Designing and 
Performing Substantive Analytical Procedures and Amendments to Other 
PCAOB Standards, PCAOB Rel. No. 2024-006 (June 12, 2024). The SEC 
approved the PCAOB's amendments to auditing standards related to 
auditors' use of technology-assisted analysis on Aug. 20, 2024.
---------------------------------------------------------------------------

    The investor survey involved 100 participants. Participants were 
screened to ensure they are professional institutional investors 
employed at companies that manage at least $500 million in assets and 
have at least five years of experience and serve at the director level 
or higher. Besides these requirements, the participating investors 
cover a variety of job levels, experience levels, and ages, cover both 
genders, and primarily (80%) focus on both large accelerated filers and 
accelerated filers. The commenter did not completely describe the basis 
on which investors were invited to participate in the

[[Page 100035]]

survey. The commenter did provide the survey questions. Eighty-six 
percent of the participants work for banks or credit unions, 13% for 
other types of funds, and 1% for family offices.
    Fifty-three percent of participating investors indicate they trust 
the audit of public company financial statements completely and 40% 
trust them a great deal. Furthermore, 57% of participating investors 
feel the information available to assess the quality of the audit meets 
all their needs and 35% feel it meets most of their needs. However, the 
Board believes the respondents may be focusing on whether information 
currently available permits them to fulfill their fiduciary 
responsibilities narrowly defined, similar to the audit committee 
members. First, just 17% of participating investors said they do not 
want to see any additional information about the audit to evaluate its 
quality. All others wanted additional information about the auditing 
process, team specifics, qualifications, and more generally, other 
information. The final metrics will provide such information. Second, 
almost all of the proposed metrics were indicated as being extremely 
helpful by between 30% and 50% of participated investors. The commenter 
did not indicate whether the survey allowed less favorable responses 
and, if so, what the participants' responses were.
    The commenter noted that there were variances between these 
percentages and the portion of participating investors who said they 
would likely seek out the information on the PCAOB website. The 
commenter interpreted these variances as being consistent with their 
view that understanding how investors would use the information is 
necessary. The Board agrees that understanding how investors would use 
the information is important. Indeed, the Board discussed through the 
economic analysis how the Board believes investors will use the 
information. However, the Board believes these variances are difficult 
to interpret because it is unclear what the practical difference is 
between finding a metric helpful and being likely to proactively seek 
it out. Therefore, the variances may be driven by confusion among 
respondents.
    Notably, despite broad agreement that engagement-level metrics 
would be helpful and 83% wanting some additional information about 
audit quality in the companies they invest in, 83% of surveyed 
investors somewhat or strongly agreed with the statement that mandated 
public disclosure of engagement-level performance metrics could lead to 
unintended consequences and as such should be voluntary. The survey did 
not indicate what unintended consequences the surveyed investors 
thought might occur or whether they were aware that the final rules 
would permit firms to provide an optional narrative disclosure along 
with each metric.\274\
---------------------------------------------------------------------------

    \274\ See above for a discussion on the limitations of voluntary 
auditor reporting.
---------------------------------------------------------------------------

    Other results of the investor survey are largely consistent with 
information presented in the proposal and above. For example, investors 
use a variety of publicly available information to assess audit quality 
(e.g., audit quality reports, inspection reports, reputation and the 
auditor's opinion and ICFR evaluation, PCAOB website). Investors also 
agree that context would be important for understanding the proposed 
metrics.
    The Board notes that the views of participating investors were 
different from the views of audit committee members in two important 
ways. First, investors are more optimistic that the proposed metrics 
would be useful to audit committees. Indeed, 30% of participating 
investors strongly agree that audit committees lack access to the 
information they need to make informed decisions about selecting an 
auditor (39% somewhat agree) and 34% strongly agree that mandatory and 
standardized firm and engagement metrics are necessary for company 
management and audit committees to uphold fiduciary responsibilities to 
shareholders (47% somewhat agree). Second, investors more strongly 
believe that PCAOB standards and rules are in need of updating. Where 
90% of surveyed audit committee members said that PCAOB standards and 
rules are well-suited or have mostly kept pace with change, just 26% of 
surveyed investors said PCAOB standards and regulations are well-suited 
for their intended purpose and 42% believed they had mostly kept up 
with change. More specifically, where 17% of surveyed audit committee 
chairs cited firm and engagement areas among the top three areas they 
would like to see the PCAOB modernize auditing standards, 28% of 
surveyed investors cited it among their top three areas.
    A commenter representing an investor-related group pointed to 
another survey of investors.\275\ This survey was conducted by the 
commenter in July 2017. The survey was limited to members of the 
commenter's group and targeted primarily buy-side portfolio managers 
and research analysts, sell-side analysts, credit analysts, and 
corporate financial analysts. There were 284 initial respondents. The 
commenter did not completely describe the basis on which investors were 
invited to participate in the survey. The commenter did provide the 
questions asked. The survey's finding, as highlighted by the commenter, 
underscores that (i) the quality of information communicated to 
investors, including AQIs, is very important to how investors perceive 
the value of an audit and (ii) developing and monitoring AQIs is a high 
standard-setting priority for investors.\276\ According to the 
commenter, the results of the survey suggest that firm and engagement 
metrics are a priority for investors, a viewpoint with which the Board 
agrees and that accords with other investor feedback the Board has 
received over the course of this project. The Board notes that survey 
respondents rated information like the final metrics (e.g., restatement 
of company financials, industry expertise of audit personnel, training 
and accreditation of audit personnel, tenure of engagement partner, 
number of audit staff per audit partner, audit firm recruitment and 
retention practices) between 2.71 and 3.66 in importance (one being 
``not important'' and four being ``very important.'').
---------------------------------------------------------------------------

    \275\ See CFA Institute, CFA Institute Member Survey Report: 
Audit Value, Quality, and Priorities, (July 2017) (``2017 CFA 
Institute Survey''), available at https://rpc.cfainstitute.org/en/research/surveys/audit-value-quality-priorities-survey-report.
    \276\ Id. at Table 1. The Board notes that the 2017 CFA 
Institute Survey did not define ``AQI.''
---------------------------------------------------------------------------

    While the Board believes the final metrics will help reduce opacity 
in the audit market and reduce frictions in the information market, the 
Board notes that the final metrics will not be direct measures of audit 
quality. Audit quality is an abstract concept, and there is no single 
comprehensive measure of audit quality. Audit quality is a concept 
designed to describe the characteristics of, and participants in, audit 
engagements in which the auditors are more likely to identify and 
report material misstatements. Or, more broadly, audit quality reflects 
all of the components of the audit that align with desirable 
outcomes.\277\ The desired outcomes of the framework depend (to some 
extent) upon the stakeholders involved, even if there are certain 
consistent areas of focus. As a result, the final metrics cannot 
directly measure audit quality. And they are not intended to do so, 
as--without additional context--it is unlikely they can be interpreted 
directly as measurements of audit quality. The final metrics are not

[[Page 100036]]

intended to imply that an increase (decrease) in a particular metric, 
or a group of metrics, necessarily relates to an increase (decrease) in 
audit quality. Lastly, the Board does not believe that the final 
metrics, individually or taken together, could be appropriately used in 
isolation to ascertain audit quality at an audit firm or for an audit 
engagement. For example, some of the most important elements of a high-
quality audit, such as application of due care and professional 
skepticism, are not capable of being entirely measured and quantified 
directly.
---------------------------------------------------------------------------

    \277\ For a review of various definitions and discussions of the 
latent attributes of audit quality, see, Knechel, et al., Audit 
Quality.
---------------------------------------------------------------------------

    Two commenters agreed that no single metric can be viewed as having 
a causal relationship to audit quality. Several other commenters agreed 
that the correlation between the proposed metrics and audit quality is 
far from perfect. However, two commenters interpreted this caveat 
regarding the relationship between the proposed metrics and audit 
quality to imply that the proposed metrics cannot be decision-relevant 
to investors and audit committees. The Board does not believe this to 
be the case. The Board continues to believe that certain aspects of 
audit quality cannot be measured. However, the Board does not believe 
this implies that the final metrics will be irrelevant to investors and 
audit committees. To the contrary, as said by one commenter, the Board 
believes certain aspects of the audit can be measured.
    One commenter said that the purpose and use of the metrics are not 
consistently correlated with stakeholders' needs because the proposal 
lacked an explicit definition of audit quality. The Board does not 
believe a definition of audit quality is necessary for the metrics to 
be correlated with stakeholders' needs. Investors' and audit 
committees' information needs are explicitly stated above. The Board 
believes the arguments made in this subsection, in conjunction with the 
discussion of benefits below, establish a correlation between the final 
metrics and stakeholders' needs.
ii. Uniform and Comparable Metrics
    In addition to mandating disclosure, the final rules will also 
specify the data sources and calculations for each final metric and 
require their disclosure in PCAOB forms in an electronic, structured 
data format. Collecting and reporting information in this manner will 
likely enhance the usefulness of the information to investors and audit 
committees by allowing them to more easily access the information and 
compare firms and engagements. Regular annual reporting should also 
allow investors and audit committees to form judgments regarding the 
quality of their auditor sooner (e.g., compared to restatements which 
may take several years to occur or PCAOB inspection reports which may 
be released several years after an audit engagement was performed).
    Commenters' views on comparability are discussed above. Overall, 
commenters questioned whether the engagement-level metrics would be 
comparable due to the importance of company-specific context, which in 
their view is necessary for understanding the metrics. Two commenters 
suggested that even firm-level metrics are not comparable. One 
commenter said that differences in the centralization or complexity of 
issuers' IT infrastructures could be a reason for cross-sectional 
differences in the engagement-level metrics rather than differences in 
the audit. One commenter suggested that comparability would improve if 
the metrics would account for firm size, issuer size, and industry. One 
commenter suggested that the standardized calculations, rather than 
facilitate comparability, could reduce it because they would not be 
appropriate for every firm. Several commenters suggested that the 
standardized calculations would not be flexible enough to evolve over 
time as the auditing environment changes. Relatedly, one commenter 
suggested that the PCAOB revisit in the future the appropriate 
calculations. One commenter said the proposed metrics would be 
meaningless without sufficient context. By contrast, one commenter said 
that investors are aware that the metrics will not be perfectly 
comparable and that they are trained to analyze this type of 
information.
    The Board agrees that context could be important to understanding 
any individual metrics. As discussed above in this subsection, the 
Board believes that no set of metrics, individually or collectively, 
can completely measure audit quality. Accordingly, the Board has 
provided auditors the opportunity to disclose additional context for 
each metric. The Board acknowledges that firm size, issuer size, and 
industry could be important context when interpreting a metric. 
However, the Board notes that this information about issuers is already 
available to the public, and the Board believes that stakeholders will 
be better served by a rule that permits them to consider this 
information alongside the metrics as they see fit rather than by 
prescribing how they should be accounted for. The Board also notes 
that, under the final rules, firms will be free to provide additional 
information voluntarily to their stakeholders (e.g. through audit 
quality or firm transparency reporting) that they believe better 
captures the changing environment. The Board recognizes that the 
standardized calculations will not explicitly account for all relevant 
facts and circumstances for each firm. However, notwithstanding the 
potential importance of context for understanding any individual 
metric, the comparability of information about firms and their 
engagements will be improved overall compared to the current largely 
voluntary state by mandating specific metrics and calculations. The 
Board discussed a potential post-implementation review (PIR) below.
Economic Impacts
    This section discusses the expected benefits, costs, and potential 
unintended consequences of the final rules. The magnitudes of the 
benefits and costs are likely to be affected by the degree to which 
firms have already voluntarily adopted disclosure practices that are 
similar to those required under the final rules or produce similar 
metrics for non-public purposes. As discussed above, as of the 2018 and 
2019 inspection years, the U.S. GNFs already track some metrics like 
those being adopted. Though their practices may have evolved since 
then, the Board believes they will need to gather additional 
information or adjust their calculations. The magnitude of the impacts 
may also vary by stakeholder depending on how useful the metrics are 
for the decisions they face. Stakeholders who find the final metrics 
more useful will be more likely to incur the costs and benefits of 
integrating the final metrics into their decision-making. The Board 
believes the final rules will have a greater impact on smaller firms 
which likely have less developed practices in this area.
    Several commenters suggested that the PCAOB should consider the 
cumulative effects of the reporting requirements in this rulemaking 
along with other rules and standards that have recently been proposed 
or adopted. One commenter reported results of a survey of audit 
committee member respondents in which 76 percent of 145 respondents 
indicated concern about the cumulative impact of PCAOB standard-setting 
and rulemaking on audit quality and 24 percent indicated no 
concern.\278\ Consistent with long-standing practice and the PCAOB's 
staff guidance on economic analysis, the Board's economic analysis for 
each rulemaking

[[Page 100037]]

considers the incremental benefit and costs for the specific rule--
i.e., the benefits and costs stemming from that rule compared with the 
baseline.\279\ There could be implementation activities for certain 
provisions of other rules and standards that overlap in time with 
implementation of the final rules, which may impose costs on resource 
constrained firms affected by multiple rules. This may be particularly 
true for smaller and mid-sized firms with more limited resources. In 
determining effective dates and implementation periods, the Board 
considered the benefits of rules as well as the costs of delayed 
implementation periods and potential overlapping implementation 
periods. The Board also considered that in some cases, overlapping 
implementation periods may have benefits because firms will not need to 
revise or redo previous process or system changes where rules interact 
with each other. For example, firms could benefit in this regard by 
implementing the final rules while also implementing QC 1000 and, if 
approved by the SEC, the PCAOB's Firm Reporting rules because all three 
rulemakings address external reporting.
---------------------------------------------------------------------------

    \278\ The survey is discussed in greater detail above.
    \279\ See Staff Guidance on Economic Analysis in PCAOB Standard-
Setting (Feb. 14, 2024) (``Staff Guidance on Economic Analysis''), 
available at https://pcaobus.org/oversight/standards/economic-analysis/05152014_guidance.
---------------------------------------------------------------------------

    Several investor group commenters stated they believe the benefits 
of the proposal would exceed the costs. In contrast, other commenters 
stated they believe the costs of the proposed metrics will not be 
proportionate to the benefits. One commenter said there was a lack of 
academic evidence about whether the benefits exceed the costs. One 
reason that academic evidence related directly to whether the benefits 
of the proposal exceed the costs is limited is likely that, for the 
reasons discussed above, the necessary data do not exist. However, the 
economic analysis incorporates where appropriate academic evidence 
related to certain impacts of the proposal. Furthermore, as described 
above, the Board has quantified certain impacts to the extent feasible. 
One commenter suggested that a more complete economic analysis of the 
proposal would reveal that the costs exceed the potential benefits. The 
commenter did not indicate a data source or methodology that would 
allow for a quantitative analysis of all benefits and costs. The 
commenter also did not indicate how they know what the results of such 
an analysis would be. One commenter suggested that the PCAOB expand the 
proposal to consider whether the benefits outweigh the costs. Another 
commenter said that they saw no indication that the Board had addressed 
whether investors and other stakeholders would place greater weight on 
the asserted benefits against increased audit fees. The economic 
analysis separately analyzes benefits and costs, and as stated above, 
the Board is not able to quantify all relevant benefits and costs due 
to data limitations. However, the Board notes that one commenter 
representing an investor-related group said that investors recognize 
they ultimately bear the cost of creating such information and metrics 
and are generally willing to pay for information and metrics.
1. Benefits
    As discussed above, the final metrics could enhance (i) audit 
committees' ability to efficiently and effectively monitor and select 
auditors as well as (ii) investors' ability to efficiently and 
effectively make decisions about ratifying the appointment of their 
auditors and allocating capital. Moreover, there will likely be 
improvements to the PCAOB's oversight programs (i.e., selection of 
firms, engagements, and focus areas for review), as well as to policy 
research. As an important indirect benefit, the final rules could 
further spur competition to the benefit of investors. Thus, while the 
metrics do not represent a comprehensive measure of audit quality, 
stakeholders may use the metrics in ways that could improve audit 
quality.\280\ Several investor-related groups generally agreed with 
these benefits. One commenter said that reporting of proposed metrics 
would improve audit quality across the profession.
---------------------------------------------------------------------------

    \280\ While some of the most important elements of high-quality 
audit, such as the application of due care and professional 
skepticism, cannot be fully measured or quantified, the final 
metrics provide proxies for certain aspects of audit quality, such 
as years of experience, auditor workload, and the percentage of 
audit hours attributable to senior members of the audit team. These 
proxies, while not a complete measure of audit quality, offer 
important information about auditors and the engagements they lead, 
which stakeholders can use to inform their decisions.
---------------------------------------------------------------------------

    Auditors have a responsibility to obtain reasonable assurance about 
whether the financial statements are free of material misstatement. If 
use of the metrics leads to higher audit quality, it could increase the 
likelihood that the auditor will discover a material misstatement or 
will qualify its audit opinion when a material misstatement exists and 
is not corrected by management.
    The SEC does not consider the requirements for audited or certified 
financial statements in Rule 2-02(b) of Regulation S-X to be met when 
the auditor's report is qualified. Furthermore, a qualified audit 
opinion may evoke negative market reactions. For these reasons, higher 
audit quality could incentivize issuers to take steps to ensure their 
financial statements are free of material misstatement. Issuers could 
take these steps proactively, prior to the audit, or in response to 
adjustments requested by the auditor. Financial statements that are 
free of material misstatement are of higher quality and more useful to 
investors.\281\ An investor-related group said that investors demand 
high-quality audits because reliable audited financial statement are 
critical to investors in making informed decisions.
---------------------------------------------------------------------------

    \281\ The Board notes several caveats. First, some theoretical 
research finds that changes to auditing standards can have 
counterintuitive effects on audit quality. For example, some 
research finds that increased precision in auditing standards can 
reduce audit quality. See Marleen Willekens and Dan A. Simunic, 
Precision in Auditing Standards: Effects on Auditor and Director 
Liability and the Supply and Demand for Audit Services, 37 
Accounting and Business Research 217 (2007). Other research finds 
that setting a higher minimum bar can reduce audit quality. See 
Pingyang Gao and Gaoqing Zhang, Auditing Standards, Professional 
Judgment, and Audit Quality, 94 The Accounting Review 201 (2019). 
The Board acknowledges that these studies examine the impacts of 
audit performance standards. By contrast, the Board adopted a 
disclosure standard. This may limit the relevance of these studies 
to the final rules. The Board is also unaware of empirical evidence 
that directly tests these theories. Second, the conclusion that 
financial statements that are free of material misstatement are more 
useful to investors hinges on the assumption that investors value 
compliance with the applicable financial reporting framework (e.g., 
U.S. GAAP). The various market reactions to restatements that have 
been documented in academic literature suggests that this is the 
case. Third, the conclusion that improved audit quality would 
improve financial reporting quality assumes that issuers would not 
switch to sufficiently lower quality auditors in sufficient number 
as a result of the final rules. Finally, one commenter said, and the 
Board agrees, that the proposed metrics cannot be viewed as the only 
proxy for measuring financial reporting quality.
---------------------------------------------------------------------------

    In the following discussion, the Board discussed the direct 
benefits related to enhancing the information available to investors, 
audit committees, and other stakeholders and follow up with a 
discussion of the potential indirect benefits. The Board then reviews 
the extant literature related to the final metrics and examine how each 
final metric could contribute to achieving the final rules' intended 
benefits.
i. Direct Benefits to Investors, Audit Committees, and the PCAOB
    The direct benefits of the final rules relate to (i) improved 
investor and audit committee monitoring, (ii) improved

[[Page 100038]]

auditor selection, and (iii) improved PCAOB oversight and scholarly 
auditing research. The Board believes these benefits will arise because 
the final metrics will significantly augment the information set 
available to stakeholders and thereby enhance their decision-making.
    Each of the final metrics and how they would enhance decision-
making is discussed in detail above. To summarize, the final metrics 
relate broadly to audit personnel, allocation of audit hours, and audit 
outcomes. The final metrics related to audit personnel will provide 
information on the audit team's involvement and workload (i.e., Partner 
and Manager Involvement, and Workload), turnover (i.e., Retention of 
Audit Personnel), experience (i.e., Experience of Audit Personnel), 
industry specialization (i.e., Industry Experience), and training 
(i.e., Training Hours for Audit Personnel). The final metrics related 
to the allocation of audit hours will provide information on the 
allocation of audit hours prior to the issuer's year end (i.e., 
Allocation of Audit Hours). The final metrics related to outcomes will 
provide information on restatement trends (i.e., Restatement History).
    These metrics could enhance decision-making by helping stakeholders 
assess whether auditors are appropriately staffing their engagements, 
budgeting their time, and achieving desirable outcomes. As the 
following examples illustrate, stakeholders will likely make these 
judgments based primarily on their experience and by comparison to 
similar firms or engagements and in conjunction with other information 
available to them (e.g., the other metrics, issuer's unique facts and 
circumstances, or research).\282\ These examples are meant as 
illustrations only; investors and audit committee members may interpret 
the final metrics differently depending on specific circumstances.
---------------------------------------------------------------------------

    \282\ Academic literature on how various proxies for the final 
metrics relate to various proxies for audit quality is summarized 
below.
---------------------------------------------------------------------------

     An investor may observe that one issuer's auditor has more 
industry experience than a comparable issuer's auditor. Depending on 
the magnitude of the difference and other information available to the 
investor, the investor may take this as a sign regarding the relative 
reliability of the audit and, consequently, the issuer's financial 
statements. This could influence the investor's voting or capital 
allocation decisions.
     An audit committee member may observe that an engagement's 
partners and managers were more involved than the audit committee 
member expected based on their experience. While the audit committee 
member may believe partner and manager involvement is, as a general 
matter, a sign of good quality control, the audit committee member may, 
depending on the facts and circumstances, suspect there was a problem 
that required the partner's attention. As a result, the audit committee 
member may request additional information from the auditor.
     An investor may observe that the auditor's retention 
metric is a low outlier compared to prior years. This may lead the 
investor to question the auditor's ability to gather sufficient 
appropriate audit evidence and, depending on other information 
available, may inform the investor's vote on ratification of the 
auditor or re-election of audit committee members to the board of 
directors.
     An audit committee member may observe that the auditor's 
allocation of audit hours prior to the year's end indicates, based on 
academic research, an elevated risk of audit deficiency and 
restatement. As a result, the audit committee member may work with the 
auditor to find ways to improve the planning of a future audit.
    The Board notes that the benefits of mandatory disclosure are well-
studied and have been measured in other markets such as credit ratings, 
health care, and financial reporting.\283\ Likewise, the benefits of 
comparable information have been observed in financial reporting.\284\ 
There are important similarities between the markets for credit 
ratings, health care, and financial reporting and the audit market. For 
example, credit ratings services, like audit services, are opaque and 
operate under an ``issuer-pays'' business model. Therefore, the impacts 
of disclosure observed in those markets provide some indication of the 
potential impacts the final rules could have on the audit market. 
However, there are also significant differences. For example, the 
quality of health care services may, in some cases, be more visible 
than the quality of audit services. These differences limit the 
relevance of these studies. The disclosures studied in these markets 
may also not be directly comparable to the final metrics and therefore 
are less relevant.
---------------------------------------------------------------------------

    \283\ For example, in the context of credit ratings, research 
has found that the introduction of additional credit ratings 
information into the market leads relatively higher quality 
borrowers to obtain lower borrowing costs by 20 basis points. See 
Tony Tang, Information Asymmetry and Firms' Credit Market Access: 
Evidence from Moody's Credit Rating Format Refinement, 92 Journal of 
Financial Economics 325 (2009). The Board notes that the relevance 
of this finding is limited by the fact that the studied disclosure 
relates to the quantity of information provided by the credit rating 
agency rather than the quality of service provided by the credit 
ratings agency. In the context of nursing home care, one study finds 
that mandatory disclosure of quality indices leads to improvement in 
two of the five indices. See Dana B. Mukamel, David L. Weimer, 
William D. Spector, Heather Ladd, and Jacqueline S. Zinn, 
Publication of Quality Report Cards and Trends in Reported Quality 
Measures in Nursing Homes, 43 Health Services Research 1244 (2008). 
For a discussion of potential benefits of mandatory financial 
reporting quality as well as potential unintended consequences, see 
Christian Leuz and Peter D. Wysocki, The Economics of Disclosure and 
Financial Reporting Regulation: Evidence and Suggestions for Future 
Research, 54 Journal of Accounting Research 525 (2016) and cites 
therein. However, some research also finds that mandatory disclosure 
can have little effect. For example, in the context of HMOs, one 
study finds that, following the introduction of public disclosure of 
six quality scores, only one--customer satisfaction--subsequently 
drove HMO market share and the effect was most pronounced in markets 
where true quality varied the most. See Leemore Dafny and David 
Dranove, Do Report Cards Tell Consumers Anything They Don't Already 
Know? The Case of Medicare HMOs, 39 The Rand Journal of Economics 
790 (2008).
    \284\ See, e.g., Mark L. DeFond, Xuesong Hu, Mingyu Hung, and 
Siqi Li, The Impact of Mandatory IFRS Adoption on Foreign Mutual 
Fund Ownership: The Role of Comparability, 51 Journal of Accounting 
and Economics 240, 241 (2011) (finding that greater financial 
reporting comparability leads to greater investment); Luigi 
Zingales, The Future of Securities Regulation, 47 Journal of 
Accounting Research 395 (2009) (concluding that a more subtle 
benefit of disclosure regulation is the standardization it entails); 
and Bingyi Chen, Ahmet C. Kurt, and Irene Gunnan Wang, Accounting 
Comparability and the Value Relevance of Earnings and Book Value, 31 
Journal of Corporate Accounting & Finance 82 (2020) (finding that 
``accounting comparability increases the value relevance of 
earnings, but not book value'').
---------------------------------------------------------------------------

    The Board also notes that the benefits of prior PCAOB disclosure 
rules vary by rule and analysis.\285\ Citing academic research, one 
commenter said studies show that, while the information contained in 
Form AP may improve the perception of auditors and financial reporting, 
Form AP is not influencing investors' decision-making. Referring to 
research discussed above and in the

[[Page 100039]]

proposal, the commenter also said that CAMs are not driving decision-
making by investors.\286\ By contrast, a recent survey finds that 
institutional investors generally rely on CAMs when making investment 
decisions and read the CAMs section in the Form10-K.\287\ Approximately 
half said that additional information would be even more beneficial. 
There are important similarities between these disclosure rules and the 
final rules. For example, CAM reporting and Form AP reporting 
requirements were significant changes in auditor reporting and the 
final engagement-level disclosures will be reported on Form AP. 
Therefore, the results of these studies provide some indication of how 
the final metrics could impact the audit market. However, there are 
also significant differences between prior PCAOB disclosure rules and 
the final rules. For example, the final rules will likely require firms 
to gather more engagement-level information than CAM and Form AP 
reporting requirements do. These differences limit the relevance of 
these studies.
---------------------------------------------------------------------------

    \285\ See, e.g., Michael J. Gurbutt and Wei-Kang Shih, Staff 
White Paper: Econometric Analysis on the Initial Implementation of 
CAM Requirements, Public Company Accounting Oversight Board 4 (2020) 
(discussing how PCAOB staff did not find ``systematic evidence that 
investors respond to the information contents in CAMs'' but 
nevertheless did find that ``some investors are reading CAMs and 
find the information beneficial.''); Kose John and Min Liu, Does the 
Disclosure of an Audit Engagement Partner's Name Improve the Audit 
Quality? A Difference-in-difference Analysis, 14 Journal of Risk and 
Financial Management 1 (2021) (suggesting that there was an increase 
in audit quality and audits costs as a result of PCAOB Rule 3211); 
and Cunningham, et al., What's in a Name? (finding evidence that any 
immediate impact of PCAOB Rule 3211 on audit quality or audit fees 
is limited to specific dimensions of audit quality, specific control 
groups, and/or specific company characteristics).
    \286\ See Doxey, et al., Do Investors Care; Candice T. Hux, How 
Does Disclosure of Component Auditor Use Affect Nonprofessional 
Investors' Perceptions and Behavior?, 40 Auditing: A Journal of 
Practice & Theory 35 (2021); Gurbutt and Shih, Econometric Analysis 
on the Initial Implementation of CAM Requirements; Jenna J. Burke, 
Rani Hoitash, Udi Hoitash, and Summer Xiao, The Disclosure and 
Consequences of US Critical Audit Matters, 98 The Accounting Review 
59 (2023). Referring to a U.K. auditor disclosure requirement 
similar to CAMs, another commenter said that the extent and quality 
of dialogue between investors and audit committees was not as 
expected.
    \287\ See Center for Audit Quality, Critical Audit Matters 
Survey (July 2024).
---------------------------------------------------------------------------

    One commenter suggested that the benefits of the proposed metrics 
would be limited by the fact that they are focused on the past and 
therefore may have limited value predicting future performance. The 
Board recognizes that the metrics will be computed using historic data 
and the Board believes this is a natural limit. The Board also 
disagrees with the premise that historic information, by definition, 
cannot have value predicting future performance. Historical metrics can 
inform future-oriented decisions by increasing the reliability of the 
data investors and audit committees use to form their expectations.
    One commenter suggested that benefits would only accrue to data 
aggregators, the plaintiff's bar, and academics and not to investors. 
The Board agrees that data aggregators may aggregate and resell the 
information. However, the Board notes that the existence of such a 
market would be evidence that there is a market demand for the final 
metrics. Data aggregators may also allow retail investors to benefit 
more from the final metrics by making them even more accessible. 
Similarly, to the extent there is future reliance on the metrics by 
academics and plaintiffs' lawyers, it would serve as evidence of their 
information value and, by extension, their relevance to investors. 
Pointing to pages 135 and 168 of the proposal, the same commenter 
stated that the proposal acknowledged that the required metrics are not 
likely to be decision-useful to retail investors. In fact, the proposal 
states on page 135 that ``[r]esearch also indicates that retail 
investors may not necessarily use information regarding an audit firm 
in their decisions to vote on a proposal to ratify the appointment of 
the firm.'' The proposal states at p. 168 that ``[d]ue to economies of 
scale, the Board believes institutional investors would be more likely 
to incur these costs than retail investors.'' To be clear, the Board 
believes that institutional investors are more likely to use the final 
metrics than retail investors.
    One commenter suggested that all the metrics must help retail 
investors make informed decisions. The Board considered the benefits 
and costs to all stakeholders, not just retail investors. As such, the 
Board does not believe that a metric should be excluded on the basis 
that it may not help retail investors make informed decisions because 
doing so could deprive other stakeholders of useful information. 
Subject to this caveat, the Board believes some retail investors will 
use the metrics, albeit likely less so than institutional investors. 
Furthermore, as discussed in above, the Board believes more passive 
retail investors may indirectly benefit from the improved decision-
making of more active institutional investors.
a. Improved Monitoring
    The final rules will increase the set of information available to 
audit committees and investors regarding their auditor. This should 
improve both investors' and audit committees' ability to monitor their 
auditors.\288\ For example, an audit committee could engage in more 
meaningful discussions with their auditor regarding the auditor's 
performance.\289\ In response to improved monitoring, auditors may 
improve audit efficiency as well as audit outcomes as they become more 
responsive to investors' and audit committees' audit service 
needs.\290\ The final rules could also reduce costs related to 
information gathering that are incurred by investors and audit 
committees when monitoring their auditor. Some of the cost reductions 
could reflect reductions in duplicative work to the extent that various 
investors or audit committees collect the same information.
---------------------------------------------------------------------------

    \288\ For a discussion of the same principle, but in the context 
of issuer financial reporting, see, e.g., Leuz and Wysocki, The 
Economics of Disclosure and Financial Reporting Regulation 
(explaining that the disclosure of operating performance and 
governance arrangements by public companies can lower the cost of 
monitoring by providing investors with useful benchmarks that help 
investors evaluate other companies' managerial efficiency or 
potential agency conflicts).
    \289\ One study reviewed the comment letters to the Concept 
Release and found that audit firms agreed with the notion that audit 
committees may benefit from enhanced dialog between the auditor and 
the audit committee. See Kathleen M. Harris, and L. Tyler Williams, 
Audit Quality Indicators: Perspectives from Non-Big Four Audit Firms 
and Small Company Audit Committees, 50 Advances in Accounting 1 
(2020).
    \290\ See, e.g., Bengt Holmstr[ouml]m, Moral Hazard and 
Observability, The Bell Journal of Economics 74 (1979) (finding that 
efficiency improves when contractable information about an agent's 
performance is available to the agent's principal) and Mai Dao, K. 
Raghunandan, and Dasaratha V. Rama, Shareholder Voting on Auditor 
Selection, Audit Fees, and Audit Quality, 87 The Accounting Review 
168 (2012) (finding evidence that shareholder involvement in firm 
selection is associated with higher audit fees and improved audit 
quality). Some research suggests that audit committees with 
financial expertise are more effective monitors (i.e., financial 
reporting quality improves). To the extent that providing additional 
information to audit committees is analogous to increasing their 
expertise, this suggests that the final rules could lead to more 
effective audit committee monitoring. See Dina El Mahdy, Jia Hao, 
and Yu Cong, Audit Committee Financial Expertise and Information 
Asymmetry, Journal of Financial Reporting and Accounting (2022). In 
principle, improved monitoring could lead to a reduction in the 
overall quality of audit services. For example, some issuers may 
seek lower audit fees at the expense of audit quality. As the final 
disclosures will be public, the Board believes, in most cases, this 
would be less likely. See Section below for additional discussion. 
Some issuers may have very strong financial reporting quality 
independent of their auditor (e.g., they have a lender with strong 
oversight). In these cases, the most suitable auditor may not 
necessarily be the ``highest quality'' auditor and over-auditing may 
be more of a concern than under-auditing.
---------------------------------------------------------------------------

    One commenter suggested that the PCAOB should not focus on over-
auditing or audit inefficiencies. Another commenter was concerned by 
the suggestion that investors should be expected to ratify auditor 
selection or make decisions related to capital allocation on the basis 
of auditor efficiency (e.g., by reviewing auditors' allocation of time 
or resources). Consistent with the PCAOB's staff guidance on economic 
analysis, the Board considered the most likely impacts. As discussed in 
the proposal, the Board believes that some reduction in over-auditing 
or some improvement in auditing efficiency could result from

[[Page 100040]]

the final rules. However, the Board does not believe they will be 
central benefits and the Board has emphasized other benefits 
accordingly.
    Two caveats could limit the extent to which improved investor and 
audit committee monitoring and reduced monitoring costs will lead to 
improved audit performance. First, the Board notes that improvements in 
audit performance will be limited by the fact that audit committees are 
able to request information like the final metrics from their auditor. 
Indeed, one survey of audit committee members from smaller public 
companies, including audit committee members of accelerated filers, 
reports that most of the survey participants believed there were no 
``gaps'' in the information they were receiving from their audit 
firms.\291\ Furthermore, at the September 2024 IAG meeting, one audit 
committee chair said that he has unfettered access to his auditor, has 
requested information related to industry expertise from his auditor in 
the past, and has never been denied access to information requested. As 
discussed above, one commenter provided a survey suggesting that most 
audit committees believe the current information environment is 
sufficient. However, the Board believes that, by making these 
disclosures mandatory and standardized across firms and engagements, 
the final rules will increase the accessibility, reliability, and 
comparability of information about auditors and their engagements. For 
example, audit committees will be better able to compare their auditors 
to peers. Moreover, at the September 2024 IAG meeting one audit 
committee chair described how their auditor can be reluctant to provide 
information deemed confidential by the auditor. Second, the benefit of 
improved monitoring of auditors could also vary depending on the 
abilities of the audit committee. As one IAG member said, audit 
committee members that do not have a background in accounting may not 
know what questions to ask their auditor. For example, more proactive 
audit committees with greater financial or audit expertise may be able 
to make better use of the final metrics than other audit committees. 
However, under the final rules, investors considering votes for 
election to the board of audit committee members could consider whether 
they expect candidates to be able to effectively use the final metrics 
when executing their oversight responsibilities.
---------------------------------------------------------------------------

    \291\ See Harris and Williams, Audit Quality Indicators Table 6.
---------------------------------------------------------------------------

    In addition to helping investors monitor the auditor's performance, 
the final metrics may assist investors in monitoring and evaluating the 
performance of the audit committee. For example, investors could 
observe audit committee performance and express any potential concerns 
through open dialogues with the board of directors or election of board 
and audit committee members. The audit committee is responsible for 
overseeing the auditor and the final metrics may assist investors in 
determining whether the audit committee was effective in this capacity 
(e.g., whether the audit committee continues to delay replacing the 
auditor despite the presence of metrics that suggest potential concerns 
about audit performance).\292\ This improved monitoring could improve 
audit committee effectiveness (e.g., more effective monitoring of the 
auditors, better selection of auditors, etc.) \293\
---------------------------------------------------------------------------

    \292\ See above for a discussion on how the final metrics could 
assist decision-making.
    \293\ Some academic research suggests that audit committee 
effectiveness is associated with audit committee incentives. See, 
e.g., Jeffrey Cohen, Ganesh Krishnamoorthy, and Arnold M. Wright, 
The Corporate Governance Mosaic and Financial Reporting Quality, 23 
Journal of Accounting Literature 87 (2004) and cites therein. Some 
research suggests that investors are willing to pay for audit 
committee effectiveness and hold audit committees accountable for 
negative audit quality. See, e.g., Ellen Engel, Rachel M. Hayes, and 
Xue Wang, Audit Committee Compensation and the Demand for Monitoring 
of the Financial Reporting Process, 49 Journal of Accounting and 
Economics 136, 138 (2010) (suggesting a willingness by companies to 
deviate from the historically prevalent one-size-fits-all approach 
to director pay in response to increased demands on audit committees 
and differential director expertise) and Suraj Srinivasan, 
Consequences of Financial Reporting Failure for Outside Directors: 
Evidence from Accounting Restatements and Audit Committee Members, 
43 Journal of Accounting Research 291 (2005) (concluding that audit 
committee members bear reputational costs for financial reporting 
failure). Some research suggests that audit committee members 
without Big 4 audit experience are more likely to favor auditors 
that are rated as ``attractive.'' See, e.g., Baugh, Matthew, 
Nicholas J. Hallman, and Steven J. Kachelmeier, A Matter of 
Appearances: How Does Auditing Expertise Benefit Audit Committees 
When Selecting Auditors?, 39 Contemporary Accounting Research 234 
(2022). Together, this research suggests that audit committee 
effectiveness could respond to improved investor monitoring. Other 
research suggests that audit committee effectiveness is positively 
associated with proxies for audit quality. See, e.g., Brian Bratten, 
Monika Causholli, and Valbona Sulcaj, Overseeing the External Audit 
Function: Evidence from Audit Committees' Reported Activities, 41 
Auditing: A Journal of Practice & Theory 1 (2022) (finding that the 
strength of audit committee oversight, as implied by audit committee 
disclosures, is positively associated with proxies for audit 
quality).
---------------------------------------------------------------------------

    One commenter supported the view that the metrics will help 
investors hold audit committees accountable. However, another commenter 
suggested that audit committees that currently execute their statutory 
mandate with an insufficient level of interest and attention will 
continue to do so despite the availability of the final metrics. 
Another commenter suggested that metrics were an inappropriate way for 
investors to oversee audit committees and would override the 
gatekeeping function of audit committees. The Board acknowledges that 
the final rules' impact may vary by audit committee. However, for the 
reasons discussed above, the Board believes that the final rules will, 
on average, lead to a valuable improvement in investors' ability to 
monitor audit committees and, by extension, audit committee 
performance. The Board does not believe the final rules will supplant 
audit committees' gatekeeper function. Rather, audit committees will 
continue to play a critical corporate governance function. Indeed, by 
enabling investors to better monitor and evaluate audit committees, the 
Board believes the final metrics will enhance the audit committee's 
role and reinforce its effectiveness in overseeing auditors.
    One commenter suggested that interaction between investors and 
directors is unlikely and directed us to industry research suggesting 
that engagement between directors of large issuers and their investors 
is decreasing.\294\ The Board acknowledges that direct interaction may 
occur more for institutional investors. However, the Board notes that 
the survey cited by the commenter notes that the decline between 2022 
and 2023 was ``slight'' overall but larger for the largest companies 
(75% to 58%). The cited survey also says that ``directors are regularly 
engaging with shareholders and the vast majority consider those 
interactions `productive.' '' Moreover, as discussed in greater detail 
above, the Board notes that many public companies have robust investor 
outreach programs, some of which target retail investors. Academic 
research on the frequency of shareholder outreach programs shows they 
are increasing over time.\295\ Therefore, the Board believes there is 
no strong evidence supporting the comment that director engagement with 
shareholders is unlikely to occur.
---------------------------------------------------------------------------

    \294\ See PriceWaterhouseCoopers, 2023 Annual Corporate 
Directors Survey.
    \295\ See Dey et al., Proxy Advisory Firms and Corporate 
Shareholder Engagement, Figure 2 (showing a monotonic increase in 
the proportion of sampled firms reporting shareholder engagement in 
their proxy statement from 5.5% in 2011 to 36.3% in 2019.)
---------------------------------------------------------------------------

    Mandatory disclosure of the final metrics could also improve audit 
firms' internal monitoring of their (i) audit

[[Page 100041]]

practices and related system of quality control, and (ii) individual 
engagements. This could improve governance, accountability, and overall 
quality control within the audit firm. The final metrics may also help 
auditors identify efficiencies or room for improvement in their audit 
approach by comparing their final metrics to their competitors. One 
commenter noted that the proposal recognized that firms may not find 
the certain metrics useful in monitoring their quality control systems. 
While the Board continues to believe that the final metrics could 
improve audit firms' internal monitoring, the Board acknowledges that 
some firms, due to their unique facts and circumstances, may find some 
metrics less useful than others.
b. Improved Selection
    The final rules may also enhance auditor selection to the extent 
that the rules improve the ability of investors and audit committees to 
compare their current auditor to an alternative auditor.\296\ When 
considering an alternative auditor, audit committees may find the 
auditor's engagement-level metrics for similar engagements (e.g., an 
issuer of similar size and/or within the same industry to the audit 
committee's issuer) most useful. As discussed above, investors and 
audit committees could electronically search for firm-level metrics and 
download engagement-level metrics when constructing rosters of 
candidate auditors. Moreover, audit committees will benefit to the 
extent that they are able to engage in more meaningful discussions and 
interviews with candidate auditors during the selection process--
improving the efficiency of auditor-issuer matching.\297\ For example, 
the final metrics (e.g., Industry Experience and Workload) could help 
audit committees select an auditor that has the capacity to perform the 
audit.\298\ Requiring mandatory, comparable, and uniform disclosure of 
the final metrics--across engagement teams and audit firms, and over 
time--should further enhance this benefit by helping audit committees 
to compare auditors on a common basis.\299\ The final rules may also 
improve investors' decision-making regarding auditor ratification and 
appointment of board members.\300\ For instance, investors may decide 
that a particular final metric is especially important to their views 
on the auditor's efficacy and the quality of the financial 
statements.\301\ Investors that rely on proxy advisors for these 
decisions may also benefit from the final disclosures because proxy 
advisors could use the information in their recommendations.
---------------------------------------------------------------------------

    \296\ One recent experimental study finds that participants 
playing the role of CFO, director, or individual investors strongly 
prefer auditors that have stronger metrics and are willing to pay 
more for those auditors. See Dennis Ahn, Radhika Lunawat, and 
Patricia Wellmeyer, Firm and Engagement Performance Metrics and 
Auditor Contracting Decisions, SSRN Electronic Journal, at Table 1 
and Table 2 (2024). The Board notes that SSRN does not peer review 
its submissions.
    \297\ See, e.g., Gene M. Grossman and Carl Shapiro, Informative 
Advertising with Differentiated Products, 51 The Review of Economic 
Studies 63 (1984) (finding that reduced information frictions (i.e., 
decreased informational advertising costs) could result in improved 
matching between sellers and buyers).
    \298\ Some academic research finds that audit committees do 
select auditors based on observable aspects of the quality of their 
services. See, e.g., Vivek Mande and Myungsoo Son, Do Financial 
Restatements Lead to Auditor Changes?, 32 Auditing: A Journal of 
Practice & Theory 119 (2013).
    \299\ See above for discussion of academic literature related to 
the benefits of comparability in financial reporting.
    \300\ Some research suggests that more informed shareholders 
make better audit ratification decisions (e.g., auditor ratification 
decisions are more closely associated with public signals of audit 
failure). See, e.g., Cassell, et al., Retail Shareholders and cites 
therein.
    \301\ Some experimental research suggests that investors are 
less likely to support auditor ratification if metrics like those 
discussed in the Concept Release are trending downward. See, e.g., 
Brown and Popova, How do Investors Respond.
---------------------------------------------------------------------------

    Improved auditor selection could improve audit efficiency as well 
as audit outcomes as incoming auditors may be better equipped to meet 
investors' and audit committees' audit service needs.\302\ The final 
rules could also reduce costs related to information gathering incurred 
by audit committees when selecting their auditor and by investors when 
voting to ratify the appointment of the auditor.\303\ Some of the cost 
reductions could reflect reductions in duplicative work to the extent 
that various investors or audit committees collect the same 
information. Improved investor decision-making regarding voting for 
members of the board of directors, including directors who serve on the 
audit committee, could improve audit committee performance as incoming 
board members may be better equipped to meet investors' expectations 
regarding auditor oversight. One commenter said that the proposed 
metrics have the capacity to make investors' vote on ratification of 
the auditor and the vote on audit committee members substantially more 
meaningful.
---------------------------------------------------------------------------

    \302\ In principle, improved auditor selection could lead to a 
reduction in the overall quality of audit services. For example, 
some issuers may seek lower audit fees at the expense of audit 
quality. Due to the fact that the final disclosures will be public, 
the Board believes, in most cases, this would be less likely. See 
below for additional discussion. Some issuers may have very strong 
financial reporting quality independent of their auditor (e.g., they 
have a lender with strong oversight). In these cases, the most 
suitable auditor may not necessarily be the ``highest quality.''
    \303\ Although investor voting on auditor ratification is non-
binding, it could be a meaningful mechanism for expressing views on 
audit-related issues. If investors are dissatisfied with auditor 
selection, they can also vote against the re-election of board 
members, including those who serve on the audit committee, to 
potentially influence future auditor oversight.
---------------------------------------------------------------------------

    Two caveats could limit the potential benefit of improved auditor 
selection and the reduction in the associated information gathering 
costs. First, the Board notes that the impact will be limited by the 
fact that audit committees could in principle request information like 
the final metrics from alternative auditors. However, auditors may not 
be willing to voluntarily provide an audit committee with engagement-
level metrics regarding their engagements with other issuers, 
information that may be particularly useful to audit committees in 
selecting an auditor. Furthermore, while audit committees can currently 
request tailored metrics, this approach imposes substantial collective 
costs and limits comparability across firms. The Board believes that, 
by making these disclosures mandatory and standardized, the final rules 
will increase the accessibility, reliability, and comparability of 
information available and therefore help audit committees. Second, the 
Board notes that, to the extent that benefits are derived from the 
ability to readily switch between auditors based on an evaluation of 
the auditors' metrics, those benefits could be limited due to 
stickiness in existing auditor-audited company relationships which 
creates switching costs. Furthermore, large multinational issuers may, 
as a practical matter, need a GNF auditor, which limits the pool of 
available alternatives--which may be in turn further limited by auditor 
geographic/industry specialization (e.g., a need for financial services 
expertise in a particular office/city), or by auditor independence 
rules (e.g., the existence of an independence-impairing financial or 
consulting relationship between the issuer and a potential alternative 
auditor).\304\ Therefore, the benefit of improved auditor selection 
could be more limited for the largest issuers. However, the Board 
believes that the final metrics could also help the audit committees of 
the largest issuers select

[[Page 100042]]

specific engagement partners within the larger audit firms.
---------------------------------------------------------------------------

    \304\ See United States Government Accountability Office, 
Continued Concentration in Audit Market for Large Public Companies 
Does Not Call for Immediate Action 21 (Jan. 8, 2008).
---------------------------------------------------------------------------

c. Benefits to the PCAOB's Inspection and Enforcement Programs and 
Scholarly Auditing Research
    The final metrics are expected to provide direct benefits to the 
PCAOB's internal operating effectiveness. In the PCAOB's oversight 
capacity, it engages in inspection and enforcement activities for 
audits of issuers and, in the course of doing so, it uses data from 
issuers and audit firms. The final metrics will expand the basis on 
which selections may be made. For example, the final metrics could 
improve the selection models used to aid in predicting negative audit 
outcomes, such as restatements or the potential for audit deficiencies. 
As discussed above, QC 1000 will help to ensure that the final metrics 
will be reliable. Greater insight into audit risks could improve the 
PCAOB's ability to select potential enforcement matters. Overall, 
improved PCAOB oversight may give auditors additional incentive to 
comply with PCAOB professional standards and rules.\305\
---------------------------------------------------------------------------

    \305\ Some academic research suggests that PCAOB oversight is 
beneficial. For example, one study of audit firms in foreign 
jurisdictions finds that PCAOB inspections access is positively 
associated with proxies for audit quality. See Phillip T. Lamoreaux, 
Does PCAOB inspection Access Improve Audit Quality? An Examination 
of Foreign Firms Listed in the United States, 61 Journal of 
Accounting and Economics 313 (2016).
---------------------------------------------------------------------------

    Moreover, the PCAOB actively engages in policy research related to 
the market for assurance services to further the PCAOB's mission by 
informing the standard-setting and rulemaking agendas among other 
purposes. The additional data provided by the final rules could enhance 
the PCAOB's ability to produce impactful research and recirculate that 
gained knowledge into improved standards and rules. Relatedly, the 
additional data could also provide valuable information sources for the 
public, including academic research. Commenters agreed that academics 
could benefit from the metrics. Improved research quality is an 
important element of the PCAOB's standard-setting and rulemaking 
projects.
    One commenter said it was unclear how the PCAOB would use the 
information. As described in the proposal and above, the Board expects 
that the metrics will at least inform the PCAOB selection of 
engagements and focus areas for review and future academic research 
that utilizes the metrics could inform PCAOB rulemaking projects. 
Several commenters agreed that the information would be useful to the 
PCAOB.
    One commenter suggested that the PCAOB should be able to articulate 
which of the final metrics provide critical insights for effective 
monitoring by inspection teams using information obtained through PCAOB 
inspections. The PCAOB uses information like the final metric in 
various ways as part of its inspections approach. However, the Board 
believes the final metrics will on the whole provide additional value 
because they will be more comparable across firms, engagements, and 
time and the engagement-level metrics will be available to PCAOB staff 
at an earlier point in time than engagement-specific information 
provided pursuant to the review of an engagement. The same commenter 
said that public disclosure of the proposed metrics would not be 
necessary for the PCAOB to benefit from them. The Board agrees that 
some of the benefits to the PCAOB do not derive specifically from the 
public nature of the reporting. However, the PCAOB expects that it will 
benefit from academic research that the Board believes will be 
conducted using the publicly reported final metrics and broader 
stakeholder engagement. Public availability of the final metrics could 
also improve the quality of other stakeholder input received by the 
PCAOB (e.g., public comment or roundtable discussions).
    One commenter suggested that reliance on the metrics by PCAOB 
oversight could create a risk of enforcement for minor, unintentional 
errors in reporting. The commenter said this risk could manifest as a 
cost to smaller and mid-sized firms. The Board believes the commenter 
may have misinterpreted the benefit to PCAOB oversight as a suggestion 
that the PCAOB intends to make reporting of the final metrics an 
inspection focus area. While PCAOB inspectors may do so in the future, 
the Board is not suggesting this will benefit PCAOB oversight per se. 
Rather, the Board are suggesting that the final metrics themselves may 
help PCAOB inspections staff select firms, engagements, or focus areas 
for review. However, the Board acknowledges that, by relying on the 
final metrics, potential deficiencies in how firms are reporting them 
may become apparent to PCAOB staff. To the extent PCAOB oversight does 
consider firms' compliance with the final rules, the Board believes the 
PCAOB would exercise appropriate discretion.
    Overall, the benefit to the PCAOB is difficult to quantify, as the 
social and economic benefits of enhanced regulatory oversight that is 
more efficient in its allocation of resources are difficult to 
monetize. The benefits of additional scholarly research are also 
difficult to quantify because there are a broad set of beneficiaries.
ii. Indirect Benefits Linked to Competition
Capital Market Effects
    Assuming that the additional information, context, and perspective 
on auditors and audit engagements helps investors assess audit 
performance, it may help investors assess financial reporting 
quality.\306\ For example, investors may incorporate the metrics into 
their portfolio selection decisions.\307\ One commenter said that the 
final metrics were necessary for auditors to have their work judged as 
something other than a commodity (i.e., competition on price alone).
---------------------------------------------------------------------------

    \306\ The IAG indicated in their comment letter regarding 
proposed QC 1000 that information related to audit quality would 
provide investors with ``a level of confidence in the financial 
statements of companies in which they invest. Their level of 
confidence in the financial statements has a bearing on the prices 
they will be willing to pay or demand for investments.'' The comment 
letters received in response to proposed QC 1000 are available on 
the Board's website in Docket 046. See comment No. 4 on the proposed 
rule from the IAG, available at https://assets.pcaobus.org/pcaob-dev/docs/default-source/rulemaking/docket046/4_iag.pdf?sfvrsn=1941e7c0_4. See above for a discussion on the 
association between audit quality and financial reporting quality.
    \307\ There is an extensive body of academic literature 
suggesting that financial markets incorporate information into 
securities prices. See, e.g., Eugene F. Fama, Efficient Capital 
Markets: A Review of Theory and Empirical Work, 25 The Journal of 
Finance 383 (1970).
---------------------------------------------------------------------------

    Issuers audited by auditors whose metrics capital markets associate 
with greater financial reporting quality may experience reduced cost of 
capital or other capital market benefits and investors may reallocate 
their capital accordingly. Taken in isolation, this would tend to 
result in a reallocation of capital from issuers with less reliable 
financial reporting quality to issuers with higher financial reporting 
quality. These capital market reactions could provide audit committees 
with a stronger incentive to appoint an auditor whose final metrics 
capital markets associate with greater financial reporting quality. 
These effects could lead to changes in audit fees as auditors respond 
to changing demand for their services. Facing capacity constraints, 
some audit firms may turn down engagements or recruit additional staff 
to expand capacity.
Auditor Competition
    Against the backdrop of capital market reactions to the final 
metrics and as auditors become better able to

[[Page 100043]]

monetize their reputations, auditors could have an incentive to compete 
on the final metrics.\308\ For example, to win engagements, auditors 
may seek to manage their final metrics by redeploying staff resources 
or providing additional training. This competitive dynamic could 
improve audit quality and, by extension, financial reporting 
quality.\309\ Reduced search costs could increase auditor 
competition.\310\ In addition to facilitating issuers' selection of a 
preferred auditor, the increase in competition could potentially reduce 
audit fees.\311\
---------------------------------------------------------------------------

    \308\ Improved competition following mandatory disclosure 
regimes has been observed in other markets. See above for additional 
discussion. One study finds that non-U.S. auditors inspected by the 
PCAOB gain market share from competing auditors after PCAOB 
inspection reports are made public, more so when the PCAOB 
inspection report has fewer engagement-level deficiencies. See 
Daniel Aobdia and Nemit Shroff, Regulatory Oversight and Auditor 
Market Share, 63 Journal of Accounting and Economics 262, (2017).
    \309\ See above for a discussion on the relationship between 
audit quality and financial reporting quality.
    \310\ Economic theory suggests that a reduction in search costs 
helps to make markets more competitive. See, e.g., Helmut Bester, 
Bargaining, Search Costs and Equilibrium Price Distributions, 55 The 
Review of Economic Studies 201 (1988). There is an extensive 
literature in industrial organization economics studying the impact 
of search and advertising costs on competition. For example, Jean 
Tirole, The Theory of Industrial Organization, MIT Press 294 (1988) 
studies informative advertising (i.e., costs borne by sellers to 
inform buyers of the seller's existence, product quality, and 
pricing) in a model involving differentiated sellers, and finds that 
prices fall as information costs fall. See also Grossman and 
Shapiro, Informative Advertising; and Glenn Ellison and Alexander 
Wolitzky, A Search Cost Model of Obfuscation, 43 The RAND Journal of 
Economics 417 (2012). Glenn Ellison and Sarah F. Ellison, Search, 
Obfuscation, and Price Elasticities on the internet, 77 Econometrica 
427 (2009) also show that reductions in search costs increase the 
price-sensitivity of demand, resulting in decreased prices for near-
substitute goods, and that sellers may attempt to engage in 
obfuscation strategies to reduce competitive pressure.
    \311\ The positive relationship between increased competition 
and lower audit fees is well-established, see, e.g., Wieteke Numan 
and Marleen Willekens, An Empirical Test of Spatial Competition in 
the Audit Market, 53 Journal of Accounting and Economics 450 (2012); 
and Andrew R. Kitto, The Effects of Non-Big 4 Mergers on Audit 
Efficiency and Audit Market Competition, 77 Journal of Accounting 
and Economics 101618 (2024). Other potential unintended impacts the 
proposal may have on competition are discussed below.
---------------------------------------------------------------------------

    The Board notes that the benefits linked to competition between 
audit firms could be reduced for the larger issuer segment of the 
market because larger issuers have fewer audit firms available to 
choose from that are able to perform large, complex audits, without 
violating independence rules and other constraints. However, the final 
metrics could help promote competition between partners within the 
larger firms.\312\ One commenter suggested that the ability of the 
proposed metrics to spark competition between firms is an important 
condition for rulemaking and one which the proposal abandons because 
the proposed metrics are divorced from audit quality and excessively 
burdensome. The Board agrees that the effect on competition is an 
important impact for the Board to consider, but the Board disagrees 
with the commenter's assertions that the proposal abandoned it. To the 
contrary, the Board's economic analysis considered all potential 
impacts of the final rules, competition among them. Indeed, based on 
the Board's careful consideration of academic research, public comment, 
and the Board's experience, the Board believes the final metrics could 
enhance competition and the Board's economic analysis reflects this 
view.
---------------------------------------------------------------------------

    \312\ See Ahrum Choi, Sunhwa Choi, and Jaeyoon Yu, Does Internal 
Competition among Audit Partners Affect Audit Pricing Decisions?, 
Auditing: A Journal of Practice & Theory 1 (2024) (finding that U.S. 
audit partners compete for clients with other partners within their 
office who perform audits in the same industry).
---------------------------------------------------------------------------

    One commenter questioned whether firms' management of their metrics 
to win market share would improve audit quality. As discussed in the 
proposal and below, the Board acknowledges that management of the final 
metrics may not always lead firms to improve their audit approach. 
However, economic theory suggests that if management of the metrics is 
entirely manipulatory, then users of the information will entirely 
discount it as ``cheap talk.'' \313\ The Board believes this extreme 
``cheap talk'' outcome is unlikely, in part, because the final rules 
will be subject to PCAOB oversight as well as firms' QC systems, which 
are in turn subject to QC 1000.\314\
---------------------------------------------------------------------------

    \313\ See Vincent P. Crawford and Joel Sobel, Strategic 
Information Transmission, Econometrica: Journal of the Econometric 
Society 1431 (1982).
    \314\ See below for additional discussion on how PCAOB oversight 
would mitigate potential manipulation of the final metrics.
---------------------------------------------------------------------------

iii. Indirect Benefits of Improved Financial Reporting Quality
    As described above, to the extent the final rules improve audit 
performance, the final rules will also improve financial reporting 
quality. More reliable financial information would allow investors to 
improve the efficiency of their capital allocation decisions (e.g., 
investors may more accurately identify companies with the strongest 
prospects for generating future risk-adjusted returns and reallocate 
their capital accordingly).\315\ Investors may also perceive less risk 
in capital markets generally, leading to an increase in the supply of 
capital.\316\ An increase in the supply of capital could increase 
capital formation while also reducing the cost of capital to 
companies.\317\ A reduction in the cost of capital reflects a welfare 
gain because it implies investors perceive less risk in the capital 
markets.
---------------------------------------------------------------------------

    \315\ See, e.g., Acito, et al., Market-Based Incentives for 
Optimal Audit Quality.
    \316\ See, e.g., Hanwen Chen, Jeff Zeyun Chen, Gerald J. Lobo, 
and Yanyan Wang, Effects of Audit Quality on Earnings Management and 
Cost of Equity Capital: Evidence from China, 28 Contemporary 
Accounting Research 892 (2011); Richard Lambert, Christian Leuz, and 
Robert E. Verrecchia, Accounting Information, Disclosure, and the 
Cost of Capital, 45 Journal of Accounting Research 385 (2007) 
(concluding that improving the quality of accounting disclosures can 
influence the cost of capital and under certain conditions can 
unambiguously lower the cost of capital).
    \317\ Cost of capital is the rate of return investors require to 
compensate them for the lost opportunity to deploy their capital 
elsewhere. Equivalently, cost of capital is the discount rate 
investors apply to future cash flows. Cost of capital depends, among 
others, on the riskiness of the underlying investment. Accordingly, 
the rate of return required by equity holders--cost of equity 
capital--and the rate of return required by debt holders--cost of 
debt capital--may differ to the extent equity and debt securities 
expose investors to different levels of risks. In the context of a 
particular company or portfolio of companies, the weighted average 
cost of capital is the average of the cost of equity capital and the 
cost of debt capital, weighted by the market values of the 
underlying equity and debt securities, respectively. See, e.g., R. 
A. Brealey, S. C. Myers, and F. Allen, Principles of Corporate 
Finance, 10th Edition McGraw-Hill 8, 90, and Chapter 7, (2011). For 
theoretical discussion on the link between financial reporting 
quality and cost of capital, see, e.g., Richard A. Lambert, 
Christian Leuz, and Robert E. Verrecchia, Information Asymmetry, 
Information Precision, and the Cost of Capital, 16 Review of Finance 
1, 16-18 (2012); and David Easley and Maureen O'Hara, Information 
and the Cost of Capital, 59 Journal of Finance 1553, 1571 (2005).
---------------------------------------------------------------------------

    The Board is unaware of any literature that would provide a basis 
for quantifying the magnitude of financial reporting quality 
improvement associated with the final rules. However, academic 
literature has attempted to quantify the impact of improved financial 
reporting quality on cost of capital by measuring the association 
between various quantitative proxies for financial reporting quality 
and cost of capital after controlling for other potential drivers of 
cost of capital. Subject to the caveats discussed below, this 
literature suggests, overall, that even small improvements in financial 
reporting quality can result in reductions in issuers' cost of capital 
of multiple basis points in magnitude. Due to the size of the U.S. 
capital markets, even a single basis point reduction in the cost of 
capital implies substantial welfare gains.
    Some studies examine the relationship between improved

[[Page 100044]]

financial reporting quality and companies' cost of equity capital. For 
example, one study quantified the relationship between earnings 
transparency and cost of equity capital.\318\ The study found that, 
compared to a baseline of no transparency, companies with an average 
level of earnings transparency had between 1.7 and 3.4 percentage 
points lower cost of equity capital, depending on the estimation 
methodology. Using restatements as a proxy for financial reporting 
quality, another study found that a restatement increases the cost of 
equity capital by between six and 15 percent in the longer term.\319\ 
Assuming a 10 percent cost of capital, this result corresponds to 
between a 60 and 150 basis point increase in the cost of equity 
capital. One study found that companies with the highest accruals 
quality had a 210 basis point lower cost of equity capital compared to 
companies with the lowest accruals quality.\320\ Using disclosure 
quality ratings (determined by an index prepared by analysts) as a 
proxy for financial reporting quality, another study found that 
companies with the highest disclosure quality ratings had roughly a 0.7 
percentage point lower cost of equity capital compared to companies 
with the lowest.\321\ From an international perspective, one study 
found that companies in countries in the 75th percentile of strength of 
disclosure rules and associated enforcement had roughly a 200 basis 
point lower costs of equity capital than countries at the 25th 
percentile (i.e., countries with weaker disclosure rules and 
enforcement).\322\ Another study found that, compared to companies in 
countries at the 75th percentile of earnings opacity, the cost of 
equity capital for companies in the 25th percentile (i.e., countries 
with less opaque earnings) had a 2.8 percentage point lower cost of 
equity capital.\323\
---------------------------------------------------------------------------

    \318\ See Mary E. Barth, Yaniv Konchitchki, and Wayne R. 
Landsman, Cost of Capital and Earnings Transparency, 55 Journal of 
Accounting and Economics 206, 216-217 (2013).
    \319\ See Paul Hribar and Nicole Thorne Jenkins, The Effect of 
Accounting Restatements on Earnings Revisions and the Estimated Cost 
of Capital, 8 Review of Accounting Studies 337, 337 (2004).
    \320\ See Jennifer Francis, Ryan LaFond, Per Olsson, and 
Katherine Schipper, The Market Pricing of Accruals Quality, 39 
Journal of Accounting and Economics 295, 297 (2005).
    \321\ See Christine A. Botosan and Marlene A. Plumlee, A 
Re[hyphen]examination of Disclosure Level and the Expected Cost of 
Equity Capital, 40 Journal of Accounting Research 21, 22 (2002).
    \322\ See Luzi Hail and Christian Leuz, International 
Differences in the Cost of Equity Capital: Do Legal Institutions and 
Securities Regulation Matter?, 44 Journal of Accounting Research 
485, 488 (2006).
    \323\ See Utpal Bhattacharya, Hazem Daouk, and Michael Welker, 
The World Price of Earnings Opacity, 78 Journal of Accounting and 
Economics 641, 643 (2003).
---------------------------------------------------------------------------

    While the above studies examine the impact of improved financial 
reporting quality on companies' cost of equity capital, several studies 
examine instead the impact of improved financial reporting quality on 
companies' cost of debt capital. For example, one study found that 
companies with the highest disclosure quality ratings (determined by an 
index prepared by analysts) have roughly 1.1 percentage points lower 
cost of debt capital than companies with the lowest disclosure quality 
ratings.\324\ Another study found that companies in the highest decile 
of accruals quality had a 126-basis point lower cost of debt capital 
than companies in the lowest decile of accruals quality.\325\
---------------------------------------------------------------------------

    \324\ See Partha Sengupta, Corporate Disclosure Quality and the 
Cost of Debt, 73 The Accounting Review 459 (1998).
    \325\ See Francis, et al., The Market Pricing 297.
---------------------------------------------------------------------------

    While the Board believes these studies are indicative of the 
potential impacts improved financial reporting quality may have on 
capital markets, the Board acknowledges that the studies are subject to 
certain caveats.\326\ First, the studies do not indicate the degree to 
which the disclosure of firm and engagement metrics could impact 
financial reporting quality in the first instance. Therefore, the 
magnitudes must be treated as illustrative examples, rather than point 
estimates, of the potential benefits of the final rules.
---------------------------------------------------------------------------

    \326\ For a more general discussion of challenges identifying 
causal relationships in financial reporting research, see Leuz and 
Wysocki, The Economics of Disclosure and Financial Reporting 
Regulation.
---------------------------------------------------------------------------

    Second, some of the studies may be subject to some endogeneity 
bias.\327\ For example, companies with high financial reporting quality 
may also be well-managed, a form of omitted variable bias. Similarly, 
companies that voluntarily provide higher quality information may do so 
because they are in a stronger financial position already, a form of 
self-selection bias. Due to these potential biases, some of the studies 
may overestimate the extent to which improved financial reporting 
quality reduces companies' cost of capital. Controlling for endogeneity 
bias is challenging and the results of any one methodology may be 
sensitive to the methodology's assumptions.\328\ Indeed, after 
attempting to statistically control for endogeneity bias, one study 
found that the association between financial reporting quality and cost 
of equity capital remains while another found that it disappears.\329\
---------------------------------------------------------------------------

    \327\ Endogeneity occurs when an explanatory variable in a 
multiple regression model is correlated with unobserved factors that 
affect the dependent variable. See Jeffrey M. Wooldridge, 
Introductory Econometrics: A Modern Approach, South-Western Cengage 
Learning, 4th edition 838 (2008).
    \328\ See David F. Larcker and Tjomme O. Rusticus, On the Use of 
Instrumental Variables in Accounting Research, 49 Journal of 
Accounting and Economics 186, 203 (2010).
    \329\ See, e.g., Christian Leuz and Robert E. Verrecchia, The 
Economic Consequences of Increased Disclosure, 38 Journal of 
Accounting Research 91, 121 (2000) (using bid-ask spreads for German 
companies as a proxy for cost of capital) and David A. Cohen, Does 
Information Risk Really Matter? An Analysis of the Determinants and 
Economic Consequences of Financial Reporting Quality, 15 Asia-
Pacific Journal of Accounting & Economics 69, 70 (2010).
---------------------------------------------------------------------------

    Third, while most research tends to find positive associations 
between financial reporting quality and the cost of capital, some 
studies have found counterintuitive or unexpected associations. For 
example, one study found that the timeliness of disclosures is 
negatively associated with the cost of equity capital.\330\ The results 
of another study suggest that the association between improved 
financial reporting quality and reduced cost of capital may apply only 
to companies with low analyst following.\331\
---------------------------------------------------------------------------

    \330\ The authors suggest that the result may be attributable to 
increased stock price volatility arising from excessive focus on 
short-term profits. See Botosan and Plumlee, A Re-examination 21 and 
37.
    \331\ See Christine A. Botosan, Disclosure Level and the Cost of 
Equity Capital, 72 The Accounting Review 323 (1997).
---------------------------------------------------------------------------

    Despite these caveats, the Board believes that the academic 
literature suggests overall that improved financial reporting quality 
results in lower costs of capital and, moreover, that even small 
improvements can reduce the cost of capital by one or more basis 
points. The studies discussed above found multiple percentage point 
reductions in cost of capital when companies (or countries) with the 
weakest financial reporting proxies are compared to the companies (or 
countries) with the strongest financial reporting proxies. As such, 
just one hundredth of the improvement in those measures could result in 
reductions in the cost of capital by multiple basis points. Due to the 
size of U.S. capital markets, even small reductions in the cost of 
capital, on the order of multiple basis points, can generate 
significant welfare gains. For example, using recent data on the size 
of the U.S. equity and debt capital markets, a single basis point 
reduction in the weighted average cost of capital

[[Page 100045]]

would imply at least $99.0 billion in welfare gains.\332\
---------------------------------------------------------------------------

    \332\ (1 basis point/(8% average cost of capital--1 basis 
point)) x ($68.1 trillion in equity market capitalization + $11.0 
trillion in debt market capitalization) = $99.0 billion. Source: S&P 
Capital IQ and SIFMA. The debt market capitalization figure reflects 
U.S. corporate bonds outstanding as of 2024 Q2. It does not include 
private debt. The Board notes several key assumptions and 
limitations of the calculation. The calculation assumes that debt 
and equity capital comprise all forms of capital (i.e., the 
calculation disregards other potential forms of capital) and that 
their total value is equal to the sum of all future cash flows 
discounted by the weighted average cost of capital. It assumes a 
weighted average cost of capital of 8% based on historic averages 
for the Russell 3000. See Michael J. Mauboussin and Dan Callahan, 
Cost of Capital: A Practical Guide to Measuring Opportunity Cost, 
Morgan Stanely Investment Management Counterpoint Global Insights, 
Exhibit 16 (2023). The calculation does not account for the 
potential beneficial impact of changes in the quantity of capital 
supplied nor does it account for potential general equilibrium 
effects in other markets. As discussed above, the calculation 
pertains to weighted average cost of capital reductions only. It 
does not capture potential increases in total market capitalization 
arising from improved management or improved capital allocation. The 
Board acknowledges that some issuers that contribute to the Board's 
market capitalization figures are not audited by firms that will be 
subject to the final requirements and therefore will not be impacted 
by the final requirements. However, the Board believes they make up 
a small share of total market capitalization.
---------------------------------------------------------------------------

    One commenter suggested that a review of the academic literature on 
cost of capital should allow the Board to quantify the impact of the 
final metrics on cost of capital decisions. The proposal provided a 
review of academic literature on cost of capital. That review appears 
here in essentially the same form. As discussed above, the Board 
believes this literature does provide evidence of the quantitative 
benefits of improved financial reporting quality generally. However, 
the Board is unaware of any literature that would provide a basis for 
quantifying the magnitude of financial reporting quality improvement 
(and thus the magnitude of cost of capital reduction) associated with 
the final rules and the commenter did not identify such literature.
    One commenter said that the proposal assumed that investors have 
homogenized interests when in fact there will always be a buyer and a 
seller with conflicting objectives. The Board recognizes that, with 
respect to secondary trading of issuer securities, buyers and sellers 
have conflicting objectives. To the extent the final metrics inform 
traders' perceptions of the value of issuer securities or otherwise 
improve financial reporting quality, the final metrics could in the 
short run benefit one trading counterparty at the expense of the other. 
However, for the reasons discussed above, the Board believes that more 
reliable financial reporting quality benefits capital markets overall 
in the long run.
iv. Academic Literature and Comments Related to Specific Final Firm and 
Engagement Metrics
    In the following discussion the Board reviews the extant literature 
related to the final metrics. In doing so, the Board separates the 
final metrics into three categories: (i) metrics related to audit 
personnel; (ii) metrics related to the allocation of audit hours; and 
(iii) metrics related to audit outcomes.
    The Board notes three important caveats. First, as most of the 
final metrics are not currently publicly available, academic studies 
principally rely on information obtained from audit firms directly, 
surveys, or foreign jurisdictions. Their relevance is thus limited by 
the fact that the metrics they study are not equivalent to the final 
metrics and their results may not be directly applicable to the U.S. 
audit market more generally. Second, while the extant literature may 
draw conclusions regarding a particular metric's relationship to 
publicly available proxies for audit quality, this does not imply that 
a final metric will provide any new insights to investors and audit 
committees incremental to the insights already provided by the publicly 
available proxies for audit quality. Finally, those relationships may 
be non-linear or difficult to fully evaluate.
    One commenter said that some studies cited in the proposal feature 
investors or investor groups who may not be representative of the 
broader population of investors. The commenter did not refer to any 
specific study. The Board acknowledges that the samples featured in 
some of the empirical studies discussed below may not be perfectly 
representative of the population of stakeholders that will be impacted 
by the final rules. While this fact limits their relevance, the Board 
believes their samples are similar enough to the impacted population 
that their results inform the economic analysis of the final rules. 
Consistent with the PCAOB's staff guidance on economic analysis, the 
Board highlighted key aspects of the studies (e.g., the 
representativeness of their data sample) that may limit their 
relevance.
    Several commenters suggested that the PCAOB should, as a starting 
point, demonstrate that any final metric has an unambiguous impact on 
audit quality. One commenter suggested that the PCAOB obtain research 
suggesting that any behavioral change produced by a final metric should 
not harm audit quality. The commenter also suggested that the 
univariate disclosures should provide a complete picture of the 
engagement and firm. As the commenter acknowledged, the Board performed 
an extensive literature review, the substance of which the commenter 
did not dispute. The Board also considered all academic research 
provided by commenters. While the Board considered the potential 
effects of the metrics on audit quality and auditor behavior, the Board 
does not believe that the rigid criteria suggested by commenters are 
necessary or appropriate. As the Board stated above, and as many 
commenters affirmed including this commenter, audit quality is complex 
and requires significant context to fully appreciate. As such, no 
metric taken in isolation can provide a complete picture of a firm and 
its engagements and thus have an unambiguous impact on audit quality. 
Furthermore, research cannot prove that any future behavioral changes 
would not harm audit quality. However, in selecting each of the final 
metrics, the Board considered whether the evidence on its relationship 
to the quality of firms and their engagements, which the Board believes 
reflects the spirit of the selection approach suggested by the 
commenter.
    The same commenter also suggested that the Board consider whether 
the disclosures would meet the SEC's goals for required disclosures. 
The SEC's goals on required disclosures have traditionally focused on 
corporate disclosure, although they may include auditor disclosure in 
certain contexts. The Board has carefully considered whether the 
required disclosures would help the PCAOB achieve its objectives in 
furtherance of its statutory mandate.
    The same commenter also questioned whether many of the academic 
studies surveyed in the academic literature review supported the 
proposal because they use statistical methods to identify causal 
relationship that hold other elements of the audit process fixed. The 
Board assumes that the commenter intended to contrast this standard 
statistical approach with the fact that, in practice, investors and 
audit committees will be comparing firms and engagements where other 
elements of the audit process are not fixed. The Board agrees that no 
single academic study that the Board reviewed provides dispositive 
proof that investors or audit committees will be able to interpret any 
individual metric in practice without also understanding the full 
context. Indeed, the Board has acknowledged that no individual metric 
can measure audit quality and a fuller appreciation of

[[Page 100046]]

audit quality requires consideration of a broad array of factors, many 
of which are unquantifiable (e.g., professional skepticism). However, 
the Board does not believe this implies that the academic studies 
surveyed provide no support for the final rules.
    One commenter said that the proposal did not provide sufficient 
evidence that public disclosure of the proposed metrics would 
meaningfully impact audit quality. Given that data using the specific 
final metrics is not currently available, evidence of their effects on 
audit quality is necessarily limited. Nevertheless, the Board believes 
the academic literature discussed below and the analysis discussed 
throughout this section provide evidence that the final metrics, taken 
as a whole, could have meaningful impacts to audit quality, which the 
Board believes could lead to significant benefits to investors, audit 
committees, and other stakeholders.
a. Metrics Related to Audit Personnel
    The Partner and Manager Involvement metrics will indicate the hours 
worked by senior professionals relative to more junior staff across the 
firm's large accelerated and accelerated filer engagements and on the 
specific engagement. Investors and audit committees could use this 
information to evaluate whether partners and managers are giving their 
engagement appropriate attention. Although the academic literature 
related to audit partner and manager involvement is limited, one study 
using Korean data suggests that audit partner involvement is positively 
associated with audit quality.\333\ Another study finds that the 
offices of U.S. Big 4 audit firms with relatively more CPAs tend to 
provide higher audit quality.\334\ While the number of staff with CPAs 
is not equivalent to the share of senior staff hours reflected in the 
metric, the finding does suggest that greater involvement of 
experienced staff is beneficial to audit quality.\335\ Another study 
using Chinese data finds that a greater partner to staff ratio is 
positively associated with audit quality.\336\ However, using U.S. 
data, another study finds partner time spent concurrently on other 
audits is not associated with audit quality.\337\
---------------------------------------------------------------------------

    \333\ See, e.g., Suyon Kim, Engagement Partners' Effort, 9 Risks 
1 (2021).
    \334\ See, e.g., Albert L. Nagy, Matthew G. Sherwood, and 
Aleksandra B. Zimmerman, CPAs and Big 4 Office Audit Quality, 42 
Journal of Accounting and Public Policy 107018 (2023).
    \335\ Another study using Japanese data finds that the number of 
CPA holders staffed to an audit engagement is positively associated 
with audit quality while the number of non-CPA holders is not. See 
Hossain, et al., The Relationship.
    \336\ See, e.g., Lo, et al., Does Availability of Audit 
Partners.
    \337\ See, e.g., Christensen, et al., Team Workloads.
---------------------------------------------------------------------------

    The Workload metrics will indicate the average weekly hours worked 
on a quarterly basis by senior professionals, including time 
attributable to engagements, administrative duties, and all other 
matters, both firm-wide and on the core engagement team. Investors and 
audit committees could use this information to evaluate whether 
partners and managers are overworked or potentially distracted by other 
responsibilities. In certain circumstances, higher workloads could 
indicate that partners and managers are working longer to ensure audit 
quality is high. While there is no established optimal workload level 
for audit teams or their staffing components, academic literature 
suggests that auditors have high workloads, particularly during the 
busy season.\338\ Furthermore, several academic studies, primarily 
using international data, find that high workload levels (e.g., 
workloads that exceed 60 hours per week), particularly during the busy 
season, negatively impact audit quality.\339\ Auditors that work on 
multiple engagements in different environments and scopes may also 
experience issues with memory-related errors.\340\ However, the impacts 
of workload may depend on the auditor's ability to handle such normal 
workloads.\341\ Furthermore, one study finds that audit partner 
busyness is not related to audit quality under equilibrium market 
conditions.\342\
---------------------------------------------------------------------------

    \338\ See, e.g., Persellin, et al., Auditor Perceptions Table 2; 
Dana R. Hermanson, Richard W. Houston, Chad M. Stefaniak, and Anne 
M. Wilkins, The Work Environment in Large Audit Firms: Current 
Perceptions, 10 Current Issues in Auditing A38 (2016); and John T. 
Sweeney and Scott L. Summers, The Effect of the Busy Season Workload 
on Public Accountants' Job Burnout, 14 Behavioral Research in 
Accounting 223 (2002).
    \339\ See, e.g., Christensen, et al., Team Workloads; Jun Chen, 
Wang Dong, Hongling Han, and Nan Zhou, Does Audit Partner Workload 
Compression Affect Audit Quality?, 29 European Accounting Review 
1021 (2020); Jin Suk Heo, Soo Young Kwon, and Hun-Tong Tan, 
Auditors' Responses to Workload Imbalance and the Impact on Audit 
Quality, 38 Contemporary Accounting Research 338 (2021); Hwang and 
Hong, Auditors' Workload; Dennis M. Lopez and Gary F. Peters, The 
Effect of Workload Compression on Audit Quality, 31 Auditing: A 
Journal of Practice & Theory 139 (2012); Persellin, et al., Auditor 
Perceptions; and Ferdinand A. Gul, Shuai Mark Ma, and Karen Lai, 
Busy Auditors, Partner-Client Tenure, and Audit Quality: Evidence 
from an Emerging Market, 16 Journal of International Accounting 
Research 83 (2017).
    \340\ See, e.g., Sudip Bhattacharjee, Mario J. Maletta, and 
Kimberly K. Moreno, The Cascading of Contrast Effects on Auditors' 
Judgments in Multiple Client Audit Environments, 82 The Accounting 
Review 1097 (2007).
    \341\ See Persellin, et al., Auditor Perceptions.
    \342\ See Goodwin and Wu, What is the Relationship.
---------------------------------------------------------------------------

    The Retention of Audit Personnel metrics will indicate the 
continuity of senior professionals (through departures, reassignments, 
etc.) across the firm. Discontinuity of senior professionals at the 
firm could be a signal of dysfunction within the firm and a loss of 
valuable issuer and firm-specific human capital. Some research suggests 
that excessive levels of turnover, particularly at the staff level, 
could lead to a deterioration in audit quality.\343\ One study finds 
that auditor turnover at U.S. Big 4 firms has a significant negative 
effect on audit quality as measured by the prevalence of 
restatements.\344\ Using Belgian data collected from private and public 
companies, another study finds that abnormal turnover is more likely to 
affect audit quality than expected (i.e., normal or average) levels of 
turnover, and the negative consequences of turnover impact existing 
clients more than new clients.\345\ Firms with larger internal labor 
pools may be better positioned to mitigate the negative consequences of 
turnover. For example, using data from Chinese audit firms on auditor 
departure from public accounting, one study finds that the negative 
effect of departure on audit quality is stronger for non-Big 4 
firms.\346\
---------------------------------------------------------------------------

    \343\ See, e.g., Khavis and Szerwo, Audit-Employee Turnover, 
Audit Quality, and the Auditor-Client Relationship 27; and 
Christensen, et al., Team Workloads.
    \344\ See Tao Ma, Chi Wan, Yakun Wang, and Yuping Zhao, 
Individual Auditor Turnover and Audit Quality--Large Sample Evidence 
from US Audit Offices, 99 The Accounting Review 297 (2024).
    \345\ See, e.g., Linden, et al., Audit Firm Employee Turnover 
and Audit Quality 4.
    \346\ See, e.g., W. Robert Knechel, Juan Mao, Baolei Qi, and 
Zili Zhuang, Is There a Brain Drain in Auditing? The Determinants 
and Consequences of Auditors Leaving Public Accounting, 38 
Contemporary Accounting Research 2461 (2021).
---------------------------------------------------------------------------

    The Experience of Audit Personnel metrics will indicate the average 
number of years worked at a public accounting firm (whether or not 
PCAOB-registered) by senior professionals across the firm and on the 
engagement. Greater experience of audit personnel metrics may indicate 
to investors and audit committee members that senior professionals are 
more effective and efficient auditors. The extant academic literature 
shows mixed results regarding the association between auditor 
experience and audit quality. One study of U.S. audit partners finds 
that absolute discretionary accruals, a proxy for audit quality, is 
increasing (decreasing) in the number of years the partner has been a 
CPA

[[Page 100047]]

licensee early (late) in their career.\347\ One experimental study from 
the United States found that less-experienced auditors may be less 
willing to request additional evidence from company controllers.\348\ 
However, another U.S. study finds that audit partner experience is not 
associated with audit quality.\349\ Using data from Taiwan, one study 
finds that an auditor's experience is positively associated with 
proxies for audit quality.\350\ One study on Chinese audit firms finds 
that the number of years that the partner has been engaged in audit 
work is negatively associated with absolute discretionary accruals, a 
proxy for audit quality.\351\ However, another study using data from 
Chinese audit firms finds that the an auditor's birth year, a proxy for 
total experience, is not associated with several proxies for audit 
quality.\352\
---------------------------------------------------------------------------

    \347\ See Chenyong Liu and Chunhao Xu, The Effect of Audit 
Engagement Partner Professional Experience on Audit Quality and 
Audit Fees: Early Evidence from Form AP Disclosure, 29 Asian Review 
of Accounting 128 (2021).
    \348\ See, e.g., Bennett and Hatfield, The Effect of the Social 
Mismatch 46-47.
    \349\ See, e.g., Hye Seung Lee, Albert L. Nagy, and Aleksandra 
B. Zimmerman, Audit Partner Assignments and Audit Quality in the 
United States, 94 The Accounting Review 297 (2019).
    \350\ See, e.g., Chi, et al., The Effects of Audit Partner 363.
    \351\ See Steven F. Cahan and Jerry Sun, The Effect of Audit 
Experience on Audit Fees and Audit Quality, 30 Journal of 
Accounting, Auditing & Finance 78 (2015).
    \352\ See, e.g., Ferdinand A. Gul, Donghui Wu, and Zhifeng Yang, 
Do Individual Auditors Affect Audit Quality? Evidence from Archival 
Data, 88 The Accounting Review 1993, Table 6 (2013).
---------------------------------------------------------------------------

    The Industry Experience metrics will indicate the average years of 
career experience of senior professionals in key industries audited by 
the firm at the firm level and the audited company's primary industry 
at the engagement level. The academic literature shows that industry 
experience, primarily using market share proxies, are related to audit 
quality.\353\ One study of U.S. Big 4 firms finds that audit quality is 
positively associated with the number of years that the auditor is an 
industry specialist (i.e., it has the largest market share in an 
industry and at least 10% more market share than the next-largest 
competitor).\354\ One experimental study finds that auditor 
participants that have experience in an industry are more likely to 
understand the specific financial reporting requirements and risks that 
issuers in those industries face.\355\ However, some research suggests 
that the impact of industry specialization on audit quality may depend 
on other contextual factors (e.g., whether the auditor is local to the 
client or the difficulty of the audit).\356\ The Board also notes that 
some studies indicate that research on experience and industry 
specialization may be sensitive to design, proxy, and stratification 
level (i.e., office-level and national-level). However, as one of the 
studies notes, the Board believes these findings do not imply that 
industry expertise is unrelated to audit quality.\357\
---------------------------------------------------------------------------

    \353\ See, e.g., Craswell, et al., Auditor Brand Name (finding, 
using a sample of Australian firms, that industries that require 
greater specialization are associated with greater audit fees, 
consistent with ``demand for audit quality''); Mark L. DeFond, Jere 
R. Francis, and T. J. Wong, Auditor Industry Specialization and 
Market Segmentation: Evidence from Hong Kong, 19 AUDITING: A Journal 
of Practice & Theory 49 (2000) (finding, using a sample of publicly 
listed Hong Kong companies, that industry specialization, as proxied 
by being among the top three firms in an industry by market share, 
is associated with greater audit fees among Big 6 auditors but lower 
audit fees among non-Big 6 auditors); Balsam, et al., Auditor 
Industry Specialization and Earnings Quality 95 (finding audit 
quality proxies are positively associated with the auditor being the 
largest auditor in an industry); Gopal V. Krishnan, Does Big 6 
Auditor Industry Expertise Constrain Earnings Management?, 17 
Accounting Horizons 1, 3 (2003) (finding that a firm's audit fee 
share within an industry is associated with higher audit quality 
[lower absolute discretionary accruals]); and Knechel, et al., Does 
Auditor Industry Specialization Matter? (finding that issuers that 
switch to auditors that have at least a 30% market share in the 
issuer's industry experience significant positive anormal returns).
    \354\ See Jennifer J. Gaver and Steven Utke, Audit Quality and 
Specialist Tenure, 94 The Accounting Review 113 (2019).
    \355\ See, e.g., Low, The Effects of Industry Specialization 
202.
    \356\ See, e.g., Jere R. Francis, Kenneth Reichelt, and Dechun 
Wang, The Pricing of National and City-Specific Reputations for 
Industry Expertise in the U.S. Audit Market, 80 The Accounting 
Review 113, 114 (2005) and Aobdia et al., Heterogeneity in Expertise 
in a Credence Goods Setting.
    \357\ See, e.g., Terry L. Neal and Richard R. Riley, Auditor 
Industry Specialist Research Design, 23 AUDITING: A Journal of 
Practice & Theory 169 (2004); Steven F. Cahan, Debra C. Jeter, and 
Vic Naiker, Are All Industry Specialist Auditors the Same?, 30 
AUDITING: A Journal of Practice & Theory 191 (2011); and Miguel 
Minutti-Meza, Does Auditor Industry Specialization Improve Audit 
Quality?, 51 Journal of Accounting Research 779, 813 (2013) (finding 
that ``auditor industry specialization, measured using the auditor's 
within-industry market share, is not a reliable indicator of audit 
quality'' and that ``these findings do not imply that industry 
knowledge is not important for auditors'').
---------------------------------------------------------------------------

    The Training Hours for Audit Personnel metrics would indicate 
average annual training hours for partners, managers, and staff of the 
firm, combined, both firm-wide and on the core engagement team. 
Overall, the academic literature provides mixed evidence regarding how 
auditor training relates to audit quality, but provides some evidence 
to support the association between specialized training and audit 
quality. Some studies find that certain proxies for auditor training 
are positively associated with some proxies for audit quality. For 
example, one survey of junior auditors at large U.S. public accounting 
firms found that the perceived effectiveness of training was associated 
with lower turnover intentions.\358\ A study on Norwegian audit 
partners found that CPE hours were positively associated with audit 
effort and going concern opinion accuracy.\359\ A survey of auditors 
working in small audit firms in Sweden found that participation in four 
or more training activities or 50 or more hours of education per year 
were negatively associated with self-reported ``dysfunctional'' 
behaviors.\360\ However, other studies suggest that the benefits of 
training are driven primarily by specialized training. For example, one 
study on the Spanish audit market found that only partners' 
specialized, or non-generic audit knowledge (as proxied by industry-
specific experience), was significantly positively associated with 
audit quality.\361\ An older experimental study found that specialized 
indirect experience (i.e., training), resulted in a stronger 
understanding for the auditor, but had a greater impact of knowledge 
unrelated to financial statement errors.\362\ Another experimental 
study found that specialized training and experience were more strongly 
associated with improved audit outcomes than general knowledge.\363\
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    \358\ See Hossein Nouri and Robert J. Parker, Career Growth 
Opportunities and Employee Turnover Intentions in Public Accounting 
Firms, 45 The British Accounting Review 138 (2013).
    \359\ See Limei Che, John Christian Langli, and Tobias 
Svanstr[ouml]m, Education, Experience, and Audit Effort, 37 
Auditing: A Journal of Practice & Theory 91 (2018). The study judged 
the accuracy of the auditor's going concern evaluation by reference 
to subsequent bankruptcy of the audited company. Note that there are 
several limitations to this proxy. See Marshall A. Geiger, Anna 
Gold, and Phillip Wallage, Auditor Going Concern Reporting: A Review 
of Global Research and Future Research Opportunities (2021).
    \360\ See Tobias Svanstr[ouml]m, Time Pressure, Training 
Activities and Dysfunctional Auditor Behaviour: Evidence from Small 
Audit Firms, 20 International Journal of Auditing 42 (2016). The 
study defines ``dysfunctional behaviors'' as: (1) making superficial 
reviews of client documents; (2) incorrectly signing off on an audit 
step; (3) prematurely signing-off on an audit step; (4) accepting 
weak client explanations; or (5) putting a greater level of trust in 
the audit client than is reasonable.
    \361\ See Josep Garc[iacute]a-Blandon, Josep Mar[iacute]a 
Argil[eacute]s-Bosch, and Diego Ravenda, Learning by Doing? Partners 
Audit Experience and the Quality of Audit Services, 23 Revista de 
Contabilidad (Spanish Accounting Review) 197 (2020).
    \362\ See Ira Solomon, Michael D. Shields, O. Ray Whittington, 
What Do Industry-Specialist Auditors Know?, 37 Journal of Accounting 
Research 191 (1999).
    \363\ See Sarah E. Bonner and Barry L. Lewis, Determinants of 
Auditor Expertise, 28 Studies on Judgment Issues in Accounting and 
Auditing 1 (1990) 16.

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[[Page 100048]]

    By requiring auditors to disclose these personnel related metrics, 
investors and audit committees could, for example, identify auditors 
with sustainable workloads, with the implicit outcome that sustainable 
workloads could improve auditor attentiveness and reduce error rates. 
Additionally, investors and audit committees may find the final metrics 
to be useful in evaluating the risk that the auditor has overlooked 
errors or material misstatements due to overworked partners or managers 
or that the engagement team was not sufficiently qualified or 
specialized. Moreover, investors may find the final metrics beneficial 
in understanding whether the engagement, and therefore the issuer, had 
significant risks or the issuer's operations were particularly complex 
compared to peer issuers. For example, if there was a significantly 
higher workload across partners, managers, and staff--or excessive 
turnover--compared to another investment opportunity of similar issuer 
size, the investor may then infer that the issuer had unique risks that 
necessitated increased audit effort. Such a signal may be particularly 
useful if the investor could ascertain whether peer issuers were more, 
or less, complex compared to the issuer under consideration. The 
investor may also be reasonably assured if there were positive audit 
outcomes as it may signal to the investor that the auditor exerted 
considerable or appropriate effort in obtaining a reasonable level of 
assurance on the issuer's financial statements in the context of their 
peers for that issuer's complexity and risk level.
    Audit committees may also find these final metrics to be 
beneficial, as the audit committee may view them as confirming that the 
auditor is appropriately staffing the engagement. In addition, during 
the selection process for a new auditor, the audit committee may review 
the final metrics of potential candidate auditors in the context of 
peer-group engagements, thereby using the final metrics to make auditor 
selection decisions more effectively. By selecting an auditor based on 
their experience or industry-specific knowledge, audit committees could 
be better able to choose the preferred candidate auditor for their 
engagement--thereby improving the matching efficiency of human capital 
within and across firms by helping to align the demand for resources 
with the supply.
    Audit firms may find the final metrics beneficial as they may be 
better able to monitor whether they are unintentionally over- or under-
auditing, as they will be able to compare their audit personnel metrics 
to other firms' metrics. Audit firms may also benefit from identifying 
lead industry-specialist auditors and improve their own audit services 
to compete with these industry specialists on the quality of those 
services. Importantly, incumbent auditors (i.e., current auditors of an 
issuer) know more about the issuer's operations than rival competitor 
auditors.\364\ The disclosure of the final metrics could provide these 
competitor auditors with the ability to observe signals regarding the 
effort and experience required on the engagement, and those auditors 
may be able to use that information to compete against the incumbent 
auditor for the issuer's prospective engagement more effectively.\365\
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    \364\ See, e.g., Monika Causholli, W. Robert Knechel, and Haijin 
Lin, and David E. M. Sappington, Competitive Procurement of Auditing 
Services with Limited Information, 22 European Accounting Review 
573, 576-578 (2013).
    \365\ Id.
---------------------------------------------------------------------------

    The final metrics related to audit personnel and commenters' views 
are discussed and summarized above. Here the Board highlighted the 
comments that are most relevant to the economic analysis. Citing 
academic research, one commenter said that human capital inputs to 
audit production are crucial to audit quality.\366\ The same comment 
letter referred to a working paper written by the letter's authors 
which finds the manager-to-employee ratio at the audit office level is 
positively associated with audit quality.\367\ The commenter cited two 
academic studies that suggest audit offices are core functional 
units.\368\ Several commenters expressed concern that the benefits to 
reporting partner and manager involvement may be dampened by the fact 
that greater partner and manager involvement is not necessarily 
correlated with greater audit quality. Some of these commenters pointed 
out that partner and manager involvement is likely to vary with the 
complexity of the audit. For example, one commenter suggested that a 
less complex audit may require little additional supervision while a 
more complicated audit may require more supervision. One commenter said 
that the firm-level workload metric would not be comparable across 
firms due to variation in the size of each firm's issuer practice. 
Another commenter suggested that presenting firm-level average 
experience will be difficult to interpret because the distribution of 
personnel experience varies vastly. Several commenters agreed that 
defining a training metric that would provide decision-useful 
information would be challenging. One commenter said they think 
training increases technical competence. Another said that training 
builds awareness and on-the-job training is invaluable. However, the 
same commenter said that on-the-job-training could not be quantified. 
Another commenter supported a training metric but preferred an 
alternative calculation.
---------------------------------------------------------------------------

    \366\ See Jeffrey L. Hoopes, Kenneth J. Merkley, Joseph Pacelli, 
and Joseph H. Schroeder, Audit Personnel Salaries and Audit Quality, 
23 Review of Accounting Studies 1096 (2018); Brandon Gipper, Luzi 
Hail, and Christian Leuz, On the Economics of Mandatory Audit 
Partner Rotation and Tenure: Evidence from PCAOB Data, 96 The 
Accounting Review 303 (2021); Christensen, et al., Team Workloads.
    \367\ See Joshua Khavis et al., Manager Staffing Leverage.
    \368\ See Kenneth L. Bills, Quinn T. Swanquist, and Robert L. 
Whited, Growing Pains: Audit Quality and Office Growth, 33 
Contemporary Accounting Research 288 (2016); Christensen, et al., 
Team Workloads.
---------------------------------------------------------------------------

    The Board acknowledges that the final metrics are imperfect proxies 
for audit quality.\369\ For example, the Board recognizes that average 
experience only partially describes the distribution of experience 
within a firm and, by extension, two firms with the same average 
experience could have quite different experience distributions. 
However, the Board believes that the final metrics will, on average, 
improve investors' decision-making.\370\ The Board agrees that the 
partner and manager involvement metric may vary with the complexity of 
the audit. The Board also agrees that the firm-level workload metric 
may vary by the size of the firm's issuer practice. However, the size 
of the firm's issuer practice and other proxies for the complexity of 
the audit are public information so stakeholders can adjust for any 
systematic variation in the partner and manager involvement and 
workload metrics. The Board also agrees that stakeholders may 
misinterpret the experience of audit personnel or training metrics. 
While some misunderstanding may reduce the usefulness of the final 
metrics, the Board believes that reporting the experience of audit 
personnel and training metrics will likely still be beneficial to 
investors.\371\
---------------------------------------------------------------------------

    \369\ See above for a more general discussion of commenters' 
concerns regarding comparability of the final metrics.
    \370\ See above for a more general discussion of commenters' 
concerns regarding the relationship between the proposed metrics and 
audit quality.
    \371\ See below for a more general discussion of commenters' 
concerns regarding potential misinterpretation by investors, audit 
committees, and auditors.

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[[Page 100049]]

b. Metrics Related to the Allocation of Audit Hours
    The Allocation of Audit Hours metric would indicate the percentage 
of hours incurred prior to and following an issuer's year end across 
the firm's large accelerated and accelerated filer engagements and on 
the specific engagement. This metric may provide insight into whether 
the audit team is being efficiently and effectively deployed. 
Generally, the academic literature related to the allocation of audit 
hours is limited, as information pertinent to studying this topic is 
non-public. However, one recent study used PCAOB inspections data and 
found that audit engagements in which relatively more audit effort was 
spent prior to the issuer's fiscal year end had overall improvements in 
audit effectiveness and a lower likelihood of negative audit 
outcomes.\372\ As noted in that study, other researchers have 
identified that work conducted earlier in the audit process may lead to 
an earlier identification of issues that could improve the possibility 
those issues would then be corrected.\373\ Another study, using data 
from one global accounting firm, also finds that a greater proportion 
of audit work performed earlier in the audit is associated with 
improved audit outcomes.\374\
---------------------------------------------------------------------------

    \372\ See, e.g., Aobdia, et al., The Economics of Audit 
Production 1, 6 and 11.
    \373\ See id. at 12.
    \374\ See Christensen, et al., Archival Evidence.
---------------------------------------------------------------------------

    The final Allocation of Audit Hours metric could allow investors 
and audit committees to better evaluate how their auditor plans its 
audit and compare their audit and auditor to peers. For example, it 
could indicate that their auditor has left substantial issues to the 
end of the engagement. The effective deployment of resources is of 
critical importance to a well-planned audit.\375\ The final metric may 
also help auditors understand whether they are effectively planning 
their audit. Auditors may compare their allocations of audit hours to 
those of other firms and adjust accordingly. The final Allocation of 
Audits Hours metric could also provide supplemental value to the final 
Workload and Partner and Manager Involvement metrics.
---------------------------------------------------------------------------

    \375\ See, e.g., Causholli, et al., Competitive Procurement (for 
an economic model describing the intersection of efficiency, 
quality, and competition in the market for audit services). See also 
Aobdia, et al., The Economics of Audit Production.
---------------------------------------------------------------------------

    The final metrics related to allocation of audit hours and 
summarizes commenters' views are discussed above. Here the Board 
highlighted the comments that are most relevant to the economic 
analysis. Several commenters cautioned that allocation of audit hours 
may not be a useful signal of audit quality because circumstances 
outside of the auditor's control may influence it (e.g., significant 
unusual, and unanticipated, transactions near the balance sheet date, 
going concern issues that arise after the balance sheet date, other 
unforeseen company delays). One commenter said that for the largest 
firms, individual issuer circumstances may not be significant enough to 
move the firm-level metric, but for smaller firms, individual issuer 
circumstances could impact the overall results. The Board recognizes 
that the allocation of audit hours will be an imperfect proxy for audit 
quality. However, the Board believes the academic literature provides 
evidence that the final metrics will likely be associated with audit 
effectiveness and audit outcomes and thus aid decision-making.\376\
---------------------------------------------------------------------------

    \376\ See above for a more general discussion of commenters' 
concerns regarding the relationship between the proposed metrics and 
audit quality.
---------------------------------------------------------------------------

c. Metrics Related to Audit Outcomes
    The Restatement History metrics will summarize restatements of 
financial statements and management reports on internal control over 
financial reporting (``ICFR'') that were audited by the firm over the 
past three years. In the academic literature, restatements are widely 
regarded as the strongest indicator of poor audit quality.\377\ 
Restatements have been shown to result in auditor dismissal or 
increased resources committed by the auditor to the issuer.\378\ Using 
data from Japanese audit firms, one study finds that auditors devote 
additional resources to companies the year they restate their financial 
statements.\379\ However, it is important to note that restatements are 
often observed after a significant lag following the restatement 
event--which causes a reduction in the informativeness of the 
restatement event, if such information is viewed as stale by investors 
and audit committees. Furthermore, the absence of a restatement does 
not imply audit quality was high and the occurrence of a restatement 
identified by a successor auditor may signal improved audit quality 
when the auditor increases audit effort to identify errors in the work 
of prior auditors.\380\ The Board acknowledges that the incremental 
value of the final metric will be limited by the fact that restatements 
are public information already (e.g., U.S. issuers must file Form 8-K 
when they materially restate their financial statements and the public 
financial statements themselves indicate when a restatement has 
occurred). However, the Board believes that there is value in having 
the restatements aggregated and presented along with the other metrics.
---------------------------------------------------------------------------

    \377\ See, e.g., DeFond and Zhang, A Review of Archival Auditing 
Research (specifically, the discussion marked Section 2.3.1 Output-
based audit quality measures). The Board notes that ``little r'' 
restatements are a less-widely used proxy for audit quality than 
``Big R'' restatements. See Jayanthi Krishnan and Mengtian Li, Are 
Referred-to Auditors Associated with Lower Audit Quality and 
Efficiency?, 42 Auditing: A Journal of Practice & Theory 101 (2023) 
for one study that uses ``little r'' restatements as a proxy for 
audit quality. By contrast to ``Big R'' restatements, one study 
found muted or absent market reactions to ``little r'' restatements. 
See Daniel Aobdia, Vincent Castellani, and Paul Richardson, Do 
Investors Care Who Led the Audit in the U.S.? Evidence from 
Announcements of Accounting Restatements, SSRN Electronic Journal 
(2024). The Board notes that SSRN does not peer review its 
submissions.
    \378\ See, e.g., Karen M. Hennes, Andrew J. Leone, and Brian P. 
Miller, Determinants and Market Consequences of Auditor Dismissals 
after Accounting Restatements, 89 The Accounting Review 1051 (2014); 
and Li[hyphen]Lin Liu, K. Raghunandan, and Dasaratha Rama, Financial 
Restatements and Shareholder Ratifications of the Auditor, 28 
Auditing: A Journal of Practice & Theory 225 (2009).
    \379\ See, e.g., Chi, Wuchun and Chien-min Kevin Pan, How Do 
Auditors Respond to Accounting Restatements? Evidence on Audit Staff 
Allocation, 58 Review of Quantitative Finance and Accounting 1 
(2022).
    \380\ See, e.g., Stephen P. Rowe and Padmakumar Sivadasan, 
Higher Audit Quality and Higher Restatement Rates: An Examination of 
Big Four Auditee Restatements, SSRN Electronic Journal, (2021). The 
Board notes that SSRN does not peer review its submissions.
---------------------------------------------------------------------------

    The final metrics related to restatement history and commenters' 
views are discussed and summarized above. Overall, commenters were 
supportive of the proposed metrics related to restatement history. Two 
non-U.S. firm-related groups suggested that financial reporting quality 
is complex, and restatements are not a perfect proxy for audit quality. 
The Board agrees that it is not a perfect indicator. However, as the 
Board noted in the proposal, restatements are a widely-used proxy for 
audit quality. The Board agrees that context will be important to 
understand the final metrics, including the final Restatement History 
metric.\381\ Two commenters said that restatements are already publicly 
available and therefore the metric would not be useful. The Board noted 
this in the proposal. The Board continues to believe that providing 
information on restatement history in Form FM would make the 
information more accessible to stakeholders.
---------------------------------------------------------------------------

    \381\ See above for a more general discussion of commenters' 
concerns regarding the relationship between the proposed metrics and 
audit quality.

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[[Page 100050]]

2. Costs
    In the following discussion, the Board considered direct and 
indirect costs related to the final rules. The Board has attempted to 
quantify certain costs where possible. However, most of the costs are 
intractable to quantify, particularly the indirect costs.
     First, auditors may incur direct costs building an 
appropriate reporting infrastructure or updating existing 
infrastructure.
     Second, auditors may incur direct costs producing the firm 
and engagement metrics.
     Third, auditors, investors, and audit committees may incur 
indirect costs understanding and integrating the final metrics into 
their current decision-making frameworks.
     Fourth, auditors may incur indirect costs revising their 
audit approaches.
     Fifth, investors, audit committees, and auditors may incur 
indirect costs to the extent that issuers switch auditors more 
frequently as a result of the final rules.
     Sixth, issuers and investors may bear indirect costs to 
the extent that costs incurred by auditors are passed on in the form of 
higher audit fees.
    Larger firms should be able to take advantage of economies of scale 
by distributing any fixed costs over a higher number of audit 
engagements. Smaller firms will likely distribute any fixed costs over 
a lower number of audit engagements, which, taking fixed costs as 
given, would make implementation relatively more costly for smaller 
firms.\382\ Many commenters agreed that smaller firms, including non-
U.S. firms, could be disproportionately impacted. However, the fixed 
costs may also be less for smaller firms than for larger firms (e.g., 
they may not require significant IT systems if they need to track only 
a few engagements).\383\
---------------------------------------------------------------------------

    \382\ See, e.g., Michael Minnis and Nemit Shroff, Why Regulate 
Private Firm Disclosure and Auditing?, 47 Accounting and Business 
Research 473, 498-499 (2017) (explaining that increased financial 
reporting regulation is disproportionately costly for smaller 
companies because complying with regulation has large fixed costs, 
and unlike larger companies, smaller companies do not benefit from 
economies of scale).
    \383\ Among the firms that will be impacted by the final rules 
approximately 41%, 19%, and 11% had a total of one, two, or three 
accelerated filer or large accelerated filer engagements, 
respectively, during the 12-month period ending September 30, 2023.
---------------------------------------------------------------------------

    Referring to research from the SEC, one commenter noted that 99.9% 
of businesses are small businesses, 43.5% of the U.S. GDP is created by 
small businesses, and 63% of net new jobs are created by small 
businesses.\384\ The commenter did not discuss what portion of these 
figures would be impacted by the proposal. The Board notes that the 
final rules will apply only to the auditors and audits of accelerated 
filers and large accelerated filers. However, the Board recognizes that 
some accelerated filers and larger accelerated filers may not be 
audited by the largest audit firms. For example, 24.0% of accelerated 
filers (representing 19.3% of total accelerated filer market 
capitalization) and 4.5% of large accelerated filers (representing 0.3% 
of total large accelerated filer market capitalization) are audited by 
non-affiliated firms.\385\
---------------------------------------------------------------------------

    \384\ See U.S. Securities and Exchange Commission, Office of the 
Advocate for Small Business Capital Formation, Annual Report Fiscal 
Year 2023.
    \385\ Source: S&P and Audit Analytics. The Board's calculations 
use market capitalization data as of the second quarter of 2024. 
``Non-affiliated firms'' are firms not affiliated with BDO 
International Limited, Deloitte Touche Tohmatsu Limited, Ernst & 
Young Global Limited, Grant Thornton International Limited, KPMG 
International Cooperative, or PricewaterhouseCoopers International 
Limited.
---------------------------------------------------------------------------

    Several commenters said that the proposal did not fully consider 
the costs and complexities associated with complying with the proposed 
rules. Two commenters said that the proposal's economic analysis 
largely disregards costs and does not attempt to quantify the related 
costs of some requirements. To the contrary, the proposal's economic 
analysis included both a discussion of the available evidence about 
costs and PCAOB staff's attempt to quantify costs of the proposal to 
the extent feasible. The Board has carefully reviewed stakeholders' 
input regarding the potential costs of the proposal. Based on outreach 
to audit firms, one commenter agreed that firms' processes and systems 
would need to be established or updated.
    One commenter suggested that the PCAOB should, as a starting point, 
consider whether the metrics would require additional systems, 
processes, or procedures. The Board considered these costs and 
quantified several of them in the proposal and, with modification to 
account for stakeholder feedback, address them again below.
    One commenter suggested that it would be helpful if the Board could 
match each cost to each benefit. The Board does not believe such an 
analysis is feasible or reasonable. For example, it is not possible to 
match fixed costs (e.g., IT investments) to a particular benefit 
because they do not drive the benefit alone. Furthermore, the variable 
cost categories (e.g., gathering, calculating, and disclosing the 
metrics) cannot be matched to specific benefit categories (e.g., 
competition). Rather, these variable cost categories are each 
associated with producing the metrics, while disclosing the metrics 
drives all the benefits. Where feasible and reasonable, the Board 
highlighted in the proposal and below connections between certain 
qualitative cost categories and certain qualitative benefit categories. 
For example, the Board has highlighted that audit switching costs may 
arise from improved competition. The Board also acknowledges how 
certain metrics may be more costly or beneficial than others to allow 
the Board and commenters to consider each metric individually (e.g., by 
surveying academic literature by metric and highlighting challenges 
gathering data required for certain metrics).
    One commenter noted that the use of data analytics at firms should 
enable them to more efficiently implement the final rules. The Board 
has observed that firms are increasingly using data analytics in their 
audits.\386\ However, the extent to which these capabilities lend 
themselves to regulatory compliance and management of the audit 
practice itself is less clear.
---------------------------------------------------------------------------

    \386\ See PCAOB Rel. No. 2024-007, 35 and cites therein for 
additional discussion on this topic.
---------------------------------------------------------------------------

i. Direct Costs To Comply With the Final Rules
a. Modifying or Building a System To Produce the Final Metrics
    Auditors may incur certain initial fixed costs (i.e., costs that 
are generally independent of the number of audits performed) related to 
modifying existing systems or building new systems that could collect 
the relevant data that is needed to generate the final metrics and 
produce compliant filings. The Board believes most firms will likely 
modify existing systems rather than build entirely new systems. These 
costs may include acquiring necessary IT infrastructure, establishing 
an appropriate system of controls, creating system documentation, and 
conducting system testing (e.g., with historical data or by conducting 
dry runs before the effective date of the final requirements). There 
could also be costs related to training personnel in how to use the new 
or modified system. This could include training: (i) engagement-level 
personnel on how to collect and document information relevant to the 
final metrics; (ii) centralized personnel on how to aggregate and 
produce the final metrics; and (iii) administrative personnel on how to 
create filings and ensure proper control over the system; all in 
compliance with QC 1000.\387\
---------------------------------------------------------------------------

    \387\ See Michael J. Gurbutt, Wei-Kang Shih, Carrie von Bose, 
and Tasneem Raihan, Staff White Paper: Second Stakeholder Outreach 
on the Initial Implementation of CAM Requirements, Public Company 
Accounting Oversight Board 11 (2022).

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[[Page 100051]]

    The fixed costs associated with these efforts will likely depend on 
the extent to which firms already have automated systems in place that 
may be adapted to comply with the final requirements. As discussed 
above, the Board believes many firms track much of the information that 
would be required to calculate the final metrics. In particular, 
information gathered by PCAOB staff in 2018 and 2019 pursuant to PCAOB 
oversight activities indicates that U.S. GNFs generally track some 
metrics similar to the final metrics and voluntarily provide 
quantitative information that is similar to many of the final metrics. 
With respect to roughly half of the engagements that will be subject to 
the final engagement-level reporting requirements, firms are already 
gathering total audit hours information from other auditors pursuant to 
Form AP reporting requirements. Furthermore, firms should be tracking 
CPE credits pursuant to licensing requirements and restatements 
pursuant to QC 1000. The Board believes firms likely have systems in 
place to help them track this information. As a result, these firms may 
be able to leverage their existing internal systems to comply with the 
final rules. Moreover, firms may be able to leverage existing systems 
related to their compliance with other PCAOB reporting requirements 
(e.g., QC 1000 and Form AP). Indeed, one GNF commenter, in response to 
the Concept Release, noted that some of the metrics discussed therein 
and included in the final rules would be ``easy to compute.''
    However, the Board has also considered that existing systems may 
not be functionally joined together, and that systems designed and 
operated for internal monitoring or informal reporting purposes may 
need to be enhanced to meet the needs of public reporting. There are, 
therefore, likely to be costs associated with integrating the various 
reporting systems and enhancing or updating current systems to comply 
with the final requirements. One GNF commenter on the Concept Release 
suggested that this would likely be especially true for NAFs. The 
required changes would depend on a firm's size and the nature of their 
engagements.
    Depending on their facts and circumstances, some firms may avoid 
the costs associated with modifying or building an automated system by 
opting for a more manual approach. Larger firms are more likely to 
build automated systems, or increase automation in existing systems, 
given the scale of their operations and the scope of data that will 
need to be collected to calculate the final metrics (i.e., they have a 
larger number of employees and engagements). Smaller firms may choose 
to build or expand upon existing manual systems (e.g., collecting 
information in spreadsheets or simple databases) because, for these 
firms, the scope of information to be collected and processed may be 
effectively collated in a spreadsheet-based tool. Firms may also opt 
for automated systems to the extent that the final metrics will require 
a larger number of individual components, a broader pool of 
individuals, or more complicated calculations (e.g., the final metrics 
related to audit-team retention, auditor experience, or industry 
expertise). The fixed costs to build or modify existing automated 
systems are likely to be greater than manual systems. However, 
automated systems should reduce variable costs in the long run.
    The Board is unaware of any data or research relevant to the 
potential costs of modifying firms' existing automated systems, which 
the Board believes would be the most likely scenario for many firms, 
particularly the largest firms which audit a significant majority of 
the audit market.\388\ However, the costs to build an automated system 
from the ground up--that is, if a firm did not have any existing 
systems that track the inputs to the final metrics--could be comparable 
to the costs to implement an enterprise resources planning (ERP) system 
(but such costs are not exactly analogous). Using surveys of companies 
that have implemented ERP systems, some studies find that ERP system 
implementation costs scale with the company's revenues and staff count. 
Using audit fees as a proxy for revenue and number of accountants as a 
proxy for staff count, an illustrative calculation suggests that the 
total costs (e.g., adding over all impacted firms), if every such firm 
were to implement an automated system from the ground up, could range 
from approximately $371 million to $512 million.\389\ This would 
represent a one-time cost of approximately 2% to 3% of audit fees paid 
by issuers to covered firms in a year. However, as discussed in more 
detail below, the fixed costs associated with modifying or building a 
system to produce the final metrics are likely to be a fraction of this 
amount given that the Board expects most firms would modify existing 
systems rather than build entirely new systems. For this reason, this 
range likely represents an upper bound of the potential costs.
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    \388\ See, e.g., Ideagen Audit Analytics, 20-Year Review of 
Audit Fee Trends 2003-2022, (July 2023) at 2.
    \389\ The Board identified two publicly available reports 
related to the costs of implementing ERP systems. Referring to the 
experiences of over 1,000 client and non-client companies that had 
implemented a digital transformation effort in the past twenty 
years, one consulting firm estimated that implementation costs for 
companies with revenues under $1 billion were approximately 3-5% of 
annual revenue, and implementation costs for companies with revenues 
over $1 billion were approximately 2-3% of annual revenue (The 2020 
ERP Report, Third-Stage Consulting Group, (2020)). Each of the U.S. 
Big 4 firms had over $1 billion of revenue for the 2023 issuer 
fiscal year, while all other firms that will be impacted had less 
than $1 billion. Using the midpoint of the ranges, 2.5% for U.S. Big 
4 firms and 4% for all other firms, implementation costs related to 
building a new system to produce the final metrics will be 
approximately $12.7 billion x 2.5% + $4.8 billion x 4% = $512 
million. The Board notes that 13 firms, which had a combined $22 
million in audit fees in 2022, had zero audit fees in 2023. Using 
information on client implementation projects active between January 
2021 and December 2021, another consulting firm reported that 
companies having over 500, between 50 and 499, or less than 50 
employees project spent $11,000, $9,000, or $8,571 per ERP system 
user over a 5-year ERP implementation period and that 7.27%, 20.13%, 
and 34.8% of employees used the ERP system, respectively (2022 ERP 
Software Report, Software Path, (2022)). Information provided by 
registered firms that will be impacted by the final requirements on 
Form 2 indicates that, for the 2023 reporting year, 130, 58, and 19 
firms employed over 500, between 50 and 499, or less than 50 
accountants, employing a total of 431,680, 14,274, and 474 
accountants, respectively. Using the number of accountants employed 
by a registered firm as a proxy for the number of employees, 
implementation costs related to building a new system to produce the 
final metrics would be approximately 430,074 x 7.27% x $11,000 + 
14,142 x 20.13% x $9,000 + 444 x 34.8% x $8,571 = $371 million. 
Source: Audit Analytics and RASR.
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    There are several reasons to expect the implementation costs will 
be substantially less than the cost of building a new ERP system. 
First, as noted above, the Board believes it is likely that firms, 
particularly the largest firms with the greatest market share, are 
already gathering much of the information that would be required to 
calculate the final metrics. For example, roughly half of the 
engagements that will be subject to the final engagement-level 
reporting requirements are already gathering total audit hours 
information from other auditors pursuant to Form AP reporting 
requirements. Furthermore, firms should be tracking CPE credits 
pursuant to licensing requirements and restatements pursuant to QC 
1000. Second, the Board believes most larger firms have automated 
systems in place that could be leveraged to comply with the final 
rules. Third, smaller firms could opt for a manual approach. Indeed, 
firms are only expected to invest in an automated system if it would be 
efficient to do so.

[[Page 100052]]

Fourth, ERP systems possess many features that would not be necessary 
in an automated system for compliance. Finally, audit firms are likely 
to need to make similar investments in their internal systems in the 
near term, owing to the rapid pace of technological advancement and 
other rules and standards currently being adopted, thus potentially 
reducing the incremental costs attributable to the final rules. 
However, at the same time, and as suggested by commenters, the Board 
recognizes that implementing new systems may be especially costly for 
audit firms if staff resources are strained due to the need to comply 
with other standards being implemented in the same time period, such as 
QC 1000.\390\ The Board's estimate does not account for these capacity 
constraints. Overall, for these reasons, the Board believes these 
figures likely reflect an upper bound on the potential implementation 
costs and the actual implementation costs will likely be significantly 
less.
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    \390\ Commenters' concerns about the cumulative impacts of 
multiple PCAOB standards and rules with overlapping implementation 
periods including potential benefits are discussed above.
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    One commenter suggested that the Board's cost estimates are 
strawmen because they have too many caveats. The PCAOB's staff guidance 
on economic analysis recommends quantifying impacts to the extent 
feasible. However, it also notes that reliably quantifying impacts can 
be difficult. The SEC's current guidance on economic analysis in SEC 
rulemakings recommends ``identify[ing] and discuss[ing] uncertainties 
underlying the estimates of benefits and costs.'' \391\ Consistent with 
these recommendations, the Board has provided an exhaustive discussion 
of uncertainties in the Board's cost estimates because the Board 
believes it provides commenters with important context necessary to 
understand the economic analysis.
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    \391\ See Memorandum from Division of Risk, Strategy, and 
Financial Innovation (now, Division of Economic and Risk Analysis) 
and Office of the General Counsel to Staff of the Rulewriting 
Divisions and Offices re: Current Guidance on Economic Analysis in 
SEC Rulemakings (Mar. 16, 2012) (SEC Staff Guidance), 12.
---------------------------------------------------------------------------

    One commenter apportioned the Board's quantitative estimate of the 
cost to implement an automated system from the ground up to their firm 
by market share. Using this approach, the commenter estimated the cost 
would be between $7 million and $10 million. The commenter said that 
they believe their estimate is low because larger firms have greater 
economies of scale. The commenter also said that this cost could 
increase the audit fees they charge their issuer clients by between 
$50,000 and $70,000 per issuer assuming they pass through the entire 
implementation cost and raise each issuer's audit fee by the same 
amount. The Board notes some limitations to applying its numerical 
illustration in this way. First, as discussed in the proposal and again 
above, the Board's methodology assumes costs are a non-linear function 
of revenue which the commenter did not account for. Second, the Board 
notes that the commenter's estimate is subject to the same caveats 
described above regarding the Board's quantification methodology. 
Finally, the Board also notes it would not expect that the cost of 
implementing a new system would be passed through to issuers in the 
form of a permanent audit fee increase, both because it is a one-time 
cost and because it is a fixed rather than a variable cost. It also 
overestimates the true pass through to the extent the commenter is 
unable to pass through 100% of the implementation cost.
    One commenter provided academic research that finds the costs to 
implement new systems is proportionally lower for larger firms.\392\ 
The Board agrees, and the Board's quantification methodology reflects 
this. The same commenter also noted that the press has reported that 
larger firms have already invested significantly into their IT systems. 
As discussed above, the Board recognizes that larger firms likely 
already have systems in place that they would be able to leverage when 
implementing the final rules.
---------------------------------------------------------------------------

    \392\ See Kathleen M. Bakarich and Patrick E. O'Brien, The 
Robots are Coming . . . But Aren't Here Yet: The Use of Artificial 
Intelligence Technologies in the Public Accounting Profession, 18 
Journal of Emerging Technologies in Accounting 27, (2021) and Dereck 
Barr-Pulliam and Amanda Carlson, Breaking Barriers to Change: The 
COVID-19 Pandemic's Impact on Attitudes Toward and Willingness to 
Pay for Audit Innovation, SSRN Electronic Journal (2024). The Board 
notes that SSRN does not peer review its submissions.
---------------------------------------------------------------------------

    Finally, the Board also notes the implementation costs could be 
offset in part by benefits to auditors. For example, technological 
enhancements to auditors' systems may, in the long run, increase 
operational efficiency and profitability.
b. Producing the Final Metrics
    Auditors may incur engagement-level and firm-level variable costs 
related to producing the final metrics. For example, the final rules 
may lead auditors to spend additional time recording, collating, and 
reporting information for relevant engagement-level, and then 
aggregated firm-level, metrics. As discussed above, the final rules do 
not impose new performance requirements other than the calculation and 
disclosure of metrics. In addition, reviews by others, such as the 
engagement quality reviewer or the national office, may result in 
additional recurring costs. Audit firms are also likely to experience 
costs, or administrative time, related to legal review and quality 
control for the final metrics.
    Specifically, variable costs may arise from the following 
activities related to producing the final metrics:
Recording & Collecting Information
    Audit firms may incur variable costs recording the necessary 
information and collecting it in a centralized location. The magnitude 
of the costs will likely depend on the extent to which existing 
practice differs from the final requirements. As discussed above, the 
Board believes many firms already internally track information related 
to the final metrics. This will reduce the variable costs attributable 
to the final rules.
    The magnitude of the variable costs may also depend on the size of 
the firm. As discussed, based on information obtained through 
inspections and oversight activities, the Board believes that the final 
rules will likely affect engagements performed by all firms but may 
have a greater impact on engagements performed by NAFs. However, NAFs 
that choose to use a manual recording system may face recurring costs 
associated with the continued collection of data and reporting of the 
final metrics. These costs likely will vary with the size of the audit 
team.
    Finally, the magnitude of the variable costs to record and collect 
information may depend on the final metric. For example, collecting the 
information needed to calculate the final Workload metrics will likely 
be relatively straightforward as such information is likely already 
stored in firms' extant timekeeping systems. One commenter said that 
the proposed engagement-level Workload metric would take considerable 
effort to compile and calculate. The commenter did not articulate a 
basis for their conclusion. To the contrary, the Board believes the 
final Workload metric area will not be burdensome to calculate for 
several reasons. First, based on commenters' views, the Board decided 
to exclude staff from the final Workload metric calculations. The Board 
believes this should reduce the effort required by firms to compile and 
calculate the metrics. Second, firms that use other auditors or serve 
as an other auditor should already be tracking partner and manager 
hours in order to calculate total

[[Page 100053]]

audit hours pursuant to Form AP reporting. PCAOB staff analysis of 
AuditorSearch data finds that approximately 48% of audits of 
accelerated filers or large accelerated filers involved other auditors. 
Third, firms that track time electronically should be able to access 
hours information by staffing level and time period and make the 
required calculations electronically. The Board believes most larger 
firms track their time electronically already. However, the Board 
recognizes that some of the smaller firms may not. Indeed, one 
commenter said that many firms have moved away from the burden of time 
reporting. As discussed above, some of these smaller firms may choose 
to build a system that would track the information needed to 
efficiently produce the final metrics, including in the final Workload 
metric area. Finally, the Board also notes that firms will be permitted 
to use a reasonable method to estimate the components of a calculation 
when actual amounts are unavailable.
    One commenter said that there could be costs associated with 
coordinating data collection efforts across firms. The Board recognizes 
that such costs would likely arise. However, the Board notes that the 
adjustments the Board has made to the set of required metrics and their 
calculations should alleviate this burden. Furthermore, firms should 
generally already be coordinating data collection efforts for Form AP 
reporting purposes and this data will be subject to quality controls 
over firm reporting. To the extent such coordination is necessary, 
academic research finds that 94% of component auditors identified on 
Form AP are associated with the lead auditor.\393\ This provides 
additional evidence there is a strong existing relationship between 
these firms which should facilitate any additional transfer of 
information required to implement the final rules.
---------------------------------------------------------------------------

    \393\ See William M. Docimo, Joshua L. Gunn, Chan Li, and Paul 
N. Nichas, Do Foreign Component Auditors Harm Financial Reporting 
Quality? A Subsidiary-Level Analysis of Foreign Component Auditor 
Use, 38 Contemporary Accounting Research 3113 (2021).
---------------------------------------------------------------------------

Aggregating & Calculating Firm and Engagement Metrics
    Once the information is collected, it will need to be aggregated 
and the final metrics will need to be derived following the calculation 
requirements discussed above. Costs will likely be incurred to make 
those calculations and to make and validate the filing. Moreover, these 
costs will be greater for firms that will use manual systems than firms 
that will use automated systems.
Making the Filing
    Once collected, aggregated, and calculated, the final metrics will 
then need to be filed with the PCAOB. There will be costs associated 
with developing the filing, validating the information, and drafting 
any voluntary textual disclosures. This could entail administrative 
costs such as legal review of the textual disclosures. Firms may also 
need to extend their existing quality control processes around PCAOB 
filings to cover these new filings.
    Overall, it is difficult to estimate the potential costs that audit 
firms will incur to produce the final metrics owing in part to the 
variability in firms' current systems (e.g., automated versus manual) 
and the extent to which firms already produce similar metrics for 
internal reporting to national offices or external reporting in firm 
transparency reports. However, the Board may extrapolate from the 
economic impacts of prior PCAOB disclosure rules. For example, as a 
result of the implementation of AS 3101 in 2019, the largest four audit 
firms surveyed through the PCAOB's outreach activities indicated they 
incurred, on average, 23,000 hours to develop the processes and 
procedures to support the implementation of CAMs. The PCAOB staff 
monetized the economic impact to those largest four audit firms to be 
approximately $4.4 million dollars each.\394\ Those audit firms also 
each reported 14,600 hours of training, estimated at $2.1 million 
dollars. The next four largest audit firms reportedly incurred 3,700 
hours, on average, to develop processes and procedures, and 3,100 hours 
in training their personnel to support the implementation of CAMs--
estimated at $610,000 and $435,000, respectively, on average for each 
firm.\395\ As estimated through April 2021, the smallest of audit 
firms, after excluding outliers, reported only 400 hours implementing 
the CAM requirements, with 600 hours associated with CAM related 
training. The average implementation costs for these smallest of firms 
was estimated to be approximately $185,000 per firm.\396\ Extrapolating 
these data points to the population of firms expected to be impacted by 
the final requirements implies a total cost of approximately $67 
million.\397\
---------------------------------------------------------------------------

    \394\ See, e.g., Michael J. Gurbutt, Wei-Kang Shih, Carrie von 
Bose, Staff White Paper: Stakeholder Outreach on the Initial 
Implementation of CAM Requirements, PCAOB 1, 8 (2020).
    \395\ Id. The ``next four largest firms'' refers to BDO USA LLP, 
Crowe LLP, Grant Thornton LLP, and RSM US LLP. See Gurbutt et al., 
Stakeholder Outreach at n. 4.
    \396\ See Gurbutt, et al., Staff White Paper: Second Stakeholder 
Outreach on the Initial Implementation of CAM Requirements 1, 13. 
``Smaller audit firms'' refers to Marcum LLP; Moss Adams LLP, Baker 
Tilly US LLP; BKD LLP; CohnReznick LLP; Dixon Hughes Goodman LLP 
(DHG); EisnerAmper LLP; Mayer Hoffman McCann P.C. (MHM); Plante & 
Moran, PLLC; and WithumSmith + Brown, PC.
    \397\ As an example, aggregating these costs across active firms 
in the market implies roughly $6.5 million in procedures and 
training for the largest four audit firms ($4.4 million for 
processes and procedures and $2.1 million for training), $1.045 
million for the next four largest firms, and $185,000 for 202 
smaller impacted firms, would amount to a combined $67.0 million in 
costs to produce the final metrics outside of implementation costs 
associated with the systems ($6.5 million x 4 larger firms + $1.045 
million x 4 next-largest firms + $0.185 x 199 smaller firms = $67.0 
million).
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    Following the implementation of processes, procedures, and 
training, surveyed audit partners report that 1% of total audit 
engagement hours were spent identifying, developing, and communicating 
CAMs.\398\ PCAOB staff research found no systematic evidence of 
increased engagement hours for audits of large accelerated filers \399\ 
and a statistically significant 6.6% increase in engagement hours for 
audits of non-large accelerated filers.\400\ The findings suggest that 
there could potentially be variable costs associated with the final 
requirements that persist after the implementation phase.
---------------------------------------------------------------------------

    \398\ See Gurbutt and Shih, Econometric Analysis on the Initial 
Implementation of CAM Requirements 4.
    \399\ See Gurbutt and Shih, Econometric Analysis on the Initial 
Implementation of CAM Requirements 4.
    \400\ See Jonathan T. Fluharty-Jaidee, Michael J. Gurbutt, and 
Wei-Kang Shih, Staff White Paper: Second Econometric Analysis on the 
Initial Implementation of CAM Requirements, Public Company 
Accounting Oversight Board, (2022).
---------------------------------------------------------------------------

    Auditors of large accelerated filers realized efficiencies in 
developing and communicating critical audit matters in the second year 
of implementation, reporting that they generally spent the same or less 
time on critical audit matters compared to the initial year of 
implementation.\401\ Accordingly, the Board expects that the costs to 
produce the final metrics will be most significant for the initial 
filings under the final rules because firm personnel will need to 
familiarize themselves with new reporting requirements and forms. In 
subsequent reporting periods, the Board anticipates that firms will 
incur lower costs as personnel become more familiar with the reporting 
requirements.
---------------------------------------------------------------------------

    \401\ See, e.g., Interim Analysis Report: Further Evidence on 
the Initial Impact of Critical Audit Matter Requirements, PCAOB Rel. 
No. 2022-007 (Dec. 7, 2022).
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    As noted above, AS 3101 and the final rules are different in ways 
that may

[[Page 100054]]

limit the relevance of the costs of AS 3101 to the potential costs of 
the final rules. For example, as discussed above, the final metrics 
will require the collection of a broader array of engagement-level 
information whereas CAM requirements focus more on narrative 
description. However, the processes, procedures, and training aspects 
are likely more comparable.
    One commenter agreed with the Board's caveat that the CAMs 
requirements are not a perfect analogy for the proposed metrics. More 
specifically, the commenter said that the proposal would require 
significantly more effort to implement than AS 3101 due, in part, to 
the need to update QC policies and procedures. Furthermore, commenters 
pointed to specific facts and circumstances that could exacerbate the 
costs of the final metrics (e.g., coincidence with other new PCAOB 
standards). One commenter asserted, incorrectly, that the proposal 
included no quantification of costs associated with reporting.
    One commenter suggested that the Board perform further analysis of 
the firms' current data collection efforts and the data collection 
efforts that will be required under the final requirements. As part of 
the Board's economic analysis, the Board considered all relevant 
information available to the Board including information gathered 
through the Board's oversight activities, academic research, and 
comments received on the proposing release.
    Commenters agreed that firms will incur some costs to report the 
final metrics. Two commenters said validating personnel's total 
experience prior to joining the firm will be challenging and expensive 
because firms do not generally track this information. Another 
commenter said that reporting industry experience of audit personal 
would be costly because sufficient information to report this metric is 
not usually held in the human resources administration of firms. One 
commenter said the proposed engagement-level Workload metrics were very 
complicated and would take considerable effort to prepare. One 
commenter said that many firms do not track non-chargeable hours. 
Commenters also said that they do not usually track restatements of 
former clients' financial statements. The Board considered these costs 
and have made several modifications to the required calculations which 
the Board believes will help mitigate them. The Board also notes that, 
under the final rules, firms would be permitted to use a reasonable 
method to estimate the components of a calculation for which data are 
unavailable.
    One commenter said that producing some of the proposed firm-level 
metrics (e.g., Partner and Manager Involvement and Allocation of Audit 
Hours) would be challenging because it would require aggregation of 
engagement-level data, including data from other auditors, for a period 
different from that required for the corresponding proposed engagement-
level metrics. The Board agrees there could be some incremental costs 
associated with collecting and validating data from other auditors. 
However, when producing the final firm-level metrics, firms would be 
able to leverage the audit hours information they already collected and 
validated pursuant to Form AP reporting for audit reports issued during 
the 12-month period ended September 30. Therefore, the Board does not 
believe the difference between the period covered by the firm-level 
metric and the period covered by Form AP presents unique challenges. To 
the contrary, the Board believes that adopted approach is an efficient 
way to provide information to stakeholders while minimizing costs to 
firms. The adjustments the Board has made to the calculations (e.g., 
reducing the scope of the Partner and Management Involvement, Workload, 
and Allocation of Audit Hours calculation to large accelerated and 
accelerated filers only) and the Board's decision not to adopt the 
proposed Use of Shared Service Centers metric should attenuate any 
concerns like those raised by this commenter.
    Several commenters said that there could be costs associated with 
correcting immaterial errors, particularly with regard to engagement-
level metric reporting on Form AP. The Board agrees cost related to 
this aspect of the final rules could arise, either though extra up-
front quality control costs or costs associated with amending an 
inaccurate Form AP. However, the Board believes investors and audit 
committees need reliable information, and correction of errors is an 
important part of ensuring the reliability of the information.
ii. Indirect Costs Arising From Market Reactions to the Final Metrics
    The Board also reviewed and considered costs that could arise from 
how investors, audit committees, and auditors may react to the final 
metrics. For example, improved decision-making on the part of audit 
committees could lead to costs from switching auditors. Most of these 
costs are not feasible to quantify. However, they are likely to be 
incurred only to the extent that they are deemed reasonable from a 
business perspective.
a. Understanding the Final Metrics
    Investors that use the metrics will incur costs to understand the 
final metrics and incorporate them into their decision-making. 
Investors will choose to bear these costs only if they anticipate that 
the costs are outweighed by the benefits of using the metrics. Due to 
economies of scale, the Board believes institutional investors will be 
more likely to incur these costs than retail investors. Audit 
committees may incur costs to understand the final metrics because 
their fiduciary duties may prompt them to do so. Moreover, audit 
committees may spend additional time discussing the final metrics with 
their auditor, which would require both audit committees' and auditors' 
time.\402\ Auditors may spend time and resources developing materials 
to explain or contextualize their metrics for the audit committee 
(e.g., presentations and decision aids).
---------------------------------------------------------------------------

    \402\ See below for additional discussion of attention diversion 
of audit committees.
---------------------------------------------------------------------------

    Furthermore, investors and audit committees may incur costs in 
monitoring the final metrics and learning to extract decision-making 
information from them. Investors may incur costs incorporating the 
final metrics into their investment decisions or exercising oversight 
over issuers and audit committees. Audit committees may incur costs to 
review the final metrics in support of their auditor oversight 
responsibilities.
    There may also be costs associated with interpreting certain final 
metrics in relation to final metrics across other firms and 
engagements. For example, partner and manager involvement on an 
engagement may be more informative when considered in the context of 
the firm's overall partner and manager involvement or other firms' 
partner and manager involvement metrics. Moreover, investors and audit 
committees may spend time researching the state of the market for 
assurance services to provide more context to the final metrics.\403\
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    \403\ For example, some literature suggests that the 
implications of staff turnover are better understood in the context 
of accounting labor supply. See Khavis and Szerwo, Audit-Employee 
Turnover, Audit Quality, and the Auditor-Client Relationship 2.
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    Auditors may also incur costs to monitor how their final metrics 
compare to those of their competitors. GNFs, in particular, could 
deploy significant resources in this way. NAFs may have less ability to 
fully evaluate the information contained in the final

[[Page 100055]]

metrics and choose instead to retain outside experts to provide such 
research. Firms may also use the final engagement-level metrics to 
inform their acceptance and continuance policies (e.g., by considering 
industry experience).
    Referring to academic research on information processing costs, one 
commenter incorrectly stated that the Board had not considered the 
costs incurred understanding the proposed metrics.\404\ The commenter 
also said there would be costs associated with misunderstanding the 
metrics. The Board discussed such costs in the proposal and again 
below.
---------------------------------------------------------------------------

    \404\ See, e.g., Charles M.C. Lee and Qinlin Zhong, Shall We 
Talk? The Role of Interactive Investor Platforms in Corporate 
Communication, 74 Journal of Accounting and Economics 101524 (2022).
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b. Revising Audit Approaches
    Armed with the new information discussed above, audit committees 
may question their auditor's audit approach. This may prompt auditors 
to make changes to their audit approaches. For example, an audit 
committee may come to the belief that the audit partners have too many 
other duties and may express this concern to the auditor. This may 
prompt auditors to adjust how they are staffing the audit. Similarly, 
audit firms could incur costs making those changes. Some of these costs 
may be greater than others. For example, reducing excessive turnover 
and workloads, to the extent they exist, could require a significant 
investment in resources.
    As discussed above, the final rules may lead audit firms to compete 
on the final metrics. This could lead some firms to update their audit 
approaches, provide additional training, or increase their 
specialization. For example, auditors may increase training in 
industry-specific areas or hire additional individuals with specialized 
knowledge. As another example, to the extent issuer preferences show an 
increased demand for auditors with lower workloads, firms may increase 
staffing. Such an increase in human-capital investment will likely 
increase labor and overhead costs for audit firms. Auditors may also 
increase the quality review of their work to reduce the likelihood of 
restatements or enhance their audit procedures to compete on the basis 
of higher-quality audit services.
c. Switching Auditors
    As discussed above, the final rules could result in increased 
auditor switching as investors and audit committees compare and 
evaluate current and alternative auditors. Should audit committees 
ultimately choose to change auditors, there may be switching costs, 
both to the issuer and the auditor. For example, an auditor's work may 
be less efficient or less effective in the first years of auditing a 
new issuer as the auditor works to build an understanding of the 
issuer's business and financial reporting risks. There would likely be 
a transitory period of increased auditor switching, after which auditor 
switching would stabilize as the audit market reaches a new 
equilibrium.
iii. Other Indirect Costs
    Economic theory suggests that auditors may pass on to issuers costs 
incurred as a result of the final rules in the form of higher audit 
fees.\405\ In addition, the degree to which increases in variable 
costs, such as certain firm compliance costs, are expected to be passed 
on will vary based on how widespread the costs are across competitors. 
Increases in variable costs that impact all sellers in an imperfectly 
competitive market are more likely to be passed on than cost increases 
that impact only a subset of sellers.\406\ If compliance costs have a 
greater impact on a subset of firms, such as smaller firms, those firms 
may be less inclined to pass on the incremental costs in order to stay 
competitive with larger firms. Accelerated filers and large accelerated 
filers may be disproportionately impacted by a cost passthrough because 
(i) auditors that do not audit accelerated filers or large accelerated 
filers would be out of scope and (ii) accelerated filer and large 
accelerated filer engagements would require additional data collection 
efforts.
---------------------------------------------------------------------------

    \405\ Economic theory suggests that fixed costs are less likely 
to be passed on. Only changes to variable costs are generally 
expected to impact sellers' pricing decisions. See, e.g., Mankiw, 
Principles of Economics 284 and 307 (showing that the profit-
maximizing price is a function of marginal cost rather than fixed 
costs).
    \406\ See, e.g., Erich Muehlegger and Richard L. Sweeney, Pass-
Through of Own and Rival Cost Shocks: Evidence from the U.S. 
Fracking Boom, 104 Review of Economics & Statistics 1361 (2022).
---------------------------------------------------------------------------

    Evidence from the PCAOB's PIR of AS 3101 suggests that there was no 
statistically significant increase in audit fees for the audits of 
large accelerated filers but a statistically significant 3.0% increase 
for the audits of non-large accelerated filers.\407\ Financial 
statement preparers and audit committees interviewed during the PCAOB's 
investor outreach efforts indicated that there were minimal or 
immaterial costs.\408\ One academic study found a small, statistically 
insignificant audit fee increases as a result of PCAOB Rule 3211.\409\ 
Another study found that audit fees increased by a statistically 
significant 7.9 percentage points.\410\
---------------------------------------------------------------------------

    \407\ See Gurbutt and Shih, Econometric Analysis on the Initial 
Implementation of CAM Requirements; and Fluharty-Jaidee, et al., 
Staff White Paper: Second Econometric Analysis on the Initial 
Implementation of CAM Requirements.
    \408\ See Gurbutt, et al., Staff White Paper: Second Stakeholder 
Outreach on the Initial Implementation of CAM Requirements 21.
    \409\ See Cunningham, et al., What's in a Name? 141 and 156 
(finding no statistically significant increase in fees following the 
implementation of AS 3211, Form AP, in 2017).
    \410\ See, e.g., John and Liu, Disclosure of an Audit Engagement 
Partner's Name.
---------------------------------------------------------------------------

    One commenter noted that the proposal failed to consider impacts on 
entities that are neither issuers nor broker dealers but are required 
or may be required under SEC rules to use a PCAOB-registered and 
inspected firm. The Board notes that the commenter provided just two 
examples of such SEC rules. One rule was recently vacated and the other 
is a proposal.\411\ The Board acknowledges that, to the extent any such 
entities are required under SEC rules to obtain an audit from a PCAOB-
registered firm, they could be indirectly impacted by the final rules 
if their auditor is both (I) subject to the final requirements and 
either (ii) chooses to pass on to these entities any part of the costs 
associated with the final rules or (iii) exits the market as a result 
of final rules.\412\ Any passthrough of cost will likely be limited by 
the fact that the engagement-level reporting requirements will not 
apply to the audits of these entities and most of the firm-level 
metrics will not require information from their audits. This means that 
the final rules should have little or no effect on the cost of their 
audits. Furthermore, the Board notes that any costs to such entities 
could be offset by benefits. For example, stakeholders in the audit of 
these entities may use the final metrics to inform their decision-
making.
---------------------------------------------------------------------------

    \411\ See SEC Final Rules on Private Fund Advisers: 
Documentation of Registered Investment Advisers Compliance Reviews, 
SEC Rel. No. IA-6383 (Aug. 23, 2023). See also SEC Proposed Rule on 
Safeguarding Advisory Client Assets, SEC Rel. IA-6384 (Mar. 9, 
2023).
    \412\ SEC rules require the use of PCAOB-registered or PCAOB-
registered and inspected audit firms by entities other than issuers 
and registered broker-dealers, including certain investment 
advisers, pooled investment vehicles, security-based swap data 
repositories, and clearing agencies. See, e.g., 17 CFR 275.206(4)-2 
(custody of funds or securities of clients by investment advisors); 
17 CFR 240.13n-11 (chief compliance officer of security-based swap 
data repository; compliance reports and financial reports); 17 CFR 
240.17ad-22 (standards and clearing agencies); 17 CFR 240.15c3-1g 
(conditions for ultimate holding companies of certain brokers and 
dealers, Appendix G to 17 CFR 240.15c3-1); and 17 CFR 240.18a-1 (net 
capital requirements for security-based swap dealers for which there 
is not a prudential regulator).

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[[Page 100056]]

3. Unintended Consequences
    In addition to the benefits and costs discussed above, the final 
rules could have unintended consequences. The following discussion 
describes potential unintended consequences the Board considered and, 
where applicable, any mitigating or countervailing factors.
i. Auditors May Exit the Market for Accelerated Filers and Large 
Accelerated Filers Due to Increased Competition and Costs
    The final rules may lead auditors to compete on the final metrics. 
The Board believes this new competitive dynamic will be 
beneficial.\413\ However, firms that are less able to compete on the 
final metrics could lose market share or be forced to lower their audit 
fees, resulting in strains on their profitability. Profitability could 
also be negatively impacted by the costs of the final rules. In some 
cases, these auditors may exit the public audit market for accelerated 
filer and large accelerated filer audits. This could reduce the number 
of potential auditors some accelerated filers or large accelerated 
filers may consider thereby reducing competition. One commenter noted 
that (i) the Big 4 firms already audit over 88% of the large 
accelerated filers and (ii) research shows that the population of firms 
with less than 100 clients has decreased by over 50% in recent 
years.\414\
---------------------------------------------------------------------------

    \413\ See above for a discussion on the benefits linked to 
competition.
    \414\ See Xiaohong Liu and Dan A. Simunic, Profit Sharing in an 
Auditing Oligopoly, 80 The Accounting Review 677 (2005); Mark L. 
DeFond and Clive S. Lennox, The Effect of SOX on Small Auditor Exits 
and Audit Quality, 52 Journal of Accounting and Economics 21 (2011); 
Vincent Rylan, The Big Four Continue to Dominate Auditing: Weekly 
Stat, CFO Magazine, (June 29, 2022) available at https://www.cfo.com/news/the-big-four-continue-to-dominate-auditing-weekly-stat/; Brant Christensen, Kecia Williams Smith, Dechun Wang, and 
Devin Williams, The Audit Quality Effects of Small Audit Firm 
Mergers in the United States, 42 Auditing: A Journal of Practice & 
Theory 75 (2023).
---------------------------------------------------------------------------

    Many commenters said that the proposal could lead smaller firms to 
exit the market for accelerated filer or large accelerated filer audits 
and increase concentration. One commenter said that the proposed 
reporting requirements would be particularly onerous on non-U.S. firms 
that carry out only one or a small number of relevant PCAOB 
engagements. One commenter suggested that smaller firms may exit the 
public company audit market as a result of the proposed requirements, 
in conjunction with other standards recently issued and proposed by the 
PCAOB, and this could negatively impact smaller public companies that 
are seeking a smaller audit firm. The commenter referred to a working 
paper on smaller firm exits to support their view. However, the cited 
paper finds the opposite result, namely that changes in PCAOB 
regulations play little if any role in a firm's decision to 
deregister.\415\ One commenter noted that smaller firm exit could also 
reduce the benefits associated with firms competing on the proposed 
metrics. One mid-sized firm said that smaller firms would have fewer 
issuers to spread their fixed costs over. The same commenter said the 
proposal would put considerable strain on firms that provide audit 
services to the 40% of issuers that represent the remaining, at most, 
2% of capital markets. The commenter did not indicate how they believe 
these issuers would be impacted by the proposal.
---------------------------------------------------------------------------

    \415\ See Michael Ettredge, Juan Mao, and Mary S. Stone, Small 
Audit Firm De-Registrations From the PCAOB-Regulated Audit Market: 
Strategic Considerations and Consequences.
---------------------------------------------------------------------------

    One commenter who represents CPAs said that the costs of the 
proposal could disproportionately impact smaller firms which could lead 
to the exit of some of the smaller firms. The commenter provided 
additional comments based on the results of a survey of small and mid-
sized firms administered by the commenter. The commenter's survey was 
distributed to the 500 largest CPA firms in the United States. Eighty-
eight firms responded. The respondent firms' revenues range from less 
than $10 million to greater than $500 million. The commenter provided 
the survey questions. All respondents that perform U.S. public company 
audits reported that the proposal would require a very heavy or 
substantial effort and would strain resources, driven in part by 
economies of scale. The Board notes that this data point is based on 36 
survey participants, some of whom do not perform audits of accelerated 
filers or large accelerated filers and therefore would not be subject 
to the final requirements. The survey reports that 23% of respondents 
(approximately eight or nine respondents) would definitely or strongly 
consider exiting the public company audit market entirely.\416\ 
However, the survey provides no information that would help the Board 
assess the significance of these firms to the overall audit market or 
whether they even audit accelerated filers or large accelerated filers, 
and therefore would be impacted by the final requirements. The survey 
also reports that another 25% of respondents (9 respondents) that 
perform U.S. public company audits would eliminate or manage their 
client base of accelerated filers. However, in addition to the lack of 
information that would help the Board assess the significance of these 
firms to the overall audit market, the relevance of this result is 
obscured by the conflation of ``elimination'' and ``management'' of 
accelerated filers. Finally, the commenter provided little detail on 
how the survey was performed (e.g., how the proposal was described to 
the survey participants).
---------------------------------------------------------------------------

    \416\ Citing the result of the survey provided by this 
commenter, another commenter said that nearly 75% of respondents 
would consider eliminating their public company audit process as a 
result of the proposal. However, this is not what the survey found. 
Rather, the survey found that 50% of respondents would at least 
consider getting out of the public company market.
---------------------------------------------------------------------------

    The potential negative consequences of firm exit could be mitigated 
by several factors. First, exit may be limited primarily to the smaller 
firms among those that would be impacted by the final rules, since 
smaller firms may be disproportionately impacted by the fixed costs of 
complying with the final rules. Reduced competition will thus tend to 
impact smaller accelerated filers rather than larger large accelerated 
filers, which typically require larger auditors. Second, there is 
little reason to expect exit from the market for non-accelerated filer 
audits. In fact, competition may increase in the non-accelerated filer 
issuer audit market to the extent firms exiting the accelerated filer 
and large accelerated filer issuer markets redeploy capacity to the 
non-accelerated filer issuer audit market. Finally, firms that remain 
profitable in the accelerated filer and large accelerated filer issuer 
audit markets could expand their market share, perhaps by acquiring 
additional capacity from exiting firms.
    One commenter provided research suggesting that firms that exited 
the market following the Sarbanes-Oxley Act were not of lower quality 
than firms that remained.\417\ The Board believes the commenter implied 
that issuers or broker-dealers may not necessarily obtain a higher 
quality audit after switching to a new auditor that has remained in the 
market. The study acknowledged that prior research using other audit 
quality proxies finds the opposite result, namely, that exiting firms 
indeed have lower audit quality.\418\ Firm size is a widely accepted 
proxy for audit quality.\419\ The

[[Page 100057]]

Board's oversight activities indicate that noncompliance with auditing 
standards is higher among smaller firms.\420\ Therefore, to the extent 
smaller firms tend to exit rather than larger firms, as commenters 
contended, then audit quality could improve on average as issuers 
switch to larger firms. The Board recognizes there is currently some 
debate on the extent to which the large-firm audit quality effect is 
driven by correlated issuer characteristics rather than auditor 
effects.\421\ The Board believes compliance with auditing standards is 
less sensitive to issuer characteristics than other audit quality 
proxies (e.g., absolute discretionary accruals). After assessing the 
available evidence, the Board believes it is likely that the firms that 
any issuers or broker-dealers would switch to would likely not provide 
lower quality audits.
---------------------------------------------------------------------------

    \417\ See Neil L. Fargher, Alicia Jiang, and Yangxin Yu, Further 
Evidence on the Effect of Regulation on the Exit of Small Auditors 
from the Audit Market and Resulting Audit Quality, 37 Auditing: A 
Journal of Practice & Theory 95 (2018).
    \418\ See DeFond and Lennox, The Effect of SOX on Small Auditor 
Exits and Audit Quality.
    \419\ See DeFond and Zhang, A Review of Archival Auditing 
Research. Though firm size is widely accepted as a proxy for audit 
quality, it is not a perfect predictor of audit quality. Some large 
firms may provide low quality audits and some small firms may 
provide high quality audits.
    \420\ See, e.g., Spotlight Staff Update on 2023 Inspection 
Activities (Aug. 2024), available at https://pcaobus.org/resources/staff-publications and PCAOB Rel. No. 2024-005 at Figure 1.
    \421\ See Alastair Lawrence, Miguel Minutti-Meza, and Ping 
Zhang, Can Big 4 Versus non-Big 4 Differences in Audit-Quality 
Proxies be Attributed to Client Characteristics?, 86 The Accounting 
Review 259 (2011); Mark DeFond, David H. Erkens, and Jieying Zhang, 
Do Client Characteristics Really Drive the Big N Audit Quality 
Effect? New Evidence from Propensity Score Matching, 63 Management 
Science 3628 (2017).
---------------------------------------------------------------------------

    Two commenters said that the final rules would disproportionately 
impact smaller firms, leading them to increase their audit fees. 
Several commenters suggested that regulatory burdens incentivize 
companies to go or remain private. Referring to the SEC Office of the 
Advocate for Small Business Capital Formation Fiscal Year 2023 annual 
report as support (``SEC Small Business Advocate Annual Report''), one 
commenter highlighted that: (i) in 2022, the number of exchange-listed 
IPOs dropped to its lowest point since 2009; (ii) small exchange-listed 
companies accounted for the vast majority of the decline; and (iii) 
smaller companies are disproportionately impacted by regulatory costs 
because a large portion of regulatory costs are fixed.\422\ The Board 
agrees that the final rules could disproportionately impact the smaller 
in-scope firms. However, smaller issuers--those that the commenter 
contended are most sensitive to regulatory burden and at greatest risk 
of eschewing the capital markets--would be minimally impacted by the 
final rules for several reasons. First, firms that do not audit 
accelerated filers or large accelerated filers (that is, all but 
approximately 207 firms) would be out of scope and therefore there 
would be no effect on audit fees for their non-accelerated filer 
issuers. Second, to the extent in-scope firms choose to pass through 
all or part of the cost of the final rules, they would be less likely 
to do so for their non-accelerated filer issuers because their audits 
will not be subject to the engagement-level reporting requirements. 
Third, the Board does not believe issuers will incur any significant 
fixed costs, which the commenter asserted disproportionately impact 
smaller companies. Therefore, any disincentive among smaller companies 
to participate in capital markets arising from increased audit fees 
would likely be minimal. Among accelerated filer and large accelerated 
filer issuers, the Board notes that audit fees, on average, comprise 
roughly 0.15% to 0.2% of issuer revenue and any increase in audit fees 
attributable to the final rules would be a fraction of this.\423\ 
Therefore, any disincentive among larger companies to participate in 
capital markets arising from increased audit fees would also likely be 
minimal. Fourth, while the SEC Small Business Advocate Annual Report 
demonstrates that smaller exchange-listed companies accounted for the 
vast majority of the decline in exchange-listed companies, the report 
also cites a paper that concludes regulatory cost itself is unlikely to 
explain the full magnitude of IPO decline in the United States over the 
past two decades.\424\ Indeed, PCAOB staff analysis finds that 
accounting fees typically comprise roughly 4.5% of the costs of an 
initial public offering (0.3% of the proceeds).\425\ With respect to 
the recurring costs of remaining a public company, one market research 
report indicates that accounting fees comprise 32% of the costs.\426\ 
Any incremental costs associated with IPOs or remaining a public 
company attributable to the final rules would be a fraction of these 
costs.
---------------------------------------------------------------------------

    \422\ See U.S. Securities and Exchange Commission, Office of the 
Advocate for Small Business Capital Formation, Annual Report Fiscal 
Year 2023 citing an earlier working paper version of Michael Ewens, 
Kairong Xiao, and Ting Xu, Regulatory Costs of Being Public: 
Evidence from Bunching Estimation, 153 Journal of Financial 
Economics 103775 (2024).
    \423\ See Ideagen Audit Analytics, 20-Year Review of Audit Fee 
Trends 2003-2022, (July 2023) at 16.
    \424\ See Ewens, et al., Regulatory Costs of Being Public 
(explaining that non-regulatory factors--such as decline in business 
dynamism, shifting investment to intangibles, abundant private 
equity financing, changing economies of scale and scope, and 
changing acquisition behavior--are likely to play a more important 
role than regulatory cost in the decline of IPOs).
    \425\ PCAOB staff obtained data on accounting fees and legal 
fees from Audit Analytics and investment bank underwriting fees from 
a PwC market research report. See PwC, Considering an IPO? First, 
Understand the Costs, available at https://www.pwc.com/us/en/services/consulting/deals/library/cost-of-an-ipo.html and Audit 
Analytics, 2018-2019 IPO Accounting and Legal Fees, (Feb. 20, 2020). 
PCAOB staff calculated deal proceeds by multiplying the quantity of 
shares issued by their price at issue. PCAOB staff calculated the 
accounting fee share of proceeds as the proceeds-weighted average 
accounting fee share of proceeds across all deals in the Board's 
sample. The Board notes that the accounting fee share of proceeds is 
decreasing in deal proceeds. PCAOB staff calculated the accounting 
fee share of IPO costs as the ratio of all accounting fees to all 
IPO costs across all deals in the Board's sample. The PCAOB staff's 
analysis assumes IPO costs are equal to the sum of accounting, 
legal, and investment bank underwriting fees. The PwC market 
research report indicates that there are other IPO cost categories, 
but they are relatively small.
    \426\ See PwC, Considering an IPO?.
---------------------------------------------------------------------------

    In connection with their concerns regarding potential 
disproportionate costs to smaller firms, one commenter said the PCAOB 
should evaluate and identify the characteristics of investors in 
smaller companies and determine if the needs of investors in those 
companies are the same as the potential needs of investors in large 
companies. The Board notes that one recent working paper finds that 
institutional ownership is, on average, lower for smaller 
companies.\427\ Since institutional investors may be more likely to use 
the metrics, these data suggest that investors in smaller public 
companies may, on average, be less likely to use the metrics. However, 
the Board believes that investors in smaller companies could still 
benefit from the metrics because: (i) retail investors could benefit 
from the improved accessibility and comparability of information about 
firms and their engagements; and (ii) institutional ownership in 
smaller companies, though less than larger companies, is not trivial 
(41.6% for the lowest quintile of companies by market 
capitalization).\428\ Furthermore, as the Board discussed below, 
financial reporting quality may be relatively more important for 
smaller companies. Finally, the Board notes that the final rules 
require engagement-level reporting only for accelerated filers and 
large accelerated filers and firm-level reporting only for firms that 
audit at least one accelerated filer or large accelerated filer. This 
should help mitigate any concern that investors in smaller companies do 
not have a need for the final metrics.
---------------------------------------------------------------------------

    \427\ See Jonathan Lewellen and Katharina Lewellen, The 
Ownership Structure of U.S. Corporations, SSRN Electronic Journal 
(2022), at Table 3. The Board notes that SSRN does not peer review 
its submissions.
    \428\ Id.

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[[Page 100058]]

ii. Some Auditors May Strategically Manage Their Issuer Portfolios
    As discussed above, auditors that do not audit accelerated filers 
or large accelerated filers will not be subject to the final reporting 
requirements. Some auditors may strategically seek to audit only non-
accelerated filers to avoid disclosure of the final metrics, either to 
avoid costs of complying or out of concern that disclosing the metrics 
could potentially damage their reputation.\429\ As a result, there 
could be a separating equilibrium in the audit market.\430\ One 
commenter agreed that smaller firms may manage their engagement 
portfolios to avoid being required to comply with the final 
requirements and one commenter provided the results of a survey 
indicating that some firms may eliminate or manage their client base of 
accelerated filers. Assuming that lower-quality auditors are more 
likely to avoid accelerated filers in this way, this would increase the 
supply of low-quality auditors to non-accelerated filers and decrease 
the supply of low-quality auditors to accelerated filers. For non-
accelerated filers, this supply shock could increase competition among 
audit firms for non-accelerated filers and therefore reduce audit fees. 
However, because the supply shock would consist primarily of low-
quality auditors, it could also lower audit quality for non-accelerated 
filers. For accelerated filers, the opposite would occur. Reduced 
availability of auditors would tend to reduce competition and therefore 
increase audit fees. However, because higher-quality auditors would 
remain, audit quality could increase. As a result of these complex and 
countervailing influences, it is unclear whether this unintended 
consequence would have a net positive or negative impact.
---------------------------------------------------------------------------

    \429\ Commenters on proposed QC 1000 said that mid-sized firms 
would deliberately manage their portfolios to avoid the proposed 
scalability requirements that apply only to annually inspected 
firms. Therefore, the Board believes that such portfolio management 
is possible in relation to the final rules. Among the firms that 
will be impacted by the final rules, approximately 41%, 19%, and 11% 
had one, two, or three accelerated filer or large accelerated filer 
engagements during the 12-month period ending September 30, 2023.
    \430\ Contextually, a separating equilibrium occurs when 
incentives cause a division in the market in which one type of 
auditor gravitates towards a particular market segment. See, e.g., 
Michael Rothschild and Joseph E. Stiglitz, Equilibrium in 
Competitive Insurance Markets: An Essay on the Economics of 
Imperfect Information, 90 The Quarterly Journal of Economics 629, 
634 (1976) (specifically, the discussion marked I.6 Imperfect 
Information: Equilibrium with Two Classes of Customers).
---------------------------------------------------------------------------

    Auditors may also attempt to manage their metrics via their 
acceptance and continuance policies. Reputation risks to the auditor 
associated with individual engagements may start to play a greater role 
in firms' acceptance and continuance decisions as well as their audit 
fee decisions because new engagements could impact firms' metrics and 
hence their ability to charge audit fees on existing engagements. For 
example, a prospective issuer engagement may present a higher risk of 
restatement. Since restatements will be reported on Form FM in a 
uniform and comparable way, auditors may require a fee premium for this 
issuer to offset any negative effect the issuer may have on the 
auditor's metrics. In extreme cases, risky issuers may not be able to 
find an auditor, may be forced to hire a low-quality auditor, or may be 
forced to delist.
    To avoid such adverse outcomes, issuers may take steps to reduce 
their contribution to audit risk.\431\ For example, issuers may become 
more forthcoming with information or opt for less aggressive financial 
reporting. This potential unintended consequence would also be 
mitigated to the extent capital markets recognize that an auditor's 
metrics are driven in part by the riskiness of the auditor's client 
portfolio rather than the quality of the auditor.\432\ Indeed, auditors 
will have the opportunity to explain important context like this in the 
qualitative portion of the final disclosures.
---------------------------------------------------------------------------

    \431\ Economic theory suggests that private negotiations yield 
efficient allocations of decision rights. See Ronald Coase, The 
Problem of Social Cost, 3 The Journal of Law and Economics 1 (1960).
    \432\ Some research finds that poor financial reporting outcomes 
are attributable to client risk rather than poor audit quality. See 
Minutti-Meza, Does Auditor Industry Specialization Improve Audit 
Quality?
---------------------------------------------------------------------------

iii. Investors, Audit Committees, and Auditors May Misinterpret or 
Misuse the Final Metrics
    As discussed above, it is possible that the final metrics may not 
relate to audit quality in a straightforward way. As a result, there is 
a risk that investors, audit committees, and auditors could 
misinterpret, or misuse, the final metrics (e.g., by assuming they are 
strongly related to audit quality). The outcomes of misinterpretation 
or misuse are difficult to predict because they would be rooted in 
complex aspects of human psychology.\433\ As one example, investors and 
audit committees could rely too heavily on a final metric (e.g., when 
making capital allocation or auditor selection decisions). In response 
to market forces or requests from audit committees, some auditors could 
make changes to their audit approach that could negatively impact audit 
quality. As another example, auditors could mistakenly attribute other 
firms' competitiveness to one final metric and adjust their audit 
approach in a way that compromises the quality of their services.
---------------------------------------------------------------------------

    \433\ See, e.g., Loewenstein et al., Disclosure (discussing how 
``[p]sychological factors severely complicate the standard arguments 
for the efficacy of disclosure requirements.'').
---------------------------------------------------------------------------

    Many commenters agreed that there would be a risk that users, 
particularly investors, of the proposed metrics would misunderstand the 
metrics. One commenter said the proposed metrics would be 
misinterpreted. The commenter suggested that this may undermine the 
benefits of the proposal. Another commenter said that users would not 
understand some of the proposed metrics. One commenter suggested that 
this potential unintended consequence should be acknowledged as a cost 
because the negative effects would be borne by investors. One commenter 
performed a survey of audit committee chairs.\434\ Some survey 
participants agreed that the proposed metrics could lead to 
inappropriate conclusions. One commenter said that the risk of misusing 
the proposed metrics by audit committees could lead to increased 
director insurance costs. One commenter said investors or other 
stakeholders could pressure audit committees to only appoint auditors 
whose metrics fall within a certain range without considering other 
aspects of the firm's audit quality. One commenter said that 
overemphasis on metrics by auditors could commoditize the profession 
and reduce incentives to innovate the audit approach.
---------------------------------------------------------------------------

    \434\ See above for more discussion on the survey.
---------------------------------------------------------------------------

    The Board agrees that, as with other financial information made 
available to investors, some investors may misunderstand the metrics 
and make poor decisions as a result. If so, this could negatively 
impact them. However, the Board believes that the final metrics will 
likely, on average, improve investors' decision-making and therefore 
have chosen to acknowledge improved decision-making as a benefit. The 
Board acknowledges that some misunderstanding could also reduce the 
magnitude of this benefit. However, the Board believes this unintended 
consequence, should it arise, would diminish over time as investors 
learn how to effectively integrate the final metrics into their 
decision-making. Though the Board believes the metrics will spur 
competition on quality by allowing firms to credibly differentiate 
themselves, the Board recognizes it is possible that some firms would

[[Page 100059]]

coordinate their metrics. The Board discussed this potential unintended 
consequence below.
    Commenters described specific ways the proposed metrics could 
create confusion. Several commenters said that some of the definitions 
in the proposal conflict with other definitions in PCAOB standards or 
otherwise lead to confusion. The Board does not believe there are any 
direct conflicts with other PCAOB standards. The Board has attempted to 
draft the definitions in the proposal as precisely and clearly as 
possible. Commenters suggest that the ICB industry classification used 
for the industry specialization metric could create confusion because 
the SEC uses the SIC system. One commenter agreed that it is 
appropriate to use the ICB for industry classification. The Board 
acknowledges that a taxonomy based on the ICB industry classification 
could create some confusion. However, crosswalks between the ICB 
system, the SIC system, and other industry classification systems are 
available. The Board describes in the proposal and above why the Board 
based the taxonomy on the ICB system rather than the SIC system. One 
commenter said that the proposed restatements metrics would be 
difficult to compare with public data because Audit Analytics 
categorizes restatements in a different way than the proposed 
requirements would require firms to categorize them. The commenter did 
not explain what Audit Analytics categorization they are referring to. 
The Board does not believe a user of the final metrics who is also 
familiar with Audit Analytics data and wishes to reconcile the two data 
sources would find it challenging to do so.
    One commenter pointed to research that suggests more information, 
including via mandatory financial disclosure, is not always better for 
investors.\435\ Several other commenters also suggested information 
overload would be a concern. The Board appreciates this research and 
agrees that there will be opportunity costs to understand the final 
metrics. However, the Board notes that investors will be free to 
disregard the final metrics if they find the costs to understand them 
exceed their benefits. Furthermore, the Board agrees with one commenter 
who said that technology would obviate this potential unintended 
consequence.
---------------------------------------------------------------------------

    \435\ See Allen G. Schick, Lawrence A. Gordon, and Susan Haka, 
Information Overload: A Temporal Approach, 15 Accounting, 
Organizations and Society 199 (1990); Eugene G. Chewning Jr and 
Adrian M. Harrell, The Effect of Information Load on Decision 
Makers' Cue Utilization Levels and Decision Quality in a Financial 
Distress Decision Task, 15 Accounting, Organizations and Society 527 
(1990); Herbert A. Simon, Rationality in Psychology and Economics, 
59 Journal of Business S209 (1986); J. Richard Dietrich, Steven J. 
Kachelmeier, Don N. Kleinmuntz, and Thomas J. Linsmeier, Market 
Efficiency, Bounded Rationality, and Supplemental Business Reporting 
Disclosures, 39 Journal of Accounting Research 243 (2001); Morris H. 
Stocks and Adrian Harrell, The Impact of an Increase in Accounting 
Information Level on the Judgment Quality of Individuals and Groups, 
20 Accounting, Organizations and Society 685 (1995); Knechel, et 
al., Audit Quality; DeFond and Zhang, A Review of Archival Auditing 
Research; Joost Impink, Mari Paananen, and Annelies Renders, 
Regulation[hyphen]Induced Disclosures: Evidence of Information 
Overload?, 58 Abacus 432 (2022); Cornelius J. Casey Jr., Variation 
in Accounting Information Load: The Effect on Loan Officers' 
Predictions of Bankruptcy, 55 Accounting Review 36 (1980); Brad 
Tuttle and F. Greg Burton, The Effects of a Modest Incentive on 
Information Overload in an Investment Analysis Task, 24 Accounting, 
Organizations and Society 673 (1999); Michael B. Clement, Analyst 
Forecast Accuracy: Do Ability, Resources, and Portfolio Complexity 
Matter?, 27 Journal of Accounting and Economics 285 (1999); Brian P. 
Miller, The Effects of Reporting Complexity on Small and Large 
Investor Trading, 85 The Accounting Review 2107 (2010); Christine A. 
Botosan and Mary S. Harris, Motivations for a Change in Disclosure 
Frequency and its Consequences: An Examination of Voluntary 
Quarterly Segment Disclosures, 38 Journal of Accounting Research 329 
(2000); and John L. Campbell, Hsinchun Chen, Dan S. Dhaliwal, Hsin-
min Lu, and Logan B. Steele, The Information Content of Mandatory 
Risk Factor Disclosures in Corporate Filings, 19 Review of 
Accounting Studies 396 (2014).
---------------------------------------------------------------------------

    Several commenters were concerned that certain calculations would 
drive misinterpretation. These comments are discussed above. For 
example, one commenter suggested that users may misinterpret the 
proposed headcount changes as turnover. One commenter said industry 
experience of audit personnel could be misleading because it does not 
distinguish between recent and past experience. The Board also 
acknowledges that some investors may misunderstand this metric and make 
poor decisions as a result that will negatively impact them. However, 
the Board believes that the final requirements would, on average, 
improve investors' decision-making and therefore have chosen to 
acknowledge improved decision-making as a benefit. In the final rules, 
the Board has modified some of the scoping and calculations, which 
likely will reduce some of the potential for confusion.
iv. Auditors May Attempt To Manipulate the Final Metrics
    As discussed above, the final rules could lead firms to compete on 
the final metrics. As a result, the Board believes some firms will take 
steps to provide higher service quality. However, it is possible that 
some firms could instead manipulate the final metrics in ways that 
create an impression of providing higher service quality when in fact 
this is not the case. For example, firms could increase training hours 
by introducing training that has little benefit for audit quality, or 
could adjust staffing in ways that they believe make their metrics look 
better but that do not improve audit quality. This unintended 
consequence will be analogous, in some regards, to earnings management 
by financial statement preparers.\436\
---------------------------------------------------------------------------

    \436\ See, e.g., Graham, John R., Campbell R. Harvey, and Shiva 
Rajgopal, The Economic Implications of Corporate Financial 
Reporting, 40 Journal of Accounting and Economics 3, 4 (discussing 
how ``[a] surprising 78% of the Board's sample admits to sacrificing 
long-term value to smooth earnings''). Firms could manipulate the 
final metrics in ways analogous to both accounting-based earnings 
management and real earnings management. For example, they might 
adjust training hours or reported experience levels without 
substantive improvements (analogous to accounting-based earnings 
management) or make operational changes, such as altering client 
portfolios, solely to improve metrics (analogous to real earnings 
management).
---------------------------------------------------------------------------

    Some final metrics will be more difficult to manage than others. To 
the extent firms are able to manage a final metric, management of the 
final metric will tend to reduce the overall informativeness of the 
corresponding disclosures and could lead investors and audit committees 
to doubt the quality of other firms' disclosures as well. This could 
degrade existing empirical relationships between the final metrics and 
audit quality that have been found in the literature discussed 
above.\437\
---------------------------------------------------------------------------

    \437\ Such behavior can be ascribed to Goodhart's law in that, 
once the final metrics are disclosed and market participants act 
upon them, previously defined relationships change, and the final 
metrics may become unrelated to the alignments previously discussed.
---------------------------------------------------------------------------

    Referring to academic research, one commenter agreed that firms 
could try to manipulate their metrics, comparing this incentive to the 
incentive companies face to manage earnings.\438\ The same commenter 
agreed that firms' attempts to manipulate could be detrimental to audit 
quality. The commenter also suggested that oversight by the PCAOB would 
create an incentive to intentionally manage the

[[Page 100060]]

metrics. While the Board agrees that PCAOB oversight could put pressure 
on firms, the Board notes that, in addition to informing the Board's 
selection of firms, engagements, and focus areas for review, PCAOB 
oversight will be focused on compliance with the final rules which 
should deter any efforts to manipulate the final metrics. The commenter 
also suggested that disclosure of the metrics may change behavior in 
ways that are harmful to audit quality. The commenter provided specific 
examples of how this could occur for the proposed internal monitoring 
and compensation metrics. The Board is not adopting these metrics. As 
discussed above, the Board believes behavioral responses to the metrics 
by firms would be largely beneficial.
---------------------------------------------------------------------------

    \438\ See Mark S. Beasley, Joseph V. Carcello, Dana R. 
Hermanson, Fraudulent Financial Reporting: 1987-1997: An Analysis of 
US Public Companies, Committee of Sponsoring Organizations of the 
Treadway Commission (1999); Mark S. Beasley, Dana R. Hermanson, 
Joseph V. Carcello, and Terry L. Neal, Fraudulent Financial 
Reporting: 1998-2007: An Analysis of US Public Companies, Committee 
of Sponsoring Organizations of the Treadway Commission (2010); Ilia 
D. Dichev, John R. Graham, Campbell R. Harvey, and Shiva Rajgopal, 
Earnings Quality: Evidence from the Field, 56 Journal of Accounting 
and Economics 1 (2013); Graham et al., The Economic Implications; 
and Jaime L. Grandstaff and Lori L. Solsma, Financial Statement 
Fraud: A Review from the Era Surrounding the Financial Crisis, 13 
Journal of Forensic and Investigative Accounting 421 (2021).
---------------------------------------------------------------------------

    Referring to the evolution of CAMs, one commenter suggested that 
the metrics could become boilerplate. The Board agrees that the 
narrative discussion could potentially become boilerplate to some 
extent. However, as the quantitative calculations are not boilerplate, 
the Board believes the corresponding optional narrative discussion will 
be less susceptible to boilerplate.
    In general, QC 1000 should help mitigate this potential unintended 
consequence by explicitly subjecting the final metrics to firms' QC 
systems. Furthermore, firms' QC systems and their disclosure practices, 
including compliance with the final rules, will be subject to PCAOB 
oversight.\439\ The required documentation will also constrain firms' 
ability to manipulate their metrics because it will allow PCAOB 
inspections staff to understand how the metrics were calculated.\440\ 
The Board believes the PCAOB will exercise appropriate discretion in 
its oversight. Furthermore, firms will also be constrained by the fact 
that manipulations may be detected by comparison to peers. Indeed, 
academic research on earnings management suggests that peer comparisons 
help stakeholders identify deceptive reporting practices, serving as a 
disincentive to manage earnings.\441\ Finally, the final rules require 
that any optional narrative disclosure should be concise and focused on 
the reported metrics, with a view to facilitating the reader's 
understanding of the metrics. The Board believes this should help 
mitigate the risk that auditors would use the optional narrative 
disclosure to manipulate users' perceptions of the metrics.
---------------------------------------------------------------------------

    \439\ Some research finds that SEC oversight reduces some forms 
of earnings management. See, e.g., Lauren M. Cunningham, Bret A. 
Johnson, E. Scott Johnson, and Ling Lei Lisic, The Switch-Up: An 
Examination of Changes in Earnings Management after Receiving SEC 
Comment Letters, 37 Contemporary Accounting Research 917 (2020).
    \440\ See above for a discussion on the final documentation 
requirements.
    \441\ See, e.g., Dichev, et al., Earnings Quality: Evidence from 
the Field.
---------------------------------------------------------------------------

    Firms may attempt to improve their metrics by shifting resources 
from non-accelerated filer engagements to accelerated filer or large 
accelerated filer engagements. This could reduce the quality of service 
on non-accelerated filer engagements. However, subject to the audit 
labor market concerns discussed below, firms would be able to mitigate 
this effect by acquiring additional resources for their accelerated 
filer and large accelerated filer engagements (e.g., hiring additional 
staff). Furthermore, the effect would be mitigated by the fact that 
non-accelerated filers have additional time to file their financial 
statements with the SEC compared to accelerated and large accelerated 
filers. Firms may also attempt to improve certain metrics by shifting 
resources within an engagement. For example, a firm may attempt to 
reduce its workload metrics by shifting manager audit hours to more 
junior staff. However, attempting to do so may not be beneficial to 
firms because it could at the same time degrade other metrics. For 
example, if a firm attempted to reduce its workload metrics by shifting 
manager audit hours to more junior staff, it would at the same time 
reduce their partner and manager involvement metrics. Furthermore, the 
firm's QC system operates over all its PCAOB engagements and should 
limit the extent to which resources can be diverted.
v. Audit Labor Market Impacts
    The final metrics could lead to increased public scrutiny of firms 
and their engagements. This could negatively impact the issuer audit 
labor market if individual auditors believe the increased public 
scrutiny negatively impacts their personal reputations or otherwise 
increases their work pressures. Some commenters agreed that the 
proposed requirements could make the audit market less attractive to 
auditors.\442\ One commenter suggested that the potential negative 
impact on individual auditors could lead individual auditors to exit 
the labor market which would in turn drive up labor costs to audit 
firms. The commenter suggested this could potentially increase labor 
costs for issuers as well to the extent audit firms seek to hire 
individuals from issuers that have relevant industry experience.\443\ 
Based on discussions with audit committee chairs, one commenter said 
that survey participants were ``very concerned'' that the proposal 
could render the profession less appealing to new auditors.\444\
---------------------------------------------------------------------------

    \442\ One commenter referred to a market research report that 
finds downwards trends in the number of accounting graduates and the 
number of hires but upwards trends in the number of new CPA 
candidates. See Association of International Certified Professional 
Accountants, 2021 Trends: A Report on Accounting Education, the CPA 
Exam and Public Accounting Firms' Hiring of Recent Graduates, 
(2022). The commenter also referred to an article discussing the 
perceived talent shortage, firms' efforts to address it, and 
commentators views. See Stephen Foley, Accountants Work to Shed 
`Boring' Tag Amid Hiring Crisis, Financial Times (Oct 3. 2022).
    \443\ In the context of this comment, the commenter referred to 
an academic article where discussion on dysfunctional manager and 
investor behavior in response to differential audit quality could be 
found. The Board is unsure how such a discussion or the article 
itself are relevant to the topic at hand. See Patrick J. Hurley, 
Brian W. Mayhew, Kara M. Obermire, and Amy C. Tegeler, The Impact of 
Risk and the Potential for Loss on Managers' Demand for Audit 
Quality, 38 Contemporary Accounting Research 2795 (2021).
    \444\ See above for more discussion on the survey.
---------------------------------------------------------------------------

    Referring to a survey commissioned by the commenter's parent 
organization, one commenter reported that, among undergraduate 
accounting majors not pursuing or undecided on CPA licensure, 94% cite 
the regulatory environment as either a major or partial reason.\445\ 
The Board notes that this statistic ignores the facts that: (i) 
undergraduate accounting majors not pursuing or undecided on CPA 
licensure reflect just 20% of the participants in the survey (80% of 
the participants in the survey are planning to pursue a CPA); and (ii) 
respondents to the question were allowed to select multiple reasons. 
Indeed, 10 out of 14 of the possible reasons were cited by over 85% of 
the respondents as a major or partial reason for not pursuing or being 
undecided on CPA licensure. Thus, the findings suggest, at most, that 
the regulatory environment is one of many factors discouraging some 
students from pursuing a CPA. Furthermore, one commenter suggested 
that, rather than the regulatory environment, the 150-credit hour 
requirement to apply for a CPA license and work-life balance concerns 
are the key reasons college graduates are discouraged from becoming 
auditors. The commenter said that the challenges finding qualified 
auditors are especially pronounced for smaller firms.
---------------------------------------------------------------------------

    \445\ See Center for Audit Quality, Increasing Diversity in the 
Accounting Profession Pipeline: Challenges and Opportunities, (July 
2023).
---------------------------------------------------------------------------

    The Board notes that individual auditors could also use the final 
metrics to gain insights into workplace conditions and find firms more 
suitable

[[Page 100061]]

to their skillsets and workplace preferences. This may lead firms to 
compete for labor by improving their workplace conditions. One 
commenter explained that the industry's challenges attracting staff may 
be driven in part by the commodification of the audit, which the 
proposal would help reduce by providing transparency around the quality 
of the audit. The same commenter agreed that the proposed metrics could 
empower potential employees when shopping for a potential audit firm 
employer.
    One commenter said that the firm-level retention metric could 
present firms with a competitive disadvantage for recruiting talent if 
high turnover rates are provided without sufficient context (e.g., 
changes in firm structure, shifting industry concentrations, 
eliminating personnel due to performance or ethical concerns, 
independence issues resulting in the departure of firm personnel, 
etc.). The retention metric may result in additional recruiting costs 
to some firms. However, the Board believes that auditors will benefit 
from using this metric to shop for employers. Firms would also be able 
to provide additional context through the optional narrative 
disclosure.
    Some commenters said that the costs would be increased by the need 
to implement multiple significant PCAOB standards at the same 
time.\446\ Relatedly, one commenter said that the costs would be 
exacerbated by the proposed timing for Form FM, which would fall during 
the same time as PCAOB inspections and the QC system evaluation. The 
Board acknowledges that the issuer audit labor market may be relatively 
inelastic in the short run, particularly so given recent concerns about 
inadequate labor supply, which could increase the cost implications of 
the additional staffing that would be required to implement multiple 
PCAOB standards in relatively quick succession. This could exacerbate 
the costs of the final rules or lead to improper implementation.
---------------------------------------------------------------------------

    \446\ Commenters' concerns about the cumulative impacts of 
multiple PCAOB standards and rules with overlapping implementation 
periods including potential benefits are discussed above.
---------------------------------------------------------------------------

vi. Litigation and Reputations Risks
    Two commenters suggested that the proposed rules would exacerbate 
audit firm litigation and reputation risks. One commenter performed a 
survey of audit committee chairs.\447\ Some participants in the survey 
agreed that the proposal could create litigation and reputation risk. 
Regarding litigation risk, the Board agrees that plaintiffs' lawyers 
may use the final metrics to support their cases. Supporting this view, 
some research finds that PCAOB inspection reports with audit 
deficiencies are positively associated with the number of lawsuits 
subsequently filed against the inspected auditor.\448\ However, while 
the Board acknowledges this could encourage some frivolous lawsuits, 
the Board believes it would largely contribute positively to audit 
quality as it would create an incentive for firms to produce high 
quality audits. Indeed, the Board believes it would help drive more 
competition on audit quality, a criterion that the same commenter urged 
the Board to consider. Regarding reputation risk, the Board believes 
that the impact on reputation is central to the intended impacts of the 
final rules.
---------------------------------------------------------------------------

    \447\ See above for more discussion on the survey.
    \448\ See, e.g., Brant E. Christensen, Nathan G. Lundstrom, and 
Nathan J. Newton, Does the Disclosure of PCAOB Inspection Findings 
Increase Audit Firms' Litigation Exposure?, 96 The Accounting Review 
191, (2021).
---------------------------------------------------------------------------

vii. Tacit Collusion
    Some commenters suggested that the proposal could have 
anticompetitive effects. One commenter analogized the proposed metrics 
to (i) the sharing of compensation practices in the poultry-processing 
market; (ii) information sharing in healthcare; and (iii) information 
benchmarking in the meat-packing market. Relatedly, several commenters 
suggested that the proposed metrics could reveal competitively 
sensitive information. The Board acknowledges commenters' concerns 
about potential anticompetitive effects which, if obtained, could 
reduce quality or increase price. For example, in addition to the 
largely procompetitive effects discussed in the proposal and above, 
there could be an offsetting negative effect on competition to the 
extent the final metrics facilitate tacit collusion among audit 
firms.\449\ Some research suggests that public disclosure can 
negatively impact competition. For example, one academic study suggests 
that U.S. public companies opportunistically use their public financial 
disclosures to tacitly collude.\450\ Another academic study shows that 
public disclosure of transaction-level pricing data by Danish antitrust 
authorities led to an increase in prices for ready-mix concrete.\451\ 
Similarly, another academic study shows that legacy airlines use their 
earnings calls to coordinate capacity reductions on competitive 
routes.\452\ However, this research may not necessarily apply to the 
audit market. For example, the relationship between competition and 
audit quality is ambiguous with some research suggesting that increased 
competition is negatively associated with audit quality.\453\ As a 
result, to the extent the final rules facilitate tacit collusion, this 
effect could either raise or lower audit quality in certain segments of 
the market. By contrast, the Board believes the procompetitive effects 
of the final rules described above will be significant due to the 
dearth of information currently available to audit committees and 
investors. Furthermore, competition in the audit market is limited by 
the presence of switching costs, reducing firms' incentives to tacitly 
collude.
---------------------------------------------------------------------------

    \449\ Tacit collusion refers to coordinated action among 
competitors intended to raise profits that does not involve explicit 
communication. See, e.g., Rama Cont and Wei Xiong, Dynamics of 
Market Making Algorithms in Dealer Markets: Learning and Tacit 
Collusion, 34 Mathematical Finance 467 (2024). The concentrated 
nature of the audit market may enhance the possibility of tacit 
collusion.
    \450\ See Thomas Bourveau, Guoman She, and Alminas 
[Zcaron]aldokas, Corporate Disclosure as a Tacit Coordination 
Mechanism: Evidence from Cartel Enforcement Regulations, 58 Journal 
of Accounting Research 295 (2020) (finding that ``after a rise in 
cartel enforcement, U.S. firms start sharing more detailed 
information in their financial disclosure about their customers, 
contracts, and products. This new information potentially benefits 
peers by helping to tacitly coordinate actions in product 
markets.'').
    \451\ See Svend Alb[aelig]k, Peter M[oslash]llgaard, and Per B. 
Overgaard, Government[hyphen]Assisted Oligopoly Coordination? A 
Concrete Case, 45 The Journal of Industrial Economics 429 (1997).
    \452\ See Gaurab Aryal, Federico Ciliberto, and Benjamin T. 
Leyden, Coordinated Capacity Reductions and Public Communication in 
the Airline Industry, 89 Review of Economic Studies 3055 (2022).
    \453\ See, e.g., Yue Pan, Nemit Shroff, and Pengdong Zhang, The 
Dark Side of Audit Market Competition, 75 Journal of Accounting and 
Economics 101520 (2023) (explaining how greater competition can, on 
one hand, ``foster audit process innovation'' and, on the other 
hand, lead auditors to ``focus on appeasing clients by reducing 
professional skepticism and allowing clients excessive financial 
reporting discretion'') and cites therein. The Board notes that 
controlling for all potential drivers of audit quality and fees is 
challenging. As such, the results obtained by these studies may be 
affected by omitted variable biases.
---------------------------------------------------------------------------

viii. Opportunistic Behavior by Preparers
    One commenter suggested that financial statement preparers may be 
able to use the proposed metrics to evade their auditor's 
scrutiny.\454\ The Board agrees that preparers might be able to exploit 
some of the final metrics in this way (e.g., partner and manager 
involvement) but for others it will be

[[Page 100062]]

less likely (e.g., restatements). The effect will be limited by the 
fact that preparers already have some familiarity with their auditor's 
processes. For example, auditors are required to provide a variety of 
audit committee communications which preparers may be privy to.\455\ 
Indeed, one key premise of the economic analysis is that auditors and 
preparers have better information than investors and audit committees 
do about the audit process and outcomes.
---------------------------------------------------------------------------

    \454\ The commenter referred to two articles about ``the fraud 
diamond,'' a heuristic that approximates the conditions under which 
fraud may occur. See David T. Wolfe and Dana R. Hermanson, The Fraud 
Diamond: A 20-year Retrospective, The CPA Journal 16 (2024) and 
David T. Wolfe and Dana R. Hermanson, The Fraud Diamond: Considering 
the Four Elements of Fraud, The CPA Journal 38 (2004).
    \455\ See AS 1301.
---------------------------------------------------------------------------

    The same commenter suggested that financial statement preparers 
could use the proposed metrics to shop for a lower quality auditor. The 
Board agrees this will be possible but, as the Board discussed in the 
proposal and above, the Board believes that the public nature of the 
metrics will tend to suppress this. More specifically, the broader 
financial statement user community will be able to observe how auditor 
switches correlate with company characteristics and firms' metrics and 
judge the company's financial reporting quality, and the audit 
committee's execution of its auditor oversight responsibilities, 
accordingly. However, the Board acknowledges that, because companies 
will be better informed about the nuances of the audit process, the 
final metrics could make it easier for some companies to shop for a 
lower quality auditor without significant negative consequence.
ix. Attention Diversion
    One commenter suggested that the proposed rules could reduce audit 
quality by diverting engagement teams' attention away from other 
activities. Another commenter suggested that this risk would be greater 
for smaller audit firms and provided numerous research articles 
suggesting that auditors are overburdened.\456\ The same commenter 
suggested that the PCAOB should, as a starting point, consider whether 
the proposed metrics place burdens on engagement teams that would 
distract them from audit quality. Several commenters suggested that the 
time required to prepare the proposed metrics would necessarily divert 
attention from audit work and thus reduce audit quality. One commenter 
suggested that strains on the audit labor market could increase audit 
deficiencies. Another commenter suggested that the proposed metrics 
would distract audit committees from their oversight responsibilities.
---------------------------------------------------------------------------

    \456\ See Kimberly D. Westermann, Jeffrey Cohen, and Greg 
Trompeter, PCAOB Inspections: Public Accounting Firms on ``Trial'', 
36 Contemporary Accounting Research 694 (2019); Persellin, et al., 
Audit Perceptions.
---------------------------------------------------------------------------

    The Board acknowledges that the final rules could require some 
engagement team members' time. For example, some engagement team 
members may be tasked with gathering information from the engagement 
team and forwarding it to the national office (e.g., experience, 
hours). Subject to the audit labor market concerns discussed above, 
firms will be able to relieve some of this burden by hiring additional 
staff or by centralizing or automating certain aspects of the 
implementation effort.\457\ The Board also rejects the premise that the 
presence of any engagement-level burden should automatically disqualify 
a metric. Such a criterion ignores the metric's associated benefits. 
Regarding audit committees, as discussed in the proposal and again 
above, the Board recognizes that audit committees could incur costs 
understanding the metrics. One type of cost could be the opportunity 
cost associated with spending less time on other oversight activities 
to the extent audit committees choose to do so. However, the Board 
notes that audit committees could minimize this opportunity cost by 
spending more total time overseeing the audit. Also, the various ways 
the final metrics would improve audit committee oversight is discussed 
above.
---------------------------------------------------------------------------

    \457\ See above.
---------------------------------------------------------------------------

x. Non-PCAOB Registered Firms
    One commenter suggested the proposed metrics could have cost 
implications for non-PCAOB registered firms. The Board agrees. For 
example, non-substantial role firms may incur costs providing 
information to firms subject to the final requirements. However, they 
already should be providing total audit hours for Form AP reporting 
purposes. Also, any incremental cost will be limited to the Partner and 
Manager Involvement and Allocation of Audit Hours final metrics.
xi. Unintentional Engagement-Level Disclosures
    Several commenters said that, for firms that issue a limited number 
of audit reports for accelerated filers and large accelerated filers, 
many of the firm-level metrics could result in the disclosure of 
engagement-level information.\458\ One commenter cited the internal 
monitoring metric as an example. However, for most of the final firm-
level metrics, corresponding engagement-level information will also be 
publicly available independent of the public disclosure of the firm-
level metric itself. The Board does not believe that the possibility of 
making engagement-level inferences from the final metrics that are 
required only at the firm level would impose costs on firms. 
Furthermore, the Board notes that the proposed internal monitoring 
metric is not among the final metrics.
---------------------------------------------------------------------------

    \458\ Among the firms that will be impacted by the final rules, 
approximately 41%, 19%, and 11% had a total of one, two, or three 
accelerated filer or large accelerated filer engagements, 
respectively, during the 12-month period ending September 30, 2023.
---------------------------------------------------------------------------

Alternatives Considered
    The development of the final rules involved considering alternative 
approaches to address the problems described above. This section 
explains: (i) why standard setting is preferable to other policy-making 
approaches, such as providing interpretive guidance or enhancing 
inspection or enforcement efforts, (ii) other standard-setting 
approaches that were considered, and (iii) key policy choices made in 
determining the details of the final standard-setting approach.
1. Why Standard Setting Is Preferable to Another Approach
    As potential alternatives to standard setting, the Board considered 
whether interpretive guidance or greater focus on inspections or 
enforcement could better address the need described above. One 
commenter suggested the PCAOB could communicate to stakeholders 
observations related to audit quality based on the outcomes of its 
inspections and its enforcement actions, noting that the PCAOB has 
unique access to information and people and has the context to 
understand quality risks. The Board determined that, despite long-term 
requests by investors to disclose additional metrics, similar 
initiatives by other standard setters, and the apparent ability of 
firms to voluntarily disclose metrics, the fact that most auditors have 
not voluntarily acted to disclose effective metrics on a uniform basis 
at the firm and engagement level points to the need for regulatory 
intervention through standard setting.
    Increased focus on inspections or enforcement is unlikely to 
incentivize audit firms to voluntarily disclose the final metrics. 
Likewise, interpretive guidance is unlikely to address audit firms' 
lack of incentives to voluntarily disclose the final metrics. While 
some firms may choose to disclose information similar to the final 
metrics voluntarily, the lack of a standardized approach would result 
in inconsistencies that prevent effective comparisons across the 
profession. Similarly, standardization without mandated disclosure is 
not sufficient to ensure the availability of comparable

[[Page 100063]]

public reporting of metrics.\459\ As discussed above, required 
mandatory and uniform reporting will help audit committees make more 
informed decisions in retaining and monitoring auditors, and investors 
make more informed decisions when ratifying auditor appointments, 
electing board members (including those who serve on the audit 
committee), and allocating capital. The Board believes that standard 
setting addresses the problem in the most effective way.
---------------------------------------------------------------------------

    \459\ See, e.g., Patrick Bolton and Marcin T. Kacperczyk, Firm 
Commitments, SSRN Electronic Journal (2024). The Board notes that 
SSRN does not peer review its submissions.
---------------------------------------------------------------------------

    One commenter said that the commenter's experienced implementing 
the Form AP amendments proved to them that calculations require a 
robust implementation support infrastructure. Several commenters 
suggested that guidance regarding the final amendments would reduce the 
complexity and challenges associated with calculating the metrics. One 
commenter said that guidance would be essential to balance the costs of 
compiling and reporting the information and this guidance should extend 
to the evaluation of differences that may arise in the disclosure of 
participating firms on Form AP. Another commenter said that the Board 
should clarify whether the current Form AP Staff Guidance regarding 
amendments would extend to all metrics as well as how routine 
corrections and re-allocations of time entries and other matters 
affecting metrics reported on Forms FM are expected to be handled.\460\ 
The Board acknowledges that guidance could help reduce the complexity 
and costs associated with implementing the final rule. As discussed 
above, the Board will monitor for issues and consider updates to 
implementation guidance as appropriate.
---------------------------------------------------------------------------

    \460\ See PCAOB Staff Guidance on Form AP.
---------------------------------------------------------------------------

2. Other Standard-Setting Alternatives Considered
    During the development of the final rules, the Board considered two 
alternatives to the current disclosure rules: (i) publishing benchmarks 
on the final firm and engagement metrics, and (ii) requiring additional 
audit committee communications.
    First, the Board considered collecting the final metrics from the 
firms on a non-public basis and then publicly publishing benchmarks 
based on those metrics. This approach would benefit the Board in the 
ways described above. However, the Board believes that investors and 
audit committees will be able to effectively interpret the final 
metrics in their disaggregated form when made directly available to the 
public. Therefore, public transparency will be important. Moreover, as 
discussed above, benchmarking could even have potentially harmful 
unintended consequences.
    Second, the Board considered requiring auditors to communicate the 
final metrics just to their audit committees and not to members of the 
public. One commenter suggested that the benefits of the proposal would 
be the same under this alternative. However, such a policy choice would 
not directly benefit the decision-making capabilities of investors and 
other stakeholders in the public securities markets. Moreover, it would 
limit audit committees' ability to compare the final metrics across 
different firms and engagements and thus impair their decision-making 
(e.g., auditor selection) by depriving audit committees of the broader 
context needed to make informed choices.
    One commenter suggested that the Board adopt a specific plan to 
conduct a PIR. The Board has an established PIR program under which 
staff of the Office of Economic and Risk Analysis (OERA) conduct an 
analysis of the overall effect of new rules or amendments on key 
stakeholders in the audit process, including whether the rules or 
amendments are accomplishing their intended purpose and identifying 
benefits, costs, and unintended consequences flowing from them. In 
determining whether to conduct a PIR, PCAOB staff will consider the 
nature of the rules or amendments (including the magnitude of and 
degree of uncertainty around the key economic effects), the feasibility 
(including research design and data availability), and the potential 
utility to the Board (including whether the PIR might identify a demand 
for additional guidance or amendments). Under the established PIR 
program, the Board expects that OERA staff will consider whether, based 
on these factors, a PIR might be warranted and, if so, OERA staff will 
recommend that the Board determine to conduct one. In other words, this 
deliberation should take place without any commitment. By contrast, a 
commitment to conduct a PIR can be counter-productive if OERA staff 
would otherwise determine that a PIR is not warranted or feasible. In 
addition, a well-designed PIR is one that is itself based on some early 
experience (even if only anecdotal), and thus, the Board believes 
having a specific plan of PIR at this stage may be premature. The Board 
believes having an established PIR program tends to increase the net 
expected value of the PCAOB's adopted rules and standards. Should 
future PIRs lead to potential modification or revision of these rules 
and standards, this dynamic approach to assessing the impact of the 
PCAOB's rules and standards compares favorably with a static analysis 
of costs and benefits.\461\
---------------------------------------------------------------------------

    \461\ See, e.g., Yoon-Ho Alex Lee, An Options-Approach to Agency 
Rulemaking, 65 Administrative Law Review 881 (2013); see also OMB 
Circular A-4 at 69 (``The assessment of real options allows you to 
monetize the benefits and costs of changing the timing of regulatory 
effects in light of the value of information about potential states 
of the world that can be learned over time.''). In short, when a 
policy is reversible (as in the case with the final rules) and the 
policy outcome is probabilistically determined between an efficient 
outcome and an inefficient outcome, a case can be made for moving 
forward with the policy even when the net expected benefit under the 
static cost-benefit analysis is negative because of the option of 
repealing the policy in the future in case the inefficient outcome 
is realized.
---------------------------------------------------------------------------

    Several commenters that opposed aspects of the rulemaking suggested 
that the Board should pilot test the final rules. One commenter 
suggested pilot testing would allow the PCAOB to obtain feedback on the 
nature, timing, extent, and usefulness of reporting. The commenter 
referred to a pilot program planned by another regulator. Another 
commenter said that pilot testing should occur prior to adoption of the 
final rules to confirm whether the final metrics can be consistently 
collected and reported by firms and whether they would be useful to 
stakeholders. One commenter suggested that pilot testing would provide 
the Board with data to quantitatively estimate the economic impacts of 
the proposal.
    The Board agrees that a pilot study could theoretically provide 
useful preliminary compliance data.\462\ For example, a pilot study 
could provide insights on the impacts of the proposed requirements or 
alternative approaches. However, the Board believes several concerns 
would challenge the utility of such an approach. First, participation 
in a pilot study would likely be voluntary, potentially with a limited 
group of participating firms, which may not be representative of all 
firms. This could skew results and would limit the applicability of any 
findings to a broader set of firms. Second, the impacts of the metrics 
on competition and capital allocation in the markets are complex and 
may require analysis across a broad set of firms and market conditions. 
A pilot study would not capture this diversity or the broader impacts 
on competition and capital markets, potentially leading to

[[Page 100064]]

incomplete or misleading conclusions. Third, the full implications of 
the metrics on competition and capital formation might take several 
years to manifest, as stakeholders would need time to adapt to and 
fully integrate the final metrics effectively. This delay could 
postpone the benefits expected from the final rules, especially if the 
pilot study would need to run for multiple years to capture the 
necessary information and trends. Finally, as stakeholders (including 
firms, issuers, investors, and others) adapt to the new metrics, their 
behaviors and the resulting data might change over time, potentially 
rendering early data from a pilot study less relevant or useful for 
long-term policy decisions. For these reasons, a pilot study, while 
potentially yielding some initial insights, would have limited overall 
benefits in this case. It would not offer a comprehensive view of the 
metrics' implications across the entire spectrum of firms and could 
unduly delay the transparency objectives of the rulemaking. The Board 
notes that the proposal considered the work of other regulators, 
including the planned pilot study referred to by one of the 
commenters.\463\ That discussion appears above in substantially the 
same form.
---------------------------------------------------------------------------

    \462\ See Admin. Conf. of the U.S., Recommendation 2017-6, 
Learning from Regulatory Experience, 82 FR 61738 (Dec. 29, 2017), 
available at https://www.acus.gov/recommendation/learning-regulatory-experience.
    \463\ See FRC, Consultation Document: Firm-level Audit Quality 
Indicators.
---------------------------------------------------------------------------

3. Key Policy Choices
    During the development of the final rules, the Board considered 
different approaches to addressing key policy issues.
i. Definitions and Calculations of the Final Metrics
    The Board considered a variety of alternative definitions and 
calculations of the final metrics, including several suggested by 
commenters and those initially proposed. See above for a discussion of 
these considerations.
ii. Applicability
    The conditions under which firms will be required to comply with 
the final engagement and firm-level reporting requirements are 
described above. During the development of the final rules, the Board 
considered limiting applicability to firms that met a certain aggregate 
issuer market capitalization threshold. The Board also considered 
broadening the set of applicable filer statuses.
    The Board noted that compared to the proposed approach, an 
aggregate issuer market capitalization threshold could help focus the 
final rules on auditors and engagements that investors are most 
interested in.
    Commenters during the development of QC 1000 indicated that a 
threshold based on market capitalization was perhaps preferable to a 
threshold based on issuer count because many auditors audit numerous 
small engagements with limited operations (e.g., special purpose 
acquisition companies). However, such an approach could present 
challenges. As one commenter noted, thresholds based on market 
capitalization may be subject to the volatility of the market. During a 
review of the potential methodologies, the Board found that such a 
threshold would also be sensitive to auditor switches, particularly if 
the switching issuer had a large market capitalization. Some auditors 
near the threshold could move back and forth between applicability and 
non-applicability. The Board also considered alternative transition 
thresholds for market capitalizations, or a phase-out period in 
attempting to mitigate the negative aspects of these options. 
Ultimately, the Board has determined that there was limited benefit to 
using these alternative applicability thresholds.\464\
---------------------------------------------------------------------------

    \464\ See above for a discussion of phased implementation.
---------------------------------------------------------------------------

    The Board also considered broadening the applicability of the final 
firm-level metrics to include all firms that audited at least one 
operating company. This would increase the number of firms impacted by 
the final firm-level metrics by approximately 160 and increase the 
number of engagements and market capitalization covered by the final 
firm-level metrics by approximately 16% and less than 0.1%, 
respectively.\465\ Expanding the scope to cover all firms that audit at 
least one operating company could reduce any potential negative stigma 
associated with smaller firms for not being required to disclose the 
final metrics. However, these firms tend to be smaller and hence may 
lack the infrastructure and economies of scale to efficiently implement 
the final rules. Furthermore, the gain of information to audit 
committees and investors would be limited by the fact that these firms 
tend to have smaller or fewer issuers on average. It also could create 
confusion to have different thresholds for the final firm-level 
reporting requirements and the final engagement-level reporting 
requirements. Finally, firms that will not be subject to the final 
firm-level disclosure requirements could voluntarily disclose the final 
metrics.
---------------------------------------------------------------------------

    \465\ See above for discussion on data sourcing. The Board 
excludes firms that filed an audit opinion during the sample period 
but whose registration has since been withdrawn, revoked, or is 
pending withdrawal.
---------------------------------------------------------------------------

    The Board also considered broadening applicability of the final 
engagement-level metrics to include non-accelerated filer issuers. 
While the importance of audit quality may be more significant for 
smaller issuers,\466\ PCAOB staff analysis finds that non-accelerated 
filers are proportionately smaller--at the median--than accelerated 
filer and large accelerated filers in terms of audit fees and total 
assets.\467\ One survey of audit committees of smaller public companies 
found that five of the 28 metrics discussed in the Concept Release were 
evaluated by more than half of the audit committees surveyed.\468\ 
PCAOB staff also reviewed the relative trading volume associated with 
these filer status groups and found that non-accelerated filer issuers 
have higher average daily (unit) volume than accelerated filer issuers 
but lower average daily (unit) volume than large accelerated 
filers.\469\

[[Page 100065]]

Neither issuer group, in general, was ``thinly traded,'' as measured by 
average daily volume.\470\ Given these differences, the costs of the 
final rules associated with non-accelerated filer issuer engagements 
could be proportionally higher than the costs associated with 
accelerated filer or large accelerated filer issuers engagements. As a 
result, the Board has restricted the applicability of the final 
engagement-level metrics to accelerated filer and large accelerated 
filer engagements. Firms that will not be subject to the final 
engagement-level disclosure requirements could voluntarily disclose the 
final metrics.
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    \466\ See below for additional discussion.
    \467\ Based on 2023 fiscal year data sourced through Audit 
Analytics' Web service, non-accelerated filers paid median audit 
fees of $320,000 and had median total assets of $66 million. 
Comparatively, accelerated filers paid median fees of $1,300,000 and 
had median total assets of $765 million. Large accelerated filers 
paid median fees of $3,010,000 and had median total assets of $5,509 
million. Only issuers filing pursuant to the Exchange Act (a.k.a. 
Act-34 filers) were retained in the sample.
    \468\ See, e.g., Harris and Williams, Audit Quality Indicators.
    \469\ Sourcing data across the University of Chicago's Center 
for Research and Security Prices (CRSP) Annual flat-file to collect 
annual volume, along with Compustat, and Audit Analytics, the Board 
identified, using filer statuses reported by Audit Analytics, that 
the median average daily volume (the quantity of share units traded 
per year divided by 252 trading days) for large accelerated filers 
in 2020 and 2021 was roughly 867,000 units per day and 762,000 units 
per day, respectively. For accelerated filers, the average daily 
volume was 183,000 and 168,000 respectively. For non-accelerated 
filers, the average daily volume was 528,000 and 756,000, units per 
day, for 2020 and 2021. One reason for this is possibly the 
relatively lower share price non-accelerated filer issuers have, 
resulting in a higher unit-volume (per trade lot) compared to 
accelerated filer issuers. The Board maintains share codes 10, 11 
(i.e., U.S. issuers), and 12 (foreign issuers trading on U.S. 
exchanges) in the Board's analysis, and remove American depositary 
receipts, shares of beneficial interest, real estate investment 
trusts, SBIs, REITs, and closed-end funds. Additionally, the Board 
retains only Exchange Act 1934 filers and volumes related to the 
first audit opinion filed with the SEC for a given fiscal year. 
Filer status, as sourced through Audit Analytics, may be an 
imperfect proxy of the true filer status of the entity-issuer due to 
errors in reporting and or collection. Furthermore, the Board 
retains only observations in which there is recorded to be complete 
volume for the entire annual period. There were 1,350 large 
accelerated filer issuers in the Board's sample in 2020, and 1,358 
in 2021. For accelerated filers there are 337 and 329 issuers in 
each 2020 and 2021 that remain in the Board's sample, and for non-
accelerated filers there are 121 and 134 issuers, respectively. The 
Board attempts to remove issuers additionally classified as Small 
Reporting Companies from the reported statistics. Lastly, not all 
issuers, particularly smaller issuers, trade on exchanges observed 
in the CRSP data set--as a result the Board's sample may be biased 
towards larger issuers, or issuers that trade on exchanges observed 
by CRSP.
    \470\ For a discussion of ``thinly traded'' markets, see 
Division of Trading and Markets: Background Paper on the Market 
Structure for Thinly Traded Securities, Roundtable on Market 
Structure for Thinly Traded Securities (April 23, 2018), available 
at https://www.sec.gov/rules/policy/2019/thinly-traded-securities-tm-background-paper.pdf.
---------------------------------------------------------------------------

    The Board also considered whether the scope for engagement-level 
reporting should be extended to non-operating company issuers whose 
financial statements are required under SEC rules to be audited under 
PCAOB standards (i.e., investment companies, employee stock plans) and 
broker-dealers. While these additional disclosures could be 
informative, commenters indicated that the proposed metrics would be 
less beneficial for these entities compared to accelerated filers and 
large accelerated filers.\471\ The Board agrees, and therefore are not 
requiring disclosure of these metrics for issuers that are not 
accelerated filers or large accelerated filers under the final rules.
---------------------------------------------------------------------------

    \471\ See above for additional discussion on commenters' views 
on this alternative.
---------------------------------------------------------------------------

iii. Reporting
    Several commenters suggested that the Board could alleviate the 
burden on smaller firms by raising the reporting threshold. One 
commenter said that firms that issue audit reports for 100 issuers or 
more are the firms whose metrics investor-related groups would be most 
interested in reviewing, given these firms audit a significant majority 
of the market capitalization of issuers reporting on Form 10-K, Form 
20-F, and Form 40-F. Another commenter suggested a threshold of 25 or 
more large accelerated filer and accelerated filer issuer engagements 
combined. The same commenter said that metrics of firms with few 
engagements could be unduly influenced by a single engagement. By 
contrast, one commenter suggested making the reporting requirements 
apply to all PCAOB-registered firms. As discussed in the proposal and 
above, the Board recognizes the potential disproportionate cost to 
smaller firms and have considered this in the Board's decision to scope 
in all firms that audit at least one accelerated filer or large 
accelerated filer.\472\ The Board believes audit committees and 
investors will benefit from information related to the audits of 
accelerated filers and large accelerated filers and the firms that 
perform these audits. Two commenters agreed that the proposed scope 
captures situations where investment and proxy voting decisions would 
be most likely to benefit from additional information about the audit 
and the auditor.
---------------------------------------------------------------------------

    \472\ See above for additional discussion on this policy 
alternative.
---------------------------------------------------------------------------

    As discussed above, firms subject to the final engagement-level 
reporting requirements will be required to disclose the final 
engagement-level metrics in Form AP, to be filed by the 35th day (for 
most audits) after the date the audit report is first included in a 
document filed with the SEC. Firms subject to the final firm-level 
reporting requirements will also be required to disclose the final 
firm-level metrics in the newly created Form FM.
    As contemplated above, the Board considered requiring that the 
final metrics be included in the audit report in addition to on Form AP 
and Form FM. Under this alternative, costs incurred by investors and 
audit committees when gathering information to inform their decision-
making could be further reduced. Investors would be able to look down 
from the auditor's opinion and immediately review the final metrics. 
Moreover, this would serve as a prime opportunity for the firm to 
communicate critical context through narratives that might be 
beneficial for investors in reviewing the final metrics.
    The disclosure of the proposed metrics in the audit report would 
not impair the usefulness of their disclosure through Form AP and Form 
FM. Indeed, such additional reporting may enhance their usefulness by 
setting the proposed metrics within the full context of the issuer's 
financial reporting. However, some investors and audit committees may 
prefer to obtain the information from Form AP and Form FM, or from 
other sources (e.g., a subscription-based data provider), and hence may 
find little use for metrics in the audit report. There likely would not 
be appreciable costs associated with this additional reporting, outside 
of costs to include the report in the filing of the audit opinion. 
Firms will already be required to collate information and compute the 
final metrics for reporting to the PCAOB in their relevant forms.
    Many commenters disagreed with this approach citing that, for 
example, it could potentially detract from the clarity and purpose of 
the report, could result in delays in the issuance of audit reports, 
and amendments to the audit report for corrections to metrics could 
create unnecessary burden for issuers and confusion for investors. One 
commenter suggested the proposed metrics would be better placed in 
audit committee reports in company proxy statements. One commenter said 
that the proposed metrics: (i) would create a misimpression that the 
metrics are indicative of audit quality; (ii) would be impractical to 
implement in a timely manner; and (iii) could distract auditors. 
However, several commenters, primarily investor-related groups, were 
supportive of reporting in the auditor's report. One commenter said 
that the proposed engagement performance metrics are as important to 
understanding audit risks as CAMs and thus merit inclusion in the 
auditor's report. The Board is persuaded by commenter feedback that 
this alternative would be burdensome and could diminish the value of 
the auditor's report. Therefore, the Board is not adopting this 
alternative at this time.
    The Board also considered requiring firms subject to the final 
firm-level reporting requirements to disclose the firm-level metrics on 
Form 2 rather than Form FM. This approach could benefit some investors 
or audit committees because the firm-level metrics would appear in the 
context of other firm-level information. It could also reduce 
compliance costs for firms because firms are already familiar with Form 
2. However, information reported on Form 2 is currently not 
downloadable as a structured data set. This could reduce the 
accessibility of the final firm-level metrics to investors and audit 
committees. Furthermore, the final firm-level metrics use terms that 
have different meanings in the context of Form 2 (e.g., ``Partners''). 
This could lead some investors or audit committees to misunderstand the 
final firm-level metrics or lead some firms to mistakenly provide 
incorrect information in Form 2. Finally, the due date of Form 2, June 
30, falls after the general timing of shareholder meanings and 
therefore would generally arrive too late to inform shareholders' 
voting decisions. This alternative and commenter feedback are discussed 
above. Overall, the Board is persuaded by commenters' concerns

[[Page 100066]]

that this alternative would place burdens on firms during their busy 
season. Therefore, the Board is not adopting this alternative at this 
time.
    While several commenters suggested that the Board limit the 
disclosure of engagement-level metrics to audit committees--citing 
audit committees' ability to engage in dialogue with the auditor and to 
understand the context of the metrics--the Board believes public 
disclosure will provide the benefits associated with investor decision-
making as well as some benefits related to improved audit committee 
decision-making. For example, public disclosure allows investors to 
make more informed decisions regarding board directors (including audit 
committee members), and auditor ratification. It also will provide 
audit committees with comparative information about other firms and 
engagements which may improve their auditor selection and oversight 
decisions. Furthermore, the Board believes that the public nature of 
the metrics will be a key driver of the pro-competitive effects in the 
auditing market, by making it easier to compare an existing auditor's 
metrics to the same metrics for other potential auditors. The Board 
therefore believes public transparency will foster a competitive 
auditing environment and support robust governance by providing all 
stakeholders, not just audit committees, with information to make well-
informed decisions.
    Two commenters suggested the Board refer to work performed by the 
SEC when it considered requiring additional audit committee 
disclosures.\473\ One commenter suggested that the 2015 SEC Concept 
Release could inform the Board's consideration of requiring auditors to 
disclose engagement-level metrics to audit committees only. Staff 
reviewed the 2015 Concept Release. The 2015 SEC Concept Release sought 
comment on, among other things, whether the reporting of additional 
information by the audit committee with respect to its oversight of the 
audit may provide useful information to investors as they evaluate the 
audit committee's performance in connection with, among other things, 
their vote for or against directors who are members of the audit 
committee, the ratification of the auditor, or their investment 
decisions. The Board believes this request for comment is consistent 
with the questions included in the Board's proposal, the feedback from 
investor-related groups the Board received, and the Board's view that 
investors need more information to: (i) evaluate the performance of 
auditors and audit committees; (ii) vote for or against directors who 
are members of the audit committee; (iii) ratify the appointment of the 
auditor; and (iv) invest capital. The 2015 SEC Concept Release also 
stated that to the extent the audit committee uses indicators or 
metrics in assessing the quality of the auditor and the audit, 
disclosure about the use and consideration of such metrics may provide 
useful information about the audit committee's process for assessing 
the auditor. The Board notes that the relevance of the 2015 SEC Concept 
Release is limited by the fact that it: (i) contemplates public 
disclosures by audit committees rather than by auditors; and (ii) aims 
to solicit feedback rather than provide a cost-benefit analysis. As 
explained previously, the Board believes that restricting the 
disclosure of these metrics solely to audit committees would cause 
investors and other stakeholders to forgo the benefits of disclosure.
---------------------------------------------------------------------------

    \473\ See SEC Concept Release on Possible Revisions to Audit 
Committee Disclosures, SEC Rel. No. 33-9862 (July 1, 2015) (``2015 
SEC Concept Release'').
---------------------------------------------------------------------------

    Some commenters suggested a more flexible approach to engagement-
level reporting, such as voluntary disclosure. One commenter suggested 
that competition among auditors should be the primary source of 
practice enhancements as opposed to regulatory control. One commenter 
suggested that voluntary disclosure allows for refinements and 
innovation in response to the evolving auditing environment. Another 
commenter suggested that voluntary disclosure could facilitate a market 
for enhanced disclosures. Relatedly, referring academic research, one 
commenter said that relevant metrics could evolve over time and that 
many metrics could be useful.\474\ Also citing academic research, 
another commenter recommended a principles-based approach.\475\ The 
Board recognizes that a purely voluntary or principles-based approach 
could foster innovation. However, for reasons discussed above the Board 
believes the benefits associated with a mandatory approach, with 
clearly articulated calculations relative to the current practice 
baseline of voluntary disclosure, are substantial. For example, as 
discussed above, the Board believes that the market does not provide 
sufficient incentives for auditors to disclose information akin to the 
metrics voluntarily. Furthermore, even under the mandatory framework 
the Board is adopting, firms would still have the freedom to innovate 
beyond the required metrics through additional voluntary disclosures.
---------------------------------------------------------------------------

    \474\ See Gillian Rose Barnes and Dana R. Hermanson, Fraud 
Brainstorming Sessions and Interviews in a Remote World: Initial 
Evidence, 15 Journal of Forensic and Investigative Accounting 248 
(2023); Lazarus Elad Fotoh and Johan Ingemar Lorentzon, Audit 
Digitalization and its Consequences on the Audit Expectation Gap: A 
Critical Perspective, 37 Accounting Horizons 43 (2023); Jean C. 
Bedard, Karla M. Johnstone, and Edward F. Smith, Audit Quality 
Indicators: A Status Update on Possible Public Disclosures and 
Insights from Audit Practice, 4 Current Issues in Auditing C12 
(2010); Knechel, et al., Audit Quality; and Christensen et al., 
Understanding Audit Quality.
    \475\ See Arianna S. Pinello, Ara G. Volkan, Justin Franklin, 
Michael Levatino, and Kimberlee Tiernan, The PCAOB Audit Quality 
Indicator Framework Project: Feedback from Stakeholders, 16 Journal 
of Business & Economics Research 1 (2019).
---------------------------------------------------------------------------

    One commenter suggested that an analysis of analogous initiatives 
in foreign jurisdictions would inform the PCAOB of potential 
alternatives to the final rules that may be less costly or present less 
risk of unintended consequences. One commenter suggested that the Board 
more carefully consider the context in which those metrics are used, 
emphasizing their voluntary nature. As discussed in the proposal, PCAOB 
staff reviewed initiatives in foreign jurisdictions and noted their 
generally less prescriptive approaches compared to the metrics the 
Board is adopting. While these international approaches may involve 
lower costs and possibly fewer unintended consequences, 'they are also 
likely to mean that metrics are less comparable and less 
comprehensively available, implying less-substantial benefits. The 
Board believes that the Board's approach, although potentially more 
prescriptive, is necessary to achieve the desired level of transparency 
and oversight in audit practices.
    Two commenters representing investor groups suggested that, if the 
Board adopts the final rules, the PCAOB could amplify the value of the 
final metrics by providing tools, research, or periodic reviews of the 
information. The Board will consider these suggestions. However, the 
Board notes that, under the final rules, users will be able to analyze 
the data using tools of their choice. Additionally, the PCAOB plans to 
have programs to sponsor research which may consider the final metrics. 
The Board will be alert to how the metrics are utilized and their 
impact.
iv. Alternative Firm and Engagement Metrics Considered
    The Board considered but at this time are not adopting metrics 
related to: (i) auditor proficiency testing; surveys of firms and audit 
committees; and auditor absenteeism; (ii) legal proceedings

[[Page 100067]]

against audit firms and firm ownership structures; (iii) engagement-
level PCAOB deficiencies; (iv) access to national office or other 
technical resources and staff and investments in infrastructure to 
support audit quality; (v) auditor independence and financial reporting 
quality; (vi) timely issuance of internal controls weaknesses and going 
concern opinions and fraud or other financial reporting misconduct; 
(vii) audit fees, effort, and client risk; (viii) audit personnel; (ix) 
allocation of audit hours; and (x) internal monitoring and incentives. 
In the following discussion the Board briefly describes and evaluates 
the literature on these metrics and provides the Board's rationale for 
not adopting them.
a. Metrics Related to Auditor Proficiency Testing, Surveys of Firms and 
Audit Committees, and Auditor Absenteeism
    Metrics related to proficiency testing, surveys of firms and audit 
committees, and auditor absenteeism would generally speak to the ``Tone 
at the Top'' or workplace culture of the audit firm. There is a lack of 
literature covering the economic impacts that disclosure of these 
metrics might engender. While some academic literature suggests strong 
work culture and a ``Tone at the Top'' is associated with audit 
quality,\476\ it is unclear how an informative metric could be 
constructed. Similarly, while some academic literature suggests 
competence is associated with audit quality, there is limited research 
related to proficiency testing per se and it is unclear how an 
informative metric on proficiency testing could be constructed.\477\ 
Finally, the Board is unaware of any literature related to auditor 
absenteeism. At this time, the Board is not requiring disclosure of 
these metrics under the final rules.
---------------------------------------------------------------------------

    \476\ See, e.g., Stephen Perreault, James Wainberg, and Benjamin 
L. Luippold, The Impact of Client Error-Management Climate and the 
Nature of the Auditor-Client Relationship on External Auditor 
Reporting Decisions, 29 Behavioral Research in Accounting 37 (2017) 
and Donna D. Bobek, Derek W. Dalton, Brian E. Daugherty, Amy M. 
Hageman, Robin R. Radtke, An Investigation of Ethical Environments 
of CPAs: Public Accounting versus Industry, 29 Behavioral Research 
in Accounting 43 (2017).
    \477\ See, e.g., Christensen et al., Understanding Audit 
Quality.
---------------------------------------------------------------------------

b. Metrics Related to Legal Proceedings Against Audit Firms and Firm 
Ownership Structures
    Some academic literature suggests there may be no relationship 
between the quality of audit services or the auditor's provision of 
reasonable assurance and the likelihood that an auditor could be sued, 
have a case settled, or be taken through court.\478\ Many cases brought 
against auditors fail to meet the threshold of fault required to show 
the auditor is liable for the damages incurred by investors. 
Information related to legal proceedings may also be confidential or 
otherwise sensitive. Furthermore, the incidence of lawsuits against 
auditors has declined in recent years.\479\ One investor survey finds 
that investors perceive private litigation as being unrelated to audit 
quality.\480\ Additionally, information regarding proceedings initiated 
by government entities against firms and certain of their personnel is 
already reported on PCAOB Form 3. Metrics related to firm ownership 
structure are being considered by the PCAOB's Firm Reporting rulemaking 
project. At this time, the Board is not requiring disclosure of these 
metrics under the final rules.
---------------------------------------------------------------------------

    \478\ See, e.g., Colleen Honigsberg, Shivaram Rajgopal, and 
Suraj Srinivasan, The Changing Landscape of Auditors' Liability, 63 
The Journal of Law and Economics 367 (2020).
    \479\ See Honigsberg et al., The Changing Landscape.
    \480\ See Christensen et al., Understanding Audit Quality.
---------------------------------------------------------------------------

c. Metrics Related to Engagement-Level PCAOB Deficiencies
    The Board's considerations regarding potential metrics related to 
engagement-level PCAOB deficiencies are discussed above. Several 
commenters suggested the Board include metrics related to deficiencies 
identified during PCAOB inspections. Several commenters suggested the 
Board require firms to report the percentage of their reviewed audits 
that received Part I.A deficiencies in their PCAOB inspection reports. 
These commenters highlighted the critical nature of Part I.A 
deficiencies and suggested that requiring this information to be 
disclosed along with the other final metrics would increase its 
prominence. While the Board acknowledges the significance of Part I.A 
deficiencies--indicating deficiencies that were of such significance 
that the Board believes the firm, at the time it issued its audit 
report, had not obtained sufficient appropriate audit evidence to 
support its opinion on the issuer's financial statements and/or ICFR--
the Board notes that this information is already publicly available and 
stakeholders already utilize this information, compiling it in their 
analyses.
    One commenter suggested that the Board consider requiring auditors 
to disclose which of their audits had Part I.A deficiencies included in 
their PCAOB inspection reports. The commenter suggested that this 
disclosure would obviate need for most, if not all, of the proposed 
firm- and engagement-level metrics. The Board acknowledges that 
information on engagement deficiencies identified through PCAOB 
inspection could provide investors and other stakeholders with 
additional insight on audit quality. However, PCAOB inspection reports 
are typically published well after the reporting deadlines for 
engagement-level metrics on Form AP, making it impractical to include 
such inspection results in that form. The Board also disagrees that 
disclosure of PCAOB inspection findings would obviate the need for the 
metrics. The final metrics will be available for the full population of 
accelerated filer and large accelerated filer issuers, whereas the 
presence of Part I.A deficiencies are available for the much more 
limited sample of inspected firm engagements. Furthermore, the Board 
believes the final metrics would provide information on aspects of 
audit quality not entirely captured by Part I.A deficiencies. While 
academic literature suggests that engagement-level PCAOB auditing 
deficiencies are indicative of low audit quality, Sarbanes-Oxley 
already provides a robust framework for making PCAOB inspection 
findings and sanctions public.\481\ At this time, the Board is not 
requiring the disclosure of engagement-level PCAOB auditing 
deficiencies under the final rules.
---------------------------------------------------------------------------

    \481\ See, e.g., Aobdia et al., Practitioner Assessments.
---------------------------------------------------------------------------

d. Metrics Related to Access to the National Office or Other Technical 
Resources and Staff and Investments in Infrastructure To Support Audit 
Quality
    The Board's considerations regarding potential metrics related to 
access to technical resources is discussed above. Overall, metrics 
related to audit teams' access to such technical resources and staff 
could indicate how accessible individuals, decision aids, or technical 
audit-process manuals are to audit teams. For example, in larger firms, 
individuals in the national office may provide consultation on complex, 
unusual, or unfamiliar issues. One study using PCAOB data found that 
national office consultations are common among PCAOB-inspected 
engagements and that national office consultation use is associated 
with engagement characteristics and proxies for audit quality.\482\ 
Smaller firms may retain

[[Page 100068]]

individuals with such expertise from outside the firm. Metrics related 
to infrastructure that supports audit quality could provide information 
on resources audit teams have available to them that could support 
audit quality. However, due to the variety of ways firms provide 
technical resources and infrastructure to support audit quality, the 
Board believes that metrics related to these areas would likely not be 
informative or comparable for all firms. Furthermore, disclosures 
related to network relationships currently being considered as part of 
the PCAOB's Firm Reporting rulemaking project would provide some 
information to investors and audit committees regarding firms' access 
to technical resources. At this time, the Board is not requiring 
disclosure of metrics related to access to technical resources under 
the final rules.
---------------------------------------------------------------------------

    \482\ See, e.g., Matthew G. Sherwood, Miguel Minutti-Meza, and 
Aleksandra B. Zimmerman, Auditors' National Office Consultations, 
SSRN Electronic Journal (2024). The Board notes that SSRN does not 
peer review its submissions.
---------------------------------------------------------------------------

    The Board's considerations regarding potential metrics related to 
investment in audit infrastructure is discussed above. In particular, 
one commenter suggested that the Board consider requiring firms to 
report the percentage of the firm's revenues invested in technology 
accessible by audit teams. The Board believes the broad range of what 
constitutes ``technology'' and how it is used across different firms 
could lead to inconsistencies in how such a metric is calculated and 
reported. Overall, the Board does not believe such a metric would be 
informative and comparable. At this time, the Board is not requiring 
disclosure of metrics related to access to investment in audit 
infrastructure under the final rules.
e. Metrics Related to Auditor Independence and Financial Reporting 
Quality
    Disclosures related to audit fees and non-audit fees are being 
considered as part of the PCAOB's Firm Reporting rulemaking project. 
Furthermore, the final rules already include a metric for restatements, 
a well-accepted proxy for financial reporting quality. Therefore, the 
Board does not think there is a need to expand disclosures related to 
this information under the final rules.
f. Metrics Related to the Timely Issuance of Internal Controls 
Weaknesses and Going Concern Opinions, and Fraud or Other Financial 
Reporting Misconduct
    Academic research suggests that (i) markets react to going concern 
reporting and (ii) timely reporting of a going concern opinion is an 
indicator of audit quality.\483\ However, there is a lack of academic 
research related to timely reporting of internal control weaknesses. 
The final rules include metrics related to restatement history, which 
the Board believes will provide a clearer signal of audit quality. 
Firms' reporting of internal control weaknesses and their inclusion of 
going concern explanatory paragraphs in the audit report are also 
publicly available already, as are indicators of auditors' timeliness 
(e.g., subsequent restatements or bankruptcies). Additionally, the 
Board is considering other standard-setting opportunities related to 
the reporting of fraud or other financial reporting misconduct as well 
as the auditor's going concern evaluation. At this time, the Board does 
not think there is a need to require disclosure of these metrics under 
the final rules.
---------------------------------------------------------------------------

    \483\ See DeFond and Zhang, A Review of Archival Auditing 
Research.
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g. Metrics Related to Audit Fees, Effort, and Client Risk
    Regarding audit fees, the Board notes that engagement-level audit 
fees are already publicly available and firm-level audit fees may be 
constructed by summing engagement-level audit fees. Regarding audit 
effort, the Board notes that, while some academic research finds that 
proxies for audit effort are associated with audit quality, the level 
of association diminishes in certain settings when considered jointly 
with other information correlated with audit effort.\484\ Indeed, 
stakeholders will have access to information correlated to audit 
effort. For example, engagement-level audit hours, a commonly used 
proxy for audit effort, are highly correlated with engagement-level 
audit fees which are publicly available.\485\ Additionally, the final 
metrics related to Partner and Manager Involvement, Workload, Training 
Hours for Audit Personnel, and Allocation of Audit Hours will provide 
information related to audit effort. Regarding client risk, the Board 
has observed through the Board's oversight activities that firms 
classify clients as high risk in various ways. At this time, the Board 
is not requiring disclosure of these metrics under the final rules.
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    \484\ See, e.g., Aobdia et al., The Economics of Audit 
Production, Table 3 and Table 4 (finding that audit effort is not 
related to various proxies for audit quality after holding other 
factors constant); Constantinos Caramanis and Clive Lennox, Audit 
Effort and Earnings Management, 45 Journal of Accounting and 
Economics 116 (2008) (studying Greek audit firms, finding that lower 
audit hours are associated with decreases in various proxies for 
audit quality) and Dafydd Mali and Hyoung-Joo Lim, Can Audit Effort 
(Hours) Reduce a Firm's Cost of Capital? Evidence from South Korea, 
45 Accounting Forum 171 (2020) (finding, using data on Korean audit 
firms, that audit effort is negatively associated with weighted 
average cost of capital).
    \485\ See, e.g., Aobdia, Practitioner Assessments, Table 4.
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h. Metrics Related To Audit Personnel
    The Board proposed but are not adopting engagement-level metrics 
related to turnover (i.e., Retention and Tenure). Academic literature 
related to turnover generally and commenters' views on the proposed 
metric are discussed above. Overall, commenters generally did not 
support engagement-level metrics in this area. Several commenters said 
that mandatory partner rotation, personal issues, and strategic 
resource management concerns could drive the proposed engagement-level 
metric related to turnover. Commenters said that for these and other 
reasons the metrics would be especially difficult for stakeholders to 
interpret and would need to be considered in conjunction with other 
metrics. After considering these comments, and in light of the Board's 
original analysis, the Board is not adopting the proposed engagement-
level Retention and Tenure metric under the final rules.
i. Certain Metrics Related to the Allocation of Audit Hours
    The Board proposed but is not adopting several metrics related to 
the allocation of audit hours (i.e., Audit Hours and Risk Areas, Audit 
Resources--Use of Auditor's Specialists and Shared Service Centers). 
These proposed metrics predominantly focus on whether the audit team is 
being efficiently and effectively deployed. The proposed metrics were 
intended to improve transparency into the audit process and help 
investors and audit committees to review: (i) whether the auditor is 
effectively allocating hours in response to areas of significant risk, 
(ii) whether the auditor is efficiently and effectively deploying 
individuals with expertise to address areas that require their 
specialized knowledge; and (iii) whether the auditor is efficiently and 
effectively using SSCs. Section IV.C.1.iv.b of the proposal provides 
additional discussion on the potential benefits of these metrics and 
relevant academic literature. Comments related to the discussion of 
academic literature are addressed above. The Board addresses below more 
specific comments related to the impacts of these metrics.
    Commenters' views on the proposed Audit Hours and Risk Areas metric 
including alternative approaches suggested are discussed above. 
Overall, many commenters did not support the proposed metric and said 
that it would be challenging to calculate. Several

[[Page 100069]]

commenters said that, because risk assessment is an iterative process, 
high-risk areas could change over the course of the audit, leading to 
challenges tracking the required hours information. Several commenters 
also said that calculating the proposed metric would require extensive 
coordination among other auditors. Several commenters also said that 
hours charged to particular accounts may include work that is unrelated 
to an identified significant risk. After considering these comments, 
and in light of the Board's original analysis, the Board is not 
adopting the proposed Audit Hours and Risk Areas metric under the final 
rules.
    Commenters' views on the proposed Audit Resources metrics including 
alternative approaches suggested are discussed above. Overall, 
commenters generally opposed these metrics. For example, one commenter 
said that the use of auditor's specialists would not be comparable 
across firms of different sizes without sufficient context. The same 
commenter said that smaller firms are more likely to engage outside 
specialists compared to larger firms with in-house specialists. One 
commenter said firms are already required to communicate their use of 
specialists to audit committees on an engagement. One commenter said 
that the use of specialists is highly contextual. One commenter said it 
would be difficult obtain the hours information to calculate the 
proposed use of specialists metric. Referring to several academic 
articles, one commenter suggests that smaller firms and larger firms' 
metrics related to the use of specialists would not be comparable 
because smaller firms feel regulatory pressure to use specialists and 
typically retain outside specialists.\486\ One commenter said that the 
SSC metric would be misinterpreted as indicating that greater SSC hours 
indicated lower quality. After considering these comments, and in light 
of the Board's original analysis, the Board is not adopting the 
proposed Audit Resources metrics under the final rules.
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    \486\ See J. Efrim Boritz, Natalia Kochetova-Kozloski, and Linda 
Robinson, Are Fraud Specialists Relatively More Effective Than 
Auditors at Modifying Audit Programs in the Presence of Fraud Risk?, 
90 The Accounting Review 881 (2015); Candice T. Hux, Use of 
Specialists on Audit Engagements: A Research Synthesis and 
Directions for Future Research, 39 Journal of Accounting Literature 
23 (2017); Zimmerman, et al., Auditor's Use; Dereck Barr-Pulliam, 
Stephani Mason, and Kerri Ann Sanderson, The Joint Effects of Work 
Content and Work Context on Valuation Specialists' Perceptions of 
Organizational-Professional Conflict, SSRN Electronic Journal 
(2022); Aleksandra B. Zimmerman, Dereck Barr-Pulliam, Joon-Suk Lee, 
and Miguel Minutti-Mezza, Auditors' Use of In-House Specialists, 61 
Journal of Accounting Research 1363 (2023). The Board notes that 
SSRN does not peer review its submissions.
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j. Metrics Related to Internal Monitoring and Incentives
    The Board proposed but is not adopting metrics related to internal 
audit quality review (i.e. Audit Firms' Internal Monitoring) and 
incentive alignment (i.e., Quality Performance Ratings and 
Compensation). Metrics related to internal audit quality review and 
incentive alignment focus on the positive and negative incentives 
auditors face. Unlike the final metrics related to audit personnel and 
allocation of audit hours, which would provide additional transparency 
into the inner workings and characteristics of the audit team, the 
disclosure of these proposed metrics would provide information related 
to audit outcomes and the incentives that led to those results. Section 
IV.C.1.iv.c of the proposal provides additional discussion on the 
potential benefits of these metrics and relevant academic literature. 
Comments related to the discussion of academic literature are addressed 
above. The Board addresses below more specific comments related to the 
impacts of these metrics.
    Commenters' views on these proposed metrics including alternative 
approaches raised are discussed above. Two commenters agreed that the 
proposed metrics related to firms' internal monitoring would be useful 
for stakeholders. One firm reported that it provides similar firm-level 
information in its transparency report. However, others expressed 
several concerns, particularly regarding the engagement-level metrics. 
By way of background, survey research cited in the proposal finds that 
internal monitoring programs are valued by audit partners for their 
focus on the firm's audit methodology, their timeliness, and the 
quality of the feedback.\487\ Pointing to this research, one commenter 
suggested that the proposed internal monitoring metric would undermine 
the efficacy of audit firm internal inspection programs and audit 
quality. Some commenters said that the information would not be 
comparable due to differences in firms' monitoring programs. One 
commenter said that smaller firms would be disadvantaged because the 
results of their monitoring programs tend to be more variable. 
Regarding incentive alignment, some commenters supported a metric for 
incentive alignment and agreed with the Board's rationale for proposing 
it. One commenter said that investors routinely evaluate executive 
compensation packages and understand that compensation may be driven by 
a variety of factors which could be discussed in the voluntary 
narrative discussion. However, other commenters said it would lack 
comparability, would not capture other important drivers of 
compensation, and would raise confidentiality concerns. After 
considering these comments, and in light of the Board's original 
analysis, the Board did not adopt these metrics under the final rules.
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    \487\ See Richard W. Houston and Chad M. Stefaniak, Audit 
Partner Perceptions of Post-Audit Review Mechanisms: An Examination 
of Internal Quality Reviews and PCAOB Inspections, 27 Accounting 
Horizons 23, (2013).
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Special Considerations for Audits of Emerging Growth Companies
    Section 104 of the Jumpstart Our Business Startups (``JOBS'') Act 
imposes certain limitations to the application of the Board's standards 
to audits of Emerging Growth Companies (``EGCs''), as defined in 
Section 3(a)(80) of the Exchange Act. Under Section 104, the JOBS Act 
provides that any additional rules adopted by the Board subsequent to 
April 5, 2012, ``shall not apply to an audit of any [EGC] unless the 
Commission determines that the application of such additional 
requirements is necessary or appropriate in the public interest, after 
considering the protection of investors, and whether the action would 
promote efficiency, competition, and capital formation.'' \488\ As a 
result, the final rules are subject to a separate determination by the 
SEC regarding their applicability to audits of EGCs.\489\
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    \488\ See Pub. L. 112-106 (Apr. 5, 2012). Section 103(a)(3)(C) 
of Sarbanes-Oxley, as added by Section 104 of the JOBS Act. Section 
104 of the JOBS Act also provides that any rules of the Board 
requiring (1) mandatory audit firm rotation or (2) a supplement to 
the auditor's report in which the auditor would be required to 
provide additional information about the audit and the financial 
statements of the issuer (auditor discussion and analysis) shall not 
apply to an audit of an EGC. The final mandatory disclosure rules do 
not fall within either of these two categories.
    \489\ The Board provided this analysis of the impact on EGCs to 
assist the SEC in making the determination required under Section 
104 to the extent that the requirements apply to ``the audit of any 
emerging growth company'' within the meaning of Section 104 of the 
JOBS Act.
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    To inform consideration of the application of PCAOB standards and 
rules to audits of EGCs, the PCAOB staff publishes a white paper 
annually that provides general information about characteristics of 
EGCs. The data on EGCs outlined in the most recent white paper, 
released in February 2024, remains generally consistent with the data 
outlined in prior EGC white

[[Page 100070]]

papers.\490\ As of the November 15, 2022, measurement date, PCAOB staff 
identified 3,031 companies that self-identified with the SEC as EGCs 
and filed with the SEC audited financial statements in the 18 months 
preceding the measurement date.\491\
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    \490\ See PCAOB, White Paper on Characteristics of Emerging 
Growth Companies and Their Audit Firms at November 15, 2022 (Feb. 
20, 2024), available at https://pcaobus.org/resources/other-research-projects (``EGC White Paper'').
    \491\ The EGC White Paper uses a lagging 18-month window to 
identify companies as EGCs. Please refer to the ``Current 
Methodology'' section in the EGC White Paper for details. Using an 
18-month window enables PCAOB staff to analyze the characteristics 
of a fuller population in the EGC White Paper, but may tend to 
result in a larger number of EGCs being included for purposes of the 
present EGC analysis than would alternative methodologies. For 
example, an estimate using a lagging 12-month window would exclude 
some EGCs that are delinquent in making periodic filings. An 
estimate as of the measurement date would exclude EGCs that have 
terminated their registration, or that have exceeded the eligibility 
or time limits. See id.
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    The discussion of benefits, costs, and unintended consequences of 
the final rules above is generally applicable to all audits performed 
pursuant to PCAOB standards, including audits of EGCs. The economic 
impacts of the final rules on an individual EGC audit will depend on 
factors such as the auditor's ability to distribute implementation 
costs across its audit engagements and whether the auditor has already 
incorporated the final metrics into its audit approach. One survey of 
audit committees of smaller public companies found that five of the 28 
metrics discussed in the Concept Release were evaluated by more than 
half of the audit committees surveyed.\492\ EGCs are more likely to be 
newer companies, which are typically smaller in size and receive lower 
analyst coverage.\493\ For example, smaller companies have very little, 
if any, analyst coverage, which reduces the amount of information made 
available to financial statement users and therefore makes markets less 
efficient.\494\ These factors may increase the importance to investors 
of the higher audit quality expected to result from the final rules, as 
high-quality audits generally enhance the credibility of management 
disclosures.\495\ The costs of the final rules may disproportionately 
impact smaller audit firms, and in so much as smaller audit firms tend 
to audit smaller issuers, pass through of these costs may 
disproportionately impact EGCs.\496\
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    \492\ See, e.g., Harris and Williams, Audit Quality Indicators.
    \493\ See EGC White Paper at Figure 9 and Figure 12 (indicating 
that exchange-listed EGCs have less market capitalization and 
revenue than exchange-listed non-EGCs).
    \494\ See SEC, Final Report of the Advisory Committee on Smaller 
Public Companies to the U.S. Securities and Exchange Commission 
(Apr. 23, 2006) at 73.
    \495\ Researchers have developed a number of proxies that are 
thought to be correlated with information asymmetry, including small 
issuer size, lower analyst coverage, larger insider holdings, and 
higher research and development costs. To the extent that EGCs 
exhibit one or more of these properties, there may be a greater 
degree of information asymmetry for EGCs than for the broader 
population of companies, which increases the importance to investors 
of the external audit to enhance the credibility of management 
disclosures. See, e.g., Steven A. Dennis and Ian G. Sharpe, Firm 
Size Dependence in the Determinants of Bank Term Loan Maturity, 32 
Journal of Business Finance and Accounting 31 (2005); Michael J. 
Brennan and Avanidhar Subrahmanyam, Investment Analysis and Price 
Formation in Securities Markets, 38 Journal of Financial Economics 
361 (1995); David Aboody and Baruch Lev, Information Asymmetry, R&D, 
and Insider Gains, 55 Journal of Finance 2747 (2000); Raymond Chiang 
and P. C. Venkatesh, Insider Holdings and Perceptions of Information 
Asymmetry: A Note, 43 Journal of Finance 1041 (1988); and Molly 
Mercer, How Do Investors Assess the Credibility of Management 
Disclosures?, 18 Accounting Horizons 185 (2004).
    \496\ PCAOB staff analysis indicates that, compared to exchange-
listed non-EGCs, exchange-listed EGCs are approximately 2.6 times as 
likely to be audited by an NAF and approximately 1.3 times as likely 
to be audited by a triennially inspected firm. Source: EGC White 
Paper and S&P.
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    However, two important caveats will limit the impact of the final 
rules on EGCs. First, the vast majority of EGC engagements will not be 
subject to the final engagement-level reporting requirements because an 
EGC cannot be a large accelerated filer and few accelerated filers 
maintain the EGC status.\497\ The Board believes these EGCs will 
therefore not be impacted by the final engagement-level reporting 
requirements. Second, approximately 23% of EGC engagements (712 out of 
3,031) will not be included in any final firm-level reporting because 
they are not audited by a firm that will be subject to the final firm-
level reporting requirements. The Board believes these EGCs will 
therefore not be impacted by the final firm-level reporting 
requirements.
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    \497\ As of November 15, 2022, among the 2,562 EGCs for which 
``accelerated filer'' status information is available, just 163 
identified as accelerated filers. See EGC White Paper at 26.
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    Overall, among the impacted EGCs, the final rules are expected to 
enhance the quality of EGC audits and financial reporting quality.\498\ 
To the extent the final rules will improve EGCs' financial reporting 
quality, it may also improve the efficiency of capital allocation, 
lower the cost of capital, and enhance capital formation. For example, 
investors may improve their capital allocation by more accurately 
identifying EGCs with the strongest prospects for generating future 
risk-adjusted returns and reallocating their capital accordingly. 
Investors may also perceive less risk in the impacted EGC capital 
markets generally, leading to an increase in the supply of capital to 
the impacted EGCs. This may increase capital formation and reduce the 
cost of capital to impacted EGCs. The final rules could reduce 
competition in an EGC's product market if the indirect costs to audited 
companies disproportionately impact EGCs relative to their competitors.
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    \498\ See above for a discussion on the link between audit 
quality and financial reporting quality.
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    As discussed above, the Board considered broadening the 
applicability of the final rules to include information from audits of 
EGCs generally. However, for the reasons described there, the Board is 
not doing so at this time. In particular, non-accelerated filer EGCs 
may be disproportionately impacted by cost passthrough and tend to be 
smaller than in-scope issuers. Comments related to this alternative are 
discussed above. There were no comments related to the EGC analysis 
specifically.
    Accordingly, and for the reasons explained above, the Board 
recommends that the Commission determine that it is necessary or 
appropriate in the public interest, after considering the protection of 
investors and whether the action will promote efficiency, competition, 
and capital formation, to apply the final rules to audits of EGCs.

Appendix--Illustrative Examples of Metric Calculations

    The examples below are based on hypothetical situations and have 
been prepared for illustrative purposes only, to show how metrics would 
be calculated based on the facts presented. They are not intended to 
provide guidance or suggestions regarding what the numerical values of 
the metrics themselves, or of the inputs on which they are based, are 
likely to be or should be. They are qualified in their entirety by 
reference to Rule 2203C, Firm Metrics, Rule 3211, Audit Participants 
and Metrics, Form FM, Firm Metrics, and Form AP, Audit Participants and 
Metrics.

I. Partner and Manager Involvement
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    \499\ As noted in Form FM and Form AP, hours worked are the sum 
of hours that are incurred on issuer and non-issuer engagements and 
include hours spent on training, practice development, personnel 
development, or other firm activities. Hours worked exclude hours 
that are not considered working hours (e.g., paid time off and 
holiday time).

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[[Page 100072]]


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II. Workload

[[Page 100073]]

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[[Page 100074]]


[GRAPHIC] [TIFF OMITTED] TN11DE24.006


[[Page 100075]]


[GRAPHIC] [TIFF OMITTED] TN11DE24.007

     
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    \500\ The number of weeks for the quarter ended March 1, 2024, 
represents the number of weeks through the issuance of the audit 
report.

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[[Page 100076]]

[GRAPHIC] [TIFF OMITTED] TN11DE24.008


[[Page 100077]]



III. Training Hours for Audit Personnel 501
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    \501\ As noted in Form FM and Form AP, training metrics should 
be calculated for the same 12-month period, either ended September 
30, or based on the firm's training calendar.
[GRAPHIC] [TIFF OMITTED] TN11DE24.009


[[Page 100078]]


[GRAPHIC] [TIFF OMITTED] TN11DE24.010

IV. Experience of Audit Personnel

[[Page 100079]]

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[[Page 100080]]


[GRAPHIC] [TIFF OMITTED] TN11DE24.012

V. Industry Experience

[[Page 100081]]

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[[Page 100082]]


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[[Page 100083]]


[GRAPHIC] [TIFF OMITTED] TN11DE24.015


[[Page 100084]]



VI. Retention of Audit Personnel 502 503
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    \502\ As provided in the Note to Item 4.6 of Form FM, promotion 
is treated as if it had occurred at the beginning of the period for 
the calculation of retention of audit personnel metric.
    \503\ As noted in Form FM, only partners and managers with one 
or more years of service and who were employed continuously during 
the 12-month period are included in the numerator.
[GRAPHIC] [TIFF OMITTED] TN11DE24.016


[[Page 100085]]


[GRAPHIC] [TIFF OMITTED] TN11DE24.017

VII. Allocation of Audit Hours 504
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    \504\ As noted in Form FM and Form AP, multi-year audits are 
excluded from both the firm- and engagement-level calculations.

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[[Page 100087]]


[GRAPHIC] [TIFF OMITTED] TN11DE24.019

VIII. Restatement History

[[Page 100088]]

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[[Page 100089]]


[GRAPHIC] [TIFF OMITTED] TN11DE24.021

III. Date of Effectiveness of the Proposed Rules and Timing for 
Commission

Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Board consents, the Commission will:
    (A) By order approve or disapprove such proposed rules; or
    (B) Institute proceedings to determine whether the proposed rules 
should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed 
rules are consistent with the requirements of Title I of the Act. 
Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/pcaob); or
     Send an email to [email protected]. Please include 
PCAOB-2024-06 on the subject line.

Paper Comments

     Send paper comments in triplicate to Vanessa A. 
Countryman, Secretary, Securities and Exchange Commission, 100 F Street 
NE, Washington, DC 20549-1090.


[[Page 100090]]


All submissions should refer to PCAOB-2024-06. This file number should 
be included on the subject line if email is used. To help the 
Commission process and review your comments more efficiently, please 
use only one method. The Commission will post all comments on the 
Commission's internet website (https://www.sec.gov/rules/pcaob). Copies 
of the submission, all subsequent amendments, all written statements 
with respect to the proposed rules that are filed with the Commission, 
and all written communications relating to the proposed rules between 
the Commission and any person, other than those that may be withheld 
from the public in accordance with the provisions of 5 U.S.C. 552, will 
be available for website viewing and printing in the Commission's 
Public Reference Room, 100 F Street NE, Washington, DC 20549, on 
official business days between the hours of 10 a.m. and 3 p.m. Copies 
of such filing will also be available for inspection and copying at the 
principal office of the PCAOB. Do not include personal identifiable 
information in submissions; you should submit only information that you 
wish to make available publicly. We may redact in part or withhold 
entirely from publication submitted material that is obscene or subject 
to copyright protection. All submissions should refer to PCAOB-2024-06 
and should be submitted on or before January 2, 2025.

    For the Commission, by the Office of the Chief Accountant.\505\
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    \505\ 17 CFR 200.30-11(b)(1) and (3).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-28142 Filed 12-10-24; 8:45 am]
BILLING CODE 8011-01-P`