An Interview with The Mexican Institute of Public Accountants

This interview of Jackson Johnson, JGA President, by Rogelio Avalos Andrade C.P.C., Chairman of the Quality Oversight Management Committee, was published in the March 2020 Contaduría Pública from Mexican Institute of Public Accountants.

Download the full article here in both Spanish and English.

Jackson Johnson, Founder and President of Johnson Global Accountancy ("JGA"), a firm that provides advisory services to accounting firms to assist them in quality issues and help them to comply with quality standards, is a Certified Public Accountant in California and Massachusetts and member of the American Institute of Certified Public Accountants. With six years in the Division of Registration and Inspections at the PCAOB, he developed his experience in audits of financial statements at Grant Thornton in Boston, Los Angeles, and the member firm in Hong Kong.

RA: Before I start with my questions to Jackson, we introduced him on how the audit practice in Mexico is being regulated and overseen. The Mexican Institute of Public Accountants (IMCP) oversees the audit and assurance practice from within this membership through its Vice-presidency of quality in the professional practice. This Vice-presidency issued the Standard of Quality Control (basically, identical to the ISQC1) and the Standard of Oversight of Quality Control (NRCC for its Spanish acronym), which sets forth the rules to perform inspections to firms to assess compliance with applicable laws, rules and professional standards in their systems of quality control and the documentation of a selection of completed audit and other attestation engagements. The NRCC rules that, those firms that are subject to similar and regular quality control inspections by other foreign regulators (such as the PCAOB), will not be subject to an inspection process by the IMCP. In Mexico, auditors of entities, listed in the Mexican Stock Exchange, are regulated by the National Banking and Securities Commission (CNBV for its Spanish acronym), which performs certain QC inspections on a “case by case” basis only.

Jackson, similar to the peer review practice that you have in the US, would you think that we should include all firms in Mexico, regardless their size and structure, to a quality control inspection process? And why?

JJ: I think there are several factors that would go into this evaluation, it’s important to consider the risks associated with investors and other stakeholders both of the companies being audited as well as the audit firms themselves. Firms that are inspected by the PCAOB within Mexico have stakeholders located in Mexico –and abroad– that have a vested interest in the integrity of those audits. Based on my understanding, however, a firm that is subject to PCAOB inspection may not have their non-PCAOB audits subject to periodic inspection. Those non-PCAOB audits would include public companies that are listed in Mexico with general public exposure. The audit of these companies still poses potential risk to the greater public markets within Mexico. This is an opportunity for firms and the regulatory environment, and stakeholders, to determine the risk of this oversight gap. As we have found in some of our work with non-PCAOB audits of registered firms, there are often differences in the quality of non-public audits as compared to PCAOB-audits. Because of the risk associated with a PCAOB audit, firms often allocate their strongest resources to ensure quality audits. However, because of a lack of regulatory exposure, non-public audits sometimes struggle to maintain strong quality. Firms could and should continue to ensure that they have appropriate quality controls for these audits in this “oversight gap.”

In the model that is set up in the US, non-public audits that are outside the purview of PCAOB are subject to inspection by the AICPA National Peer Review Committee (NPRC). So there is an inspection review process for the firms that only audit private companies, and for the private company audits of firms that are also regulated by the PCAOB. For example, firms in the US that audit both public and private companies are subject to inspection by both regulatory entities.

So I don’t necessarily agree that firms that are subject to similar and regular inspection by foreign regulators should be excluded from IMCP inspection, because that presents too much predictability into what audits are included in the population subject to quality control inspection (only those under foreign jurisdiction).

RA: Jackson, in your capacity as consultants to PCAOB-registered firms, what would you say are the key aspects with respect to an inspection process and their results for smaller PCAOB – registered firms?

JJ: The Big 4 in the US, and any other firms that audit one hundred or more issuers (currently 8 firms in the US) are subject to annual PCAOB inspections. The rest of the PCAOB-registered firms are statutorily required to be inspected once every three years. Based on our experience with our clients, the PCAOB may choose to inspect those smaller firms more frequently than once every three years, depending on the results of previous inspections. Based on our work supporting our clients through the inspection and remediation process, the focus on quality control (QC) tends to be on independence, practice monitoring (also known as internal inspection), and partner admittance and compensation. Inspection teams do touch on all the elements in the QC standards, however, and focus on changes since the last inspection.

The inspection will also include a review of various aspects of audits selected by the inspection team. The inspection team member assigned to each audit will typically select higher risk audit areas and conduct meetings with the engagement team. In addition, they will review audit workpapers to understand the audit procedures performed over risk assessment and the engagement team’s responses to identified risks, including significant and fraud risks.

In preparing for inspections, we have seen firms perform a wide range of activities. Overall, we have found that teams that spend time reviewing the audit files and refamiliarizing themselves with the audit issues are more successful in articulating these issues during the actual inspection. We believe that preparation is key.

Keep in mind that there are a number of changes on the horizon. As I discussed in my recent article summarizing key PCAOB regulatory updates that the Board described at the recent annual AICPA Conference on Current SEC and PCAOB Developments in Washington, D.C., the PCAOB has established a dedicated team that will take a look at QC policies and effectiveness of all of the largest annually-inspected firms to draw comparisons and perhaps identify best practices. ¹ This hasn’t been established or put into place for the triennially inspected firms, including Mexican PCAOB-registered firms.

RA: Is there any scalability for smaller firms to comply with PCAOB standards? Does the PCAOB have different expectations for smaller firms?

JJ: There is an expectation that all firms that audit US public companies, regardless of size, apply the same PCAOB standards throughout their audit practice. Of course, the larger firms have more complexity in how those standards and policies are carried out. For example, consider compliance with US SEC and PCAOB independence rules and regulations. A larger firm with multiple offices and multiple foreign affiliates will need more layers and processes to ensure that non-audit services provided to an entity in one location do not impair the independence of audit services provided to another entity in another location. Further, larger, more complex firms may also be auditing larger, more complex issuers.

In our experience working with our clients, one common area where we see the same expectations are applied in a PCAOB inspection, for both small and large firms, are the tests of internal controls over financial reporting. For example, the level of precision of testing of management review controls is still an area that receives a lot of scrutiny by inspectors and we see these issues and comments surfacing on all inspections that we observe.

RA: What would be common findings as a result of an inspection to a non-PCAOB registered firm and a registered firm?

JJ: Non-PCAOB registered firms are subject to AICPA peer reviews only for external oversight. These re- views tend go into many more administrative aspects of the audit in addition to the audit procedures over the financial statement accounts and disclosures. The AICPA does not publish a significant amount of information regarding thematic issues in peer review results. From our work with clients in which we help firms get through their peer review with as much success as possible, we have noted that the issues tend to be similar and can revolve around matters such as (i) lack of procedures to understand the internal control environment and the financial reporting process; (ii) performing tests using an inadequate sample size; and (iii) inadequate testing of revenue recognition.

The PCAOB does release more information that compiles results of inspections and identified broad themes. The Board’s Staff Preview of 2018 Inspection Observations identified common audit deficiencies from their 2018 inspections that included deficiencies over ICFR, Risk assessment and revenue, audit estimates, including the allowance for loan losses and business combinations, and procedures to perform the engagement quality review, or concurring review.

In our work performing pre- and post-issuance reviews of PCAOB and non-PCAOB audits of various sizes, and assisting firms with their annual internal inspections, we have seen the quality of understanding internal controls is a big opportunity. For example, we have seen reliance on internal control to reduce substantive testing when insufficient work was performed on internal controls. Sometimes, engagement teams believe that gaining an understanding of internal controls –such as performing walkthroughs– gives teams the ability to rely on controls in a certain process or over certain assertions within a process.

RA: What would you think firms frequently struggle with, in respect to carry out effective remediation plans or improvements to their QC Systems, including timing?

JJ: In our work with clients, one of the areas that firms could do better in is root cause analysis. An effective remediation plan is only as good as an effective root cause analysis, otherwise the remedial actions may not be getting to the heart of why a deficiency actually occurred. At JGA we’ve seen a variety of root cause analyses ranging from formal, documented processes to informal conversations. We’ve found that the concept of having a formalized RCA is gaining traction at the triennially-inspected firms, but there’s much work to do in terms of developing what the process looks like and how it can be put into the QC process and consistently implemented. The new PCAOB Board members have indicated that a robust root cause analysis can lead to better identifying the underlying issues as to why an audit or QC deficiency occurred. Any of your readers that have gone through a PCAOB inspection in 2019 and that received a comment form may remember a new section that was added to the comment form asking firms to identify the relevant QC area that may be related to each finding. This is just one way that the PCAOB is driving home the importance of performing an RCA and asking the firms to take more accountability in this area. In addition, the PCAOB is considering incremental requirements to the new concept release on QC standards to require root cause analysis, or a separate standard, to align with proposed ISQM 1 that, as drafted, requires a firm to have a root cause analysis built into their QC system.

RA: As part of the QC inspection process carried by the IMCP, remediation plans are also requested to firms. Not having a robust structure such as PCAOB’s, what would be a good approach to follow-up remedial actions from firms and how to evaluate their effectiveness?

JJ: Firms should continue to incorporate the monitoring of the effectiveness of remediation plans into their internal processes. This should be regardless of how the matter was identified, whether it was from internal inspection, or regulatory inspection. It should also be regardless of whether the external regulator has the capacity to follow up timely and thoroughly on these matters. This can be done through a number of mechanisms. First, firms can enhance their internal inspection process by selecting engagements where a particular matter is applicable, tailoring specific internal inspection procedures to vet out whether the issue is recurring in a subsequent audit of the same engagement, or different engagements with the same risks or audit issues. Further, the procedures performed by the concurring review, or Engagement Quality Review as we call it under PCAOB standards, can be enhanced to include specific procedures to review work pertaining to audit areas where deficiencies occurred in the past.

From a purely regulatory perspective, a cost-effective approach to oversight of remediation actions could be one that’s more detective in nature. For instance, the regulator could consider the results of subsequent inspections and in instances where there are repeat findings (from previous inspections), the regulator could perform additional procedures to understand and evaluate effectiveness of firms’ remedial actions. In addition, the regulator could also risk-rate firms and inspections and focus remediation efforts on either firms with the worst inspections and/or on firms with the most risk exposure from a stakeholder perspective.

RA: Some of the professionals that have been involved in a PCAOB inspection, at least in Mexico, have noted that the reporting and follow-up processes, as a result of inspections, take too much time [sometimes up to two years]. Have you noted any recent changes to the time it takes for Firms to receive draft/final inspection reports?

JJ: I have not noted a significant change to report issuance time, either positive or negative. Based on the board’s remarks at the AICPA conference, the largest annually inspected firms will be the first to receive their reports in a new format, including a new Part I.B which will report on non-compliance with standards in an audit even though the audit opinion was supported. The Board gave examples such as non-compliance with AS 1215, Audit Documentation, or AS 1301 Communications with Audit Committees. From some conversations with clients, the rollout of this new report format has caused some delay with issuance of reports for the largest firms.

RA: Jackson, followed to the earlier question, what would you tell about effectiveness of firms’ remediation plans considering such a long timing in the reporting and follow-up processes?

JJ: Our clients need to be a little creative and be proactive to implement remedial actions timely –meaning before the next year’s audit– when they do not yet have a draft inspection report to clearly articulate the findings from the inspection. While the remediation actions are not required until the issuance of the report, the sooner changes can be implemented the sooner teams can start learning and improving their audits. So we often recommend some element of getting ahead of the report for the sake of making timely improvements to the Firm’s trainings, methodology, and QC policies and procedures. To start, firms have a copy of the comment forms and these comment forms are the basis of the report. Thus, while the criticisms in the report may evolve slightly from the comment forms, they are typically closely aligned and while the procedures the firms first implement may not fully respond to the criticisms in the report, we believe that implementing some remediation actions early is a meaningful way to improve audit quality immediately. We believe that firms in Mexico contemplating making changes to their system of quality control in response to findings from an IMCP inspection could follow a similar approach. Waiting for a report sometimes means waiting another audit year cycle.

RA: On the other hand, how would you describe the major challenges an accounting firm should face to become PCAOB [or an equivalent regulator from other country] compliant?

JJ: Among other matters, we have found working with our foreign-based clients that the most common challenges they face are understanding PCAOB and SEC independence rules and regulations and the “add-on” requirements or restrictions from their local jurisdictions. For example, the rules of cove- red persons, and what are considered prohibited non-audit services are usually more strict under US SEC and PCAOB rules and regulations than we have seen of local foreign jurisdictions. Firms need to have a tool in place to look at these for their US public companies and considering building in safeguards to ensure a qualified individual with experience in independence requirements in United States takes a look at these complex issues when it comes to client acceptance, retention, and communications to audit committees, and performance of any non-audit services, including tax services.

Another area that is typically more challenging is around the understanding of the design and testing of the operating effectiveness of controls for integrated audits. While most understand the concept of controls, we find that many engagement teams struggle to understand how controls work in the context of an integrated audit and how effective or ineffective controls can impact the overall substantive audit approach. The PCAOB has specific standards dedicated solely to understanding and testing the design and operating effectiveness of controls in an integrated audit.

RA: What would you recommend to those firms that, even they are not registered firms before the PCAOB, they have to comply with the requirement to implement a system of quality control?

JJ: I would recommend firms to set a robust tone at the top reinforcing the importance of following the firm’s system of quality controls to ensure that audits are performed in accordance with the relevant standards. A strong tone at the top shows the rest of the firm that the QC manual is more than just a manual; it is a collection of documentation, requirements, and principles that everyone should think about and must adhere to each day they work on their audit clients.

RA: How important the investment to adopt a system of quality control should be for an accounting firm? And, to what extent such an investment could limit a successful implementation?

JJ: A good system of quality of control, reflective of the size, complexity, and nature of a firm’s practice, is very important. This requires an investment of time and money. What I see as even more important as the adoption of a system of QC is the ongoing monitoring of the effectiveness of the system of QC. This is where an investment is worthwhile so that proper identification of why something went wrong, and the steps to fix it, is important. A proper system of QC at a firm, therefore, is an evolutionary one. I think it needs to be evolutionary.

RA: Various firms in Mexico have been inspected by the PCAOB, and over the past year to date, the Board has publicly announced certain enforcement actions to some of the reviewed firms. Given the jurisdiction this takes place, and from your professional perspective, what would you expect from regulators and the IMCP to react on the involved firms and individuals?

JJ: I don’t have any insight into the process IMCP has to consider the findings from PCAOB on Mexican firms. I think it would be important for both the firm and any relevant regulatory bodies to understand the effect of the finding on the firm’s audits, including both the audits subject to the PCAOB findings as well as the audits that fall outside of the PCAOB’s jurisdiction. This would help the firm determine what else beyond any required remedial actions should be considered for these other aspects of the firm’s practice. A full and effective remediation plan would look at the applicability of the findings to the broader practice of the firm.

RA: Given the proposed changes to the International Quality Standards, issued by the IAASB, do you know whether the PCAOB is planning on similar changes to its quality standards? And how challenging you foresee these changes to put in place for auditing firms?

JJ: Yes! The PCAOB has issued a concept release in mid-December 2019 to propose significant changes to its QC standards. The potential approach proposed by the PCAOB in the concept release is based on the proposed International Standard on Quality Management, ISQM 1. This will strengthen the QC standards using an integrated risk-based framework and will help avoid unnecessary differences between PCAOB and IAASB frameworks, and also reduce costly evaluations around those differences to ensure they are addressed in firms that need to comply with both sets of standards. While it should be scalable, it is too early to tell how that would work in practice. The concept release is currently seeking feedback from the public and as a result, we don’t know yet whether ISQM 1 and the new PCAOB concept release will be the final adopted version. I believe the efforts required to implement the new standard –whatever the final standards may be from IASSB and PCAOB– will be well worth it and can help reduce costs in the future since the model is a risk-based approach. There are still a lot of moving parts and it will be some time before we have a final rule for firms to implement.

RA: Jackson, again, I really appreciate the opportunity to have this chat with you. Your comments, feedback and points of view gives us, all what we compose the major professional accountancy organization in Mexico, an encouraging message on what we have to foresee in the near future regarding the improvement of quality, not only in the audit practice, but also, in our overall professional accountancy practices. Thank you very much, and all the success at JGA and your team for the work are currently doing.

This article was featured in the Dossier section of March 2020 Contaduría Pública, a publication of Mexican Institute of Public Accountants.

¹ Recap of PCAOB Hot Topics at the AICPA National Conference

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Joe Lynch, JGA Managing Director to Speak at AICPA® & CIMA® ENGAGE 25

April 25, 2025

WASHINGTON, D.C.: Johnson Global is pleased to announce that Joe Lynch, JGA Managing Director will speak at the AICPA® & CIMA® ENGAGE 24 Conference on June 9–12, 2025, at the ARIA Resort & Casino in Las Vegas, NV and live online. This CPE-eligible event is the premier annual event for accounting and finance professionals, bringing together thousands of peers, experts, and industry leaders for top-tier learning, networking, and career growth opportunities. Register by May 1, 2025, to take advantage of Early Bird rates— $1,995 for members ( regularly $2,095 ) and $2,445 for nonmembers ( regularly $2,545 ). *PCPS, Tax and PFP section members and CITP®, PFS™, CGMA® credential holders save an additional $150 . Discount reflected in section member/credential pricing during checkout. Register Today ! About Johnson Global Advisory Johnson Global partners with leadership of public accounting firms, driving change to achieve the highest level of audit quality. Led by former PCAOB and SEC staff, JGA professionals are passionate and practical in their support to firms in their audit quality journey. We accelerate the opportunities to improve quality through policies, practices, and controls throughout the firm. This innovative approach harnesses technology to transform audit quality. Our team is designed to maintain a close pulse on regulatory environments around the world and incorporates solutions which navigates those standards. JGA is committed to helping the profession in amplifying quality worldwide. Visit www.johnson-global.com to learn more about Johnson Global.

JGA to Sponsor 2025 ALI-CLE Accountants' Liability Conference

March 21, 2025

WASHINGTON, D.C.: Johnson Global Advisory (JGA) is proud to sponsor the Accountants' Liability Conference hosted by ALI-CLE. This two-day event will take place in Washington, D.C. and virtually on June 2nd and 3rd. This is an excellent opportunity to gain valuable insights into a wide range of critical issues. The 2025 conference will focus on audits and oversight, providing essential guidance to help you navigate the evolving landscape of regulatory compliance and better protect your firm and clients. “We are pleased to sponsor this conference for the last several years. This event brings together top law firms, internal counsel, and risk experts for dynamic discussions on trending topics such as accounting liability and other important issues affecting the profession,” said Jackson Johnson, JGA President. “I look forward to personally engaging with participants, presenters, and stakeholders at this conference.” This year’s program is still being finalized but planned topics include: Recent Trends in Accounting Litigation Living in a post- Jarkesy world The future of enforcement PCAOB inspection program update SEC perspectives on gatekeeper liability AI and emerging technologies in the accounting industry Accounting firms entering the legal space International firm considerations Alternative practice structures and AICPA independence rules Register by April 25 to attend in-person and use the code “ JGA ” to save $250 off . OR, for webcast attendance, use the code " JOHNSON " to save $125 off the tuition. Click here to register. About Johnson Global Advisory JGA is dedicated to helping public accounting firms around the globe achieve the highest level of audit quality. All CPAs and former PCAOB inspection staff, JGA professionals are passionate and practical about working alongside firm leadership to ensure the right controls, policies, and practices are implemented throughout the organization. Visit www.johnson-global.com to learn more about Johnson Global.

JGA Makes Third Annual Contribution to The Boys & Girls Club of Greater Kansas City

March 21, 2025

WASHINGTON, D.C.: Johnson Global Advisory (JGA) makes third annual contribution to the Boys & Girls Club of Greater Kansas City. The 29th Annual Kids Night Out is scheduled for Saturday, April 26, 2025, and promises to be an unforgettable evening, bringing together over 1,500 guests to support the children served by Boys & Girls Clubs of Greater Kansas City. “We’re thrilled to continue our support for the Boys & Girls Club of Greater Kansas City. This marks our third year backing this chapter, and I know that many of our JGA employees have personally benefited from the programs the Boys & Girls Clubs offer nationwide,” said Jackson Johnson, JGA President. “Kids Night Out is Boys & Girls Clubs of Greater Kansas City’s biggest fundraiser each year– and all dollars raised stay right here in Kansas City”, said Andy Burczyk, Board Member and Chair of Kids Night Out. “This organization is doing extraordinary things, and it is because we as a community invest in their impact.” For over 100 years, Boys & Girls Clubs of Greater Kansas City has provided a safe, supportive environment for youth. Serving over 8,000 kids and teens annually across 11 locations, the organization helps young people achieve their full potential through programs that promote academic success, healthy lifestyles, and character development. Through mentoring and leadership training, they equip members with the skills needed for success now and in the To learn more information on the Boys & Girls Club of Greater Kansas City and their work with the youth, please visit www.bgc-gkc.org . About Johnson Global Advisory JGA is dedicated to helping public accounting firms around the globe achieve the highest level of audit quality. All CPAs and former PCAOB inspection staff, as well as JGA professionals, are passionate and practical about working alongside firm leadership to ensure the right controls, policies, and practices are implemented throughout the organization. Visit www.johnson-global.com to learn more about Johnson Global.

Johnson Global Advisory Supports Sustainable Harvest International

March 21, 2025

WASHINGTON, D.C.: Johnson Global Advisory (JGA) is proud to provide a financial contribution to Sustainable Harvest International (“SHI”). SHI is a nonprofit helping Central American farmers adopt sustainable farming practices for over 27 years. Their mission is to address the destruction of tropical forests caused by slash-and-burn farming and logging. SHI’s mission benefits both current and future generations by equipping farmers with the knowledge to farm sustainably. “We’re proud to partner with Sustainable Harvest International in their important work,” said Jackson Johnson, JGA President. “This collaboration helps drive lasting, positive changes and by backing such vital organizations, we stay true to our mission of giving back and making a real difference. JGA’s philanthropic efforts focus on supporting organizations that are important to our people. I appreciate Vernon sharing his experience as a board member and we are grateful to work with him to amplify this organization.” Vernon Johnson, JGA Director, is a Board Member and Treasurer for SHI. He is actively involved in this organization. "My nonprofit work has helped me maintain perspective in both life and at work,” said Vernon. “It’s taught me to stay calm during challenges and focus on the bigger picture. This experience has improved my relationships and made me more resilient in stressful situations. My advice to busy professionals is to step back, appreciate the simple things, and not sweat the small stuff—being thankful and present can make a big difference." To learn more about SHI, visit www.sustainableharvest.org/donate . About Johnson Global Advisory JGA is dedicated to helping public accounting firms around the globe achieve the highest level of audit quality. All CPAs and former PCAOB inspection staff and JGA professionals are passionate and practical about working alongside firm leadership to ensure the right controls, policies, and practices are implemented throughout the organization. Visit www.johnson-global.com to learn more about Johnson Global.

ISQM 1, SQMS 1: Influencing the Firm on the Benefits Beyond Compliance (Part II)

February 26, 2025

The implementation of the System of Quality Management (SQM) is not just a compliance requirement but an opportunity to drive significant business value. By aligning firm-wide goals, improving internal processes, and optimizing controls, firms can streamline their operations, reduce inefficiencies, and improve overall performance. The process also provides an opportunity for firms to gain valuable insights through key metrics, enabling data-driven decisions which provide strategic business insights, enhances audit quality, and promotes employee retention. In addition, early adopters who focus on the business value from the outset see improvements that reach across different practices within the firm, making the SQM implementation a strategic investment that benefits the whole firm long-term. We have seen that our work in this area results in meaningful improvements to the way the business of audit and assurance is conducted, and many of these improvements will have benefits that reach across other practices of the firm. This is part II of a series on the benefits of SQM implementation. This article builds on our insights from 2022 in Part I of this series . Compliance as a Driver Compliance is the main driver of the new System of Quality Management (for all standard-setters, referred to as “SQM”) standards issued by the IAASB, AICPA, and the PCAOB. There is no disputing that. However, for the early adopters, what we are finding is immense business value that come out of this process; more so if you start the process with business value in mind. Our ability to anticipate the benefits of executing ISQM 1 years ago is a key strength. Some firms have already implemented ISQM 1 at some level (partial adoption for group audits, for example). For SQMS 1 and QC 1000, since firms are all in various stages preparing for the December 15, 2025, go-live date, now is the time to lay out the strategic value drivers from this compliance exercise. Related: See a breakdown of the various implementation dates here . SQM implementation requires firms to take a closer look at their internal process; every process that touches the value chain of getting an audit done. To demonstrate how this requirement goes beyond the confines of the “audit practice”, consider these examples: Employee onboarding, training, and retention; Software tools and technology used to monitor internal aspects like independence; Tools used by engagement teams, for example, to test 100 percent of smart contracts or select journal entries to examine for fraud; Archiving of binders on time, and in compliance with audit documentation requirements; or Monitoring programs that identify and fix deficiencies in both audit performance and the underlying functions supporting the audit. Getting Buy-In, Aligning Goals, and Engaging Personnel We have seen firm quality leaders struggling to get the buy-in needed from stakeholders across the business (IT, HR, Tax, Advisory) for effective SQM implementation. And we have heard leadership from firms around the world ask: “What’s in it for us?” “All this investment just for a compliance exercise?” “Why do I need to be involved in something the audit group has to do?” But the best question we’ve heard is: “How can the system of quality management implementation improve our business?” When everyone is working toward the same objectives and goals, implementation becomes a cohesive and streamlined process. It’s important to have goals that are aligned throughout the organization, with them tailored to the component and roles within those areas. This includes: Getting the invested support from the partnership board down to process owners; Having goals that are specific and measurable (e.g. documenting the current process and eventually operating controls consistently and timely); Aligning the firm’s tone-at-the-top helps get everyone in sync; and Reinforcing management’s responsibility to establish a culture of quality and its importance in all the services performed by the firm. Management should: Lay out the long-term benefits of improved business performance, reduced risks, more timely and accurate data created which leads to insightful decisions; Emphasize the benefits of overall reduced costs related to non-compliance with network, firm, peer review, and regulators requirements; and Evaluate the potential for lower costs of insurance upon implementation and overtime. Understanding Current Processes Conducting interviews, gathering data, and documenting the processes within the firm’s system of quality management allows visibility of how these processes currently work (or don’t work). When SQM implementation project leaders invite personnel involved in a process together into one room and facilitates an open discussion, a clear picture of how each process really works materializes, and this strengthens cross-functional teaming. For instance, these meetings often result in the realization that two (or more) people are doing the same tasks (inefficiency) or discovering that no one is performing an important review check (gap). Formalizing and Optimizing Processes Once the current process is understood (“As-Is”) and with the right people in the room, the identification of areas where procedures can be more uniform, streamlined or simplified emerges. We often find that processes can be improved without adding more controls. This optimization effort incorporates standardization and normalization across the firm’s services and business functions providing benefit beyond the compliance exercise of the audit practice. Gaining Business Insights A sound system of quality management will bring new business insights and transparency to make confident decisions with reliable data. The optimization process will identify the key information used in the system of quality management (a similar concept to the work auditors performs with their companies as described here). This information provides new insights to help process owners and firm leaders make decisions. A firm can develop key quality metrics that are used to measure and improve the operation of the firm and audit quality which results in a modernized competitive firm. When a firm establishes a system to monitor the SQM environment, these insights allow for timely monitoring which enables leaders to quickly make decisions that address anomalies or negative trends as they arise. Getting Started Early Getting started early begins with: Firm leadership embracing the need for a consistent and well-monitored SQM to improve the business; Aligning objectives and goals for all firm personnel based on their role within the SQM; Disseminating to all firm personnel the importance of how their role contributes to the SQM; and Incentivizing all firm personnel to commit to their SQM objectives and goals which contributes to the benefits of these modern practices that lead to competitiveness. While compliance may be the hand forcing you forward, the upside to this “exercise” is that undoubtedly you will be a stronger, more efficient firm when executed correctly. We see firms that begin with such a mindset have more success internally and in the marketplace. Conclusion The journey of implementing a quality management system is transformative. Beyond compliance, it reveals deep insights and benefits, positioning firms at an advantage in our profession. For more information, reach out to your JGA audit quality expert. Jackson Johnson , JGA President and Founder, is a seasoned expert in audit quality and technical accounting matters. With nearly six years of experience at the PCAOB, he has worked with small and medium-sized accounting firms globally, focusing on firm quality control and ICFR audits. Jackson advises firms in PCAOB and SEC investigations related to cryptocurrency audits and has served on the Enforcement Advisory Committee of the California Board of Accountancy. Before his tenure at the PCAOB, he worked with public and private clients at Grant Thornton LLP in Boston, Los Angeles, and Hong Kong. Jackson is also a frequent speaker on quality control and enforcement issues in the accounting industry. Joe Lynch , JGA Managing Director and Shareholder, and a member of the AICPA Quality Management Implementation Task Force. Joe works with mid-market public accounting firms worldwide to implement quality management programs that integrate technology and process to improve the delivery of audits. Joe spent more than six years as an Inspection Leader at the PCAOB, he conducted inspections of quality control and global issuer audits at large firms in the US as well as foreign affiliate firms, focusing on examining quality control and the design and implementation of audit work. Joe also has experience supporting financial service industry audit teams at a Big Four firm. In addition, his experience includes active-duty service in the US Air Force and supporting companies with IT strategic initiatives such as designing the IT framework for technology departments as well as leading implementations of ERPs and systems.

PCAOB Withdraws Firm & Engagement Metrics Rule from SEC Approval Process

February 25, 2025

The Public Company Accounting Oversight Board (PCAOB) recently decided to withdraw proposed rules that would have required registered firms to report a significant new set of firms and engagement metrics. It was also set to mandate that large accounting firms submit financial statements to the U.S. Regulator, as part of a wider effort to enhance oversight. This decision came after criticisms from a variety of stakeholders from both the PCAOB and SEC comment process. For example, the American Institute of CPAs (AICPA) expressed concerns that these requirements could harm U.S. capital markets and negatively impact small and midsized audit firms, potentially driving them out of the public company auditing practice. The PCAOB's decision to withdraw the rules was seen as a positive move by the AICPA, which had urged the Securities and Exchange Commission (SEC) to refrain from approving the rules due to the significant challenges they posed. JGA commented to the SEC on the proposal; you can read our position on the proposal here .

Johnson Global Advisory Releases Updated 2025 Guide to Help PCAOB-Registered Firms Navigate the Inspection Process

January 17, 2025

WASHINGTON, D.C.: Johnson Global Advisory (JGA) has published a new third edition guide examining the key considerations faced by public company auditors during their PCAOB inspections. Drawing experience as audit and audit regulation experts and advisors to firms worldwide on all aspects of audit quality improvement, the JGA team has authored NAVIGATING PCAOB INSPECTIONS: Understanding the Inspection Process from Start to Finish.

Firm and Engagement Metrics: Getting a Head Start

December 20, 2024

Firm and Engagement Metrics: Getting a Head Start *** Please see the updated information on the PCAOB Firm & Engagement metrics Rule change. Click here . Introduction As regulatory requirements in the accounting profession continue to evolve, accounting firms are facing new challenges in ensuring compliance with quality management standards. One of the most significant changes comes with the adoption of the PCAOB’s QC 1000 and the associated Firm and Engagement Metrics requirements , which aim to increase transparency and accountability within the auditing process. These new requirements are set to provide critical data on a firm’s operations and other factors that can inform audit quality, including partner involvement, workload distribution, and other factors. In this article, we’ll explore the challenges and opportunities firms face as they begin collecting the information necessary for firm and engagement metrics. We’ll also provide actionable steps that, in concert with implementation of QC 1000 / ISQM 1 / SQMS 1, firms can take to ensure they’re ready for compliance, with a focus on the key areas highlighted in recent industry discussions. 1. Quality Management Implementation: Bridging Internal and External Requirements Key Insights: A major challenge shared by our clients was the distinction between internal quality management (QM) processes and external regulatory requirements. Firms are finding it difficult to ensure that the information they provide to regulators will be complete and accurate. The requirement to report accurate and non-misleading information to external parties under QC 1000 , such as firm and engagement level metrics necessitates a shift in how firms view and manage data internally. Action Items for Firms: Ensure Data Accuracy : Firms must evaluate their quality management system to ensure they are designed to meet the requirements for accurate and non-misleading information. This is crucial as QC 1000 requires firms to communicate data to external parties that is accurate and complete. Implement Data Tracking Systems : Develop systems to track and report data, ensuring that the information provided to external parties, including regulators aligns with quality management objectives. This may require new systems or modifications to existing systems. Evaluate Communication Processes : Firms should focus on improving or implementing communication processes to ensure that all external communications, especially those with regulators, meet the high standards of accuracy and clarity mandated by QC 1000. 2. Comparability of Metrics Among Accounting Firms Key Insights: The introduction of standardized firm and engagement metrics is designed to increase comparability and accountability across accounting firms. This allows regulators, investors, and stakeholders to evaluate firms based on consistent data. However, there are concerns about how these metrics might influence firm selection by audit committees and whether these metrics alone tell the full picture to accurately represent audit quality. Action Items for Firms: Adopt Standardized Metrics : Firms should ensure that their reported metrics align with the prescriptive guidelines outlined in the adopted Firm and Engagement Metrics Rule. This includes applying the defined roles in a consistent manner (such as engagement partners and managers) and calculating metrics consistently across all engagements. Prepare for External Scrutiny : Be aware that these metrics may not only be scrutinized by regulators but also by audit committees and investors. Firms should ensure that they are accurately capturing and reporting their metrics to avoid misrepresentations. Monitor AI Usage in Audits : Consider how AI tools may impact workload calculations and the measurement of audit hours. As AI becomes more prevalent in auditing , firms may need to report on the extent of its use, which could influence workload metrics. 3. Potential Implications of Reporting Metrics Key Insights: While firm and engagement-level metrics can provide valuable insights, there are potential risks to firms that are likely to emerge. These include the possibility that the metrics may inadvertently point to root causes of issues in the inspection process, particularly regarding workload and capacity challenges. Additionally, these metrics – coupled with inspection report findings - may influence how audit committees select firms, potentially providing a skewed representation of audit quality. Action Items for Firms: Use Metrics Internally for Root Cause Analysis : Firms should utilize firm and engagement level metrics as reported, when performing internal root cause analysis , identifying potential problems in workload distribution or staffing levels before they escalate. Evaluate the Impact on Firm Selection : Be mindful of how these metrics might affect firm selection. Firms should aim to demonstrate the full context behind their metrics to avoid misinterpretations that could impact their reputation. Balance Metrics with Qualitative Insights : Firms should complement quantitative metrics with qualitative insights, ensuring a comprehensive picture of their audit quality is presented to external stakeholders. 4. Engaging Stakeholders in the Use of Metrics Key Insights: One concern we have heard was the uncertain use of metrics by investors and other stakeholders. While the objective of the PCAOB in the rule-setting process was for investors and audit committees to analyze these metrics, it’s unclear how much weight they will place on the data in making decisions about firms’ audit quality. In the planning process, firms can take charge and shape stakeholder use and effectiveness of the use of firm and engagement metrics shared publicly. Action Items for Firms: Engage with the Investor Community : To better understand how investors will use the metrics, firms should engage more actively with the investor community. This could include attending shareholder meetings and investor calls to gain insights into what data investors prioritize when evaluating audit quality. Increase Transparency in Reporting : Firms should be transparent in explaining the context and methodology behind their metrics, helping the clients, audit committees and other stakeholders understand the full context to make informed decisions. Ensure Data Relevance : Firms should ask their clients whether the data currently being reported is sufficient, and whether additional data points might be necessary to better assess audit quality and reliability. 5. Getting Started with QC 1000 and Firm Metrics Key Insights: As firms begin implementing QC 1000 and collecting firm and engagement level metrics , they face the challenge of ensuring their existing systems are capable of tracking and reporting the required data. Many firms may need to redesign or enhance their internal controls to capture the necessary information accurately. Action Items for Firms: Align QC 1000 with Firm and Engagement Level Metrics Reporting : Firms should carefully review QC 1000’s requirements and align them with the firm and engagement level reporting requirements. Focus on the information and communication component, ensuring that data is collected and reported accurately and consistently. Evaluate Current Systems : Firms should assess whether their current systems are capable of tracking metrics such as workload and audit hours. If systems are lacking, firms should plan to either redesign or implement new controls to capture this data accurately. Implement Real-Time Monitoring : Firms should adopt real-time monitoring tools that allow them to proactively manage workload issues and other potential risks. This ensures that data is captured and analyzed continuously, improving overall quality management. Be Agile and Proactive : QC 1000 requires firms to monitor metrics and adapt to emerging issues. Firms should adopt an agile approach to quality management, ensuring that metrics are not just reported at the end of the period but are actively managed throughout the year. Conclusion: Preparing for the Future of Quality Management and Firm Metrics The new QC 1000 and firm and engagement level metrics requirements can represent a significant shift in how accounting firms track, report, and manage audit quality. By adopting these standards, firms can improve transparency, enhance accountability, and demonstrate their commitment to high-quality audits. However, the implementation of these new requirements will require careful planning and investment in both systems and processes. Firms that act now to align their systems with QC 1000, engage with stakeholders, and monitor their metrics in real-time will be better positioned to meet regulatory expectations and enhance their market reputation. As the industry moves towards more data-driven decision-making, firms that prioritize accuracy, transparency, and continuous improvement will be the leaders in delivering quality audits. For more information, please contact your JGA audit quality expert .

Key Takeaways from the 2024 AICPA SEC/PCAOB Conference: What It Means for Your Firm

December 18, 2024

Key Takeaways from the 2024 AICPA SEC/PCAOB Conference: What It Means for Your Firm In December 2024, the AICPA SEC/PCAOB Conference in Washington D.C. brought together leaders from the SEC, FASB, and PCAOB to discuss critical developments in the accounting profession. The conference focused on fostering audit quality, improving the resilience of capital markets, and addressing ethical challenges. Below are the key takeaways from the conference speeches most relevant to you, including insights from Paul Munter, SEC Chief Accountant, Erica Williams, PCAOB Chair, Christina Ho, PCAOB Board Member, and Mark Uyeda, SEC Commissioner, and what these developments mean for the accounting firm clients we serve. 1. Munter’s Remarks on Upholding Independence Key Points: In his speech, Paul Munter, SEC Chief Accountant, emphasized the importance of maintaining auditor independence to preserve market integrity. Munter stressed that independence should be seen as a core professional standard, not just a compliance requirement, and urged auditors to foster a culture of skepticism and integrity. He called on auditors to ensure they challenge management when necessary to detect fraud and ensure accurate financial reporting. What This Means for Firms: The points are reminders to keep independence and objectivity at the forefront of engagement teams, despite the new technical complexities (e.g. PE deals), and general lowering our guard around these obligations: ways to continue to demonstrate this important across the firm system of QC are: 1. Reinforcing independence policies and ensure continuous training and monitoring; 2. Encouraging a skeptical mindset within audit teams to prevent ethical lapses; 3. Ensuring firm-wide commitment to independence, especially in long-term client relationships or where conflicts may arise. 2. PCAOB Chair Williams on Improvements in Deficiency Rates, and new standards Key Points: PCAOB Chair Erica Williams shared significant positive news, highlighting improvements in the aggregate deficiency rate at the largest audit firms. She attributed this progress to the firms’ increased efforts to enhance audit quality, including better risk assessment procedures and heightened transparency in reporting. Williams emphasized the importance of maintaining this momentum in order to build trust and credibility in the profession and the capital markets. Williams also discussed the newly adopted QC 1000 , the quality control standard that mandates firms to have comprehensive quality control systems to ensure that they meet PCAOB and SEC standards. She noted that this standard is designed to provide reasonable assurance that audit firms have the necessary controls in place to perform high-quality audits consistently. Additionally, she emphasized the critical role of the SEC in passing firm engagement metrics , which will help ensure that audit firms are held accountable for the quality of their engagements and provide investors with more detailed insight into firms’ performance. What This Means for Firms: Implement QC 1000 : Firms should begin preparing for the adoption of QC 1000 by reviewing and strengthening their own quality control systems. Ensure that these systems are robust enough to guarantee compliance with PCAOB and SEC standards and can provide reasonable assurance of consistent audit quality. Focus on Firm Engagement Metrics : If the SEC passes firm engagement metrics, firms will need to ensure they have clear, accurate data on their engagements, performance, and quality measures. Preparing now for these metrics will help firms stay ahead of the regulatory curve and demonstrate their commitment to transparency and high-quality audits. Enhance Risk Management and Quality Control : Firms should continue refining their risk-based audit approaches, focusing on stronger internal controls, and implementing transparent reporting practices. Continuous improvement will ensure the firm stays in line with both regulatory expectations and industry best practices. 3. PCAOB Board Member Christina Ho on Collaboration to Advance Audit Quality and Market Resiliency Key Points: In her speech, Christina Ho, Board Member of the PCAOB, stressed the need for genuine collaboration among regulators, auditors, and firms to advance audit quality and improve the resiliency of capital markets. This collaboration is essential to address emerging challenges, such as increasing regulatory expectations and the complexities of global markets. Ho highlighted that this collective effort is crucial to maintaining strong, transparent financial reporting and ensuring that audits remain effective and reliable, particularly as financial markets evolve. What This Means for Firms: Engage with regulators : Actively participate in consultations and industry forums to stay ahead of regulatory trends. Foster collaboration : Encourage open communication between audit teams, clients, and audit committees to ensure alignment on regulatory expectations. Adapt to global market changes : Firms must remain agile and ready to respond to the shifting dynamics of both domestic and international markets, ensuring that their audit processes remain resilient and effective. 4. SEC Commissioner Mark Uyeda on Crypto, and PCAOB’s Future Key Points: In his keynote, SEC Commissioner Mark Uyeda discussed the SEC's evolving role in the accounting and auditing of cryptocurrencies, noting that crypto is currently being accounted for and audited through enforcement activities. He stressed the need for greater clarity in crypto accounting and auditing standards. Uyeda also discussed the future of the PCAOB, stating that "all options are on the table." What This Means for firms: Crypto Accounting and Auditing : Firms need to stay abreast of emerging standards and enforcement actions in crypto accounting. As regulations evolve, firms must be prepared to adapt their auditing and reporting practices accordingly. Take a look at positions from other regulators or standard setters (e.g. CPAB), to inform what sufficient procedures looks like. PCAOB’s Future : The potential restructuring of the PCAOB may affect how audits are overseen in the future. Firms should monitor developments closely and assess the impact on their operations and regulatory compliance, and firm strategy. 5. Ethical Considerations and Audit Quality Throughout the conference, both SEC and PCAOB leaders emphasized the need for ethical leadership in the accounting profession. Lapses in ethics, whether intentional or inadvertent, can severely undermine trust in auditors and in financial markets. The speeches underscored the responsibility of firm leaders to uphold high ethical standards and ensure that these values are embedded in their teams’ daily practices. What This Means for Firms: Promote ethical leadership across all levels of the firm, ensuring that ethical considerations are integrated into every stage of the audit process. Invest in ongoing ethics training to reinforce the importance of upholding integrity and objectivity. Implement early detection mechanisms for identifying potential ethical lapses, ensuring timely corrective action. Conclusion: Positioning Your Firm for Success The 2024 AICPA SEC/PCAOB Conference provided crucial insights into the current and future landscape of the accounting profession. By focusing on audit quality, independence, collaboration, and ethical leadership, firms can not only meet regulatory requirements but also strengthen their reputations as trusted professionals in the marketplace. For JGA’s clients, the key takeaway is that maintaining robust quality control systems, engaging in ongoing dialogue with regulators, and staying ahead of emerging trends such as crypto accounting are critical strategies for ensuring continued success in a dynamic regulatory environment. For more information, reach out to your JGA audit quality expert.

Johnson Global Advisory Establishes Strategic Leadership Council and Appoints Three Council Members

November 26, 2024

WASHINGTON, D.C., November 26, 2024 - Johnson Global Advisory (JGA) is announcing the formation of its Strategic Leadership Council (SLC) , an initiative aimed at bolstering the firm's strategic direction and reinforcing its commitment to industry-leading advisory services. The Council, composed of executives from diverse sectors within the audit quality stakeholder ecosystem, will provide insights into the JGA leadership on industry trends, strategic decision-making, and growth opportunities. Kathleen M. Hamm, Greg Jonas, and Dave Sullivan are the first appointees to the SLC. Kathleen M. Hamm has an extensive background in financial regulation, control infrastructures, and risk management, particularly relating to fintech and cybersecurity. Her previous role as a Board Member of the Public Company Accounting Oversight Board (PCAOB) highlights her leadership in regulatory transformation and strategic policy development. "Joining JGA’s Strategic Leadership Council allows me to leverage my experience to further the Firm's mission in these transformative times," remarked Hamm. Greg Jonas is an independent consultant on auditing and business reporting matters. He served as Director of the Division of Research and Analysis at the PCAOB from 2012-2016. In addition to roles as a financial analyst at Morgan Stanley and Moody’s Investors Service, Greg spent 23 years at Arthur Andersen, serving in various roles supporting its global audit practice. “JGA serves a vital role in improving audit quality for the benefit of auditing firms and investors. I look forward to contributing to the firm’s success.” Dave Sullivan, a seasoned executive known for his strategic insight in audit quality and risk management, has over 35 years of experience from Deloitte. His leadership in global audit quality initiatives make him a pivotal addition to the council. "I look forward to collaborating with my fellow council members to propel JGA to new heights," stated Sullivan. The SLC will meet quarterly, advising JGA’s leadership team on critical business opportunities and challenges, ensuring the Firm remains at the forefront of industry innovation and strategic excellence. The first meeting of the SLC was held on Friday November 1, 2024, at JGA's Washington D.C. office. “I am proud to welcome Kathleen, Greg, and Dave to our new Strategic Leadership Council,” said Jackson Johnson, JGA President and Founding Shareholder. “Their collective expertise will be instrumental in guiding our strategic initiatives and ensuring that JGA continues to set high standards our clients expect in this sector.” About Johnson Global Advisory JGA partners with leadership of public accounting firms, driving change to achieve the highest level of audit quality. Led by former PCAOB staff, JGA professionals are enthusiastic and practical in their support to firms in their audit quality journey. We accelerate opportunities to improve quality through policies, practices, and controls throughout the firm. This innovative approach harnesses technology to transform audit quality. Our team is designed to maintain a close pulse on regulatory environments around the world and incorporates solutions which navigate those standards. JGA is committed to helping the profession in amplifying quality worldwide.