Broker-Dealer Update: Two Years Later and Still Struggling

In September of 2020, we published an article summarizing the state of the broker-dealer inspection program, noting that at the time, it had been nine years and still running as an interim program. Now, in August of 2022, the PCAOB released its Annual Report on the Interim Inspection Program Related to Audits of Brokers and Dealers (“2022 Report”) and sure enough, not much progress has been made, both with regards to audit quality or with regards to establishing a permanent program. 


As a refresher, the interim program was established in response to the 2010 Dodd-Frank Act. The Board originally anticipated “being in a position to propose rules for a permanent program by 2013.”1 Now, in 2022, the PCAOB, having been governed by three different boards, has yet to propose rules for a permanent program and broker-dealer audits continue to lag in audit quality, as compared to issuer audits. 


SUMMARY OF FINDINGS 


Taking a glance at the most recent annual report on the broker dealer inspections program, 78% of firms inspected had at least one audit deficiency, as compared to 89% of firms inspected and disclosed in the 2019 report. Of the audits inspected, 49% had at least one deficiency, compared with 71% of audits inspected and disclosed in the 2019 report. The industry has also continued to consolidate with only 345 audit firms registered, as compared to 411 in 2019. 


The PCAOB explicitly states: “While inspection results over that period indicate that the quality of broker-dealer audit and attestation engagements has improved, the overall deficiency rates remain unacceptably high.” Unacceptably – wow! That’s a strong word that carries with it a lot of judgment, especially coming from the objective regulator. 


We noted that the majority of findings are in the following areas: 


  • Financial statement audits: Auditing revenue continues to be a challenge for all firms under both programs. In addition, firms struggled to audit related party relationships and transactions (often stemming from expense sharing agreements), going concern, expenses and related accruals (again, typically linked to expense sharing agreements), fair value measurements (which is true across the entire audit industry), and receivables and payables. 


  •  Examination engagements (including internal controls over compliance (ICOC)): Engagement teams continue to struggle to sufficiently test the operating effectiveness of controls, including controls over information technology. In addition, engagement teams often fail to test the completeness and accuracy of information used in compliance tests/controls. 


  • Review engagements: Through inspection procedures, the PCAOB continues to identify contradictory evidence that is not sufficiently addressed/considered by the engagement teams. In addition, firms continue to fail to perform all of the requirements under Attestation Standard No. 2. This includes performing inquiries about controls over compliance, among other requirements. 


JGA’S' ANALYSIS 


Role of the auditor 


While the PCAOB’s findings are valid, it does raise the question of the role of the auditor. Is the audit another compliance test or is it truly an audit of the financial statements, which is inherently predicated on risk assessment? For instance, the PCAOB indicated numerous findings around related party relationships and transactions, specifically around expense sharing agreements. Many broker-dealers are small legal entities that are subsidiaries of larger organizations (often banks or asset management companies). To the extent the broker-dealer is entirely owned either by private investors or by a larger private company, what is the real risk with intercompany expense allocations? We’re not saying that the engagement team shouldn’t perform some procedures to test the related party disclosures, but to what extent? Does the audit team need to test the completeness and accuracy of the source documents coming from the parent company? That could potentially expand the audit to an audit of the parent company’s expenses; that’s not typically built into the audit budget and fees. 


When auditing financial statement accounts, engagement teams need to be sure to respond to the risk of material misstatement for each relevant account; this includes documenting all procedures performed and documenting the considerations and judgments made when determining the appropriate audit approach. The extent of procedures should depend on risk. 


Tests for compliance objectives do not have the same materiality concept as tests for audit assurance. It seems as if the PCAOB has taken the compliance mindset and applied it to audit, without acknowledging that audit procedures should be commensurate with the risk. That said, engagement teams need to improve their documentation of the audit risks. Absent evidence of the evaluation and documentation of its judgements, the engagement team cannot demonstrate how or why its audit procedures align with the risk assessment. 


Inconsistency of PCAOB expectations 


We have identified certain differences between the apparent expectations of the PCAOB’s BD inspectors, compared to other PCAOB inspectors, SEC examiners, and the PCAOB’s own guidance. We highlight some of these discrepancies below. 


Differences between broker-dealer and issuer inspection programs 


We have supported firms and their engagement teams on issuer inspections as well as broker-dealer inspections. We can say that there appear to be differences in the rigor and granularity of the procedures performed by the two programs. This isn’t surprising since so much of an audit comes down to professional judgment and therefore the inspection of an audit will also necessarily incorporate differences in judgment. That said, it seems the broker-dealer inspection program holds the audit quality bar to a different level than the issuer program. This disparity is true even within each program; we have seen PCAOB inspection teams challenge immaterial aspects of a management review control over “cash reconciliations,” which have almost no management judgement or subjectivity, and other inspection teams that have glossed right over a very complex, detailed management review control over investment valuations. 


After 11 years, one would expect the audit quality in both broker-dealer and issuer audits to “normalize.” That hasn’t happened: deficiencies in broker-dealer audits continue to be significantly higher than in issuer audits. While there could be any number of causes, some of which we already explored in our previous article, it still begs the question, do the inspection programs have different expectations, thus accounting for some of the divergence in results? 


Differences between the PCAOB and SEC 


An example of differences between the two regulator’s expectations stems from the reliability of broker statements used by broker-dealers to support revenue. Non-clearing (or “introducing”) broker-dealers often rely entirely on clearing-broker statements to support trade transactions that form the basis of the majority of operations and revenue of an introducing broker-dealer. The SEC has clearly indicated that is okay if introducing brokers rely on the information provided by clearing brokers. 17 CFR § 240.17a-3(c) states, “A member of a national securities exchange, or a broker or dealer registered pursuant to section 15 of the Act (15 U.S.C. 78o), that introduces accounts on a fully-disclosed basis, is not required to make or keep such records of transactions cleared for such member, broker or dealer as are made and kept by a clearing broker or dealer pursuant to the requirements of this section and § 240.17a-4.”Further, the clearing broker-dealers are very heavily regulated and scrutinized by the SEC and FINRA (more so than introducing broker-dealers). 


On the other hand, PCAOB guidance(AS 1105) indicates that the sufficiency of audit evidence depends largely on the risk of material misstatement and the quality of the audit evidence. Quality of audit evidence is a function of relevance and reliability. Despite this statement, the inspection teams often expect that audit teams test the completeness and accuracy of these clearing broker reports, as if they were unreliable. There appears to be some divergence between what the SEC deems reliable and what the PCAOB inspection teams accept as reliable. 


Differences between broker-dealer inspection issues and PCAOB staff guidance 


To continue on the path of reliability of the clearing broker statements, in October 2021, the PCAOB released staff guidance on how to evaluate external audit evidence with regards to relevance and reliability. While relevance is not the concern here, the PCAOB inspection teams often challenge engagement teams on how it concluded that clearing broker statements are reliable. The language used during inspections is often in the form of “how did the engagement teams test for completeness and accuracy?” Shouldn’t the question actually be, “how did the engagement team evaluate for relevance and reliability?” And if that’s the real question, it gets more difficult to understand why a clearing broker statement would not be reliable. Taking the considerations from the PCAOB staff guidance, these statements often come from large clearing brokers who are well known players in the industry, such as Pershing or National Financial Services.  They have years of proven experience and expertise. They report to numerous stakeholders including FINRA, SEC, investors, and customers; they work in highly regulated industries where almost everything can be reconciled to cash movements and/or to security movements validated through the Depository Trust and Clearing Corporation (DTCC), often considered a “utility” within the industry. The statements are often obtained directly by the auditor from the clearing broker directly. All these considerations would support the conclusion that the statements are highly reliable and yet, inspection teams continue to challenge the reliability of these statements unless the engagement teams perform specific testing over the data, which is really pulling from testing completeness and accuracy. Could this be because the PCAOB views the clearing broker’s (i.e. a service provider) statements as the equivalent of the internal books and records? To auditors with less inspection experience, this kind of nuance, while subtle, has significant implications and so perhaps the PCAOB needs to be more explicit when using references to internal or external support, because the clearing broker is to the layman the equivalent of an external source. 


Audit quality considerations 


Acknowledging the fact that audit quality continues to lag in the broker-dealer program, the PCAOB has continued to modify the annual report to include “Good Practices” and recommendations for action to help guide teams. Those additions are well received, and definitely a step in the right direction; however, the guidance is often still too high level. During the annual Small Business and Broker-Dealer Forums, perhaps the PCAOB could attempt to work through more hands-on examples demonstrating specific procedures that would be sufficient for recurring deficiencies, such as auditing 12b-1 trailer fees. Of course, no two audits are the same. And perhaps that’s the struggle with providing real guidance or even establishing a permanent program; no two broker-dealers are the same and there are so many different risks and audit approaches. Until the PCAOB establishes a permanent program and firms are held accountable to remediation efforts, auditors will be at a disadvantage to find a real path to improvement. Currently, the main accountability is referrals to the PCAOB’s Division of Enforcement and Investigations. But that feels a little unfair to broker-dealer auditors who aren’t given the benefit of remediation discussions with the PCAOB as they seek to improve, as is the process in the issuer audit inspection program. Regardless of the regulator, as a profession, we should always be striving to make daily improvements in all our audits. 


In light of all these questions and reflections, the reality is that there is still room for improvement in the broker-dealer audit industry. To continue to improve quality, consider some of the following: 


  1. Improve application of the audit evidence standard: engagement teams should thoroughly document their testing over the completeness and accuracy of internally-derived information as well as their evaluation over the relevance and reliability of externally-derived information. 
  2. Improve competencies over ICOC by looking at ICFR principles: engagement teams need to continue developing their understanding and experience over ICFR. ICOC incorporates testing the design and operating effectiveness of controls, which is very similar in theory to what is required for an ICFR opinion. 
  3. Enhance engagement team procedures over valuation and accuracy of revenue: The deficiencies cited in the revenue area are more often than not related to the accuracy of the revenue (e.g. accuracy of the commission based on the terms of the trade, the proper rate applied to the actual amount of capital raised for investment banking fees, the rate per the investment advisory agreement applied to the actual amount of AUM, etc.).   
  4. Review KSEs of audit personnel around using and auditing the work of specialists: As with any complex or specialty area, ensure engagement teams are staffed with the appropriate knowledge and experience. And if teams lack in a specific area, seek out specialists to assist with the audit of that area. We’ve worked with audit teams in a variety of capacities, whether reviewing planned audit approaches in a more consultative role, performing in-flight reviews, or even performing engagement quality review (EQR) services. 

 

KEY TAKEAWAYS 


  • Broker-dealer audits continue to have unacceptably high rates of deficiencies in audits, examinations engagements, and review engagements. 


  • Engagement teams need to better document evaluations around risk assessment and be sure to document clear correlations between audit procedures performed and how they address the risk of material misstatement for each relevant assertion. If engagement teams document their thoughtful consideration of risk and how they addressed it, the PCAOB will often respect that professional judgement. 


  • Completeness and accuracy of information continues to be a hot topic for the PCAOB. Engagement teams need to document their testing over completeness and accuracy of internally-derived information and/or their evaluation over relevance and reliability of externally-derived information. Sometimes (and we’d argue, increasingly in the future considering the technological nature of financial services), this will require testing controls around information technology. 


  • Despite any number of reasons that could explain why the broker-dealer program has such high deficiency rates, it doesn’t change the reality that we need to continue to improve audit quality. If the regulator doesn’t take more assertive action, then it’s on us as the auditors to drive that change. 


Dane Dowell is a Director at Johnson Global Accountancy who works with PCAOB-registered accounting firms to help them identify, develop, and implement opportunities to improve audit quality. With over 12 years of public accounting experience, he spent nearly half of his career at the PCAOB where he conducted inspections of audits and quality control. Dowell has extensive experience in audits of ICFR and has worked closely with attorneys in the PCAOB’s Division of Enforcement and Investigations. Prior to the PCAOB, he worked with asset management clients at PwC in Denver, Singapore, and Washington, DC.


Don Melody is a Director at Johnson Global Accountancy and has more than 23 years of audit and audit regulation experience, focusing on the broker-dealer industry. He previously served as an Inspections Leader in the Broker-Dealer Firm (BDF) Inspection Program at the PCAOB. His key activities as Inspection Leader included transforming the inspection approach, leading inspection teams, assessing auditor and examination procedures, and reviewing comment forms. He also served as Risk Assessment and Selections Leader for the BDF Program, where he was responsible for selecting audit firms/broker-dealer audits for inspection and served as a liaison between BDF Program and the SEC. During his 12-year tenure at the SEC, Don served as Examination Manager / Branch Chief, Broker-Dealer Examinations, in the Chicago Regional Office. .


 

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.

Joe Lynch to speak at 40th Annual SEC Reporting & FASB Forum

November 21, 2024
Johnson Global Advisory (“JGA”) is pleased to announce Joe Lynch, Shareholder and Managing Director, will speak on a panel at the 40th Annual SEC Reporting & FASB Forum. This panel will summarize the activities of the PCAOB including: Gain insight on the amendment to PCAOB Rule 3502 Governing Contributory Liability Understand the amendments addressing aspects of audit procedures that involve technology-assisted analysis of information in electronic form Recite new requirements for lead auditor’s use of other auditors Enumerate the new requirements of QC 1000, “A Firm’s System of Quality Control” Recall the guidance of the new auditing standard “General Responsibilities of the Auditor in Conducting an Audit” Anticipate the New Standard, “The Auditor’s Use of Confirmation” Learn about the proposal to replace existing auditing standard related to an auditor’s use of substantive analytical procedures Understand the PCAOB’s proposals on public reporting of standardized firm and engagement metrics and the PCAOB framework for collecting information from audit firms Anticipate the Proposed New Standard on Amendments to PCAOB Auditing Standards related to a Company’s Noncompliance with Laws and Regulations Gain insight on the PCAOB’s 2024 Inspection Priorities Learn about other Standard-Setting and Research Projects Click here to register and learn more 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.
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