How the US is looking to reform its audit oversight

The accountancy sector in the US is on the brink of significant change with the introduction of new audit oversight rules. These rules are designed to tighten the scrutiny of public company audits, aiming to enhance the reliability of financial reporting and protect investors. However, the many firms, especially the Big Four, have come out against the changes, arguing that these new regulations could have unintended consequences that might disrupt the industry. So what are the changes, why the pushback and how do these changes compare to what already exists in the UK?

The new audit oversight rules

The new audit oversight rules are primarily driven by the US Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB). The driving force behind these changes is a number of high-profile corporate scandals as well as ongoing concerns about the overall quality of audits provided by major accountancy firms.

Under the proposed rules, firms will be required to provide more detailed information about their audit procedures. They will also be required to bring in independent outsiders to help oversee audit quality. Under the new PCAOB standards, firms that audit more than 100 public companies will have to set up an oversight board that includes at least one independent outsider. Around a dozen firms, including the Big Four, will be affected.

Why the pushback?

If all the changes seem like steps in the right direction, why has there been significant criticism from the industry? One of the biggest concerns cited by those in the industry is the increased cost that will come with these new rules. The rules will require firms to invest in additional resources such as more detailed documentation, better training and even hiring more staff to meet the new standards. Small and mid-sized audit firms in particular have argued that these costs could be prohibitive, potentially driving them out of the market and reducing competition.

Alongside this, there have been claims that the new requirements will mean that auditors will spend more time on compliance-related activities rather than the core-audit process. Some believe this could lead to a culture of box-ticking meaning audit quality falls down in favour of satisfying regulatory requirements.

While the rules are designed to strengthen auditor independence, some in the industry believe they could have the opposite effect. By imposing stricter regulations on the provision of non-audit services, the rules might inadvertently reduce the scope of services that audit firms can offer, making it harder for them to maintain long-term client relationships.

There is also concern amongst those in the industry that the new rules could have unintended consequences. Some believe that the new regulations could cause auditors to become more risk-averse, potentially harming audit quality.

In response to these concerns, both the SEC and PCAOB have emphasised that the new rules are necessary to restore trust in the audit process and protect investors. They argue that the benefits of increased transparency, accountability, and audit quality far outweigh the potential downsides.

Both bodies have also pointed out that the new rules are the result of “extensive consultations with industry stakeholders, and they have made efforts to ensure that the regulations are balanced and proportionate”. PwC argued it was unnecessary to give independent advisory bodies a formal oversight role with the specific requirements set out by the PCAOB. The Big Four already have informal independent oversight bodies.

How does it compare to the UK?

UK accountancy firms are subject to rigorous oversight and regulation by several key bodies and through a framework designed to uphold standards, independence, and accountability. The regulatory framework governing audits in the UK primarily revolves around the Financial Reporting Council (FRC) and its associated bodies.

A key function of the FRC is the Audit Quality Review, which assesses the quality of audits performed by registered audit firms. Through AQR inspections, the FRC evaluates whether audit firms comply with auditing standards and maintain sufficient quality control.

A key function of the FRC is the Audit Quality Review (AQR) which assesses the quality of audits conducted by registered auditors. Through these inspections the FRC evaluates whether firms are complying with auditing standards and regulations to maintain quality control.

Furthemore, Recognised Supervisory Bodies (RSBs), such as the Institute of Chartered Accountants in England and Wales (ICAEW), the Association of Chartered Certified Accountants (ACCA), and the Institute of Chartered Accountants of Scotland (ICAS), also oversee their member firms. These bodies set professional standards, provide guidance, and enforce disciplinary procedures for auditors and audit firms.

The FRC also plays a pivotal role in enforcing regulatory compliance and addressing misconduct within audit firms. The FRC’s Enforcement Division investigates cases of misconduct, breaches of auditing standards, or violations of ethical principles. It has the authority to impose sanctions, fines, or restrictions on audit firms or individuals found to have acted improperly.