Audit regulators are getting more specific with audit firms about what they expect in improvements to quality control systems that would enable firms to keep criticisms of those systems out of public view.

The inspections staff of the Public Company Accounting Oversight Board published a brief summary of their criteria for evaluating improvements to quality control systems. The staff published the summary to provide general awareness of the expectations the board has been communicating to the audit firms over the years it has reviewed their remediation efforts, says PCAOB spokesman Colleen Brennan.

Under Sarbanes-Oxley rules, any concerns inspectors may note related to an audit firm's system of quality control is not published in the firm's routine inspection report, giving the firm 12 months to address those concerns. If the year passes and firms have not remediated quality control problems to the PCAOB's satisfaction, the board can republish the report with those concerns included and made public. The board has so far published about 160 such reports, only four involving Big 4 firms. Deloitte's 2007 inspection report was republished with quality control criticisms described in detail, followed by EY's 2009 report and PwC's 2008 and 2009 reports. In all four of those cases, the PCOAB waited far longer than 12 months to republish those reports.

The inspection staff document explaining their criteria for evaluating remediation says there are five key issues that are taken into consideration. The staff will look at whether corrections represent a change to the quality control system, whether the change is responsive and specifically addresses criticisms, whether the remedial action is designed appropriately to make a correction, whether it was implemented within 12 months, and whether it was effective in making the necessary correction.

The staff also says firms themselves are best suited to determine appropriate remedial measures, so “the board generally avoids prescribing specific remedial approaches. However, the staff also advises audit firms to “initiate a dialogue” with inspections staff early in the 12-month remediation period to explain their plans to allow early feedback. “The board's experience has show that, the earlier in the 12-month period that the firm initiates such a dialogue, the better it will be able, based on inspections staff feedback, to adjust its approach, if necessary, to achieve a positive staff recommendation,” the staff says.

PCAOB member Jeanette Franzel said in a recent speech that inspection staff consider consider a number of factors in analyzing whether to issue criticisms of quality control, beginning with the themes that emerge in identifying deficiencies in specific audits. Inspectors also consider deficiencies they may notice during inspections that aren't severe enough to describe in an inspection report, she said. In addition, inspection staff consider's how the firm's management structure and processes affect audit quality, and how the firm's management of its partners may affect audit quality. Inspectors also take into account how a firm considers risks related to accepting or retaining specific audit engagements, and how the firm assures compliance with independence rules.

Franzel said the board encourages audit committees in particular to question their auditors about the nonpublic portion of inspection reports. “Audit committees may want to ask about the quality control findings and the audit firm's efforts and actions to address any quality control deficiencies,” she said. “Audit committees may also want to inquire about the status of the PCAOB's evaluation of the firm's progress on remediation.”

In its ongoing effort to get audit committees more engaged with overseeing their auditors, the PCAOB has created a page on its website specifically targeted at audit committees.