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By identifying and incenting accounting firms to correct their quality control defects, the quality control remediation process holds the potential to lead firms to improve the quality of all their future audits. -- James Doty, PCAOB Chairman, January 17, 2014.
Introduction
The objective of the Public Company Accounting Oversight Board (PCAOB) is to protect investors and the public interest by promoting informative, accurate and independent audit reports (PCAOB, 2014). As part of its mission, the PCAOB examines registered public accounting firms’[1] audit processes and audit reports for compliance with the Sarbanes–Oxley Act (SOX), the rules of the Board, the rules of the Securities and Exchange Commission (SEC) and professional standards. PCAOB inspectors review firms’ public audit engagements and their quality control environment to identify audit deficiencies[2] (Part I) and weaknesses in the quality control system[3] (Part II). The first part of the inspection report (Part I) is always made publicly available on the PCAOB website. The second part (Part II) is only made publicly available if: 1) the firm is cited for a quality control deficiency and 2) the firm failed to satisfactorily “remediate” the quality control deficiency within 12 months after the release of Part I (the remediation period)[4].
To avoid creating a distorted or misleading impression, the PCAOB does not automatically disclose quality control criticisms before the firm has a chance to address the issues raised in the inspection report (PCAOB, 2004). Unlike Part I, which is released for every registered firm, the release of Part II is meant to be a signal (i.e. noncompliance with the PCAOB) for differentiating the quality of audit firms. The PCAOB clearly identifies firms that fail to remediate the Board’s criticisms on the inspection page of its website via a link entitled “Firms that Failed to Address QC Criticisms Satisfactorily.” The press has referred to the release of Part II as “a rare public reprimand” (Aubin, 2013) and “quality control criticisms laid bare” (Whitehouse, 2013). This effort to publicly identify firms suggests that the PCAOB intends for the release of Part II to be an effective tool for both signaling and improving audit quality. The PCAOB invests approximately $140m annually to register and inspect firms with the intent to improve audit quality (PCAOB, 2018). Consistent with...