New guidelines for the use of multiple audit firms are adopted by PCAOB

On Tuesday, the Public Company Accounting Oversight Board (PCAOB) declared that a rule establishing a new audit standard and amending a number of existing ones regarding audits involving multiple audit firms had been approved.

The changes are the result of a rule that was initially proposed in April 2016 and then went through three separate comment periods. The Securities and Exchange Commission (SEC) overhauled the PCAOB in November after the resignation of former Chair William Duhnke III, and the decision to release the final rule marks the organization's first standard-setting action.


The final rule will go into effect for financial statement audits for fiscal years ending on or after December 15, 2024, if the SEC, which regulates the PCAOB, approves it.


The new audit standard AS 1206, "Dividing Responsibility for the Audit with Another Accounting Firm," is one of the amendments. Audit standards for due professional care (AS 1015), audit evidence (AS 1105), supervision (AS 1201), quality review (AS 1220), and more are also affected.

The goal of the amendments was to make the lead auditor the undisputed authority in audits involving multiple firms. In a statement, PCAOB Chair Erica Williams said that "enhancing the lead auditor’s supervision of other auditors, including through better coordination and communication, should result in increased investor protection by improving the lead auditor’s ability to prevent or detect deficiencies in the work of other auditors before the audit report is issued."


The PCAOB has made a number of significant changes, including defining specific actions that the lead auditor must take when organizing and managing an audit involving multiple firms and implementing a risk-based supervisory approach to the lead auditor's supervision of other auditors for whose work she or he is responsible. A requirement that the lead auditor understand, evaluate, and respond to other auditors' knowledge, skill, and ability, including experience with independence and ethics requirements, was also brought up by a number of board members.


Board Member Anthony Thompson said, "the changes to our existing standards will better ensure that the lead auditor is sufficiently involved in, and evaluates, the procedures performed by other audit firms. Such involvement should improve audit quality through better communication among auditors and increase the ability of the lead auditor to prevent or detect deficiencies in those procedures before the lead auditor issues its audit report and before harm to investors can occur."


Growing public company globalization and their reliance on numerous audit firms in various international markets were two factors that propelled the six-year project. Williams pushed for the amendments to be adaptable with regard to technological developments, allowing businesses to "develop and use technology that improves the overall interaction between the lead auditor and other auditors to the extent that these technological advancements lead to improved audit quality."


Board member Kara Stein said, "The journey required to update this standard appears to have been long and laborious…However, this standard is a necessary complement to the Board’s oversight to address adverse audit outcomes, which can be driven by poor coordination and communication amongst auditors."

By fLEXI tEAM