Staff Guidance Concerning the Remediation Process

November 18, 2013 

The staff of the Division of Registration and Inspections ("inspections staff") has prepared this document to provide information for firms that receive a final inspection report that includes any criticism of the firm's system of quality control. Such criticisms reflect concerns about the design or operating effectiveness of a firm's system of quality control based on the requirements set out in the Board's quality control standards.^[1] As described in Part III of the report, any such criticism is nonpublic when the report is issued, but it will remain nonpublic only if the firm addresses the criticism to the Board's satisfaction no later than 12 months from the date of the report. This document describes certain considerations that the inspections staff has identified as relevant to its recommendations to the Board concerning the sufficiency of firms' remediation efforts. These considerations are consistent with the inspections staff's practices for assessing firms' remedial actions. The inspections staff encourages firms to review the information included in this document and to design and implement their particular remediation efforts with these points in mind.

In General

In 2006, the Board issued a release, The Process for Board Determinations Regarding Firms' Efforts to Address Quality Control Criticisms in Inspection Reports, PCAOB Release 104-2006-077 (March 21, 2006) (the "Release"), to provide information about the Board's process for determining whether a firm has addressed quality control criticisms to the satisfaction of the Board for purposes of Section 104(g)(2) of the Sarbanes-Oxley Act of 2002. In the Release, the Board explained that a favorable remediation determination reflects the Board's assessment that the firm has "demonstrated substantial, good faith progress toward achieving the relevant quality control objectives, sufficient to merit the result that the criticisms remain nonpublic."^[2]

As explained in the Release, the Board's approach to making that determination is based on a view that each firm is best suited to determine, in light of its particular structure and operations, how to address particular quality control weaknesses. For this reason, the Board generally avoids prescribing specific remediation approaches. Ultimately, the recommendation that the inspections staff makes to the Board about whether a firm's efforts to remediate a particular criticism are satisfactory depends upon the inspections staff's evaluation of whether the firm has identified steps suited to the particular quality control objective and its evaluation of the nature and extent of the firm's efforts to implement those steps.^[3]

In addition, just as the Board's quality control standards recognize that the nature, extent, and formality of the quality control policies and procedures appropriate for any particular firm may vary depending on such factors as the size of the firm and the nature and complexity of its practice, the evaluation of firms' remediation efforts under Rule 4009 also takes those factors into account.^[4] Thus, the inspections staff's evaluation recognizes that firms of differing sizes and complexity may achieve the same quality control objective using differing approaches.

All firms are strongly encouraged to initiate a dialogue with the inspections staff early in the 12-month remediation period, develop draft remediation plans that describe how a firm intends to address the quality control criticisms, and share those plans with the inspections staff. The Board provides the opportunity for a dialogue between the inspections staff and the firm so that a firm can receive timely, constructive feedback regarding its proposed efforts for each quality control criticism before the 12-month deadline. The Board's experience has shown 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 Criteria Used to Assess a Firm's Remedial Actions

In assessing a firm's remediation efforts, the inspections staff applies the five criteria discussed below:

• Change: Does the remedial step represent a change to the firm's system of quality control that was in effect at the time of the conduct that resulted in the quality control criticism? Depending upon the circumstances, relevant change may involve supplementing or replacing previous guidance, policies, or procedures or taking steps to increase the technical competence and proficiency of the firm's personnel.

• Relevance: Is the remedial step responsive to and does it specifically address the quality control criticism described in the inspection report; and, does it help satisfy compliance with the Board's quality control standards? If the root cause of the underlying quality control criticism is unclear, did the firm perform an appropriate root cause analysis in developing the remedial action?

• Design: Is the remedial step appropriately designed (either individually or in combination with other actions) to remediate the quality control criticism?

• Implementation: To what extent was the remedial step put in operation by the close of the 12-month remediation period? If not fully implemented, has the firm demonstrated an appropriate level of diligence and reasonable progress in addressing the criticism during the 12-month period?

• Execution and Effectiveness: Has the remedial step achieved (or, if sufficient time has not passed to measure results, is it expected to achieve) the proposed effect that it was designed to achieve? If available, what do the subsequent firm monitoring procedures and external inspection results suggest about the effectiveness of the remedial step?

Additional Information on the Application of the Criteria

The criteria guide an evaluation process that is scalable to the particular circumstances and to different types of remedial actions. The following are examples of how the inspections staff has applied the criteria in connection with certain types of issues that recur with some frequency.

Repeated or Persistent Criticisms Require a New or Enhanced Response

Repeated or persistent criticisms include those that have appeared in inspection reports for multiple years. For these types of criticisms, the inspections staff's evaluation of current remediation efforts takes into account whether those efforts reflect change. In other words, do the current efforts differ meaningfully from the types of efforts the firm has described in previous remediation submissions but that ultimately do not appear to have sufficiently addressed the deficiency? Even if a particular type of remediation step was considered satisfactory in a previous determination, the same type of step, without some meaningful enhancement, will not necessarily be viewed as satisfactory again if the particular problem has persisted after there has been sufficient time for the previous efforts to effect improvement. In the inspections staff's evaluation of a firm's remedial efforts, the actual implementation, execution, and tangible results of a firm's remedial steps take on increasing importance with repeated or persistent criticisms.

A Firm Should Monitor the Effectiveness of its Remedial Actions

The inspections staff's evaluation considers the extent to which a firm's approach includes ongoing firm monitoring of the effectiveness of remedial actions and implementation of further adjustments, when appropriate.^[5] If a firm's initial remediation effort appears not to be sufficiently designed, implemented, or executed, the presence of this type of self-monitoring and self-correcting approach can weigh favorably in the inspections staff's recommendation about a firm's remediation determination. In addition, if a firm's remediation effort is, by its nature, an effort that cannot be completely implemented within the 12-month period, establishing reasonable interim and long-term milestones coupled with firm monitoring of its performance against those milestones and making timely adjustments, when appropriate, can favorably influence the inspections staff's recommendation. In addition, in those circumstances, the implementation of interim measures to more quickly address issues while longer-term measures are underway may weigh favorably in the inspections staff's recommendation.

Training and Intra-firm Communications Should be Tailored and Responsive

Training programs, intra-firm communications, and guidance materials are appropriate and important elements of a system of quality control, and firms should routinely consider how to focus and improve those efforts in light of the results of PCAOB inspections and other monitoring of the firm's practice. The relevance and likely effectiveness of those improvements to the quality control remediation process under Rule 4009, however, depend upon the particular circumstances. The inspections staff assesses the content and delivery methods and whether or not they represent a meaningful change from those that were in place at the time of the audits in which the deficiencies underlying the criticism were identified. In evaluating the design of the training, the inspections staff also considers (i) whether the training specifically addresses the quality control criticisms, (ii) whether the training and communications have been specifically tailored and provided to the appropriate levels of professionals within the firm who would be expected to perform or review the audit procedures that resulted in the deficiencies, and (iii) the extent to which the firm requires and tracks attendance at training events, tests retention of course materials, and monitors its professionals' execution of audit procedures based on new communications and trainings.

The Inspections Staff Considers Evidence of the Effectiveness of Implemented Remedial Actions

The information available at the time of an evaluation of the firm's remediation efforts may include evidence of the effectiveness of the firm's actions, including results of firm monitoring procedures or external inspections of audits performed by the firm after the firm's remediation efforts were put into place. Where such evidence is available, it is treated as relevant but is not the exclusive or conclusive data point in making an evaluation. Strong remediation efforts, particularly when accompanied by firm monitoring procedures and timely adjustments can result in a favorable remediation determination even if subsequent inspection results indicate recurrences of the same type of deficiency. However, in other cases, adverse subsequent results without such efforts may be a factor contributing to the inspections staff's recommendation that the Board determine that the criticism was not satisfactorily addressed.

October 31, 2024 Supplement

Based on experience since publishing the November 18, 2013 staff guidance (above), inspections staff has identified ways that the guidance can usefully be supplemented. This supplement does not change or supersede the existing guidance. Inspections staff believes, however, that firms undertaking to address quality control criticisms may benefit from considering the points discussed below, which relate to (1) taking advantage of the full remediation period; (2) planning ahead in order to get the benefit of inspections staff feedback; (3) implementing actions early enough to be able to monitor their operation and include in the submission evidence that they are effective; (4) considering whether certain quality control criticisms persist due to the influence of non-technical factors, such as a firm’s culture; and (5) understanding the limits of acceptable supplemental submissions after the submission deadline. 

The Remediation Period

For purposes of the Rule 4009 remediation process, inspections staff considers only actions taken by the date that is 12 months after the date of the final inspection report, referred to as the remediation period end, or RPE. Remediation actions taken after the RPE are not considered in inspections staff’s evaluation. This cut-off is established in the Sarbanes-Oxley Act of 2002, which prohibits the Board from making a quality control criticism public if the criticism is “addressed by the firm, to the satisfaction of the Board, not later than 12 months after the date of the inspection report.”^[6]

A firm can begin to develop a remediation plan and make changes to its quality control system even before the issuance of a final inspection report that starts the 12-month countdown to the RPE. As a practical matter, this means that a firm could have more than 12 months to address quality control criticisms, since a firm will be on notice of potential quality control criticisms no later than its receipt of a draft inspection report, which typically precedes a final report by several weeks. In many cases, a firm may also effectively be on notice of these criticisms much earlier, through written comments provided by inspections staff during or following inspection field work.

Pre-RPE Communications with Inspections Staff

Inspections staff works to provide feedback on firms’ draft remediation plans in the belief that doing so can serve the PCAOB’s statutory mission of investor protection. Inspections staff, however, is in no sense a collaborator or coach with respect to a firm’s remediation efforts, and the firm remains solely responsible for decisions about what remediation actions to take and for the content of its remediation submission. Moreover, any feedback provided by inspections staff should not be viewed as any form of assurance concerning an eventual determination by the Board.

Inspections staff can best provide feedback when a firm submits a well-developed draft remediation plan during the remediation period.^[7] A firm should not assume that it will have the benefit of receiving substantive feedback on multiple rounds of drafts. A firm risks missing the opportunity for substantive feedback if it submits an underdeveloped description of a high-level or incomplete plan. Earlier submission of a plan during the remediation period may allow the inspections staff additional time for consideration and to provide more substantive feedback; it could also give the firm more time to consider and implement such feedback. Firms should understand that inspections staff will not prioritize their efforts just because a firm’s RPE is approaching.

Rule 4009(a) Submission

The RPE is the last day on which a firm may make a Rule 4009(a) submission.^[8] Inspections staff encourages firms to consider the points discussed below when preparing a Rule 4009(a) submission.

Thorough Description of Actions, with Supporting Documentation

A Rule 4009(a) submission should describe fully and clearly a firm’s remediation actions and should include all evidence that the firm wishes to have considered regarding the implementation, execution, and effectiveness of those actions. A Rule 4009(a) submission should provide a complete picture of the firm’s remediation effort, describing not only the core remediation actions, but also any related details and changes that contribute to a full understanding of the actions, such as implementation dates, methods of ensuring understanding of the change within the firm, changes in responsibility for execution and oversight, intended use within audits and prescribed documentation and review requirements regarding that use, approach to monitoring the effectiveness of the changes, and any available results from such monitoring. The submission should include a description of the firm’s view as to why the actions will effectively address the criticism.

Evidence from a Firm’s Monitoring Process

In the interest of effective remediation of quality control issues, inspections staff believes that firms should engage in early monitoring of the execution and effectiveness of remediation actions (i.e., the extent to which the actions are being implemented as intended (execution) and the extent to which, when implemented, those actions are having the intended impact (effectiveness)). If a firm’s remediation effort includes such monitoring even before the RPE, the submission’s description of positive results from that monitoring, or of meaningful pre-RPE adjustments to its actions based on that monitoring, could factor favorably into inspections staff’s evaluation. Any preliminary positive results would not, however, guarantee a favorable inspections staff recommendation. Moreover, the degree to which any such positive results factor favorably into inspections staff’s evaluation will depend upon the degree to which inspections staff has a basis for confidence in the quality of the firm’s monitoring.

If a firm submits monitoring results, it should submit all relevant monitoring results rather than selectively submitting only results that reflect favorably on the execution and effectiveness of the firm’s remediation actions. If a firm submits only favorable results, the firm’s withholding of less favorable results could render the submitted evidence misleading. If later detected by inspections staff (such as in a subsequent inspection), that misleading aspect of the firm’s submission could form the basis for a referral to the Division of Enforcement and Investigations as a possible violation of PCAOB Rule 4006, Duty to Cooperate with Inspectors.^[9]

Repeated or Persistent Quality Control Criticisms

If a quality control criticism is similar to a criticism that has been included in one or more of a firm’s previous inspection reports, a strong Rule 4009(a) submission will reflect meaningful consideration by the firm of why the problem persists despite the firm’s previous remediation efforts. Inspections staff's evaluation of the firm's most recent remediation efforts will include a focus on how the nature and design of those efforts differ from previous efforts and on the depth of the firm’s related exploration of the reasons the deficiencies persist. Inspections staff encourages firms to consider that the persistence of criticisms may sometimes be due less to flaws in a firm’s efforts to enhance technical aspects of its audit practice or its professionals’ technical proficiency and more to other factors, including, for example, aspects of the firm’s culture that may repeatedly erode whatever improvement seems initially to be promised by such enhancements. Inspections staff’s evaluation takes into account whether a firm has limited its efforts to another round of those enhancements, or whether the Rule 4009(a) submission also describes efforts to identify and address non-technical factors that may blunt the effectiveness of the technical enhancements.

Separately, in the case of persistent criticisms, the firm’s ongoing awareness of the issue – along with the experience the firm should be gaining in trying to address the issue – should make it increasingly feasible for the firm to perform pre-RPE monitoring of the execution and effectiveness of the firm’s actions and include the results in its Rule 4009(a) submission. The absence of such monitoring would increasingly (year over year, while the criticism persists) factor unfavorably into inspections staff’s evaluation. As indicated above, however, preliminary positive results from a firm’s internal monitoring do not guarantee a favorable inspections staff recommendation. In the context of persistent criticisms that exhibit a history of early positive results that were not sustained, such preliminary monitoring results may be even less meaningful, particularly if unaccompanied by the type of effort described above to identify and address non-technical factors.

The Limits of Post-RPE Supplemental Submissions

PCAOB rules do not afford a firm any right to supplement a Rule 4009(a) submission after the RPE. On occasion, inspections staff may ask a firm to provide particular clarifying or supporting information that was not included in the Rule 4009(a) submission. Apart from such a request, inspections staff generally will not consider post-RPE supplemental submissions, even if they relate solely to pre-RPE actions, with two narrow exceptions.

First, the firm’s monitoring of its pre-RPE actions in operation may provide evidence that did not exist as of the RPE that is relevant to assessing the execution and effectiveness of the pre-RPE actions. A post-RPE submission that is narrowly limited to such post-RPE evidence could influence inspections staff’s recommendation to the Board.

Second, Rule 4009(a) requires the Director of the Division of Registration and Inspections to advise a firm of the reasons that inspections staff will recommend that the Board determine the firm’s remediation efforts to be unsatisfactory. The Board has noted that this communication from the Director “provide[s] a practical opportunity for the firm to come forward quickly with any additional evidence or demonstration that it has in fact improved its systems or remedied the identified defects.”^[10] But again, for any such information to be relevant, it must concern actions that the firm both took before the RPE and described in its Rule 4009(a) submission. There is no prescribed window of time in which a firm is guaranteed an opportunity to present such additional information,^[11]  and the time between the Director’s communication to the firm and Board action on the inspections staff’s recommendation is typically short.^[12]

Other Information Related to Remediation

• Firms that Failed to Address Quality Control Criticisms Satisfactorily
• PCAOB Process for Board Determinations Regarding Remediation 
• Spotlight: Additional Insights on the Remediation Process