Watchdogs in the US have begun the last few weeks of deliberation over controversial measures that would beef up rules for audit quality control.

The US Securities and Exchange Commission (SEC) will decide on 9 September whether to approve QC 1000, a new standard that demands US audit firms have a quality control function that includes at least one member from outside the firm, as well as conduct an annual review of their QC arrangements.

The new rule has been written by the Public Company Accounting Oversight Board (PCAOB) and also requires firms to report on their reviews to regulators.

However, QC 1000 has met with determined opposition. So much so that the PCAOB has issued a note defending its position, while the SEC has delayed a decision on approval more than once.

Opponents have rallied against the new rule. The Centre for Audit Quality (CAQ) says in a letter to the SEC that the external quality control measures fall short of being “necessary or appropriate” and clash with measures in existing legislation contained in the Sarbanes Oxley Act (SOX), perhaps one of the most influential pieces of financial legislation in the world.

In a letter to the SEC, the US Chambers of Commerce reiterates the SOX conflict. “On its own the SEC should reject the PCAOB’s final QC 1000 standard because it contains fundamental failures and flaws…”.

The Chamber has threatened legal action if the SEC goes ahead with approval.

A ‘feasible’ move

For its part, the PCAOB has defended QC 1000 in its own 28-page letter to the SEC. It points out firms already have measures in place, including external advisers, which demonstrate that implementing the quality controls measure is “feasible rather than unrealistic”.

Last week, the SEC approved another PCAOB standard, AS 1000, that simplifies and re-emphasises auditor responsibilities.

However, the rule making comes at a sensitive time when watchdogs are cracking down on audits in the US. A study by the Brattle Group, a research provider, recently showed that more enforcement action took place against auditors in the first six months of this year than in any previous 12-month period between 2018 and 2021.

Brattle principal Alison Forman said: “PCAOB enforcement in 2024 is off to its fastest start in the agency’s history, bringing 34 actions against 45 respondents and imposing a record $35m in penalties by the end of June.”

The UK is expecting its own wave of new rule making for auditors. The King’s Speech, a statement of the UK government’s legislative agenda, said a new regulator, potentially with new powers, is on the way. Draft legislation would be introduce some time in the current Parliament. Significant reform of the UK audit sector has been under discussion since the collapse of construction giant Carillion in 2018.

Accounting scandals and developments in technology have made audit and auditors a contested subject. The painful process of adjusting regulation continues both in the US and elsewhere.