Thomson Reuters recently had a conversation with U.S. Public Company Accounting Oversight Board (PCAOB) Chair Erica Williams during a sunny afternoon at a café patio in Washington. Williams, who became the board’s chair in January 2022, was previously a litigation partner at Kirkland & Ellis LLP.
The following has been edited for length and clarity.
Question: The PCAOB is in the middle of negotiating a deal with China on inspection and investigation of accounting firms whose audit clients’ stocks are traded on U.S. exchanges. With some countries, the board has joint inspection agreements. Is this something that is being considered, or must it be U.S.-only inspection?
Williams: What we are really focused on is just fulfilling the mandate of the Holding Foreign Companies Accountable Act. So, I am not going to negotiate in the press with the Chinese. But we are focused on making sure that we have complete access to audit work papers in order to make a determination and fulfill Congress’s mandate.
Question: The PCAOB has been inspecting auditors of broker-dealers for a decade, but it has so far been under an interim program. There had been an effort to issue a proposal for a permanent program in the past. Where does it stand today?
Williams: That’s not currently on our agenda. But we have put out probably the most ambitious standard-setting agenda in the PCAOB’s history. And we are actively moving forward on those eight standard-setting projects, which actually include 25 standards.
Since the PCAOB’s creation, we have inspected more than 1,000 broker-dealers. The program is working really well. We put out broker-dealer inspection reports to provide transparency, and we are going to continue to do that.
Editor’s Note: The PCAOB gained the authority to inspect broker-dealers in the Dodd-Frank Act of 2010 to lessen the risk of a repeat of the Bernard Madoff Ponzi scheme, in which the outside accountant never bothered to verify that the assets reported on client statements were being managed by Madoff’s investment company. Dodd-Frank left the scope of the inspection program and the frequency of inspections to the PCAOB’s discretion. The audit regulator is also free to differentiate among categories of broker-dealers and whether to exempt some auditors from inspections. But over the years, lawmakers introduced bills that would exempt audits of certain small broker-dealers. The proposed legislation has not passed so far, but its fate may change following the 2022 November midterms if Republicans take control of Congress with more conservative lawmakers than before. PL111-203
Question: The Sarbanes-Oxley Act of 2002, which established the PCAOB, barred the board from making disciplinary proceedings public. Do you think Congress should amend the law to make the proceedings transparent? The proceedings of other regulators, for example the U.S. Securities and Exchange Commission (SEC), which oversees the board, are public.
Williams: So, I defer to Congress to make the law. Our job is really to just faithfully execute it. But we are trying to increase transparency where we can. Our Investor Advisory Group meetings are public, our Standards and Emerging Issues Advisory Group meetings are public. And to the extent that we can promote more transparency through our inspections and in other areas, that’s what we are going to do.
Question: A decade ago, the PCAOB held a roundtable about the feasibility of forcing public companies to switch their external auditors after every several years. The idea never translated into reality. What do you think about the idea?
Williams: There are a lot of issues, and maybe auditor rotation may be one of them, that our advisory groups are going to be taking into account. The very first thing this board did was to reconstitute those advisory groups because we really want to hear from our stakeholders about the issues that are important to them. And we want to take them into consideration. So that may come up.
Editor’s Note: Some investors and regulators believe that years-long auditor-client relationships undermine an audit firm’s objectivity and independence and can lead to auditors accepting questionable decisions by a client to protect millions of dollars in fees. In their view, forcing companies to regularly switch auditors would break this pattern and give auditors the freedom to challenge a company on its accounting practices. But companies, auditors, and audit committees challenge this premise. They believe forced rotation would drive up audit costs and introduce unnecessary disruptions while not producing any improvements.
The PCAOB’s advisory groups were reconstituted earlier this year after the previous leadership had abolished prior panels and set up new groups that never took off. Investors had criticized the previous board’s efforts on advisory groups because the meetings would in general be closed to the public, and the auditing profession got a seat at the table in choosing audit firm members to the advisory group while no other constituents got such a privilege.
Question: Some members of the reconstituted Investor Advisory Group noted that they are getting better information on Key Audit Matters (KAMs), which are international standards, compared to the PCAOB’s Critical Audit Matters (CAMs). Is this something that the board will look into?
Williams: I think it’s a critical tool to provide information for investors, and I was really happy that the board was able to pass standards in order to require this. We are just really trying to make sure through our inspections and other efforts that firms are complying with the standards. And we have a post-implementation review (PIR) of CAMs.
Editor’s Note: An interim report was issued in October 2020. A PIR report will be issued later this year. “Because some of the effects of the CAM requirements may take several years to fully manifest or stabilize, the PCAOB expects to publish a more comprehensive post-implementation review in 2024,” according to the PCAOB website.
Question: While noting that you have an ambitious agenda, a project on “other information” is absent.
Williams: The agenda is dynamic and fluid. One of the things that we really are focused on is some of the standards have been in place since the inception of the organization, and they were written by members of the industry. And I believe that outdated standards need to be updated. So, we are really focused on this. And I am really grateful for SEC Chair Gary Gensler’s support on this and all of the projects on our agenda right now. We have people putting pen to paper to work on all of them, which would include the eight projects, more than 25 standards. And as we complete the standards, we are going to be adding standards-setting projects.
Editor’s Note: Investors had said they want some sort of assurance on other information because public companies are increasingly providing useful information, especially non-GAAP measures and environmental, social, and governance (ESG) matters. Investors want to make sure that they can rely on them. Because the extra information is not in the financial statements, it means that companies’ outside auditors do not perform rigorous procedures to make sure they are accurate and fairly presented. Moreover, often investors believe that such information is audited, creating confusion in the market.
Question: Because the agenda is so ambitious, are you worried that you might fall behind, especially with the war on talent and the Great Resignation?
Williams: So, we have more than 800 really talented staff at the PCAOB, and they are extremely dedicated to the mission and excited about moving these projects forward. And as we move things forward, we move teams to work on new standards. And I really am not concerned about ability to get this done because of the dedication and excitement of our staff and also the leadership of this board, which I’m really honored to be part of.
On the Great Resignation, one of the things I will say is that we are trying to be very focused on increasing diversity in the profession and increasing students who are interested in going into accounting. And we recently awarded 250 scholarships. A majority of those scholarships are going to folks who are traditionally underrepresented in accounting. And so we are doing what we can at the PCAOB to encourage more people to go into accounting, auditing so that we can have more folks who are helping us move forward to protect people and investors.
Question: The Center for Audit Quality (CAQ), which represents accounting firms that audit public companies, believes it is important to have some consistency among standards developed by different audit rule makers; thus, having completely disparate auditing standards would not be ideal. Some accounting firms have audit clients who also have to follow international audit standards, for example. The CAQ believes it is important to minimize unnecessary differences and incremental effort that does not benefit audit quality.
Williams: At the heart of our mission is investor protection and increasing audit quality. And in doing that, we have to adopt standards with that investor protection mission in mind. We are thinking every day about folks who are saving for retirement, people who want to send their kids to college, people who are using our capital markets in order to pursue their dreams. And it is with that mission that we are considering our standards.
We also do a cost-benefit analysis of every standard and in doing that, there are a variety of factors that we consider. But our driving force, our North Star is how does it best protect investors?
Question: A related question is on the quality control standard-setting project. The concept release that was issued in December 2019 uses international standards as a starting point. The PCAOB is working on a proposal, which is expected to be out this year. Will the proposal still have international standards as a starting point?
Williams: We are actively working on the quality control standard. As you know, the project itself could impact 11 different standards. What we are considering, first and foremost, is how can we drive performance standards to increase audit quality? What do we need to put in there to make sure that auditors are providing more quality audits. And I know that the previous concept release reference the International Auditing and Assurance Standards Board. I am not at liberty to tell you what we are actively doing right now. But I will be able to tell you that it is about making sure that we are increasing audit quality through that project.
Question: In 2019, then-board member Jay Brown gave a speech about making more of the PCAOB’s activities public such as industry letters, rulemaking petition. Is this something you are considering?
Williams: Transparency is definitely a goal of this board. And I mentioned that we are making our advisory group meetings public. We are also increasing transparency in other ways; in our enforcement actions if it involves audit failure; or on independence violations, we are naming issuers. We are considering how we can bring even more transparency to our inspection reports. In some areas, we’re bound by the law of transparency as we talked about earlier with respect to our disciplinary proceedings. But we know that transparency is important for investors. So, we are trying to make things as transparent as we can.
Question: A lot of people want to know the name of the companies in inspection reports.
Williams: I have heard that from our stakeholders. There are a variety of different areas that I know stakeholders are focused on. I am really excited about having more advisory group meetings. We just kicked it off. We have another one coming up in a few months. And I am interested in hearing from the investors and also the members of the Standards and Emerging Issues Advisory Group on a variety of topics because we want to use all the tools in our toolbox in order to drive investor protection. But we need to hear from our stakeholders in order to make sure we do it right.
Question: Do you still hear complaints from the U.S. Chamber of Commerce that the board’s inspections are a little bit too aggressive? The business organization complained loudly several years ago, arguing that the PCAOB is doing excessive review of internal controls which the group believes provides no commensurate benefits.
Williams: The way I like to look at it is that we have to faithfully execute the law, and what Congress has determined is the best way to maintain integrity in our markets is for the PCAOB to be able to inspect and investigate and for us to be able to pass standards. And so, that’s what we are doing.
Question: The U.S. Chamber has been lobbying the PCAOB to set up a Business Advisory Group as a separate one like the Investor Advisory Group.
Williams: If we step back and just look at what happened and why we are here, it’s to protect investors. When we didn’t have the PCAOB, there was cheating that occurred, and investors got hurt. So, since we have been in existence, audit quality unquestionably has improved. Studies show that audit deficiency rates have been going down. So, this is just proof that we are delivering on our mandate.
Question: Would you credit PCAOB inspections the most for improvements in audit quality?
Williams: I think standards, inspections, and enforcement all together. You have to have standards for the industry to comply in order to drive the quality of audits. Then in order to make sure that they are following those standards, we go and inspect and we kick the tires. But I would be remiss, as an enforcement attorney at heart, if I didn’t mention enforcement because if you aren’t holding wrongdoers to account and showing that there’s consequences for putting investors at risk, then I don’t think that you are being a strong enough regulator, and we really mean business at the PCAOB for those people who are trying to cheat investors, and we are going to use every tool in our enforcement toolbox that includes significant sanctions, substantial penalties.
You have already seen that we have more than doubled the penalties against individuals than the previous five years, so in the last six months, those penalties have doubled if you go back five years.
We have also brought the highest penalty against an individual ever. And we are pursuing under statutes that hadn’t been used before, rules that hadn’t been used before. So, enforcement is something that I think really does drive compliance. And it really does drive investor protection.
Question: SEC Chair Gensler mentioned the importance of reviewing auditor independence rules. And as part of that review, will a rule adopted in late 2020 be revisited? This was a subject of criticism at the time because the board did not follow due process, and it gave more leeway to auditors in determining whether they are independent of their clients.
Williams: So on auditor independence, it is a critical issue to make sure that auditors are behaving ethically. It is on our standard setting agenda. I can’t tell you what is going to end up in our standard-setting rule, but I will tell you that it is on our agenda, and that we have teams working on it now.
This article originally appeared in the Aug. 17, 2022, edition of Accounting & Compliance Alert, available on Checkpoint.
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