The audit regulatory board—the PCAOB—is currently soliciting nominations for its new Standards Advisory Group (SAG) established last month, but some observers are criticizing the charter of the new SAG.
Among other issues, critics are concerned that the board will not get sufficient input from investors even as the PCAOB’s sole mission is to protect investors and promote the public interest. They are also concerned about lack of transparency.
The PCAOB on March 29, 2021, set up the new SAG and abolished previous advisory panels, the Standing Advisory Group (old SAG) and the Investor Advisory Group (IAG). The new SAG will advise the board on its standard-setting activities. The board will assign specific tasks to the advisory panel.
The new SAG will have 18 members: five investors, four auditors, three audit committee members or directors, three financial reporting oversight personnel, and three academics and others with specialized knowledge. On April 12, the board opened up nominations with deadline of June 14.
Narrow Investor Criteria?
However, some are worried that the charter’s specific criteria about qualifications of each representative groups may not serve the public well.
For investor members, the PCAOB spelled out narrower and specific criteria than in the past: “Five SAG Members shall have substantive experience in investing in securities or analyzing equities or bonds for investors, and shall be actively and principally engaged in selecting securities, managing portfolios, or allocating assets for retail or institutional investors in the U.S. public capital markets.”
Barbara Roper, director of investor protection with the Consumer Federation of America who has spent a lot of time on SEC and PCAOB advisory groups, said the charter’s definition of investor is far too narrow.
“Either by intent or through ignorance, they have defined investor in a way that is likely to exclude investor advocates with expertise in these issues,” Roper said. “In terms of muting investor voices, that more than outweighs the decision to give investors the most slots on the SAG. Meanwhile, the task-based approach to SAG responsibilities will likely significantly limit the input of the advisory group to only those issues where the board seeks input.”
Jeffrey Mahoney, general counsel of the Council of Institutional Investors (CII), questioned whether investor views were solicited about the appropriateness of the exclusionary limitations for investor membership.
“My concern with this provision is greater in the absence of an active PCAOB Investor Advisory Group with broader investor membership,” Mahoney said. CII is an influential investor group that represents pension funds and foundations that collectively manage more than $4 trillion in assets.
Former PCAOB Acting Chairman Daniel Goelzer, who was previously a general counsel of the SEC, said if the board’s objective is to have a group that deals primarily with technical issues, it makes sense to have some investor members with day-to-day experience in using financial statements to make investment decisions.
“The investor member criteria in the charter do, however, limit the kinds of traditional investor advocates that have served on the SAG in the past from serving on the new version,” he said, adding that some investor advocates might quality under the special knowledge category. “In my view, this approach prevents the board—and the other SAG members—from hearing a perspective that should be considered, along with others, in standard-setting.”
Outsize Role of Auditing Profession?
On the other hand, the charter explicitly says that the board will select audit professionals based on nominations from the Center of Audit Quality (CAQ), an affiliate of the AICPA which represents audit firms who have clients that are publicly traded.
“We’re pleased the PCAOB continues to proactively seek stakeholder input, including from audit professionals, to achieve our collective goal of strengthening audit quality. Engaging stakeholders in the auditing process is essential to keeping pace with the latest advances and challenges in auditing,” said Catherine Ide, CAQ Vice President of Professional Practice. “We look forward to contributing to the Standards Advisory Group by nominating audit professionals from firms of different sizes who collectively have experience or expertise that includes audits of emerging growth companies and broker-dealers.”
But Roper and Mahoney were skeptical.
“Giving the CAQ a formal role in selecting accounting members shows questionable judgment, in my view,” Roper said. “Does the PCAOB really need to defer to an industry group to fulfill this function? The PCAOB under [William] Duhnke’s leadership has been extraordinarily opaque. Time and again it has failed to seek public input before taking action on important issues, appearing to take its cues instead from the accounting industry it is supposed to regulate. It has weakened both auditor oversight and auditor independence. A change in leadership can’t come soon enough.” Duhnke’s term end in October 2022.
CII’s Mahoney, in the meantime, asked whether the charter is consistent with PCAOB Rule 3700(c), which says that when the board solicits candidates, “nominations may be submitted by any person or organization, including, but not limited to, any investor, any accounting firm, any issuer, broker, dealer, and any institution of higher learning.”
Closed Door Meetings
Another problem, critics say, is despite the board’s strategic plan to be more transparent, the charter says that the meetings will be “generally non-public” to promote candor. Previously, the old SAG and IAG meetings were open to the public.
Jack Ciesielski, an investment manager who previously wrote The Analyst’s Accounting Observer, said the optics are terrible if the meetings are not open to the public. “It immediately raises questions, valid or not, about what they’re discussing – and why they wouldn’t want the public to understand it,” he said. “The PCAOB could learn a lot from the FASB’s far more open model of engagement. Their advisory board meetings are open to the public.”
Mahoney agreed, saying that the purpose of the SAG is analogous to the purpose of the FASB’s Financial Accounting Standards Advisory Council (FASAC), which has conducted public meetings for over 40 years. He added that non-public FASAC meetings are allowed only under limited circumstances spelled out in its operating procedures.
He also pointed to the PCAOB’s current strategic plan, which includes a section about enhancing transparency and accessibility through proactive stakeholder engagement.
Roper was harsher in her criticism.
“Clearly this is designed to mute the voice of dissent,” she said. “In a public meeting, investors who disagree with the approach being advocated by the majority of auditor, issuer, audit committee members, their concerns get heard. In a non-public process, it is more difficult to see those difference and to determine the extent to which shareholder views are being sidelined.”
However, Goelzer said that he has no problem with some non-public SAG or task force meetings, explaining that previously the old SAG broke out into subgroups for non-public discussions and reported back to the full group in a public session.
“The charter provides for a smaller SAG than in the past and seems to envision that most of the new SAG’s work will be done by task forces,” he said. “I think that is a good approach. The prior SAG dealt primarily with policy-level standard-setting issues in full-group sessions. If the new SAG is intended as more of a working, technical advisory group, emphasis on Task Forces, rather than periodic meetings of a large group, makes sense.”
Nevertheless, Goelzer said the full SAG should still hold regular open meetings so that the public can understand what the group is considering and what it is telling the board.
“This is apparently not what the board intends, since the charter provides that, ‘to promote candor, the activities and meetings of the SAG shall generally be non-public,’ although public meetings can also be held,” he said. “Many of the SAG members will necessarily be directly or indirectly affected professionally by PCAOB rules and standards, and I think it is appropriate that the public have some insight into their advice. I am not sure exactly what is intended by ‘promoting candor,’ but if it means that SAG members are likely to give advice in private that they would not be willing to be associated with in public, I don’t think that is something that should necessarily be encouraged in the context of a formal advisory board. More generally, I think that it would be in the PCAOB’s interest to make the SAG process reasonably transparent, since that helps to build confidence and understanding in the PCAOB’s work and what it is trying to accomplish.”
The PCAOB did not immediately respond to a request for comment.
New SAG is Years in the Making
The new SAG comes as the audit regulatory board struggled to reconstitute its advisory groups for three years, and it has not held a single advisory panel meeting in 2019 and 2020. The effort to reshape the advisory groups comes as the SEC, which oversees the PCAOB, replaced all members of the board for a fresh start at the end of 2017.
After PCAOB Chairman Duhnke took over in January 2018, the board began a comprehensive review of all aspects of the board with the goal of ultimately improving audit quality. But the advisory groups have been a source of controversy and complaints in the past several years.
In the ensuing years after Duhnke became chairman, he said that the board was trying to reconstitute the advisory panels to maximize their effectiveness, but there had been no agreement yet on the best way to achieve it. The board adopted the charter shortly after the lone investor voice on the board, Jay Brown, stepped down as his wife, Allison Herren Lee, was designated acting chair of the SEC, which oversees the board.
In particular, Duhnke said the board has been trying to make sure that it separates its outreach from advisory function. Previously, he said the two functions were conflated.
The PCAOB in the past three years instead has ramped up its outreach to auditors, audit committees, companies, and investors. The board also set up a separate office dedicated to that effort.
“Building on our concerted effort to improve our outreach over the last several years, we are now taking the PCAOB’s engagement to a higher level by creating a new, more effective structure for the Board to receive advice from our stakeholders on key PCAOB initiatives,” Chairman Duhnke said on March 29 when the board approved the charter. “The formation of the Standards Advisory Group extends the dialogue we’ve advanced with investors and others since 2018 and gives stakeholders additional and tangible opportunities to assist the Board in accomplishing its mission.”
Among other things, the PCAOB may have been trying to address complaints from some panel members as well as business groups about their role. For example, a few SAG members said they are not sure what the board does with the advice or views expressed during meetings. The U.S. Chamber of Commerce has criticized for a number of years that the PCAOB is not getting enough input from companies and urged the board to form a separate Business Advisory Group (BAG).
Some lawmakers also took note of such criticisms. The Financial Choice Act—passed in the House of Representatives in 2017 when Republicans had control of the chamber—contained a provision that would abolish IAG. The Senate at the time did not move forward with the Choice Act, instead focusing on narrower issues rolling back regulations for smaller banks.
The U.S. Chamber of Commerce did not respond to a request for comment about the new SAG.
This article originally appeared in the April 15, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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