Chamber of Commerce: PCAOB’s Ambitious Regulatory Activities ‘Will Undermine Audit Quality’

After having threatened the Securities and Exchange Commission (SEC) with a lawsuit if it moves ahead to approve the Public Company Accounting Oversight Board’s (PCAOB) new quality control (QC) standard that large audit firms say is unjustifiable, the U.S. Chamber of Commerce now fired off its shot at the audit regulatory board by asking it to revamp its standard-setting and rulemaking agendas.

The SEC oversees the PCAOB, and the U.S. Chamber’s threat of lawsuit has led to a delay in the commission’s decision on the board’s QC standard. The commission on August 20, 2024, approved three out of four standards the PCAOB adopted recently. The SEC said it would consider QC—the fourth one—by September 9.

In the business group’s view, the PCAOB’s record-breaking standard-setting activities in terms of speed and volume “will undermine audit quality, investor protection and market confidence” because, among other things, it did not properly follow due process in changing its standards.

Tom Quaadman, an executive vice president of the Chamber, wrote the letter on the same day the SEC approved the PCAOB’s rules—August 20.

The PCAOB declined to comment.

Criticisms

The U.S. Chamber’s letter largely echoes concerns expressed by the Center of Audit Quality (CAQ), an affiliate of the AICPA which represents accounting firms that have public company audit practice. The difference is the U.S. Chamber’s stinging bluntness in its criticism towards the PCAOB. Quaadman does not mince words, and he embraces the “sky will fall” approach much more than other critics.

Over 20 months, the PCAOB has proposed and adopted four auditing standards and one rule, the Chamber said. The board has also advanced four standard-setting projects and one rulemaking project during that timeframe.

During that time, Quaadman said the PCAOB failed to provide ample comment periods on largely complex and lengthy proposal by only providing 45-day, 60-day or 75-day comment periods. And some of these comment periods overlap with each other or with the SEC’s comment period before approving the PCAOB’s standards. The Chamber noted that the PCAOB ignored the CAQ’s request to extend comment periods and delay its rule filings with the SEC.

Among other complaints, the Chamber said the PCAOB has also rejected doing reproposals before adopting a standard, risking violation of the logical outgrowth requirements of the Administrative Procedure Act (APA).

It must be noted, however, that the PCAOB is not a federal government agency but a private non-profit overseen by the SEC. But in a footnote to his letter, Quaadman said that the Sarbanes-Oxley Act’s requirement that the SEC approve the PCAOB standards means that the arguments that APA does not apply “can be set aside.”

Quaadman also put forth perhaps one of his favorite arguments when going after proposed regulations: faulty or inadequate economic analysis.

Recommendations

To fix what it sees as failings, the U.S. Chamber said the PCAOB should restore “a more reasonable and predictable cadence” to its standard-setting activities; have a comment period of at least 90 days; reconsider and extend effective dates of new standards; engage with audit firms; establish an audit consultation process consistent with what the SEC does; and repropose the noncompliance with laws and regulations proposal, which is strongly opposed by audit firms and public companies.

Investors Generally Happy With Today’s PCAOB

However, the most important stakeholder—investors—does not think the sky will fall. On the contrary, they have been generally happy with the PCAOB in the past 20 months. Under Sarbanes-Oxley, the board has a single mission to protect investors.

After a sluggish period at the PCAOB during William Duhnke’s tenure, the level of regulatory activities under Erica Williams’ leadership has been quite high to the delight of investors who felt ignored by Duhnke.

Not only has the PCAOB pursued the most ambitious standard-setting and rulemaking activities, but it has also brought record-breaking enforcement actions against firms and individual auditors. Moreover, the board has stepped up its audit inspection activities, perhaps the most important tool in bringing up audit quality. Nobody likes to get a bad scorecard when the PCAOB issues individual firm results publicly.

Duhnke led the PCAOB during the Trump administration which had a starkly different philosophy towards regulation than the Biden administration.

That changed when Gary Gensler became chair of the SEC and Williams was appointed to run the PCAOB.

In comment letters after comment letters on the PCAOB’s regulatory projects, investors advocates, including the board’s own Investor Advisory Group (IAG) said it is high time for the board to update its standards. These advocates, who support rule changes, believe the PCAOB should have gone further in modernizing the standards to protect investors, which is the board’s single mission.

Moreover, they believe the PCAOB should have worked to modernize its standards sooner, especially since it has had over two decades to study them. This is because the PCAOB adopted the AICPA’s standards on an interim basis when it was established by the Sarbanes-Oxley over two decades ago.

The board over time has adopted some standards, but many AICPA standards remained on its rulebook, with “interim” becoming more than 20 years old. This means that there is a conflict of interest if AICPA standards are used by the auditing profession since it’s basically self-regulation. And Congress set up the PCAOB to put an end to such self-regulation for public company auditors.

In that vein, Williams issued a statement, saying that the SEC’s approval of the board’s standards on August 20 represents a win for investors.

“One of the Board’s top strategic goals is to modernize our standards and rules to ensure they are best fit to protect investors from today’s risks,” she said. “Our markets are evolving every day. To keep investors protected in an era of rapid change, our standards and rules must keep up.”