The Securities and Exchange Commission (SEC) by a vote of 3 to 2 on December 13, 2023, decided to approve the Public Company Accounting Oversight Board’s (PCAOB) 2024 budget of $384.7 million, which is a significant increase of 11% over its revised 2023 spending plan of $347.3 million.
When the board estimated its 2023 budget in November 2022, it was $349.5 million, roughly a 10% increase. The 2024 spending plan follows a substantial increase of 13% for 2023 over its 2022 budget of $310.3 million. And SEC Commissioners Hester Peirce and Mark Uyeda voted against the budget, citing concerns about the need for the board to exercise fiscal restraint.
The SEC oversees the board, and its standards and annual budgets must be approved by the commission before they become effective. The PCAOB unanimously approved its budget a month ago even though board member Christina Ho expressed concerns about year-over-year large increases.
This comes as the board has been working on the most ambitious standard-setting and rulemaking agendas. Moreover, the audit regulatory board has stepped up on its enforcement and inspection activities amid increasing audit deficiency rates. And the PCAOB is upgrading its information technology that will phase out certain legacy systems, which may over time reduce some costs.
However, Peirce, who voted against the PCAOB’s 2023 budget last year, questioned whether the board needs more money especially when 2022 audit inspections found 40% deficiency rate.
“What does that startling statistic tell us about how the PCAOB is doing its job? More money may not be the answer to this problem,” Peirce said. “For perspective, if approved the 2024 budget will be 41% higher than the 2019 budget.”
SEC Chair Gary Gensler disagreed, saying that the 2024 budget supports “a modest 2% increase in headcount” and noted the important role the PCAOB plays in protecting investors and facilitating capital formation. The board expects to fund 946 positions by end of next year, which is 20 more than for the revised 2023 budget.
“A critical feature of our capital markets is that investors rely on public company disclosures, including their financial results. Essential to investors’ trust in the reliability of such financial information is an independent audit of issuers’ financial statements,” said Chair Gensler. “Congress understood this when they passed the Sarbanes-Oxley Act of 2002 in response to some of the largest accounting frauds and bankruptcies in the history of our country.”
Section 109 of Sarbanes-Oxley authorizes the PCAOB to collect accounting support fees from public companies and broker-dealers to fund its operations and supervise public accounting firms.
The audit firm regulator estimated that the total accounting support fees will be $358.8 million, with $331 million on public companies and $27.8 million on broker-dealers.
This compares with total accounting support fees of $329.4 million, with $300.3 million on public companies and $29.1 million on broker-dealers in 2023 spending plan.
Math: Gensler vs. Uyeda
To support his dissent, Uyeda pointed out that while the accounting support fees are paid by companies, “rather it is the shareholders and customers of those entities” who ultimately foot the bill.
Uyeda then provided some historical figures for perspective.
The PCAOB requested double-digit percentage increases in their budget in the early 2010s. By the mid-2010s, the large year-over-year increase abated. For a couple of years, the budget even declined. For the 2017 budget when Mary Jo White was SEC chair in 2016, the board said it was nearing a steady state with its core functions. White then encouraged the board to continue to look for cost efficiencies.
“Seven years later, we are back to the PCAOB seeking double digit percentage increases in its budget for now two consecutive years,” Uyeda said.
Comparing the 2017 and 2024 budgets, the increase is $116.2 million, from $286.5 million to $384.7 million—a 43% increase, he said.
Personnel costs account for 74 percent of 2024 budget. In 2017, it was $205.6 million in 2017 to $285.8 million in 2024, or roughly more than $80 million, a 39% increase, Uyeda said. The overall headcount number between 2017 and 2024 goes up 70 from 876 to 946—an 8% increase.
“So you can understand my question was: where’s the money going? How has it been allocated among the staff? You got a roughly a five-fold increase in personnel costs over total headcount,” Uyeda said.
At the end of the meeting just before the commissioners voted, Gensler defended the PCAOB’s budget against Peirce and Uyeda’s criticisms.
Doing the calculation himself, he said the accounting support fee of $331 million is around $7 or $8 per million dollars of market cap.
“So, if a family was fortunate enough to have $100,000 in the capital markets, and if they were indirectly paying, and I’m not saying they are because the charges are being picked up by the issuers, but even if they were indirectly paying it, that would be about 70 or 80 cents per that family that has $100,000 in the equity markets, or that a million dollars would be $7 or $8,” he said.
“This is a really important part about trust in our capital markets. And it’s important we look very closely at the numbers,” he said.
Then Gensler proceeded to look closely at the 2017 numbers Uyeda mentioned. The Bureau of Labor Statistics’ Consumer Price Index is up 27% during the seven years, he said.
“That 27% plus about 8% increase in staff, which was the number you mentioned… compounding, that’s 37%, 38% increase, which is just pure inflation—the 8 percent,” Gensler said. “So, it’s kind of in line with the 40% that you mentioned. Probably means that PCAOB staff has only gotten a 2 or 3% inflation-adjusted pay increase in seven years.”
“So I am happy to support,” he said.
The SEC’s approval is in Release No. 33-11258, Order Approving Public Company Accounting Oversight Board Budget and Annual Accounting Support Fee for Calendar Year 2024.
This article originally appeared in the December 14, 2023, edition of Accounting & Compliance Alert, available on Checkpoint.
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