Alarmed that the House of Representatives is considering eliminating the Public Company Accounting Oversight Board (PCAOB) as part of a broader effort to reduce federal government spending, six former board members warned of significant harm to U.S. financial markets if lawmakers proceed.
They explained why Congress set up the audit regulatory board by passing the Sarbanes-Oxley Act of 2002: massive accounting frauds at companies like Enron and WorldCom that cost investors billions and eroded trust in public company financial reporting over two decades ago.
“We believe strongly that this legislation risks great harm to our capital markets and to the investors and companies that rely on the integrity of the financial reporting that underpins those markets,” former PCAOB chair James Doty wrote in a May 8, 2025, letter to the leaders of the House Committee on the Budget and the Financial Services Committee.
Others who signed the letter are: PCAOB founding members Kayla Gillan, Daniel Goelzer, and Bill Gradison, as well as board members Steven Harris and Lewis Ferguson. Doty and Goelzer previously served as general counsel of the Securities and Exchange Commission (SEC), which regulates the $120 trillion capital markets.
The letter responds to the House Financial Services Committee’s reconciliation text the panel advanced under the House’s Concurrent Resolution on the Budget for Fiscal Year 2025, which would amend Sarbanes-Oxley to dissolve the PCAOB and transfer its functions to the SEC, which currently oversees the board.
The legislative text, offered by French Hill (D-AK), chair of the committee, was reported out of the panel at the end of April.
The letter notes that Congress passed the law with overwhelming majorities because Enron was once the fifth largest U.S. company, WorldCom the 21st largest, and their auditor, the now-defunct Arthur Andersen, was the second largest accounting firm in the world.
When Enron collapsed in December 2001, it was the largest bankruptcy in U.S. history. The company had manipulated its financial statements, and its auditors, Arthur Andersen, allowed it. Six months later, the SEC charged WorldCom, followed by scandals at Adelphia and Tyco.
“When these organizations shut their doors, thousands of employees lost their jobs and retirement savings,” the former PCAOB members wrote. “Further, under enhanced scrutiny, it was discovered that numerous other public companies had also significantly overstated their financial health – undetected or, in some cases, enabled by their auditors.”
They said such financial reporting failures led to a significant drop in stock prices, causing investors to lose billions.
However, the PCAOB has since significantly improved audit quality, particularly with its inspection authority.
“Investors have more reliable financial information upon which to make decisions and, as a result, our markets are more efficient and resilient,” the former board members wrote. “In light of that record, shifting the PCAOB’s work to the SEC is a bad idea.”
SEC Can’t Replicate PCAOB’s Expertise
They expressed skepticism that the SEC, with its broader mandate, “could replicate the PCAOB’s expertise and infrastructure with similar positive results.”
“Auditor oversight would be simply another item on a long list of Commission priorities,” they wrote. “We are concerned that adding this complex and resource-intensive responsibility to the Commission’s mandate would dilute both auditor oversight and the SEC’s ability to accomplish other critical facets of its investor protection mission.”
They also warned that the bill would increase U.S. investors’ exposure to the risk of foreign financial reporting fraud.
The PCAOB has been inspecting audits of foreign companies trading on U.S. markets, possible after difficult negotiations. The board reached an agreement with China in 2022 only after Congress threatened to ban trading in Chinese companies.
“In a significant number of those inspections [of firms overseas], the PCAOB uncovered audit deficiencies that would not otherwise have been detected,” they wrote. “The SEC does not have agreements that enable it to inspect accounting firms in other countries. If the PCAOB’s functions were transferred to the SEC, it would be unlikely that the SEC could negotiate new agreements with the required jurisdictions in time to avoid mandatory delisting of many companies.”
The letter also pointed out a flaw in the bill, as the PCAOB’s budget is funded through accounting support fees paid by public companies and broker-dealers.
“Transferring the PCAOB’s duties to the SEC would require that Congress increase the SEC’s annual appropriation to support these new responsibilities,” they wrote. “This would inevitably increase the federal budget deficit.”
‘Backdoor Legislation’
It is unclear whether this part of the reconciliation package will move forward in Congress.
In a follow-up, Goelzer told Thomson Reuters that “it is appalling that an organization that has been an important part of financial reporting oversight for over 20 years could be abolished through this sort of backdoor legislative maneuvering.”
“Whatever one may think of the PCAOB’s record, the question of its future deserves full public debate,” he said on May 15. “The structure of auditor oversight in the United States should not be treated as just a minor detail in a massive budget bill that addresses many other major issues.”
Current PCAOB Members Speak out
Meanwhile, PCAOB Chair Erica Williams and board member George Botic have also spoken publicly.
Following her remarks at a meeting of the board’s Investor Advisory Group on April 29, Williams emphasized on May 1 that investors are better protected today because of the PCAOB’s work.
“The integrity of our markets is not inevitable. It takes vigilance to guard against negligence, recklessness, and fraud that threaten our system and the people who depend on it,” she said at a financial reporting conference in New York. “The PCAOB plays a vital role in that effort – a role our talented and dedicated staff have developed over decades, building unique experience and expertise that cannot be simply cut and pasted elsewhere without significant risk to investors at a time when markets are already volatile, and investors have so much to lose.”
Botic, who previously headed the board’s inspections program, also said such expertise cannot be easily replicated.
He noted the benefits of one organization that not only inspects but also writes standards that auditors must follow.
“The ability of our inspectors to freely share insights and perspectives with the staff of the Office of the Chief Auditor, I believe, has been invaluable,” Botic said on May 1 at the board’s forum for auditors of small businesses and broker-dealers in Jersey City, New Jersey. “This coordination facilitates real-time insight on firms’ execution of our audit standards and allows us to quickly issue practical guidance, when warranted.”
This article originally appeared in the May 16, 2025, edition of Accounting & Compliance Alert, available on Checkpoint.
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