In a victory for public company auditors, the current leadership of the Securities and Exchange Commission (SEC) decided not to consider two recently adopted Public Company Accounting Oversight Board (PCAOB) rules intended to increase audit transparency, which the accounting profession strongly opposed but investor advocates pushed for a long time.
The commission said in a late January 14, 2025, release that it is giving the public additional time to comment on the two separate but related rules: one is audit firm reporting; the other is firm and engagement metrics.
But this means that it is most likely that the rules will not become effective even in the future, given the industry-friendly approach that SEC Chair nominee Paul Atkins will take under the Trump administration that favors deregulation.
The last-minute decision from the current commission headed up by departing Chair Gary Gensler comes as all comment letters from the auditing profession or industry groups told the SEC to reject the rules, citing midnight rulemaking with administration change on January 20.
Moreover, they said that the board has neither demonstrated how these rules would enhance audit quality nor sufficiently addressed concerns expressing during standard-setting.
As part of its oversight activities, the SEC must approve standards and rules set by the audit regulatory board before they can become effective. The PCAOB had adopted the two rules on November 21, 2024. And the SEC’s notice for comment on firm reporting were published in the Federal Register on December 5 and firm metrics on December 11.
The reporting rule requires firms to provide more disclosure, such as financial data and governance information in annual and special reporting forms filed with the PCAOB, which reform and investor advocates have pushed the board to do since at least 2008.
The other rule requires firms to disclose several standardized metrics intended to give some insight into the performance of audits. This was also recommended by reform advocates in 2008.
The SEC has 45 days to act after publishing the board’s rules for public comment in the register under the securities laws. If necessary, the SEC can extend the period for up to additional 45. The agency can also decide to institute proceedings, giving opportunity for hearing, which needs to be concluded within 180 days after the agency publishes the notice of the filing of the proposed rule change.
For these rules, the SEC said it is extending the comment periods until February 4, according to Release No. 34-102179. The commission will act on the firm reporting rule by March 5 and March 11 for the metrics.
“The SEC’s decision to extend the comment period will enable us to work with the new commission to continue to advance our mission to protect investors,” a PCAOB spokesperson said in an emailed statement. “The PCAOB encourages all stakeholders to provide their perspectives on these two transparency projects, which the board approved to bolster confidence in our capital markets, strengthen oversight and accountability, and empower investors and audit committees with consistent, comparable information.”
Former PCAOB member Daniel Goelzer believes the SEC made the right decision because many of the comment letters “raised serious issues about the costs and benefits of these proposals, particularly the engagement level performance metrics.”
“A commission vote in the last few days of the Gensler SEC would probably have split 3-2, and a challenge to the rules, either in the courts or in Congress under the Congressional Review Act, would have been likely,” he said.
Because the SEC’s action is March, Goelzer also said that the “probability of approval is low. The board should withdraw these proposals and rethink them rather than risk a disapproval proceeding.”
Auditing Profession Welcomes Decision
The Center for Audit Quality (CAQ) welcomed the SEC decision.
The CAQ, an affiliate of the AICPA which represents accounting firms that audit public companies, has been concerned about the rules throughout the standard-setting process.
“Given the concerns expressed by many commenters, this decision will allow for a more thorough examination of the proposals and their intended benefits,” CAQ Chief Executive Officer Julie Bell Lindsay said in an emailed statement. “As the CAQ noted in its own comments to the SEC and PCAOB, in our research investors and audit committees expressed mixed opinions on the utility, value, and likely use of the proposed metrics and other required disclosures.”
Investor Advocates Furious
While the auditing profession came out against the rules, the PCAOB and investor advocates said they are neither midnight rulemaking nor unnecessary, emphasizing that both rules were studied for 16 years and are thus long overdue.
The rules were recommended by the U.S. Department of Treasury’s Advisory Committee on the Auditing Profession (ACAP) in 2008, which included accounting firm representatives as well as the AICPA.
Investors say they need more decision-useful and comparable information. And the PCAOB was set up with only one mission in mind following the collapse of companies like Enron and WorldCom that cooked their books: investor protection.
Advocates said today they do not have enough information about the company’s external auditor when shareholders vote on the audit committee chair and members or ratify the external auditor.
Former SEC chief accountant Lynn Turner said the SEC’s decision to punt was expected but expressed disappointment in the PCAOB in taking 16 years to forward the final rules to the commission.
“The board, including the current board, have held various public meetings on these topics over the years, issued concept releases and rule proposals,” he said. “For the board to wait for over 16 years to submit final rules to the SEC, is unacceptable, especially when they have ‘jammed’ the SEC giving it little time to solicit public comment and evaluate the rules, as the SEC is required to do so. The performance of the PCAOB over the years and up to now, has not matched the compensation it receives, some of the highest in Washington, DC.”
The chair makes about $673,000, and other members are paid about $547,000.
On the sidelines of a conference over a month ago, SEC Chief Accountant Paul Munter told Thomson Reuters that he doesn’t know whether the current makeup of the commission will have enough time to approve it. “It’s a good question and certainly on firm metrics, it’s really hard to guess because it has to appear in the Federal Register. So, the clock hasn’t started yet,” he said on December 9.
In the meantime, Sandy Peters, head of financial reporting policy for the CFA Institute, who has often said that “audit is a credence good,” was also disappointed, especially about the politicization of the PCAOB’s work to protect investors.
In a comment letter to the SEC, she pointed out that what the PCAOB adopted was the bare minimum and should have gone further.
“Given that auditors are paid by the company under audit and audit committee members are incentivized to engender themselves to management, there is an inherent, structural lack of independence and potential conflicts of interest,” she wrote. “This lack of independence, combined with the current lack of transparency in the audit, auditor selection and audit committee process necessitate transparency such that there is better accountability throughout the process.”
Peters also criticized the accounting profession and PCAOB member Christina Ho who was the lone dissent.
“While the AICPA and the Dissenting Board Member argue – even after the PCAOB has scaled back the requirements for smaller firms – in responses to both the Firm Reporting and Firm and Engagement Metrics Final Rule that additional transparency will be burdensome to smaller firms, the opposite is actually true,” Peters wrote. “It is the existing lack of transparency which results in the smaller firm not being selected by audit committee members as they do not want their auditor choice questioned should there be an audit failure.”
And she also refuted the claim that this was midnight rulemaking, given the 16 years that these issues were studied and worked on to death.
In an interview, Peters pointed out that the board is funded through accounting support fees paid by public companies and broker-dealers under the Sarbanes-Oxley Act of 2002 which created the board.
For example, such fees in 2025 will be $375.9 million, an increase of 4.5% from $358.8 million in 2024. The portion allocated for issuers is $346.1 million, and it is $28.8 million for broker-dealers.
In essence, Peters said that the PCAOB got $5 billion from investors since it was set up.
“Investors, not taxpayers and not politicians, should be involved in the decision making about what comes out of the PCAOB … because they’re funding them,” she said.
But these rules were asked for by investors a long ago, which still remain incomplete, Peters said.
“And investors are Democrats, and they are Republicans. Investors want capital formation, and that capital formation means that you need to have trust in audit,” she said.
She also pointed out that during the 2024 election, the Teamsters union did not endorse anyone for President, but its members voted Republican.
“They are a member of the Council of Institutional Investors who supported this,” she said. “So, there needs to be an understanding that the Republican Party is a different Republican Party. It’s not the Republican Party of the audit firm. It’s the Republican Party of the audit firm, the working class, and their pensions.”
This article originally appeared in the January 16, 2025, edition of Accounting & Compliance Alert, available on Checkpoint.
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