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Investor Advisory Group Asks PCAOB to Strengthen Proposal on Firm Registration Rules

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 7 minute read

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 7 minute read

Members of the Public Company Accounting Oversight Board’s (PCAOB) Investor Advisory Group (MIAG) asked the board to strengthen its proposal that would ban audit firms from making misleading statements about their registration and oversight by the board, which lends an aura of credibility to their services.

This is intended to put an end to some firms’ practice of using the PCAOB registration as a marketing tool or an implied endorsement for their activities. There are firms that even charge higher fees by claiming that they are supervised by the board, which includes audit inspections.

The proposal, issued late February 2024, would also institute a new procedure under existing Rule 2107, Withdrawal from Registration, that allows the PCAOB to treat a registered firm’s failure both to file annual reports and pay annual fees for at least two consecutive reporting years as a request to withdraw from registration and deemed withdrawn under specified conditions.

In a comment letter, MIAG said it makes sense to deregister such firms without having to use the PCAOB’s limited budget, including resources for registration, inspection, and enforcement, but the group suggested a better approach.

The board should send a delinquency notice to a firm that has not timely filed its annual report and not paid its annual fee on time to its latest address. And MIAG said the notice should state that “if (1) the firm remains noncompliant with the PCAOB rules, and (2) the noted two deficiencies are not corrected within 60 days, the firm’s registration will be terminated.”

Further, the advisory panel asked the PCAOB to post a list of such notices on its website as well as a list of firms who got deregistered in the last year.

“We also believe the PCAOB’s resources can be put to better use than maintaining firm registrations and associated data for firms that are inactive and serve no useful purpose,” MIAG wrote.

For firms whose registrations have been inactive for more than one year, the advisory group suggested a notice to the firms that their registrations will end in 90 days unless they can reasonably demonstrate that they expect to audit companies that are regulated by the SEC within the next year. The PCAOB’s jurisdiction covers audit of publicly-listed companies and broker-dealers registered with the SEC.

IAG to PCAOB: Who Is Real Audit Client?

The PCAOB’s sole mission is to protect investors. The Sarbanes-Oxley Act of 2002 established the PCAOB two decades ago to regulate public company auditors following accounting scandals at companies like Enron and WorldCom that cost investors huge amounts of money when they were found to have cooked their books.

And MIAG has again urged the PCAOB to stop using the word “client” when describing the company that an accounting firm audits. Instead, it suggested using the term “company under audit.”

This is something that former members of IAG have also pressed the board to do because there is an inherent bias towards pleasing public company audit clients. Companies pay their own “independent” auditors, creating systemic conflicts of interest.

And reform advocates want auditors to be truly beholden to investors who want to have confidence in the financial statements of the companies that they own shares.

The comment letter noted that the PCAOB uses “client” throughout the proposal but “failing to recognize the ‘public responsibility transcending any employment relationship with the client,’” citing a 1984 Supreme Court decision in United States v. Arthur Young & Co..

Other Views: Scope, Intent, Liability Issues

Meanwhile, the PCAOB has received 18 comment letters, which also asked the board to make clarifications or changes before finalizing its rules. Unlike MIAG’s, however, many of the letters did not seek strengthening of the proposed provisions.

The U.S. Chamber of Commerce questioned the intent of the proposal, criticizing the board that certain provisions are too broad.

For example, the proposal says that “marketing” covers all commercial statements, including communications on a firm’s website, blogs, podcasts, in newspapers, on the radio or television, as well as communications in person, over the phone, through electronic means, or the snail mail. Further, “otherwise holding out” statements could be displayed on a firm’s website, letterhead, business cards, brochures, flyers, posters, social media profiles, or trade booth displays.

The general provision on false and misleading statements includes a materiality threshold, and the PCAOB is not looking to sanction minor errors.

“Nonetheless, with its broad sweep as proposed, Rule 2400 [false and misleading statements] opens-up additional avenues for PCAOB inspection deficiencies and enforcement actions,” Tom Quaadman, an executive vice president with the Chamber, wrote. “Thus, the Proposal adds to the Chamber previously expressed concerns about the Board shift to focusing on inspection findings and enforcement and how this focus exacerbates audit firm staffing challenges and undermines the attractiveness of public company auditing, specifically, and the accounting profession, generally.”

However, the Council of Institutional Investors (CII) pointed out that the proposal speaks to a wider issue about why many investors and other market participants might be misled by using the PCAOB as a marketing tool or as an implied endorsement of audit quality.

“To be effective, we believe rigorous enforcement of the provisions of the Proposal must be married with more and better public education about the PCAOB and its registration and enforcement processes,” CII General Counsel Jeffrey Mahoney wrote. “Such education should be a responsibility shared by the Board and the public accounting profession.”

Audit firms said the PCAOB should clarify the circumstances that would create a liability when the proposed rule is violated.

For example, Ernst & Young LLP asked whether an associated person be held liable when the statement was clearly not produced by the firm. And when the PCAOB finds that the firm did not violate the proposed rule, EY asked whether the firm can be held liable for statements made by an associated person who does not follow the firm’s marketing templates and internal guidance.

In such cases, EY suggested a safe harbor from firm liability.

RSM US LLP said the proposed general prohibition is not appropriately tailored.

“The proposal is too far encompassing and there is too much room for interpretation,” RSM wrote and suggested a tighter definition of what is considered a false or misleading statement.

The firm pointed to a footnote in the proposal that says that “the PCAOB would not be required to prove that a misstatement or omission was made with the intent to deceive, manipulate, or defraud…. Nor would there be a need to demonstrate reliance on the misstatement or omission and any such loss.”

RSM is concerned that this footnote invalidates the intended application of the rule to “material” facts and misrepresentations.

“The standard should be revised to include either a definition or description of what constitutes material, or the final rule should not carry forward the language in footnote and should directly explain the correlation between the rule as written and an errant statement made without intent to deceive and by which no one was harmed,” the firm wrote.


This article originally appeared in the April 19, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.

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