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Investor Advocates Urge Audit Firm Regulator to Set More Targeted Plans and Goals

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 6 minute read

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 6 minute read

The Public Company Accounting Oversight Board (PCAOB) last month issued a five-year strategic plan that has four goals for public comment. But the plan largely centers on generalities, and comment letters from some investor advocates, including the board’s Investor Advisory Group (IAG), say that the PCAOB should develop specific and actionable goals to better improve audit quality.

The board’s four proposed long-term goals relate to modernizing audit standards, enhancing inspections, strengthening enforcement and improving organizational effectiveness in order to better protect investors, according to Strategic Plan 2022-2026, Draft for Comment, published on Aug. 16, 2022.

“The document lacks a plan of action for attaining those stated goals, including accountability for achieving them. We view this as the overarching weakness of the entire Plan and urge the Board to increase the Plan’s specificity,” the IAG wrote. “We recommend the Board consider remaking the Plan into a two-part effort: a broad description of goals, and a plan of action for accomplishing stated goals.”

The PCAOB oversees public company financial statement audits in order to protect investors. Congress two decades ago passed the Sarbanes-Oxley Act to establish the PCAOB in response to large accounting scandals at companies like Enron, WorldCom and Adelphi. When Enron collapsed in December 2001, it was the largest bankruptcy in U.S. history.

The advisory panel mentioned that before 2018, the board had issued more detailed plans for comment but has since moved towards a high-level approach. In January 2018, there was a complete change of board members with William Duhnke as chairman. But investors had criticized that he had ignored investor views. In response, the Securities and Exchange Commission (SEC), which oversees the PCAOB, fired Duhnke in June last year and replaced four of five board members in November.

“We understand that the Board is imbuing the Plan with its organizational priorities of investor protection, engagement, and adaptability – but we believe these are overly broad priorities,” IAG wrote. “We do not see an explicit prioritization of the goals that have been set. Furthermore, while the Plan delineates worthy goals and sets objectives for achieving them, we do not see timelines or milestones within those objectives, and once again, no prioritization of the objectives.”

The group suggested certain steps the board should take to improve its effectiveness in promoting the quality of audit. One such step, the IAG notes, is increasing transparency of the PCAOB’s activities.

“Because of the Board’s unique legal stature, it is allowed to operate with relative opaqueness compared to the SEC and the Financial Accounting Standards Board,” the IAG wrote. “It is not, however, required to operate with such opacity.”

The panel said it also wants the PCAOB to add audit quality indicators (AQIs) project to its goal. The board had been working on this for a while but had it set aside after resistance from auditors and audit committee members.

The IAG said it wants AQIs at the level of the audited company, audit firm office and audit firm.

“AQIs would provide important feedback to auditing firms on how well they are managing their duties to their true clients: investors,” the panel wrote. “It would provide the same information and feedback to investors so they can make more informed decisions about the continuation of auditors’ services.”

The IAG letter notes that while it represents the group’s views, it does not necessarily represent the views of its individual members. Some individual members of the advisory panel also sent separate comment letters. Still, some of these letters provide plenty of recommendations about what the board should do to better protect investors.

For example, Jeffrey Mahoney, general counsel of the Council of Institutional Investors, recommended that the PCAOB to come up with ways to enhance the dialogue it has with investors, including the establishment of IAG task forces.

Among other things, a task force could issue for public comment an annual survey of the standard-setting priorities of the PCAOB, encourage responses from IAG members, board members, senior PCAOB staff and the general public. The survey’s summary would then be issued. Mahoney is also a member of the board’s other advisory panel, the Standards and Emerging Issues Advisory Group.

While investor advocates had a lot of suggestions, most fully supported the PCAOB’s enforcement goals, which signaled a much tougher approach. The PCAOB will hold accountable those who violate rules and related laws, including violations that result from negligent conduct.

“Investor protection demands that we consider whether violations of our rules and standards merit enforcement actions, even if we have never brought charges under those rules or standards before,” according to the draft plan. “We will use all of the statutory tools available to our enforcement program, and, when the conduct warrants it, we will use them to the maximum extent possible.”

Companies and Auditors Have Different Views

However, business groups or audit firms had a different take.

The U.S. Chamber of Commerce wrote that it is concerned by the elevation of enforcement. The business group said that the PCAOB was organized and operated under a supervisory model for oversight of audit firms, citing the board’s initial five-year strategic plan.

“The supervisory model gives primacy to the PCAOB’s inspection and standard-setting processes, while not ignoring the role of enforcement,” wrote Tom Quaadman, an executive vice president with the U.S. Chamber. That has worked to improve audit quality.

Quaadman said that he is concerned that the board’s plans for a more assertive approach to enforcement may indicate an abandonment of the supervisory model.

“Without any data or public observations by the PCAOB, it is unclear how such a shift can be justified,” he wrote.

PricewaterhouseCoopers LLP said that it understands the board’s desire to make its enforcement program stronger. But the Big Four firm encouraged the board to strike an appropriate balance between enforcement and inspection resources.

“Because responding to investigations can be time consuming, resource intensive, and costly, enforcement inquiries and investigations should be reserved for those facts and circumstances where addressing issues through the inspection process is unlikely to be sufficient,” PwC wrote. “In our view, the Division of Registration and Inspections is well-placed to help identify issues and in many cases to promote appropriate change, given the nature of the interactions between the inspections teams and the firms.”


This article originally appeared in the September 21, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.

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