Public Company Accounting Oversight Board (PCAOB) member Christina Ho said she is giving the board “a low grade” for standard-setting “because it has lost its focus in multiple respects.”
She shared her views at the PCAOB’s forum for auditors of small businesses and broker-dealers in Miami on March 18, 2025. And her speech centered on the need for the PCAOB to rethink its approach to help small public company auditors.
Her remarks are not surprising as she has been a critic of the current board’s ambitious standard-setting and aggressive enforcement activities in the past three years.
Ho said she’s giving a low grade because the changes in the standards or rules will not improve audit quality—the objective of standard-setting—as she does not believe there are clear and direct links for improved audit quality.
For example, she did not believe that a pair of rules intended to increase audit firm transparency would directly improve audit quality. One rule is on audit firm reporting and the other is firm and engagement metrics. The board adopted them in November 2024 and sent to the Securities and Exchange Commission (SEC) for approval. But with change in administration, the PCAOB withdrew the rules in February.
“This is a prime example of waste and abuse on the part of the PCAOB, because the end result of the PCAOB withdrawing the two rules was entirely foreseeable,” Ho said.
She was also worried about changing standards too quickly and frequently as it would be a “tremendous strain… on the personnel and the financial resources of small firms, where the collective implementation of all the new PCAOB standards and rules will not only detract focus from audit quality but also accelerate the exit of smaller firms from conducting public company audits.”
To back up her claims, she cited a recent report by the SEC’s Office of the Advocate for Small Business Capital Formation that said small public companies account for almost half of all publicly listed companies. But the report said small public companies “continue to account for the majority of the decline in the number of exchanged-listed companies.” And a big reason behind the decline is regulatory costs.
“Similarly, the number of PCAOB registered firms in the U.S. has been declining,” Ho said. “By my back of the envelope math, it has declined by nearly 20% since 2021.”
The board member also criticized the PCAOB for being behind the times.
Artificial intelligence (AI) is, in her view, one of the biggest potential drivers of audit quality. The PCAOB’s standards have historically been neutral towards technology.
“But today that is short-sighted and perhaps even wrong,” Ho said. “In terms of short-sightedness, the PCAOB should focus on technology-driven standards to improve audit quality, while perhaps first testing them through a pilot.”
While Ho did not mention it in her speech, in a major strategic shift, the International Auditing and Assurance Standards Board (IAASB) last year moved away from a neutral stance towards the use of technology to facilitate and encourage accounting firms and practitioners to use technology in their assurance work.
The “PCAOB can no longer do things the same old way,” she said. “It must adapt its standard setting approach to take advantage of rapidly changing technologies, like AI, by conducting pilots with large and small firms to advance the use of technology in furtherance of improved audit quality.”
The PCAOB under the leadership of Erica Williams set a record with standard-setting activities, responding to complaints by investors that previous boards were too slow and did not do enough. For example, most of the rules the board adopted during Williams’ tenure were updates to interim standards adopted from the AICPA when the board was set up by the Sarbanes-Oxley Act of 2002 in response to accounting scandals at companies like Enron and WorldCom.
Enforcement Program
Ho also had plenty of criticisms about the board’s enforcement program. In some cases, she said the PCAOB’s enforcement actions have been “excessive if not mean spirited.”
In one example, she said that in late 2022 the PCAOB started to include language in settled orders that prohibits auditors from seeking any form of reimbursement or indemnification for PCAOB fines. Thus, an engagement partner who agrees to pay the PCAOB the fine, that partner cannot be reimbursed by the firm or by Directors and Officers liability insurance.
In Ho’s view, the PCAOB already does plenty to deter wrongdoing without having to take that extra step: The settled order is on the PCAOB’s website; a press release is sent to reporters; and the sanctions are reported to the SEC as well to the state boards of accountancy.
“Shouldn’t all that be enough to deter individual wrongdoing?” Ho asked. “Why did the PCAOB feel the need to extract an extra pound of flesh from professional audit staff?”
Inspections
In addition, Ho said that she now has doubts about the board’s inspections program, which has been credited for improving audit quality.
“Specifically, the publicly available inspection reports identify deficiencies but there are no severity ratings, meaning an investor cannot read inspection reports to discern whether a deficiency has an impact on the financial statements and the relevant assertions and cannot discern the materiality of the deficiency,” she said. “This is important because not all deficiencies are the same. Some deficiencies may reflect a disagreement between PCAOB and firms on the firms’ exercise of judgment, where in many cases reasonable minds can disagree.”
This article originally appeared in the March 25, 2025, edition of Accounting & Compliance Alert, available on Checkpoint.
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