By Soyoung Ho
PCAOB member Jay Brown said he does not support the board’s recently revised standard-setting and research agendas because investors’ views are largely ignored.
“This is a tragic mistake,” Brown said in a statement issued on October 13, 2020, adding that the updated agendas do not reflect the goals laid out in the Strategic Plan published in 2018, which commit the PCAOB to consider investors’ expectations.
His rebuke is especially poignant since the board’s sole mission is to protect investors and the public interest. “The result will be less trust in our system of financial reporting, an outcome that harms our capital markets,” Brown said.
In early September, the PCAOB dropped the auditor’s role on “other information” and non-compliance with laws and regulation (NOCLAR) from its research agenda and going concern from the standard-setting agenda.
The board said going forward, it will include only the projects that it believes will have a public milestone in the next 12 to 18 months. However, the PCAOB had worked especially on other information and going concern for several years.
“The agendas removed matters repeatedly identified by investors as important – matters that have only grown in significance in a COVID-19 environment,” Brown stated. “What remains largely overlaps with the priorities of an international standard setter. While these priorities may be good ones, the goal of global alignment and coordination should not take precedence over the expressed interests of U.S. investors.”
Today, auditors “read and consider” information outside the financial statements—such as non-GAAP metrics—to check for consistency, and the board seven years ago proposed a higher standard to “read and evaluate” and included specific procedures for auditors. But it has not resulted in any changes in part because of resistance by auditors. Investors increasingly want more assurance that other information is reliable as companies have an incentive to use cherry-picked or exaggerated information that are flattering to them while ignoring things that are negative, among other things.
In terms of going concern—or a company’s ability to stay afloat—the board’s Investor Advisory Group (IAG) said the standards need to be improved because of the failure by many auditors to warn the markets about the severe problems banks were having prior to the 2008 financial crisis. Several large financial institutions collapsed, two of the nation’s Big Three carmakers had to be rescued by the federal government, and the pain was felt throughout the economy.
For NOCLAR, the PCAOB has not worked on it as long as the other two, but this is another project that the IAG recommended that the board take up.
The focus on the auditor’s responsibilities regarding its client’s illegal acts came amid a string of high-profile scandals. For example, Wells Fargo & Co. created more than 1.5 million unauthorized bank accounts and more than 560,000 credit card applications from 2011 to 2015, and investors asked where its auditor, KPMG LLP, was to prevent the fraud. KPMG said its audits were done appropriately.
“The revised agendas do not adequately explain the reasons for the removal of these items or include any discussion of how investor concerns that caused them to be added to the agendas in the first place were addressed,” Brown said.
The board member also pointed out that the new agendas largely do not change the remaining legacy standards adopted temporarily in 2003. Those interim standards were adopted by the AICPA, which represents the accounting profession, during an era of self-regulation.
He said it is urgent to revise those interim standards as the PCAOB is currently considering changes to quality control (QC) standards for audit firms.
“In our Concept Release published in December 2019, we suggested that firms’ QC systems could have as an objective conformity with our existing standards,” he said. “Given the dated nature of these interim standards, this objective could establish a low bar that does not ensure the quality of audits expected by investors and the public.”
In addition, Brown noted that there has been a lack of adequate public participation by investors in the standard-setting process.
“With respect to the September 2020 revised agendas, there have been no public meetings of our advisory groups to discuss these changes or any other standard-setting matters,” he said.
As for having an overlapping agenda with the International Auditing and Assurance Standards Board (IAASB), he said it is important to monitor its activities.
“The focus of the PCAOB, however, must be on the priorities of investors and the public rather than priorities of the other standard setters,” he said. “In so doing, we will be far more likely to lead, rather than follow, in the global debate on auditing standards.”
There have been some criticisms that international standard-setters are unduly influenced by the auditing profession. And the Monitoring Group, a consortium of international financial regulators, recommended some changes to the standard-setters.
He said the lack of transparency surrounding the revised agendas and the failure to sufficiently get investor input have consequences for the markets. Brown said other than advisory group meetings, the board rarely holds roundtables or other public meetings. Even its advisory groups have not met since November 2018.
“Lack of transparency was a concern in the era of self-regulation and has yet to be fully remedied,” he said. “Without adequate transparency, there cannot be adequate accountability.”
Lynn Turner, a former chief accountant at the SEC, blamed the commission for some of the problems at the PCAOB. As part of its oversight activities, the SEC appoints board members and must sign off on standards before they become effective.
“In 2017, with the appointment of a new SEC Chair and members, the SEC threw out the existing PCAOB members and replaced them with members that in large [part] were friendly towards the auditing firms,” he said. “In turn, the new chair of the PCAOB terminated all the senior staff of the PCAOB, and replaced them with staff who were more aligned with the large audit firms.”
Turner noted that Sarbanes-Oxley was passed in 2002 almost unanimously in response to the accounting scandals at companies like Enron and WorldCom. Investors lost an estimated $85 billion. Sarbanes-Oxley created the PCAOB.
“Of the 535 members of Congress, only three voted against the bill,” he said. “The keystone of the legislation was the creation of an independent oversight Board to regulate and oversee the auditing profession and set their professional standards.”
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