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Proposal Would Prohibit Misleading Statements by Auditors About PCAOB Registration, Oversight

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

The Public Company Accounting Oversight Board (PCAOB) on February 27, 2024, voted unanimously to propose a new rule that would ban auditors from misleading capital market participants and others about their oversight by the board, which lends an aura of credibility to their services.

If adopted, new Rule 2400, False or Misleading Statements Concerning PCAOB Registration and Oversight, would be established.

It would address how the public accounting firm and its employees present the firm’s PCAOB registration status, including the scope of the board’s oversight.

“PCAOB registration is not an advertising gimmick for firms,” said Chair Erica Williams. “In order to protect investors from misinformation, there must be consequences when firms misrepresent their registration status or what it means.”

Accountants that audit private companies do not comply with rigorous PCAOB standards and rules; these auditors follow standards set by the accounting profession, the AICPA. Private companies also do not comply with extensive SEC disclosure requirements that apply to publicly-traded companies.

With the planned rule, the PCAOB wants to make it clear that registration with and oversight by the board do not automatically mean that a firm is providing high-quality audits.

The “PCAOB has observed instances where registered firms have misrepresented PCAOB registration as a ‘seal of approval’ or a ‘mark of excellence,’” the board said.

Some firms might even charge more for their services with claims of PCAOB oversight, a staff said.

“The PCAOB does not sponsor, recommend, or endorse firms,” Williams added. “And PCAOB registration is not a system for grading the quality of a firm’s professional work.”

Some firms have a mix of public and private company audit clients, potentially making it confusing about questions over the PCAOB’s involvement as a regulator.

Almost half of the firms that are registered with the PCAOB today do not engage in any audit work for issuers or broker-dealers that is subject to regulatory oversight. Yet, the PCAOB said some of these firms promote their registration in a way that could make investors and others think that their work is subject to board oversight.

Williams said so-called proof of reserve reports “offer just one example” of services that PCAOB-registered firms may provide, but those services are not under the board’s purview. In March, the PCAOB’s investor advocate had to issue an advisory statement to warn investors.

“Firms must also do their part as trusted gatekeepers to ensure that the information they share with the marketplace is not false or misleading,” she said. “Under the proposed rule, a firm issuing a proof-of-reserve report and touting its PCAOB registration in that report would be considered misleading, unless the firm also states that its work on the proof-of-reserve report does not fall within the PCAOB’s jurisdiction.”

Key Elements of Proposal

The PCAOB said Proposed Rule 2400 would establish a general prohibition on false or misleading statements about the firm’s registration, including the extent of the board’s oversight over the firm’s services.

The proposal would specify about the application of that general prohibition. It would set forth a non-exhaustive list of scenarios that would violate the rule.

“These include certain statements regarding PCAOB registration and oversight that (i) state or imply the PCAOB sponsors, recommends, or otherwise endorses the firm or its services; (ii) are made by a firm that is not currently subject to PCAOB oversight; (iii) refer to particular services that are not subject to PCAOB oversight; (iv) appear in auditor’s reports for clients other than issuers or broker-dealers; or (v) are made about a firm with a pending request to withdraw from PCAOB registration,” the PCAOB states.

Further, Rule 2400 would codify the board’s practice of considering any prior misleading statements when reviewing a registration application.

In addition, the proposal would 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.

Comments on the proposal are due by April 12.

While supporting the proposal, board member Christina Ho said she questioned whether the PCAOB needs to act with its already long list of items on its standard-setting and rulemaking agendas especially when the problem cited may not be pervasive.

She said the staff reviewed 167 firms and found that about 17% used misleading statements. But the sample is not random, and the rate might be lower than 17%.

Ho also said that 87 firms, or about 6%, that have ceased to exist or are non-operational failed to both file annual report and pay annual fees for reporting years 2022 to 2023. Board member George Botic said of 87 firms, 13 of those have not done so for over a decade.

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.

About a decade later, Congress gave the PCAOB the authority to supervise auditors of broker-dealers that are regulated by the SEC, which oversees the audit regulatory board. This inspection program was established to lessen the risk of a repeat of the Bernard Madoff Ponzi scheme, in which the outside accountant never bothered to verify that the assets reported on client statements were being managed by Madoff’s investment company.

 

This article originally appeared in the February 28, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.

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