Thomson Reuters had an opportunity to have a quick interview with Public Company Accounting Oversight Board (PCAOB) Chair Erica Williams during a break from the meeting of the board’s Investor Advisory Group (IAG) held in Washington on June 7, 2023.
Because the PCAOB currently has the biggest number of standard-setting projects since its inception 20 years ago, less pressing matters may be on the back burner, according to Thomson Reuters’s overall impression of the PCAOB’s activities.
The following has been edited for clarity.
IAG is currently working on drafting a set of recommendations that would improve critical audit matter (CAM) disclosures because they have not been as useful, and the number of CAMs provided has gone down. Moreover, compared to key audit matters (KAMs) under international standards, U.S. CAM disclosures have been rather underwhelming with some auditors providing boilerplate CAMs with no real insight for Wall Street analysts and investors.
And some members of IAG believe that the definition of CAM should be changed. During the IAG meeting, Jeffrey Mahoney, general counsel of the Council of Institutional Investors (CII), recommended that the board delete the word “especially” in the definition of CAMs in the sentence where it states they are matters that “involved especially challenging, subjective, or complex auditor judgment.” This is something that IAG also recommended in a comment letter.
“I have heard, including in discussions with the IAASB [International Auditing and Assurance Standards Board] that they’ve heard that the word ‘especially’ is the word being used by U.S. auditors in limiting the number of CAMs compared to the K KAMs,” Mahoney said.
Mahoney, who has been involved in discussions related to the auditor reporting model since 2007, also suggested a second change, which gets more to the substance of the CAM itself.
“What many investors were pushing for during the development of the standard…, many investors … were asking for this project to give information about what the auditor learned,” he said, pointing to the PCAOB’s rule text that discusses what the auditor must disclose for each CAM.
As it is currently written, the rule does not require “disclosure of an indication of the outcome of the audit procedures and a disclosure of key observations with respect to the matter,” Mahoney said. “Those two disclosures were the types of disclosures that many investors were asking for during the long number of years this project was being developed.”
Question: the PCAOB is still doing a post-implementation review of CAMs because more data is needed, but when do you think the IAG’s recommendation will be addressed?
Williams: I thought this discussion was informative today. I always wanted to hear from the advisory group. We have the most ambitious standard-setting agenda that we are working through. We will take the information that we receive from IAG definitely under consideration as we think about how we move forward.
Question: The PCAOB has been inspecting auditors of broker-dealers for over a decade, but it has so far been under an interim program. Will there be a proposal to set up a permanent program?
Williams: Our broker-dealer inspection program, while interim, is very rigorous and has been working very well since we implemented it following Dodd-Frank. Because it is working well, we are just going to continue to put out reports and to inspect broker-dealers. Sec. 982 of PL111-203
Again, we have the most ambitious standard-setting agenda that we are working through, and I am really proud of the inspectors and the critical work they are doing on our broker-dealer inspections.
Question: The PCAOB started to put independence findings on inspection reports for individual firms starting from May, which looks like progress as investors have pushed for more useful and timely inspection reports.
Williams: We are always trying to increase transparency and our new revised inspection reports are definitely reflective of that, and I hope that the information including the new part 1c on independence is very helpful to investors and other stakeholders.
I am grateful to the IAG and other stakeholders who have encouraged us and being supportive of us in increasing transparency. That’s just the first step; we are always looking for more ways to provide information to investors.
Question: Would that include disclosure of the company name in the inspection reports?
Williams: I am very grateful for the Investor Advisory Group’s recommendations, and those are things we think about as we go forward.
Question: Disciplinary proceedings today are closed to the public, and lawmakers have introduced and reintroduced a bill that would but so far has not been able to advance it.
Williams: I am going to leave it to Congress. Our goal is to continue to faithfully implement the law. And we have been strengthening our enforcement program last year. We had the highest number of penalties ever. We doubled our enforcement actions. And we are not going to hesitate to continue to impose significant sanctions and also bar wrongdoers from the industry if appropriate whenever we find people are violating our rules and standards.
(She has told The Wall Street Journal last year that she “would support changing the law to make the PCAOB’s disciplinary proceedings public, in line with the way the SEC and many other regulators operate.”)
Question: You have a very ambitious standard-setting and rulemaking agendas. There are nine on short-term standard-setting agenda and five on mid-term agenda. Currently, there is one research project. In addition, the PCAOB put four rulemaking projects to its agenda. In total, the staff is working on 19 projects.
Williams: One of the board’s goals, and it’s reflected in our strategic plan, was to modernize the standards. As you know when the PCAOB was created 20 years ago, they adopted the standards—on an interim basis—of the AICPA. There have been changes in the market over the 20 years. What we want to do is to make sure our standards are keeping up with those changes, and we are proud of the staff and the work we are doing. We are going to push more on modernizing the standards.
Question: As promised last year, you have now moved the project on audit quality indicators, renamed as firm and engagement performance metrics—from research to standard-setting agenda.
Williams: Firm performance metrics is an issue that both our Investor Advisory Group and our Standards and Emerging Issues Advisory Group have been very interested in and other stakeholders. What we said last year, every single standard on our agenda, we have people putting pen to paper on them and we are committed to moving them as we look to modernize our standards.
This article originally appeared in the June 9, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.
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