Securities and Exchange Commission (SEC) Chair Gary Gensler last week said that the Public Company Accounting Oversight Board (PCAOB) has a difficult job of regulating public company auditors. But the current board, unlike previous boards, has been doing a good job of protecting investors.
The SEC oversees the PCAOB, and his remarks come almost three years after the commission replaced four out of five board members for a fresh start. Investor protection advocates had criticized William Duhnke who was named to chair the PCAOB when Gensler’s immediate predecessor, Jay Clayton, ran the SEC.
Critics took particular aim at Duhnke, a former staffer to Republican Senator Richard Shelby, for bringing an industry-friendly approach to supervising auditing firms when the PCAOB’s sole mission is to protect investors and further the public interest in the preparation of informative, accurate, and independent audit reports. Moreover, PCAOB staffers accused Duhnke of employee mismanagement.
Now towards the end of 2024, Gensler praised the PCAOB’s reinvigorated standard-setting activities. Businesses and their auditors have criticized the volume and speed of the board’s regulatory efforts, but in Gensler’s view, the updates that the board has been making to its auditing standards are long overdue since previous board leadership did not update most of the standards that were adopted from the AICPA temporarily when the Sarbanes-Oxley Act of 2002 set up the PCAOB following accounting scandals at companies like Enron and WorldCom.
What the SEC “tried to do three years ago in selecting the new board is to live up to that basic premise that you are there to protect investors and then make sure that the auditing profession isn’t captured by the issuers,” Gensler said in response to a question by PCAOB Chair Erica Williams during the 16th International Institute on Audit Regulation in Washington on October 29.
Gensler: ‘Figures don’t lie, but liars sure can figure’
The SEC chief said that it is hard being the audit firm regulator because of inherent conflict of interests. Among other problems, auditors are paid by the companies they audit.
“We know human nature is pretty straightforward. Figures don’t lie, but liars sure can figure,” Gensler said. Most auditors do their job in good faith, but some want “to smooth earnings, move up revenue recognition, etc. So, it’s a challenge because the auditors are also in a service business.”
Gensler, who was a senior adviser to Senator Paul Sarbanes in writing the Sarbanes-Oxley, said the lawmakers got it right in setting up the PCAOB to write auditing standards.
“I think the senator made the right choice with his colleagues to say, ‘well, we will let the PCAOB move them [AICPA’s standards] over as interim standards,’” he said. “But of course, they will kind of update them, freshen them up, make sure they are not so industry-happy and -focused.”
But 19 years after Sarbanes-Oxley became law, only 5 of 49 interim standards were updated, Gensler said.
“I think that’s a shortcoming of your predecessors. And maybe it’s self-critique on the SEC, too,” he said. “So, I applaud you all to take them up, fresh them up. Technology changes, business models change….And a compliment to the board… I think you’ve updated half of those.”
Since 2022 the PCAOB has updated 20 standards, 18 of them interim ones. Today, 26 interim standards remain, and the board is actively working to update 15 of those. The remaining 11 will be considered.
In addition, the PCAOB has two additional projects that will modernize six interim attestation standards and four interim ethics and independence standards.
The board is also actively working on rulemaking projects, with one out of three completed so far.
In a separate speech at the conference, Williams emphasized that interim is not meant to be permanent.
“The word ‘interim’ signals that change is to come. And in a rapidly changing world, investors deserve better than what was originally designed to be temporary measures to ensure their savings, their retirements, their futures are protected,” she said. “Our auditing standards must adapt and evolve to meet not only the current challenges, but to help instill faith and confidence in investors.”
This article originally appeared in the November 4, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.
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