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US Securities and Exchange Commission

SEC Commissioner Hester Peirce Criticizes PCAOB’s ‘Ballooning’ Budget

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

Securities and Exchange Commissioner Hester Peirce in a statement criticized what she sees as the Public Company Accounting Oversight Board’s (PCAOB) “ballooning budget.” In mid-November, the PCAOB voted unanimously to approve its 2023 budget of $349.5 million, which is a substantial increase of 13 percent over its 2022 budget of $310.3 million.

She said that the 2023 budget continues previous expansion “and may facilitate mission-creep at the PCAOB,” Peirce said on Dec. 23, 2022.

Section 109 of the Sarbanes-Oxley Act of 2002 authorizes the PCAOB to collect accounting support fees from public companies and broker-dealers to fund its operations and supervise public accounting firms. The audit regulator estimated that the total accounting support fees will be $329.4 million, with $300.3 million on public companies and $29.1 million on broker-dealers.

The SEC oversees the PCAOB, and the board’s decisions on its standards and budget do not become effective until commission approval. While the SEC delegated some oversight authority to the Office of the Chief Accountant, commissioners still vote on important PCAOB standards, rules and budget. The SEC also appoints five voting members of the PCAOB.

The majority of the commissioners voted to approve the PCAOB budget, however.

“The PCAOB plays a critical role to ensure that investors can trust a company’s financial disclosures,” said SEC Chair Gary Gensler in a statement. “I’m glad to support this budget, providing the PCAOB the resources to promote its mission under the Sarbanes-Oxley Act, benefiting investors and issuers alike.”

The SEC’s approval is in Release No. 33-11142, Order Approving Public Company Accounting Oversight Board Budget and Annual Accounting Support Fee for Calendar Year 2023.

Peirce’s Criticisms

In her statement, Peirce provided some trends taken from a summary published by the PCAOB:

  • The 2023 budget is $349.5 million, 12.6 percent higher than last year’s $310.3 million.
  • The 2023 accounting support fee of $329.4 million is 10.6 percent higher than 2022’s $297.9 million accounting support fee, 21.9 percent higher than 2020’s $270.2 million accounting support fee, and 40 percent higher than 2018’s $235.3 million accounting support fee.
  • Budgeted personnel costs for 2023 are about $27 million higher than 2022 personnel costs and $46.5 million higher than 2020 personnel costs. The 2023 budget also includes funding for 926 employees, an almost 15 percent increase from the 807 actual employees as of the PCAOB’s latest annual report.
  • Budgeted non-personnel costs for 2023 are $33.8 million higher than in 2018, a 58.7 percent increase. “While increased travel costs and inflation in general likely account for some of this change, the increase over five years is nevertheless notable,” she said.

In her statement, Peirce acknowledged the critical role that the PCAOB plays in the U.S. economy. Investors need to have reliable audits of public company financial statements. And the board plays a key role in helping to achieve that objective by writing strong audit standards, inspecting audits and bringing enforcement actions when auditors do not follow the rules.

The board is currently pursuing an ambitious standard-setting agenda to modernize dated audit standards, including one related to quality control, which is foundational to audit quality.

“Despite the importance of some of the PCAOB’s recent work, other parts of its plans raise concerns,” Peirce said. “A smaller budget might assist the PCAOB in being more selective, hewing more closely to its narrow mandate, and better stewarding its resources.”

Peirce then provided some examples.

She said the PCAOB should not reopen standards without clear justification.

When the PCAOB was established by Sarbanes-Oxley two decades ago, the board adopted the AICPA’s auditing standards on a temporary basis—called interim standards. Some were revised to become the PCAOB’s standards, but others remained unchanged. The PCAOB writes standards for public companies. The AICPA today writes audit standards for private companies only.

Peirce said that the PCAOB should not automatically assume that interim standards are not fit for purpose or must necessarily be updated. There may be good reasons for not updating interim standards: they may still be good today.

“The PCAOB should focus its efforts on the standards that really do need updating,” Peirce suggested. “An overly ambitious agenda could result in insufficiently considered standards and inadequate bandwidth for sound implementation of new standards and subsequent post-implementation review. The PCAOB will struggle to manage the consequential projects on its agenda if it also pursues inconsequential changes to old standards that are working well.”

Peirce was also troubled by the PCAOB’s plans to more frequently name companies or broker-dealers who were implicated in enforcement actions against their auditors. She emphasized that the PCAOB does not regulate companies or broker-dealers, just their auditors. Failings of their auditors should not penalize the companies.

“Not only does this type of transparency exceed the PCAOB’s mandate, but it may lead to unwarranted doubts about the accuracy of an issuer’s or broker-dealer’s financial statements,” Peirce explained.

She also criticized the PCAOB’s emphasis on its enforcement program, bringing cases under authority not used before and upping penalties on individuals, among other efforts. There may be tools other than enforcement to promote audit quality, she said.

“As Chair Williams has noted ‘a single, serious wrongful act, whether reckless or negligent’ can be ‘serious enough to put investors at risk,’ but an approach to oversight that relies on enforcement actions with hefty penalties and other remedies to prevent such acts from happening is unlikely to be successful,” Peirce noted. “Such an approach could devolve quickly into bringing enforcement actions for minor infractions rather than ‘prioritiz[ing] those enforcement matters likely to have the greatest benefit for investors and most likely to deter improper conduct,’ the approach embraced by the PCAOB’s superseded 2020-2024 strategic plan.”

Peirce said that the smallest firms could suffer disproportionately, diminishing competition in an already concentrated industry where about six large firms dominate.

But Pay for Board Members Has Not Increased

While the PCAOB’s budget has been increasing, at least the salary of board members, which was a source of criticism in the past, has not been going up for a long time.

Pay for board members will stay flat for the 14th consecutive year despite 40-year high inflation rates. In 2023, the chair will again earn $672,676, and other members will be paid almost $546,891. The figures have been constant since 2009.

In 2007, then-SEC commissioner Paul Atkins voted against the PCAOB’s 2008 budget, objecting to a 3.3 percent increase in board member salaries.

“As a matter of policy, I believe the board’s salaries are disproportionately high,” said Atkins at the time, as he displayed a chart comparing PCAOB salaries with those from executives at not-for-profit organizations and government agencies.

The 2008 budget raised then-chairman Mark Olson’s salary to $654,353 per year from $632,400, and each board member’s pay to $532,000 from $515,000.

 

This article originally appeared in the December 27, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.

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