In comment letters, the accounting profession asked the Securities and Exchange Commission (SEC) to reject the Public Company Accounting Oversight Board’s (PCAOB) recently approved rules intended to increase auditor transparency, which investor advocates support as they say the additional information will be helpful in assessing and comparing auditors.
The AICPA on December 19, 2024, said it has “grave concerns about the added burdens these rules would place on audit firms, particularly small and midsized ones, and believes they would unintentionally hurt U.S. capital markets and the investing public.”
It is unusual for the AICPA to write a comment letter on public company auditing matters as its affiliate, the Center for Audit Quality (CAQ), represents accounting firms that audit listed companies. But this shows how concerned the accounting profession is.
The CAQ for its part wrote a letter to the SEC on November 22 even before the rules were posted publicly on the commission’s website.
The SEC oversees the board, and it must approve changes to the PCAOB’s standards before they become effective. And the rules in question were adopted by the PCAOB on November 21. They are two separate but related rules.
One rule requires firms to disclose several standardized metrics intended to give some insight into the performance of audits, which reform and investor advocates have pushed the board to do since at least 2008.
The other rule requires firms to provide more disclosure, such as financial data and governance information in annual and special reporting forms filed with the PCAOB. This was also recommended by reform advocates in 2008.
“Alternative approaches that better balance transparency, cost, and the needs of audit committees, while continuing to support the quality of audit services and choice of audit providers available to perform public company audits and serve the public interest should be pursued, rather than introducing potentially detrimental unproven regulations,” the AICPA wrote.
Accounting firms like Ernst & Young LLP, KPMG LLP, RSM LLP, which wrote before comment deadlines, also said the SEC should not approve the rules.
Most comment letters are submitted at deadline or very close to deadline.
For example, on firm and engagement metrics, KPMG on December 19 said the PCAOB said that investors seek additional information “but fall short of explaining how the information in the final rule will be decision-useful. Specifically, the Board has not demonstrated the needs of stakeholders that would require the public reporting of the proposed metrics.”
In addition, KPMG said that engagement-level metrics require context, and in its view, it is best evaluated by audit committees.
The PCAOB’s final standard does give auditors the option to provide limited narrative disclosures. This is to address concerns that readers may not fully understand the metrics without context.
The U.S. Chamber of Commerce in its letter criticized what it sees are midnight rulemaking, echoing concerns that PCAOB member Christina Ho had when she voted against the adopting releases.
“The PCAOB ruled to adopt these transformative and controversial rules without appropriate consideration of comments, adequate economic analysis, and respect for due process,” the Chamber wrote on December 20. “The SEC also rushed due process and ignored options to give stakeholders sufficient time participate in a robust comment process,” pointing to the CAQ letter.
The firm and engagement metrics standard is in SEC Release No. 34-101724, and comments are due January 2, 2025. The firm reporting rule is in SEC Release No. 34-101723, and comments are due December 26.
The SEC is providing the public 21 days to comment following publication in the Federal Register. And the different comment letter deadlines reflect when the releases were published in the register.
Among other problems, the Chamber said that the rushed approach “is also counter to views expressed by members of the U.S. Congress.”
The business group noted that any approval by the SEC is likely subject to the Congressional Review Act (CRA), which can be used to address midnight rulemaking.
Under the CRA, lawmakers can scrap a regulation through a simple majority vote in both the House and Senate, subject to certain deadlines. The GOP will control both chambers in the next Congress starting from January 2025. After Congress overturns a rule, an agency is prohibited from issuing one that is “substantially the same.” CRA resolutions are subject to a presidential veto, but President-elect Trump is expected to pursue a more business-friendly agenda.
Investor Advocates Support Additional Disclosure
However, investor advocates that wrote comment letters ahead of comment deadline said the SEC should approve the PCAOB rules.
The Council of Institutional Investors (CII) said that today there is not enough information to be able to compare audit firms and cited the board’s explanation that “the lack of transparency regarding firm information leaves investors less equipped to assess a firm’s capacity, incentives, and constraints when voting on a proposal to ratify the appointment made by the audit committee or in exercising their rights to oversee the audit committee through board of director elections.”
And the CII said it “strongly” agrees with the board’s conclusion that the “final rule enhances transparency of audit firms by mandating public disclosure of firm information— including financial, governance, network, and cybersecurity characteristics—relating to the firm’s capacity, incentives, and constraints to provide quality audit services.”
“The final rule thus reduces frictions in the information market . . . and thereby enhances: (i) audit committees’ abilities to efficiently and effectively compare firms in their appointment and monitoring efforts and (ii) investors’ abilities to efficiently and effectively compare firms in their decisions to vote on ratification proposals and allocate capital,” the release on firm reporting added.
In a joint letter, 12 investor and reform groups said they “strongly endorse” the firm and engagement metric standards.
“First, they reflect the information markets need to make investment decisions. Second, comparative data reduces the likelihood of opportunistic disclosure,” wrote the groups, which include the AFL-CIO, Consumer Federation of America, and Better Markets.
Large firms publish transparency reports with metrics they choose to provide voluntarily today. Since they are voluntary, the letter said that firms can include metrics that are favorable to them, cherry picking the most attractive metrics and obscuring less favorable ones.
“Moreover, to the extent particular metrics become less favorable over time, companies can change the metrics’ definitions or terms or drop the reporting of certain metrics entirely,” the letter states.
The PCAOB’s standards require a common set of metrics that carry common definitions to promote comparability and consistency.
“The consistent and comparative metrics will also benefit audit committees. Audit committees sometimes struggle to know exactly what type of information about an engagement to seek from auditors. Even when audit committees ask for particular metrics, the firm may not have them available,” the joint letter said. “The metrics required by the PCAOB will simplify this process by requiring the disclosure of a standardized suite of metrics that can be the basis for further discussion between committees and firms. Moreover, the PCAOB’s standard would result in audit committees having access to metrics that are comparable, something impossible under the current system.”
This article originally appeared in the December 24, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.
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