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US Securities and Exchange Commission

SEC Investor Advocate Urges New PCAOB to Reinstitute Investor Advisory Group

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

The SEC’s Office of the Investor Advocate in a report encouraged the PCAOB to reinstitute “a meaningful investor advisory group as one of its first orders of business” as new members are seated.

After firing then-PCAOB Chairman William Duhnke in June, the SEC named four new members in November. Gary Gensler, chair of the SEC which oversees the board, had said that he wanted to take the board into a different direction.

Investors criticized that the board under Duhnke’s leadership had strayed from its mission of protecting investors and furthering the public interest in the audit of public companies under the Sarbanes-Oxley Act of 2002, which set up the PCAOB.

Duhnke took a more business-friendly approach to regulation.

One source of contention was the PCAOB’s Investor Advisory Group (IAG), and the board in March abolished IAG as well as its main advisory panel, the Standing Advisory Group (old SAG), in favor of one panel, the Standards Advisory Group (new SAG). However, investor protection advocates were upset when the new group’s charter diminished investor representation.

The report by the SEC Investor Advocate Rick Fleming said that the PCAOB also has important work ahead to implement the rules to determine foreign audit firms that block board inspections because of positions taken by local authorities under the Holding Foreign Companies Accountable (HFCA) Act.

“In addition, the adoption and implementation of a new audit quality standard and reporting of inspections in a more thematic, impactful way remain outstanding,” according to Office of the Investor Advocate Report on Activities Fiscal Year 2021, which was published on December 16, 2021.

Digital Assets

Among other things, Fleming’s staff has also been paying attention to the accounting treatment of digital assets. The Canadian Public Accountability Board has found that seven of eight inspections identified significant deficiencies in the audits of issuers active in digital asset markets.

“We wonder whether these deficiencies extend to audits of issuers in digital asset markets in the United States,” the report noted.

Dodd-Frank Clawback Rules

In the report, Fleming said that he supports the SEC’s reproposal on so-called clawback rules mandated by Dodd-Frank to seek additional comment in Release No. 33-10998Reopening of Comment Period for Listing Standards for Recovery of Erroneously Awarded Compensation, which was issued in October. PL111-203 (See SEC Reproposes Dodd-Frank ‘Clawback Rule’ for Additional Comments in the October 15, 2021, edition of Accounting & Compliance Alert.)

“The request for comment specifically asked for feedback on the scope of proposed rulemaking as including not only restatements but also revisions, on the inclusion of deferred and non-GAAP measured compensation, and on enhanced disclosures of instances where a clawback was considered and/or initiated,” the investor advocate wrote in the report. “We support the reopened rule proposal because, in our view, it gives companies the necessary discretion to recover compensation from wrongdoers but also informs investors of the exercise (or non-exercise) of that discretion.”

The investor advocate office said it was also concerned that some revisions in reality are restatements in disguises, and that in some cases management may be opportunistically adjusting its definition of materiality to avoid clawbacks or other bad consequences of a restatement.

“Materiality is subject to both quantitative and qualitative factors where investors have every reason to expect similar transactions be reported and disclosed accurately and consistently in accordance with accounting standards,” the report stated. “Sometimes, however, it appears that adjustments may be motivated by considerations such as earnings targets, compensation metrics, or performance measures, rather than what an investor would consider to be material. Ultimately, the character of the adjustment, as material or not, should be decided upon by the company’s audit committee after consultation with the independent auditor.”


This article originally appeared in the December 29, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.

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