The SEC has scheduled a meeting for December 13, 2023, to consider approving the PCAOB’s 2024 budget of $384.7 million, which is a significant increase of 11% over its revised 2023 spending plan of $347.3 million.
This follows unanimous approval by the board for its 2024 budget on November 16. The SEC, as the securities market regulator, oversees the PCAOB. And changes to its standards and annual budget must be approved by the commission.
The budget increase comes as the board has been working on the most ambitious standard-setting and rulemaking agendas under the leadership of Erica Williams. Moreover, the audit regulatory board has stepped up on its enforcement and inspection activities amid increasing audit deficiency rates.
But it is likely that SEC Commissioner Hester Peirce will again vote no because the 2024 spending plan follows a substantial increase of 13% for 2023 over its 2022 budget of $310.3 million. She had already rejected the PCAOB’s 2023 budget a year ago.
During the SEC oversight meeting in December 2022, Peirce criticized the board’s “ballooning budget.” She said that the 2023 budget continues previous expansion “and may facilitate mission-creep at the PCAOB.”
While the SEC is meeting to consider the PCAOB’s budget, commissioners usually ask questions about the board’s activities, especially given the record-breaking number of standard-setting and rulemaking projects that are on its short-term agenda.
In addition to PCAOB Chair Williams, SEC Chief Accountant Paul Munter, Office of the Chief Accountant (OCA) Chief Counsel Natasha Guinan, OCA Senior Associate Chief Accountant Anita Doutt, and OCA Deputy Chief Counsel Shehzad Niazi are expected to be present. Questions are usually directed to PCAOB chair and commission chief accountant.
NOCLAR Proposal May Come Up
It is likely that Republican commissioners will question about the status of a particularly controversial project that has ruffled the feathers of auditors, lawyers, and companies: non-compliance with laws and regulations (NOCLAR).
The PCAOB issued the proposal in early June to strengthen its standard and require public company auditors to more proactively identify, evaluate, and communicate instances of a company’s NOCLAR. The board has gotten 139 comment letters, an extremely high number for the board as it usually gets about three dozen comment letters on a proposal.
Business organizations even banded together to write a joint comment letter saying that the proposal would drive new liability concerns among auditors that would drive audit costs even higher.
The proposal turns “financial statement audits into wide-ranging investigations of potential instances of NOCLAR,” the joint letter states. “These new auditor responsibilities would fundamentally alter the audit function and would insert auditors into core legal and management decisions.”
Moreover, “auditors may be put into a position to second-guess a company’s own legal counsel regarding whether noncompliance may have occurred,” the letter states.
But the PCAOB has a single mission to protect investors, and investor advocates largely supported the proposal. Its own Investor Advisory Group (IAG) suggested improvements that would make the standards even more robust.
A renewed focus on the auditor’s responsibilities regarding NOCLAR originally came amid a string of high-profile cases in the past several years, including unauthorized creation of bank accounts by Wells Fargo & Co., whose auditor is KPMG LLP, which has denied any wrongdoing.
IAG pointed out that its members are worried that auditing standards have not changed even though the business and financial reporting environment has evolved. Members of IAG include the Council of Institutional Investors (CII) and the CFA Institute.
Similar questions are likely to be asked during a House hearing of accounting and auditing standard-setters the day before on December 12.
Patrick McHenry (R-NC), chairman of the Financial Services Committee, wrote a comment letter in August to express concerns in Corporate America and asked the board to reevaluate its proposal before finalizing it. As it stands, he believes that costs outweigh benefits. The SEC has long-established auditor independence rules, which ban accountants from offering services to audit clients “that fall under the purview of legal experts,” McHenry wrote. Thus, the proposal is in direct conflict with existing rules.
While the PCAOB’s agenda says that it is planning to finalize the proposal in 2024, it is unclear whether that will be the case and whether any changes will be made to the proposed provisions.
Both SEC and PCAOB Chairs Mum on NOCLAR
When asked about any potential modifications, Williams simply told reporters at an AICPA conference in Washington on December 4 that the board is analyzing each and every comment letter, and that it is essential for the board to get it right.
Asked about whether there could be a second round of proposals by Thomson Reuters, Williams sidestepped the question.
“We received quite a few comments. There was a lot of interest, and we are reviewing all of those comments to determine how we might move forward,” she said.
In the meantime, SEC Chair Gary Gensler also did not divulge what he thought of the proposal during a separate conference on December 7 in Washington hosted by the American Bar Association when asked by a moderator, Jay Knight, chair of ABA Business Law Section Federal Regulation of Securities Committee. The ABA sent a comment letter to the PCAOB.
Some provisions “were really concerning from an attorney-client privilege perspective. And so… I urge you and your staff to help to make sure that PCAOB is focused on those particular issues,” Knight told Gensler.
Gensler responded that he will not speak about any one standard that the PCAOB is working on because if adopted, it will be sent to the SEC. The commission in turn puts it out for public comment before deciding to approve the standard.
During his mid-career, he was a senior adviser to Senator Paul Sarbanes in writing the Sarbanes-Oxley Act of 2002, which created the PCAOB to prevent a repeat of big accounting scandals at companies like Enron and WorldCom. And Gensler said that one of the debates that the senator had was whether a standard-setter should exist, and he thought so. But it should not be a trade association—the AICPA—writing the standards.
When the PCAOB was set up, it adopted—on an interim basis—the AICPA’s standards, “some of which had been written 10, 30 years earlier,” Gensler said.
He became chair of the SEC in April 2021, “and there were over 20 interim standards still on the books at the PCAOB,” Gensler said. “I can tell you having been an adviser to Paul Sarbanes, that was never the intent. Interim was meant to be interim.”
He added that the PCAOB has a “great board” under Williams’ leadership, and “they are going about their business through notice and comment thinking about how to actually update these interim standards from 21 years ago.”
“Give your comments to the PCAOB, and if they adopt something, you’ll get a chance to give us comments still,” he said.
At the SEC meeting next week, the commission will also consider adopting clearance and settlement rules for the US Treasury market.
This article originally appeared in the December 8, 2023, edition of Accounting & Compliance Alert, available on Checkpoint.
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