With the clock ticking with administration change next year, observers are closely watching when or if the Securities and Exchange Commission (SEC) will approve the Public Company Accounting Oversight Board’s (PCAOB)recently finalized rules to increase audit firm reporting that are opposed by auditors.
The SEC as the capital markets regulator 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, 2024.
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.
Following adoption, the PCAOB quickly sent the releases to the SEC, which in turn posted it on November 25 on its website. The firm and engagement metrics standard is in SEC Release No. 34-101724. The firm reporting rule is in Release No. 34-101723. Both are not posted in the Federal Register as of November 27.
Timing in Question
When a new SEC chair takes the helm, the GOP will have majority votes with three Republican appointed commissioners. Current SEC Chair Gary Gensler will step down on January 20, and another Democrat on the commission Jaime Lizarraga said he will leave on January 17.
Assuming that the two GOP-appointed commissioners, Hester Peirce and Mark Uyeda, will vote against the two releases, the SEC must approve the PCAOB standards by January 17.
The PCAOB adopted the two rules exactly two months before Trump is to be sworn in.
The SEC has 45 days to act after publishing the board’s rules for public comment in the register under the securities laws. If necessary, the SEC can extend the period for up to additional 45. The agency can also decide to institute proceedings, giving opportunity for hearing, which needs to be concluded within 180 days after the agency publishes the notice of the filing of the proposed rule change.
When posting the PCAOB’s rule changes, the SEC seeks the public input, and the comment periods are usually 21 days.
There is also a clause that says that if the commission fails to approve or disapprove within 45 days of publication in the register, the standard automatically takes effect. Former PCAOB member Daniel Goelzer said he is not aware of a past PCAOB rule or standard taking effect without approval by an SEC majority.
“While it will be tight, there should be adequate time for these rules to appear in the Federal Register, for the commission to receive comment, and for the commission to vote on them,” said Goelzer, who previously served as SEC general counsel.
However, because these were not supported by audit firms, the timing of the PCAOB’s releases and the speed for which the SEC has to approve come into question.
Criticisms by Board Member Ho, Audit Profession
Even the PCAOB’s vote was not unanimous. It was 4-1 on both rules, with member Christina Ho dissenting. She criticized the regulatory action as midnight rulemaking, especially since it makes significant changes that are not supported by firms that will have to comply.
“Never in the history of the PCAOB has the board rushed to adopt new standards and rules in the middle of a historic transition to new SEC leadership, let alone adopt standards and rules that are not ready,” she said at the PCAOB meeting.
The proposals were issued on April 9. This sets the record of the fastest adopted standards. It took 226 days or about seven and a half months. But the average number of days from proposal to adoption for the five standards adopted by this board to date was 448 days or 15 months.
“Political expediency is not evidence-based policymaking,” she said. “Haste naturally harms work product quality, which will not escape any keen eyes.”
In particular, Ho said that the firm reporting adopting release “makes it abundantly clear that the PCAOB believes that extremism in the name of investor and audit committee protection is a virtue and not a vice.”
“The PCAOB believes that no reporting burden is too great for public company audit firms to bear even if: (1) the benefits are speculative; and (2) there are no direct linkages to improving audit quality,” she said.
Alarmed that the board has adopted the rules despite concerns expressed in comment letters, the Center for Audit Quality (CAQ), which represents accounting firms that audit public companies, sent a letter to the SEC on November 22, a day after the PCAOB adopted the releases but before the commission posted the filings.
The CAQ pointed out that 70% and 85% of commenters expressed concerns on performance metrics and firm reporting rules, respectively. These comments were based on “public policy concerns, lack of cost-benefit analyses and the likely negative competitive impact to the U.S. public company audit profession.”
Thus, the CAQ asked the SEC to take 45 extra days to consider, especially as this is happening during holidays.
The AICPA affiliate took an example of the register publishing the rules on December 5, and the SEC does not extend the initial 45-day. Final action would be due January 17.
CAQ Chief Executive Officer Julie Bell Lindsay wrote that such timing is “wholly inadequate” not only for commenters but also for the commission to carefully consider the comments.
Goelzer also said that the two rules raise important issues as Ho’s statements underscore.
“They should not simply take effect by lapse of time or a split Commission vote,” Goelzer said. “Without actual SEC approval, critics will be able to argue that they weren’t fully and fairly considered and should be reopened when there is new leadership at the SEC. Whatever one thinks of the rules, both the PCAOB and the SEC should want to avoid that appearance.”
The PCAOB’s decision to the firm transparency rules is in contrast to its last minute decision not to adopt its noncompliance with laws and regulations (NOCLAR). However, it must be noted that NOCLAR was opposed by a wider market participants, including stock exchanges.
Investor Advocates Believe Rules Are Overdue
In the meantime, four other PCAOB members who voted to approve the releases said that both rules were studied for a long time for 16 years; thus, they are long overdue.
The two rules were recommended by the U.S. Department of Treasury’s Advisory Committee on the Auditing Profession (ACAP) in 2008, which included accounting firm representatives as well as the AICPA.
Investors said that they need more decision and comparable information. And the PCAOB was set up with only one mission in mind following the collapse of companies like Enron and WorldCom that cooked their books: investor protection.
Before the PCAOB took a vote on the two releases, Jeff Mahoney, general counsel of the influential Council of Institutional Investors (CII) said that “providing more public information about the company’s external audit and external auditor to inform shareholder voting for the election of audit committee chairs and members and the ratification of external auditor may be the most important action the PCAOB can take as part of its auditing standard setting responsibilities.”
CII represents benefit funds, foundations, and endowments with combined assets under management of more than $4 trillion.
This article originally appeared in the December 2, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.
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