The Public Company Accounting Oversight Board plans to hold a meeting next Wednesday with its reconstituted Investor Advisory Group, the first meeting in nearly four years with one of the audit regulator’s biggest stakeholders.
The PCAOB announced the agenda Friday for the June 8 meeting. It will include the PCAOB’s new strategic plan for the next five years and its standard-setting agenda, along with its plans for the group going forward. The meeting will be open to the public as well online via WebEx and by phone.
Earlier this year, the PCAOB revived the IAG and another outside advisory group, formerly known as the Standing Advisory Group, but now called the Standards and Emerging Issues Advisory Group after they had both lain largely dormant since November 2018 (see story). After creating a new charter for both groups and appointing members, the groups are set to meet, although the first meeting of the SEIAG has not yet been announced.
The move comes amid dramatic changes at the PCAOB itself, after the former chairman and two other members were effectively ousted by the Securities and Exchange Commission last year and four new members were appointed. The PCAOB’s new chairman, Erica Williams, discussed the revived outside groups, along with the PCAOB’s new priorities and agenda, during a prerecorded “fireside chat” with George Botic, director of registration and inspections at the PCAOB, at an accounting conference hosted Thursday by the University of the Southern California’s Leventhal School of Accounting.
“I’m really excited about the fact that we’re going to be holding our first meetings of both of these groups,” said Williams. “The Investor Advisory Group is comprised of investors, and investor advocates are going to be able to share investors’ viewpoints and expectations with us, not just on our standards, but on a variety of other issues that are facing the PCAOB. Our mission is to protect investors, and it’s critical for us to be able to hear the views, to assist us in forwarding that very important mission.”
The Standards and Emerging Issues Advisory Group includes some investor advocates, she noted, but it also has financial statement preparers, audit committee members and academics.
“This group is going to be very critical to providing views to us on our standard-setting process,” said Williams. “They’re also going to be asked to help us learn about development and emerging issues in the financial reporting and audit industries so that we can make sure that we anticipate and respond to changes.”
Four members of each group will be sitting on both advisory groups “They’re going to help us coordinate the efforts between the two groups and just to keep everyone informed about what the different groups are doing,” said Williams. “We really want to use both of these groups as a resource, and we intend to consult them on a wide variety of issues again. Our standard-setting projects are top of mind there, but other issues as well, including our strategic plan. … Because these advisory group meetings are going to be public, it will provide an opportunity for the public to really see the groups in action and for everyone to hear the valuable feedback that they provide.”
Details for accessing the initial meeting by WebEx or phone are available here.
Williams also discussed the PCAOB’s standard-setting agenda, enforcement and inspection plans and its negotiations with Chinese authorities on allowing access to PCAOB audit firm inspections, which have been much in the news lately (see story). Botic noted that Williams previously worked for the law firm Kirkland & Ellis and as a litigation counsel at the SEC’s Division Enforcement trial unit.
Enforcement and inspections
“I look at enforcement and the interconnection between enforcement and our standard setting as being things that are really intertwined,” said Williams. “I was a litigator by training, so I deeply care about the importance of a robust enforcement program. From my perspective, our standards are really only as good as our ability and willingness to enforce them. And so in many ways, for the PCAOB oversight ecosystem to function at its best, standard-setting, inspections and enforcement really need to complement each other. Our enforcement program needs to serve as an important deterrent against noncompliance, both a specific and a general deterrent. To be an effective deterrent, we need to be able to use all of the tools and our toolbox, and we need to be able to be willing to use them to the maximum extent possible if the conduct warrants it. This is the way I think about enforcement: It can’t be that violation of our standards is more profitable than compliance with our standards, and robust enforcement helps to ensure that.”
Williams discussed her top priorities for the board, both this year and for the remainder of her tenure. “Above all, I really want to make sure that we’re executing our mission to our highest and best purpose,” she said. “That means performing transparent and timely inspections in a manner that holds firms accountable for performing public company and SEC-registered broker-dealer audits. In accordance with our standards, it means bringing robust enforcement matters that deter wrongdoing. And it really means streamlining, modernizing and enhancing our standards.”
She views the PCAOB inspection program as critical to the board’s mission, and she highlighted special purpose acquisition companies, or SPACs, as one area she might target. SPACs, also known as “blank check companies,” had been a popular way in recent years for companies to go public by setting up shell companies that would merge with private companies. They were thereby able to skirt many of the traditional IPO rules, but the SEC began cracking down on the accounting for the way they used warrants last year. The SPAC market has fallen out of favor this year, and over 25 companies that went public as SPACs since 2020 have issued going concern warnings in the past few months, according to Audit Analytics and The Wall Street Journal. A beefed up PCAOB inspection program may help safeguard investors.
“We want to continue to adapt and improve that program, including by issuing our inspection reports in a more timely manner so that we are providing transparency to stakeholders and relevant information on the status of audit quality,” said Williams. “We also want to make sure that we’re being nimble in the program so that we’re being responsive to new and emerging issues and topics; for example, the use of SPACs and how the current rise in inflation is having any impact on companies’ operations.”
She noted that the PCAOB has recently assessed some of the largest civil monetary penalties against individuals in the history of the board, but she sees room for improvement.
“We are going to continue to use all the tools that we have to bring cases and apportion the appropriate penalties and sanctions,” said Williams. “As we execute our enforcement program, we’re going to be continuing to think about deterrence because we believe that is what really helps to protect investors.”
Standard-setting and research agendas
“This is arguably one of the most ambitious standard-setting and research agendas that the board has ever pursued,” said Williams. “I really am looking forward to working with my fellow board members and the staff on the projects that we have added to those agendas. Those projects really align with the board’s objective to advance audit quality, to protect the interests of investors, and to further that public interest in the preparation of informative and accurate and independent audit reports. To be more specific, through this standard-setting agenda, we want to strengthen the standards related to audit, firm oversight of other auditors, audit firm quality control systems, audit firm transparency, through the reporting on a company’s ability to continue as a going concern.”
The research agenda includes a focus on auditing technology and data as audit firms leverage increasingly sophisticated technology like artificial intelligence to automate the process. It also includes a project on audit evidence.
“We want to continue to evaluate the impact of technological changes to financial reporting and audit practices, as well as the audit profession’s evolution,” said Williams. “Over time when it comes to technological changes, so many of the standards that we have right now were drafted by the profession and they were adopted by the PCAOB’s board at the inception of the organization, and they were termed interim standards.”
The PCAOB dates back to the Sarbanes-Oxley Act of 2002, which was passed after a wave of accounting scandals at now notorious companies like Enron and WorldCom. Williams noted that some of those so-called “interim” standards date back decades.
“Now I know that they’re no longer technically interim,” she said. “That’s just a term that we sort of use as shorthand. But this board really thinks it’s high time that we update those interim standards and make them current.”
One of the projects on the standard-setting agenda is an interim standards project to consider updating those standards to better promote compliance, ethical behavior and independence and determine which of them needs to be amended, replaced or eliminated. The PCAOB staff is currently analyzing those interim standards and will be breaking them into separate projects and adding them to the agenda as they go forward.
The PCAOB website has now divided the agenda into two parts: short-term projects where the board expects to take action in the next 12 months and midterm projects where the staff is actively working on them. Currently there are a total of six projects on the short-term agenda: other auditors (to strengthen and modernize the existing requirements and impose a more uniform approach to the lead auditor’s responsibilities, including the supervision of other auditors), quality control, noncompliance with laws and regulations, an attestation standards update, going concern, and confirmations and then we have projects on.
The midterm agenda includes substantive analytical procedures, fraud, interim ethics and independence standards, and interim standards for the remaining ones in a catchall category.
The PCAOB plans to continue to update both agendas on a regular basis. “These agendas aren’t static,” said Willaims, “They’re dynamic, and they’re going to be updated in response to development of our oversight activities, our engagement with investors and relevant stakeholders, including our two new advisory groups and other relevant inputs. At a minimum, we’re going to update them every six months to provide the public with the latest information on the status of the projects and the timing.”
Boosting staff morale and China inspections
Williams also hopes to improve morale at the PCAOB, which went through a period of turmoil in recent years with many of the top officials and staff ousted, while also facing accusations of harassment, discrimination and political bias.
“One other priority that is really near and dear to my heart is to identify opportunities to make the PCAOB an even better place to work,” said Williams. “I’m firmly committed to providing our staff with an environment where they can enjoy working, where they’re motivated to execute on the mission and on their responsibilities to drive audit quality. We can’t protect investors if we’re not taking care of our dedicated staff, and so one of my highest priorities is to work to improve and enhance our staff’s experience.”
Williams also discussed the status of the situation with inspecting auditing firms in China, amid conflicting reports lately from both Chinese authorities and the PCAOB that the two sides are getting close to an agreement on the long-stalled issue. In 2020, Congress passed the Holding Foreign Companies Accountable Act as a way to pressure China to allow inspections of firms that audit companies whose shares trade on U.S. markets. The Securities and Exchange Commission is authorized to delist any foreign companies whose audits can’t be inspected for three years in a row, and the SEC has begun listing the names of dozens of companies, mostly in China, who risk delisting. The names include prominent Chinese technology companies like Baidu, Weibo and Futu.
“Last December, the board made a determination under the Holding Foreign Companies Accountable Act that it was unable to fully inspect and investigate in China and Hong Kong,” said Williams. “It’s critical for the protection of capital markets that the PCAOB be able to perform inspections and investigations of audit firms that are registered with U.S. and associated persons, regardless of where those firms are located and where the audits are being performed. Notably, we’re able to do that in every other jurisdiction except for China and Hong Kong. But we have been negotiating with the authorities in the People’s Republic of China to try to reach an agreement under which we could inspect and investigate completely as required by the HFCAA. Those talks are ongoing. At this point, it is really speculative as to whether a final agreement will be reached, so any determination there would be premature.”
She denied reports that PCAOB officials have actually visited China to negotiate, but acknowledged that the board has been in talks with China Securities Regulatory Commission, which oversees audits.
“You may have recently seen articles that report that PCAOB employees or representatives were in China,” said Williams. “That’s not true. The PCAOB has not been in China since 2017. Still we are very much actively engaged with members of the People’s Republic of China and the CSRC to try to reach an agreement. I will say that reaching that agreement that allows us to inspect and investigate is necessary but is not sufficient. Under the HFCAA, we need to actually be able to send our staff to China and actually inspect and investigate and test out that agreement to be able to say that we are able to do so completely. As a result of that, it is critically important that we reach an agreement, as is the first step, and get that agreement in place, that we’re able to send staff over to begin inspecting and investigating. The board is required to determine whether it’s going to be able to inspect or investigate completely by December of this year, so time is of the essence for us to be able to reach an agreement. But our team at the PCAOB is doing everything we can to try to advance that process.”
Williams was asked by Botic about the most pressing challenges facing the PCAOB in the near and long term, and she cited the shortage of accounting talent during the current tight job market. She also hopes to improve diversity at the PCAOB.
“In the near term, I think our most pressing challenge is the labor market,” said Williams. “As you’re aware, there is a war for talent right now, and particularly among the accountants, lawyers and other skilled professionals that the PCAOB needs to do our work. As a result of that, recruiting and retention have become extremely important, and it’s important that we provide a fulfilling experience for our employees. The labor market is also frankly a long-term challenge for the PCAOB and for the profession as a whole, because the number of students majoring in accounting has been decreasing in recent years and the profession is continuing to struggle to attract and advance the careers of diverse accountants.”
One of the ways the PCAOB is trying to address the talent and diversity issue is through the board’s internship and scholarship programs. “The scholarship program provides funding to students who are majoring in accounting, and we also provide a variety of internship opportunities,” said Williams. “We’re also planning to try to roll out an internship for the board, so look out for that. For all of those in the audience who might know people who are interested, the scholarship program has been extremely successful. It’s not only us providing information to students and getting them interested in possibly one day working for the PCAOB, but also in promoting diversity among the next generation of accountants in the profession.”
She noted that since 2017, the percentage of racial and ethnically diverse scholarship recipients has increased from 35% to 51%, and the percentage of recipients with annual household incomes under $75,000 has increased from 49% to 71%.
“We continue to focus on increasing the number of students in the profession, and we are also very focused on increasing the number of diverse candidates,” said Williams. “But this is absolutely one of the biggest challenges that we have.”