AICPA wants SEC to reject new PCAOB metrics

The American Institute of CPAs is asking the Securities and Exchange Commission to reject the Public Company Accounting Oversight Board's recently adopted standard on firm and engagement metrics, arguing they would drive smaller firms out of the auditing business and affect companies large and small.

The PCAOB voted to adopt the standard last month, along with a related standard on firm reporting, but the new rules still need to be approved by the SEC before they become official and take effect. Under the new rules, board-registered public accounting firms that audit one or more issuers that qualify as an accelerated filer or large accelerated filer would be required to publicly report specified metrics relating to such audits and their audit practices. The board made some changes from the originally proposed rules to accommodate some of the objections from the audit industry and public companies, but they remain far reaching in scope.

The AICPA argues that the rules would affect more than just accelerated filers and large accelerated filers and could harm smaller companies and their auditors as well. Under SEC rules, accelerated filers are companies that have a public float of between $75 million and $700 million, and annual revenues of $100 million or more, and have filed periodic reports and an annual report within the past year. Larger accelerated filers have a public float of $700 million or more. The AICPA expressed caution soon after the PCAOB voted to approve the new standards, but said it was still studying it. Now it is coming out firmly against the new rules and urging the SEC to reject them.

"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 said in a comment letter to the SEC.

The AICPA argues the new rules would hurt U.S. capital markets as well as the investing public, in addition to auditing firms of all sizes. 

"We believe these rules will have unintended negative consequences, including driving small and medium-sized firms out of the public company auditing practice," said the institute's comment letter. "This would result in fewer firms performing audits which are critically important for smaller and medium-sized companies seeking to access the U.S. capital markets. Consequently, companies will face greater challenges and higher costs in meeting necessary audit requirements to access to the U.S. capital markets. The PCAOB acknowledges that midsized and smaller accounting firms serving small to midsized public companies will incur substantial, if not prohibitive, costs in complying with the proposed amendments. The final rules reaffirm the PCAOB's belief that the rules will disproportionately affect smaller firms."

The AICPA contends it's overly simplistic to believe the impact of the rules would mostly fall within the market for large accelerated filers. "Smaller audit firms often serve clients of varying sizes, and their departure from the broader public company audit market could result in a substantial loss of audit firm options, particularly for smaller, less complex accelerated filers," it said. "The loss of competition and the reduction in available audit firms could lead to higher costs and less favorable engagement terms for these smaller issuers. A landscape in which smaller issuers have fewer options contradicts the PCAOB's goal of promoting fair competition."

Proponents of the new rules claim that competition may actually increase in the non-accelerated filer audit market as firms exit the accelerated filer and large accelerated filer markets, but the institute disputes this.

"This fails to account for the fact that non-accelerated filers often rely on firms with specific expertise and resources," said the AICPA comment letter. "Further, the firms exiting the accelerated filer space may not be able to effectively redeploy their capacity to the non-accelerated filer market. In fact, their exit could lead to a loss of specialized services and a further concentration of resources in the larger end of audit firms, making it harder for non-accelerated filers to secure high-quality, affordable audits."

The AICPA disagrees with predictions that profitable firms in the larger audit markets could expand their market share against the Big Four: "The resources required to absorb and integrate such capacity are substantial, and many firms may not have the operational flexibility to do so without significant strain on their existing clients and resources. This further risks driving up audit costs for smaller and midsized issuers, which are often less agile and unable to absorb such change without significant disruption."

The institute is also concerned about the use of performance metrics within the PCAOB's inspection and enforcement program, and how they might drive up the risk of enforcement for minor, unintentional reporting errors. It said the board rejected calls for a threshold based on the severity of reporting errors. The PCAOB declined a request for comment.