The chair of the Public Company Accounting Oversight Board, Erica Williams, said Thursday that the PCAOB is working on updated auditing standards and stricter enforcement and audit firm inspections, a day after Securities and Exchange Commission Chair Gary Gensler urged the PCAOB to act faster on new standards.
Williams spoke during an online event hosted by the Council of Institutional Investors to commemorate the 20th anniversary of the Sarbanes-Oxley Act, which established the PCAOB. Williams took over as chair in January after she was appointed by Gensler. He pointed out during another online webinar Wednesday that the PCAOB had updated relatively few of the industry-written auditing standards it inherited from the American Institute of CPAs two decades ago (
The board has appointed four new members in the past year since Gensler moved to replace the majority of the five-member board. Williams pointed out that the PCAOB has already begun working on modernizing its standards.
“Today’s board has identified three key areas where we plan to further the PCAOB’s investor-protection mission: modernizing our standards, enhancing our inspections, and strengthening our enforcement,” she said. “High standards are the foundation for high-quality audits. That’s why earlier this year, the board announced one of the most ambitious standard-setting agendas in the PCAOB’s history. Just six months into my term, we are already actively working to update more than 25 standards within eight standard-setting projects, and we are just getting started.”
She noted that when the PCAOB was first getting off the ground in 2003, it adopted existing standards that had been set by the auditing profession on what was intended to be an interim basis.
“Twenty years later, far too many of those interim standards remain unchanged,” she added. “But the world has changed since 2003. And our standards must adapt to keep up with developments in auditing and the capital markets. Our current short-term and mid-term projects will address more than half of the remaining interim standards from 2003, and we don’t intend to stop there.”
Gensler pointed out Wednesday that the PCAOB has been slow to update the standards over the years and he emphasized the need for updated standards on auditor independence. “The PCAOB is tasked with setting enhanced auditing standards,” he said. “For practical purposes, Congress permitted the then-new PCAOB to carry over existing AICPA standards on an interim basis. The expectation was that the board would produce a more appropriate set of standards going forward. Historically, though, the PCAOB has been too slow to update auditing standards. Twenty years later, most of those interim standards remain.”
Williams acknowledged that Gensler has made updating these standards a priority, and said she was grateful for his support of the PCAOB’s agenda. In June, the PCAOB adopted a set of amendments designed to strengthen requirements that apply to audits involving multiple auditing firms.
Accounting Today asked Williams to respond to Gensler’s comments. “This new board, which has been in place for six months, has been working very diligently and has already updated a set of standards related to other auditors,” she said. “We have this ambitious agenda that we are moving forward, I believe, at a good pace, and I believe Chair Gensler's comments related to the past 20 years. But again, we are looking forward to this ambitious agenda that we’ve set. We agree that auditor independence is a critical issue. It is on our standard-setting agenda, as I mentioned, so we could take a look at the best way to ensure that our standards promote the highest ethical behavior and independence.”
She told CII general counsel Jeff Mahoney more about some of the standards that are on the agenda. “Our standard-setting agenda is one of the most ambitious in the organization's history, and it includes eight active projects: quality control, noncompliance with laws and regulations, and updates to our attestation standards, going concern, confirmations, substantive analytical procedures, fraud, and updates to our independence and ethics standards,” said Williams. “But that really doesn't tell the whole story. Each of the projects that I just mentioned actually contain multiple individual standards that we intend to update.”
She noted that the quality control project alone has 11 different standards that the PCAOB is considering replacing or significantly amending. Williams added that the board is actively engaging with investors and investor advocates about other standard-setting and rule-making projects to advance and it has a research agenda that includes data technology and audit evidence projects. “That is also going to help to inform additional actions we may take in standard setting,” she said.
The PCAOB recently reestablished two outside advisory groups — the Investor Advisory Group and a new Standards and Emerging Issues Advisory Group — to elevate the voice of investors, and hired its first-ever investor advocate, Williams noted.
Enforcement and inspections
The PCAOB has also been working to make its enforcement and inspections tougher.
“We will not hesitate to hold wrongdoers accountable for breaking the rules,” said Williams. “We are just about halfway through the first year of this new board. Already we’ve more than doubled our average penalties against individuals compared to the last five years. This includes the largest money penalty ever imposed on an individual in a settled case. At the same time, we’ve increased our average penalties against firms by more than 65%. In the past five years, the PCAOB assessed penalties against individuals less than half of the time and firms only about 86% of the time. This year it’s 100%. We are also pursuing enforcement actions involving certain types of violations for the first time. And we are taking steps to proactively seek out wrongdoing by increasing the use of sweeps against firms where there may be a violation of our standards or rules. Those who break the rules should know that the PCAOB means business.”
The board has also been in talks with Chinese authorities on opening up inspections of firms in mainland China and Hong Kong.
“The PCAOB has completed inspections in 55 countries. But China has continued to block our access,” said Williams. “The U.S. Congress sent a strong message with the passage of the Holding Foreign Companies Accountable Act: access to the U.S. capital markets is a privilege, not a right. The PCAOB will follow U.S. law, and the law is clear that we must have complete access to audit work papers of any firm we choose to inspect or investigate — no loopholes and no exceptions. While we will continue working with the People's Republic of China authorities to reach an agreement that meets our mandate under U.S. law, it’s critical to remember that an agreement is just the first step. Our team must be able to go to China and test whether what’s written on paper works in practice. Time is of the essence.”
Lynn Turner, a former chief accountant at the SEC, asked Williams about why no Chinese companies have yet been deregistered by the PCAOB for not allowing access to PCAOB inspectors.
“We are very focused right now on trying to comply with the Holding Foreign Companies Accountable Act,” said Williams. “I completely agree with Lynn that access to the U.S. capital markets is a privilege and not a right. What we are doing actively is trying to work with the PRC to reach an agreement that meets our mandates under the HFCAA. But we aren’t going to stop there and we will be prepared to make a determination if we are not able to inspect and investigate completely under the HFCAA. And then after making our determination under the HFCAA, then the SEC will have the opportunity to potentially delist and that could impact on nearly 200 companies. But we are taking our responsibility very seriously and the HFCAA has finally given us a tool to bring the Chinese to the table, to actually help us to try to potentially reach an agreement. Whether we reach an agreement is premature right now, but we are continuing to talk to them.”
Turner also asked Williams why an earlier project on audit quality indicators wasn’t on the agenda released by the new board.
“Many of our stakeholders ... have indicated that audit quality indicators are of great interest to them, and we are looking into options for adding a standard-setting project or research project related to AQI to our agenda, and I hope to provide an update very soon,” Williams explained. “I want to reiterate that our focus is on performance standards such as quality control standards, and that will also directly affect the quality of work performed by the auditor as well as the firm’s quality control system. Of course, while focusing on those areas is important for the benefit of investors because they directly drive audit quality, we are actively considering what additional information investors may need for them to be able to assess the quality of audits.”
Diversity
Turner was also asked about what the PCAOB is doing to improve diversity in its ranks and in the audit profession in general.
“That is a huge area of focus for this board and for me personally, as the first person of color and first woman to chair the PCAOB and to be part of what is the most diverse PCAOB board in the history of the organization,” Williams responded. “I want to let everyone know that we are very focused on diversity and inclusion. One of the things that we have done is that recently we have announced scholarships for 250 students to pursue degrees in accounting through our PCAOB scholarship program. The large majority of those scholarships do go to students who are underrepresented in the accounting profession. And those scholarships are going to make careers in auditing possible for the best and brightest students, no matter their backgrounds. We’ve also prioritized diversity in our hiring and we are additionally increasing the diversity and inclusion program internally for our staff through affinity groups, diversity councils and the like. Diversity and inclusion are critical. I think it’s very important for the regulators to reflect the diversity of the investors that we serve to protect, and the PCAOB, as the most diverse board in the history of the organization, does just that.”
Sarbanes-Oxley legacy
Williams also discussed the impact of Sarbanes-Oxley on the audit profession after scandals in the early 2000s involving companies like Enron led to the establishment of the PCAOB. She pointed to academic studies that have found PCAOB inspections improve audit quality, both in the U.S. and in other countries where the board has inspection access.
“Evidence shows that increase in audit quality has boosted investor confidence in the credibility of financial reporting,” she said . “A study published in the Review of Financial Studies compared the market response to earnings announcements and 10-k filings before and after the PCAOB’s existence. The study found both stronger stock price reactions and higher trading volume following the creation of the PCAOB — indicating investors have more confidence acting on the information they receive from financial reporting, knowing that the PCAOB is on the case.”
Even some plaintiff attorneys who have sued auditing firms agree that Sarbanes-Oxley has helped, but they still see room for improvement in audit regulation.
“I largely think Sarbanes-Oxley has been a really effective piece of legislation and regulatory reform, which is an odd thing to say these days, but it came at a time when government was working a little bit more effectively,” said Laura Posner, a partner at the law firm Cohen Millstein in New York, who recently won a $35 million settlement in a class action she led against KPMG, where the plaintiffs alleged that the Big Four firm perpetuated a massive fraud by signing off on Miller Energy's $480 million valuation of its Alaskan oil reserve assets. “But I think it was a necessary reform at a time when the markets were really roiled by what happened with Enron, WorldCom, Adelphia and Global Crossing. We had a lot of major scandals that really rocked investor confidence in the markets, and I think Sarbanes-Oxley went a long way toward bringing back investor confidence in the markets.”
She cited the establishment of the PCAOB as an important factor. “It was conceptually really important that there was an actual cop on the beat, theoretically, and that there would be some independent oversight for the accounting industry,” Posner told Accounting Today in an interview. “That was important, although the PCAOB has not been without its own scandals, particularly most recently. Although it’s correlation, not causation, we’ve seen a significant reduction in the number of restatements that come out of public companies, but also the size of those restatements. We’re not seeing these mega-earth-shattering restatements like we did during that era, and I think that has been largely very beneficial, both for corporations but more importantly for the investors in those corporations.”
