The Public Company Accounting Oversight Board increased its enforcement activity significantly in 2022 and levied record-setting penalties under its mostly new set of board members, according to a new report, signaling a tougher approach to its oversight of auditing firms.
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The increased enforcement came after the Securities and Exchange Commission removed the former chair of the PCAOB and several other board members in 2021 after complaints about lax regulation and standard-setting at the board, replacing them with four new board members, including the current chair, Erica Williams, who has pledged a tougher stance.
"We're seeing the highest level of activity since 2017, and we saw record penalties, the highest penalties in PCAOB history," said Alison Forman, a Cornerstone Research principal and co-author of the report. "They're stepping it up."
The PCAOB was founded in 2003 after passage of the Sarbanes-Oxley Act of 2002 in response to the accounting scandals of the early 2000s involving companies like Enron and WorldCom. The PCAOB has been focusing especially on enforcement against auditors and auditing firms in other countries, which may be easier than taking on U.S. firms.
"Another thing that we saw for the first time this year that we haven't seen in the past is there were actually more actions involving non-U.S. respondents than actions involving U.S. respondents, and 90% of the penalties in 2022 were imposed against non-U.S. respondents," said Forman. "That's a big change from what we've seen in the past."
The percentage of actions involving non-U.S. targets, 52%, was double the 2017–2021 average. Since 2017, the PCAOB has brought actions involving respondents in 17 countries outside the U.S.
Of the PCAOB's 29 disclosed actions in 2022, there were 26 individual and 17 firm respondents. Over 75% of the actions against firms contained allegations related to the firm's system of quality control, up from approximately two-thirds in 2020 and 2021. The number of unique actions was more than 40% higher than in 2021 and over 20% higher than the 2017–21 average. Monetary penalties were imposed on all firm respondents and all but two individual respondents.
While issues related to auditor independence are supposed to be an area of focus at the PCAOB, none of the 2022 actions involved allegations of auditor independence violations. The PCAOB disclosed one adjudicated action in 2022, the first since 2017.
The PCAOB considered firm respondents' extraordinary cooperation when imposing sanctions on four firms in 2022. Nearly 30% of 2022 actions involved alleged violations of the PCAOB's Engagement Quality Review standard, down nearly 40% from 2021 and 70% in 2020. No actions in 2022 alleged auditor independence violations.
Over 80% of the penalties ($8.8 million) were associated with actions that were disclosed in the fourth quarter of 2022, with 75% ($7.9 million) on the 10 actions disclosed in December alone.
"We have seen, in some prior years, higher PCAOB enforcement activity in the fourth quarter," said Forman. "We don't see it every year, but it has happened in the past."
