The Public Company Accounting Oversight Board is stepping up its enforcement activities with a mostly new slate of board members, who made one of their first public appearances Monday.
PCAOB Chair Erica Williams appeared alongside her fellow board members at the AICPA & CIMA Conference on Current SEC and PCAOB Developments, being held this week. "Coming out of a pandemic, many companies are continuing to navigate challenges and uncertainties," she said in prepared remarks. "Incentives for fraud are heightened. Your vigilance must be higher. Unfortunately, right now, the trendline is moving in the wrong direction."
Williams told panel moderator Julie Bell Lindsay, CEO of the Center for Audit Quality, that last week the PCAOB released a
"That means a third of the audits we inspected had deficiencies of such significance that PCAOB staff believe the audit firm failed to obtain sufficient appropriate audit evidence to support its opinion on the public company's financial statements or internal control over financial reporting," said Williams. "At the same time, we are seeing increased comment forms for both U.S. and non-U.S. firms in our 2022 inspections. These comment forms usually result in inspection findings in our reports. Together, these facts present a troubling warning sign."
She acknowledged that there's no single reason for why deficiencies increased in 2021, and the causes probably varied from firm to firm. Some firms told the PCAOB that the combination of the COVID-19 pandemic, remote auditing, the Great Resignation and the war for talent have made it difficult to maintain stable audit teams and provide training to newer hires. But Williams pointed out that it's nearly the end of 2022, so these factors are no longer new, and nobody should be caught off guard by those same challenges.
"Firms have a responsibility to design and implement solutions to restore and maintain audit quality," said Williams.
She acknowledged that some firms are taking steps to meeting the challenges, and it will take time before that's reflected in the inspections.
"At the same time, the 33% of audits with at least one Part I.A finding cannot be explained away by the pandemic," Williams added. "Some of the auditing deficiencies we identified have recurred for many years, well before COVID-19 — including auditor independence, which is a critical element of an audit firm's quality control system and is essential to an audit firm's credibility with investors. Firms must sharpen their focus and prioritize their efforts to increase audit quality and ensure investors are protected. In order to effectively — and credibly — meet the responsibility to enforce honesty in our system, firms must enforce the highest ethical standards within your own walls."
This year, she noted, the board has announced sanctions pertaining to exam cheating, modifying work papers, noncooperation with investigations, unlawfully obtaining and using confidential PCAOB information, and failure to have sufficient quality control processes in place to guard against ethical violations.
"Let me be clear: The PCAOB will not tolerate unethical behavior," said Williams. "I have said before, and I will say again, the PCAOB means business when it comes to enforcement. We intend to use every tool in our enforcement toolbox and impose significant sanctions, where appropriate, to ensure there are consequences for putting investors at risk and that bad actors are removed. This includes substantial monetary penalties and significant or permanent individual bars and firm registration revocations."
Penalties have been climbing over the past year. "Those who break the rules — whether they are ethical rules or auditing rules — should know we won't be constrained by the types of cases the PCAOB has pursued in the past," said Williams. "We won't be limited to the level of penalties that have been seen before. And we will seek admissions of wrongdoing in appropriate cases — for example, where the conduct is intentional or egregious. Don't just take my word for it. This year, we imposed the highest total penalties in PCAOB history."
The other board members discussed some of their priorities and approaches. "We really get each year a pretty comprehensive, detailed view as to the state of audit quality," said Duane DesParte, the longest-serving member, whose tenure dates back to early 2018 when he served with the previous set of board members, several of whom were ousted by the Securities and Exchange Commission last year. "How are firms complying with our standards and where our standards may need to be strengthened, where may we need to give additional guidance to help firms better know what they should be doing? We also identify good practices that may be helpful to share across firms and with other stakeholders. Inspections are the primary means we have to routinely interacting with the firm, and in my mind it's kind of a supervisory approach to oversight that really works best when we have constructive engagement, open dialogue, not a gotcha approach, but an engagement where we are walking the firm through by highlighting for them where they have deficiencies and where they need to improve."
Most of the other board members began their terms late last year or early this year. Like DesParte, Christina Ho is the only other CPA on the current board. She has been tasked with chairing a new Technology Innovation Alliance Working Group.
"I believe that the PCAOB has made some progress in addressing the use of technology in auditing," said Ho. "However, there is continued opportunity for a regulator to be forward-thinking and concerned about emerging technology and how it impacts audit quality. ... The concept of the TIA Working Group stems from the desire to have a seasoned group of technical experts with a hands-on understanding of the emerging technologies, combined with a deep understanding of the impact on the future of auditing."
She expects that the group will be convening roundtable discussions to hear from stakeholders, including investors, investor advocates, auditors and preparers. The overarching goal is to pursue a holistic approach to the impact of emerging technologies on auditing and on the PCAOB, she noted.
Another of the new board members is Kara Stein, a former SEC commissioner, who compared the commission to the PCAOB. "One of the most exciting things is I can actually talk to my fellow board members," said Stein. "As an SEC commissioner, because of the Sunshine Act, you couldn't be in the room talking policy with more than one of your colleagues. So if you had three out of the five SEC commissioners, you actually had to schedule a public meeting and make sure everybody else could hear. It's been an absolute delight to actually talk about things together. What happens at the commission a lot is your advisors run around talking to the other advisors and trying to express your views. It's much nicer to be able to do it in person."
She welcomed the board's recommitment to engaging with investors, preparers, audit committees and audit firms and listening to what they are seeing on the front lines. "Our mission is ultimately to work with you to protect investors and the public interest," said Stein. "I believe this even more after being an SEC commissioner that the audit is foundational to the strength of the American financial market."
The other new PCAOB board member, Anthony Thompson, previously worked at the Commodity Futures Trading Commission, the U.S. Department of Agriculture, and the Air Force, where he rose to the rank of colonel and chief budget officer. He sees strategic planning as a priority for the PCAOB and so is hiring new staff after a wave of departures in recent years.
"I'm a disciple of governance and strategic planning from my 30 years in the United States Air Force and the Department of Defense, planning on the Joint Chiefs of Staff," he said. "It's in my DNA to look at what's going to happen in the future. As far as paying attention to executing right now, people are the fundamental piece to everything you're going to do. I look at the system, process, people and infrastructure. You can debate, but the proportion of people is what's always going to get you to the end game, and it's possible through the planning process. When we looked at capabilities at the PCAOB, that's one of the things we focused on right away. People are our top resource. We are all facing problems with recruitment and retention in the audit profession."
