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Could We Soon Be Living In a PCAOB-less World?

I cut out of the office early yesterday afternoon to watch my oldest daughter’s junior high basketball game, thinking: “It’s a slow news day, I’m not missing out on anything.” It wasn’t until I had my first cup of coffee this morning that I saw a couple of articles posted yesterday afternoon, including one from Amanda Iacone of Bloomberg Tax, that talk about the all-of-a-sudden uncertain future of the PCAOB.

She reported:

The U.S. audit regulator would turn over its duties to the Securities and Exchange Commission under the Trump administration’s budget proposal for fiscal 2021.

The White House would transfer the authority of the Public Company Accounting Oversight Board to the SEC by 2022 in order to eliminate duplication between the two regulators and “reduce regulatory ambiguity,” it said in the budget released Monday.

The administration estimates eliminating the board would save an estimated $580 million over nine years. Public companies and registered broker-dealers pay support fees that fund the board and its operations. In 2020, the board is working with an operating budget of $284.7 million.

Several thoughts popped into my head:

  • Would a divided Congress (especially House Democrats) get behind this?
  • Could the SEC handle being both the capital markets regulator and the audit industry regulator?
  • Would the SEC be a better/stricter audit watchdog than the PCAOB? If not, would the audit industry revert back to the Wild Wild West days of pre-Sarbanes-Oxley?
  • Would the SEC inspect audit firms, especially the Big 4, as frequently as the PCAOB?
  • Would something like the PCAOB/KPMG inspections leak scandal happen if the SEC was the overseer of audit firms?
  • Can SEC employees drag themselves away from watching porn long enough to handle the PCAOB’s duties?

So many questions.

But the one big question I had was: Is taking away the PCAOB’s powers a bad idea or a good idea? Iacone talked to our friend Michael Shaub, accounting professor at Texas A&M University, about that:

Whether the SEC would maintain the same level of inspections as the board is a question for policy makers. Rather than the fees, it’s the board’s inspections that companies and accounting firms don’t like, said Michael Shaub, accounting professor at Texas A&M University.

Shaub said he can see the arguments to eliminate the redundancies between the two agencies, and he would support the SEC taking on the board’s inspection work. The problem, he said, is the SEC never did that before Sarbanes-Oxley, and only stepped in after there was a problem.

It seems that most of the people Iacone spoke with, including Dan Goelzer, a former PCAOB member and former general counsel to the SEC, thought turning over the PCAOB’s duties to the SEC was a bad idea. Do other people feel the same?

John Keyser, assistant professor of accounting at Case Western Reserve University, told me he didn’t see a compelling reason to dismantle the PCAOB at this time.

“When it enacted the Sarbanes Oxley Act of 2002, Congress could have assigned the responsibilities for auditor oversight to the SEC, but elected instead to establish a new entity with a narrow focus on the oversight of the public accounting profession,” he said. “In fact, the idea of establishing a separate regulator of audit firms was first proposed in 1978 when a bill was proposed in the House of Representatives to establish the National Organization of Securities and Exchange Commission Accountancy (H.R. 13175, June 16, 1978). The PCAOB has operated for more than 15 years and, according to the public accounting firms, has improved audit quality.”

However, if the budget proposal falls through and the PCAOB remains as audit regulator, Keyser said he’d like to see the PCAOB narrow its focus to just registration, inspection, and enforcement—not standard setting.

“Under SOX, the PCAOB could have looked to the accounting profession for audit standard setting, similar to how the SEC looks to the FASB. Instead, we have two sets of auditing standards in the U.S.—one for SEC registrants and broker dealers, and a separate set of standards for audits of all others. If there is inefficiency in the PCAOB, I think it is in standard setting,” he said. “The SEC has sufficient influence over the FASB—the PCAOB could have similar influence of the AICPA’s Auditing Standards Board or the IAASB (or a new standard setter under the control of the Financial Accounting Foundation). I wonder if auditor oversight were to be transferred to the SEC whether the SEC might transfer audit standard-setting responsibility to the profession or the FAF?”

Jeffrey Cohen, professor of accounting at Boston College, called the SEC/PCAOB proposal “a terrible idea.”

“The PCAOB currently has the resources to conduct inspections of the auditing firms and thus increase overall audit quality. If it goes under the SEC, the oversight function would be diluted and inevitably protection for the financial markets would be compromised,” he told me. “I am not surprised by the proposal as the Trump administration is clearly on a path to undermine regulation in any sector and to reduce protection for the individuals with less power.”

Ever since the PCAOB and KPMG gave the accounting profession a swift kick to the nads, the PCAOB has been a shell of its former self. And how much audit quality has actually improved since the PCAOB was created can be debated. But would the quality of audits get any better under the SEC’s purview, or would they get worse? I’m leaning more toward the latter than the former.