September 23, 2020

Let’s Give Up on the PCAOB But Not on Regulating Auditors

Ed. note: Paul Gillis Ph.D, CPA is a Professor of Accounting at the Guanghua School of Management, Peking University in Beijing, China and co-director of its IMBA program. He is a former member of the PCAOB Standing Advisory Group, he also writes the China Accounting Blog and you can follow him on Twitter. He's not pointy-headed, as he was once lovingly called by yours truly. He does, however, want in on this week's PCAOB flame war.

"It's never too early to learn that the government is a greedy piglet that suckles on a taxpayer's teet until they have sore, chapped nipples." – Ron Swanson

I hate to see Going Concern publishing op/eds on serious regulatory issues like the future of the PCAOB. As a retired Big Four partner I come here to read about how miserable you all are, reminding me it really was as bad as I remember. But then you let a serious fight break out, and I cannot resist the urge to pile on. Twenty years ago I cost PW a ten-yard penalty for piling on an EY quarterback in a flag football game. The EY quarterback broke my clavicle on the very next play, so please let me have it in the comments.

Andrew Argue argues that the PCAOB is like welfare to the profession, creating lots of meaningless jobs. Channeling Ron Swanson, he argues to get the PCAOB out of the way and make the profession survive on its reputation for adding value.

Big4Veteran argues Argue has shitty ideas and is a Ron Paulite nihilistic zealot who should really be saying we should just stop requiring companies to get audits. Big4Veteran says the PCAOB has started to clean up the mess of the last 70 years, but let’s not throw out the baby with the bath water.

Let’s cut the baby in half instead. I think the PCAOB was an overreaction to Enron. Yes, there were a lot of problems, but we didn’t need a separate regulator spending a quarter of a billion dollars to fix them.  

So, I propose we shut down the PCAOB. But let’s keep on regulating and reforming the auditing profession.  

The PCAOB does three things:

  • it makes the rules for auditing
  • it inspects to make sure firms follow the rules
  • and it punishes those who do not.

Before the PCAOB the AICPA Auditing Standards Board made the rules. It still does for non-issuers. Enron did not happen because the AICPA made bad rules.  Turn standard setting back to the AICPA and let the SEC oversee the process.

The PCAOB's limited mandate is resulting in some goofy proposals. Currently the board is looking at requiring disclosure of the audit partner, participating member firms, and audit firm tenure in the audit opinion. While that is probably good information to disclose, it belongs in the proxy statement, not the audit opinion. Why would the PCAOB want to put it in the audit opinion? Because that is the only part of the filings it controls, and the SEC seems happy to let the PCAOB take the heat on the proposal.  

The SEC should also take on inspections and enforcement. Create an Office of the Chief Auditor to do all the inspections. Turn enforcement over to the Division of Enforcement. Heck, they are doing it already anyway – the last two accounting firms to get shut down were collared by the SEC, not the PCAOB.

This will not solve the federal budget problem, but getting rid of one regulator would make me, and Ron Swanson, happy.
 

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