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September 23, 2023

More PCAOB Comment Letters Need to Complain About the Issuer-pay Model

If you're like us, you've been anxiously awaiting comment letters on the PCAOB's auditor reporting model proposal. There's nothing better than self-righteous firms penning letters filled with thinly-veiled condescension. Plus, the U.S. Chamber owes us all an honest effort after phoning in their initial response
So far none of the major accounting firms, the AICPA, CAQ, Chamber or other heavy hitters have their comments posted on the PCAOB's website. We're on the look out but in the meantime, there is an extensive joint letter from the National Asian American Coalition and African Methodist Episcopal Church
Yeah, I don't know, but hey, it's something.
The letter sides strongly with Board member Steven Harris, who expressed quite a bit of disappointment with the proposal, stating:
We would urge that the Board take seriously all of Board Member Harris’ perceptive observations about the infirmities and weaknesses of the proposed changes.
One of the biggest problems that Harris has spoken about over the years is the issuer-pay model. That is, the companies that are required to obtain an independent audit pay the auditors who perform the independent audit.
This arrangement defies comprehension. Yet at some point, some supposedly smart people concluded that this arrangement was perfectly fine and that the audit business would attract individuals who were impervious to the temptation of pleasing clients that were giving you millions of dollars for your services. "Oh, you want to pay us to independent? Right away, sir!"
Even the NAAC and AME Church who, at best, have a marginal interest in this topic, know that expecting audit firms to be independent is like expecting a dog not to eat a plate of bacon you left on the counter: 
[W]e strongly urge an historic change from the past as to how auditors should be paid. Rather than being paid by the corporation they audit, all payments should come from a central PCAOB-controlled fund. This would enable the auditors to be totally free of corporate influence, at least as it affects the level of compensation for services. We estimate that this PCAOB central fund would be approximately $2.5 billion just for Fortune 500 corporations who would contribute to the fund based upon the complexity and size of the audit.
We believe that many large CPA firms would prefer this if the general level of compensation to them was fair and related to the size and complexity of the audit. Please note, we do not contend that present compensation is excessive. We are merely trying to maximize the independence of and perceptions of independence from management.
A PCAOB central fund probably isn't politically plausible and like most things in the accounting world, disrupting the status quo is always a non-starter.
Unless more stakeholders start asking for a solution that doesn't involve issuers lining auditors' pockets, independence will remain nothing more than lip service.

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