The PCAOB Sucks, the PCAOB Is Doing Great

The PCAOB recently approved a $384.7 million budget for 2024, an 11 percent increase over 2023, and just needed to get approval from the SEC. It was assumed this wouldn’t be a problem, though it was equally assumed that resident contrarian Hester Peirce would have some shit to say about it. And she did.

SEC Chair Gary Gensler said in his Wednesday statement he supports this $385 million budget and its accompanying “modest two percent increase in headcount” because of “the important role the PCAOB plays in protecting investors and facilitating capital formation.”

Then came several hundred words about Sarbanes-Oxley (“A central goal of the Sarbanes-Oxley Act was to restore trust in our financial system by providing external regulation of auditors”) before he got to the point:

The PCAOB budget request is $385 million, up from the 2023 budget of $350 million. This supports 20 new positions, increasing the headcount to 946. Half of the new positions are for the Division of Registrations and Inspections, which would increase from 510 to 520, restoring the inspections division back to its 2017 headcount after which resources for audit inspections were reduced.

Thanks to PCAOB inspections, the quality of auditor oversight all over the world has improved, over time. More than 50 jurisdictions have complied with the requirements that the PCAOB inspect audit firms that audit or participate in the audit of U.S.-listed companies based in their borders.

[bunch of stuff about China and Hong Kong inspections]

In conclusion, I’m pleased to support the 2024 budget for the PCAOB.

You notice he said the quality of auditor oversight all over the world has improved, not the quality of audits.

In her statement, Commissioner Hester M. Peirce was not so complimentary.

The Public Company Accounting Oversight Board (PCAOB) opened its doors in 2003 to promote “informative, accurate, and independent audit reports.” We sit here, twenty years later, considering the PCAOB’s $385 million budget. We owe it to the public companies and broker-dealers that fund the PCAOB and the investors that rely on the PCAOB to ask how well it is doing its important job, which is why we are having an open meeting on this topic.

One troubling piece of evidence was cited by Chair Williams in an op-ed earlier this year, in which she wrote that: “PCAOB inspectors expect that approximately 40% of the audits they reviewed in 2022 will have had one or more deficiencies, in which the audit firm failed to obtain sufficient appropriate evidence to support its opinion.” What does that startling statistic tell us about how the PCAOB is doing its job? More money may not be the answer. Board member Christina Ho labeled the budget “[g]rowing and [u]nsustainable” and called for the PCAOB “to do a better job of “identify[ing] where inefficiencies exist.” Yet more money is just what the PCAOB is here requesting. After receiving a 13% budget increase last year, the PCAOB is back this year asking for another 10% increase. For perspective, if approved, the 2024 budget will be 41% higher than the 2019 budget. For further perspective, the recent federal debt limit deal would increase discretionary spending by about 4% compared to 2023 outlays.

Chair Williams’ op-ed:

Peirce goes on to question the PCAOB bragging about its record penalties (“Should enforcement stats be the measure by which we assess the PCAOB’s success as an audit regulator?”) and why 946 employees are needed to “assist the Board in achieving its mandates under the Sarbanes-Oxley Act of 2002″ when the PCAOB’s 2019 budget used that same justification for 838 employees (“What changed over five years for the PCAOB to justify 108 more employees?”).

But this bit is of special interest. Peirce questions the PCAOB’s ambitious standard-setting regime, something the Board has only recently decided is important after basically two decades of doing very little on the standard-setting front. Great idea on paper, terrible in actual application. Look no further than the controversial NOCLAR matter.

Peirce said:

Erica, the standard-setting regime is, in the words of the PCAOB’s strategic plan, “one of the most ambitious standard-setting agendas in the organization’s history.” [PCAOB Strategic Plan 2022-2026, PDF] While at first blush this may seem positive, an overly active standard-setter can lead to problems down the road as firms retool to comply with those new standards. Gradual standard-setting is the best way to ensure that standard-setters, the public, and firms can devote adequate attention to each standard. With all the new standards you are rolling out, we could see widespread audit deficiencies several years down the road when all these new standards first take effect. Audit quality could suffer if firms are forced to devote more resources to implement new standards and therefore fewer resources for basic quality control measures.

1. How are you thinking about that particular problem as you set and carry out the standard-setting agenda?
2. The strategic plan defends this aggressive agenda by arguing that many of the PCAOB’s standards have not been updated since 2003. How has the PCAOB identified the most consequential standards to update and avoided undergoing a lengthy process to update old standards that have been working well?
3. A former PCAOB staffer raised concerns “that the board and its economic analysis office don’t understand the impacts of its audit standards and whether the benefits outweigh any costs or serve the interests of the American public.” Has the Board ever made a change in a standard-setting project because of its economic analysis? If so, please provide me with an example.
4. A recent survey of institutional investors by the Center for Audit Quality found support for “modern regulations that balance the value of information with the cost of collecting the information.” These investors understand that more is not always better. How does the PCAOB achieve the right balance?

Ultimately the SEC did approve the PCAOB’s increased budget so guess we’ll see you next year for more delicious criticism, Hester.