From One Acorn to a Thousand Forests: Trust, Financial Statement Auditing, and the Future of the Accounting Profession

Remarks as prepared for delivery 

Good evening and thank you, Tom [Banas] for the warm introduction. I congratulate you on your upcoming graduation and wish you continued success as you begin the Master of Science in Accounting program in the fall. I have had the opportunity to meet with numerous student groups over the past two years. And after each meeting, I walked away with confidence that the future of the accounting profession is in capable hands.  

It is a privilege to be with you this evening as part of the Helen and Oscar Sufrin Lectureship in Accounting. Since 2007, the Helen and Oscar Sufrin Lectureship series has brought together leaders in financial reporting, regulation, and the accounting profession including Sherron Watkins, former Enron Vice President of Corporate Development who exposed the accounting irregularities,¹ Paul Munter, former Securities and Exchange Commission Chief Accountant, Financial Accounting Standards Board members, and the PCAOB’s own Mary Sjoquist in 2009.² These speakers offered their insights into challenging and topical areas.

In light of Oscar Sufrin’s 35-year accounting career in New York City, including 25 years as an accounting instructor at City College,³ I am sure he would be pleased with the importance and longevity of this speaker series and with the robust dialogue it promotes. It is an honor to add my voice to this list of distinguished speakers and rich tradition.     

Before I continue, please know that my remarks this evening are my own in my official capacity as an individual PCAOB Board member and do not necessarily reflect the views of the full Board, my fellow Board members, or the PCAOB’s dedicated staff.

When contemplating the work of the PCAOB, I always find it beneficial to look back at the long and plentiful history of the accounting profession to help provide additional context to the issues facing us today. As former President Harry Truman famously said “There is nothing new in the world except for the history you do not know.”⁴ With that perspective in mind, I want to begin by recognizing the important role that the city of Buffalo and, more broadly, New York State have served in the evolution of the accounting profession.

The New York State Society of Certified Public Accountants (CPAs) is the oldest state society of CPAs.⁵ It is not an exaggeration to say that the accounting profession would not be what it is today without the work of the New York State Society of CPAs (Society). The Society’s role reminds me of the Ralph Waldo Emerson quote “The creation of a thousand forests is in one acorn.”⁶ The Society was that one acorn.

In the wake of the Civil War, the United States experienced a prosperous economy and the emergence of its first corporations that attracted investors from around the world. New York State was the epicenter of this economy with Buffalo serving as a key trading, logistics, and innovation hub on the Erie Canal (Canal), which I will discuss in more depth later.

Yet, the accounting profession had not advanced with the economy. Instead, foreign investors in American companies, particularly from England, had concerns about some of these enterprises and sought advice from their accountants.⁷ James T. Anyon, a well-known British accountant who immigrated to the United States during this era, found when he arrived that “public accounting was in its infancy and that it was little known or understood as a distinct profession.”⁸ Unlike in England, businesses in the United States had little regard for accountants and would turn to their lawyers or bankers to help with complex accounting or bookkeeping problems.⁹

As a result, accountants in New York banded together to raise the status of the nascent profession by establishing a state society of CPAs.¹⁰ In addition, they lobbied to pass state legislation to create the first licensure requirements for CPAs.¹¹ The Society’s first president was Charles Waldo Haskins. An interesting historical sidenote is that Haskins was Ralph Waldo Emerson’s cousin. Haskins played a pivotal role in both the founding of the Society and the passage of the New York State CPA licensure requirements.

While Haskins was not a renowned poet like Emerson, he did use words to inspire others. At the Society’s first annual dinner in December 1897, he delivered a speech on the need for licensing regulations for a profession that existed since, in his words, “the very morning of time.”¹² At the core of his argument, Haskins asserted that the public interest focus of the accounting profession was so high, much like that of lawyers or doctors, that it required a standard of quality.

In Haskin’s remarks, he discussed the societal importance of accountants going back a millennium, noting that “through all ages . . . we have had our place, and a very high one, in the affairs of mankind. We have stood ever near the throne and altar.”¹³ Haskins further discussed the importance of financial statement auditors, in particular, stating “No business can be economically carried on without a proper system of accounting, with the safeguard of a periodical examination by an independent auditor of judgment, experience and tact.”¹⁴ He also noted the need of independent audits “to bring together all the figures showing the operations of the concern, so that the results may be clearly seen, and any mistakes of management or errors of judgment may be discovered.”¹⁵ Today, we might highlight this as the importance of high quality financial reporting and auditing.

From the simple beginning of the Society, or, to paraphrase Ralph Waldo Emerson, from this “one acorn,” this noble profession that serves the investing public, the capital markets, and ultimately society, flourished into a “thousand forests.”  

For the remainder of my time, I will expand on the following three areas: First, how Haskins’ belief in the importance of the accounting profession and the need for independent audits have demonstrated their value over time. Second, how the PCAOB’s activities have enhanced the quality of independent audits. And third, how two areas representing both opportunities and concerns – the continued rise of private equity (PE) investment in accounting firms and the growing use of artificial intelligence (AI) - are significantly impacting accounting firms and audits. I welcome your thoughts on each of these topics.

Role of the Accounting Profession and its “Conscience”

Haskins’ work to propel the accounting profession forward did not stop with his speech at the Society’s first dinner. He built one of the leading American accounting firms, Haskins & Sells,¹⁶ while continuing his engagement in public policy. In 1901, he was an early voice in calling for “independent audit[s] of accounts by disinterested certified public accountants.”¹⁷ Ultimately, the first published audited financial statements of a public company occurred in 1903.¹⁸

The risks associated with investing in the stock market and the lack of independent audits for public company financial statements became more evident in the years leading up to the 1929 stock market crash. While not the result of an accounting irregularity, during the 1920s, Buffalo had its own, although less well known, stock market scandal.

Buffalo was home to a large corporate retail conglomerate, L. R. Steel Company.¹⁹ Its founder sought funds from public investors to establish five-and-dime stores across the country, an idea Sam Walton would later implement with great success with the creation of Walmart.²⁰ At its height, the L. R. Steel Company had over 5,000 salespeople convince approximately 60,000 retail investors to invest over $25 million in its common stock for the promise of generous returns and dividends.²¹ Unfortunately, the founder’s vision ended in ruin when it was discovered that the company’s expenses far exceeded its profits, leading to bankruptcy and devastating investor loss.

The failure of the L.R. Steel Company and other companies,²² coupled with the Great Depression, brought Haskins’ earlier call for independent audits into sharp focus. Haskins had laid the groundwork for one of his successors to realize this idea nearly 30 years later. That successor was Colonel Arthur H. Carter. Colonel Carter held the distinction of having served in both World Wars where he rose to the rank of Major General. He also followed in Haskins’ footsteps as a leader of the accounting profession, serving as the managing partner of Haskins & Sells and the president of the New York State Society of CPAs.

Colonel Carter’s tenure as president of the Society came at a pivotal time for the country and the accounting profession. Following the stock market crash, a United States Senate committee considered legislation that ultimately became the Securities Act of 1933. Colonel Carter was apparently the only representative of the accounting profession to testify before the committee.²³ The committee sought to identify a responsible party to ensure the accuracy of financial statements. Some committee members thought it should be the company’s directors, while others favored establishing governmental auditors to fill this role.

Colonel Carter, however, advocated for independent auditors to certify the financial statements.²⁴ This approach raised the skepticism of some committee members, including Senator (and future Vice President) Alben Barkley, given the obvious windfall such a requirement would provide to accounting firms. The senators directed a series of increasingly pointed questions to Carter, who testified that independent CPAs should audit the records of corporate controllers. When Senator Barkley challenged the Colonel on who would audit the auditors, Colonel Carter simply responded, in what would become a part of auditing history, “our conscience.”

These hearings ultimately resulted in the passage of the Securities Act of 1933, which included a mandate for annual independent audits of public companies.

Colonel Carter did not expand on what he meant by “our conscience,” but I suspect that he would likely have agreed with the list of qualities of a good auditor that Haskins listed 30 years before him: judgment, experience, and tact. But, as we know, these qualities must be used in service of a higher purpose – a fidelity to the investing public. The challenge for auditors is that the interests of investors and the management of the company whose financial statements are being audited do not always align.  

Since Colonel Carter provided his fabled response, history has shown that the auditor’s conscience, by itself, is not always sufficient to overcome the pressures of profitability and commercialism; forces that can undermine the auditor’s higher purpose.

The Creation and Role of the PCAOB

Those forces were at play in the events leading up to the creation of the PCAOB. In the 1970s, in response to additional Congressional scrutiny, the accounting profession established a system of self-regulation based on a peer review process. In the early 2000s, the weaknesses of self-regulation became apparent when accounting scandals contributed to the bankruptcies of Enron and WorldCom, followed by the collapse of their auditor, Arthur Andersen.

The bankruptcies of Enron and WorldCom not only resulted in staggering losses for investors and the broader economy, but they also triggered a breakdown in the public’s trust that the financial statement auditor will exercise professional skepticism and judgment independently of the company they are auditing.²⁵  

This focus on profitability was most pronounced in the case of Enron. Although Enron’s annual audit fees were significant, they were eclipsed by the fees received from non-audit services.²⁶ To quote one observer “It appears that Andersen’s audit team, when faced with accounting issues, chose to ignore them, acquiesced in silence to unsound accounting, or embraced accounting schemes as an advocate for its client.”²⁷ The pressures of commercialism in the audit were not new. One only needs to look back 30 years earlier to the bankruptcy of the Penn Central Transportation Company (Penn Central).²⁸ In that instance, the Securities and Exchange Commission chastised the independent auditors of Penn Central for failing to “exercise critical and independent judgment.”²⁹

An overriding objective of the Sarbanes-Oxley Act of 2002 (Act) was to restore public confidence in the capital markets and implement actions to refocus financial statement auditors on their obligation to the investing public. Prominent among those actions was the establishment of the PCAOB. The PCAOB is unique in that it serves as both a regulator and a standard setter; designed to be independent from the accounting profession. The Act endowed the PCAOB with the authority to require accounting firms that perform audits for public companies to register with the PCAOB, to set standards and rules for registered accounting firms conducting public company audits, to conduct periodic inspections of registered accounting firms, and to bring enforcement actions against registered accounting firms that fail to abide by the PCAOB’s rules, professional standards, and the securities laws. No longer would the auditors be guided solely by their conscience.

I strongly believe that audit quality, by any measure, has markedly improved since the passage of the Act. As support, the Center for Audit Quality’s 2025 survey³⁰ found that 91 percent of institutional investors trust the accuracy of audited financial statements. Over 95 percent of these respondents stated that oversight of public company audits and the audit process increased their confidence in audited financial statements. In fact, these institutional investors “draw a direct line between regulatory oversight and audit confidence.”

I have spoken before about how commercial aviation and the financial statement audit both involve complex systems with real consequences.³¹ They also share another feature – users often take their performance for granted. For example, most travelers simply trust that the plane they are boarding will get them to their destination safely. They trust that the plane has been designed, tested, inspected, and maintained such that the safety of the flight is never seriously in doubt. Similarly, investors trust the accuracy of a company’s audited financial statements. In doing so, there is inherent trust that the auditor has fulfilled their gatekeeping role by testing, evaluating, and assessing the accuracy of the public company’s financial statements. I would offer that this inherent trust should be celebrated, but by no means taken for granted.

The historian Simon Winchester summed up one of the challenges of complex systems: “Due to the inherent nature of…complex systems, their natural tendency is to regress if not constantly monitored – and occasionally even when monitored vigorously.”³² I believe the PCAOB’s inspection program provides that monitoring.

Since 2003, the PCAOB’s highly skilled inspectors have traveled the world to inspect registered accounting firms that issue audit reports for public companies. In 2025, our inspection staff conducted over 200 firm inspections, encompassing the review of portions of over 880 audit engagements. A key part of each inspection is the inspectors’ evaluation of a firm’s system of quality control.

The inspection process has been designed to drive sustained improvement in a firm’s system of quality control. This process focuses on prevention, detection, and deterrence of audit engagement deficiencies and quality control deficiencies. I believe the PCAOB’s oversight work, and in particular our inspection program, benefits not only investors, but also the accounting firms, the accounting profession, and public companies. 

Specific to accounting firms, I believe that the ability of an accounting firm to consistently perform high quality audits often comes down to the firm’s culture and that culture’s ability to combat the forces, both formal and informal, that can undermine an auditor’s conscience. The resilience of a firm’s culture is often revealed in difficult moments. To quote one observer “When the firm’s commercial interests collide with its professional obligations, its culture is revealed by observing which side wins.”³³

Private Equity Investments in Accounting Firms and the Use of AI

In addition to the ever-present pressures of profitability and commercialism, the accounting profession today faces new challenges. I want to focus on two of those challenges – the continued expansion of PE investments in accounting firms and the increased use of AI to conduct audits. Combined, these changes may fundamentally alter the business model of accounting firms.

Historically, accounting firms have operated as partnerships whereby the skills of individual auditors are honed through an apprenticeship model. While performing audit procedures, junior auditors gained experience and an understanding of the “why” behind the audit procedures they performed from those that supervised them. This on-the-job training also allowed junior auditors to develop and refine their professional judgment and a sense of skepticism. Today, some suggest PE investments in accounting firms and the increasing use of AI in audits may reduce, if not eliminate, the need for junior auditors, since the parts of the audit typically performed by junior auditors will be predominantly performed by AI. Over time, auditors without the experience of performing certain basic audit procedures will be responsible for reviewing the work performed by AI. In fact, new auditors might be starting their professional careers at what has been traditionally considered a senior or even manager level. I question how those auditors will develop the knowledge necessary to review that work and hone their sense of professional judgement and skepticism.

Another impact we have seen with the rise of PE investments in accounting firms is that the more senior equity partners leave the firm shortly after the PE transaction. This may result in fewer individuals being available to coach, mentor, and train less experienced audit staff.

Factored together, I suspect the implications of losing personnel at both the bottom and top of what traditionally was a pyramid staffing structure will impact both the culture and even the enterprise risk of accounting firms.  

Private Equity and the “Financialization of Professionalism”   

I now want to focus on PE investments, the latest evolution in the accounting firm ownership model.

Historically, outside investment in accounting firms was “precluded due to state laws that require CPA firms to be majority owned by CPAs and all owners to be actively engaged in the business.”³⁴ Over time, that ownership requirement changed to simply require that CPAs own a majority interest.

During the 1990s, a new structure for accounting firms was developed to allow for non-CPA ownership in accounting firms while still maintaining majority CPA ownership of the audit function required under state Boards of Accountancy ownership regulations. This structure was termed an alternative practice structure (APS).³⁵

When an accounting firm takes an investment from a PE firm, the accounting firm is effectively divided into two – the attest entity, where the audit function is preserved, and the non-attest entity, where the rest of the business functions reside, including tax and consulting. The attest entity remains owned by the CPA partners, while the PE investors purchase an ownership interest in the non-attest entity.

Part of the benefit PE ownership has for accounting firms stems from the flexibility the investment brings to the firm. The traditional accounting firm ownership model, which primarily relies on partner contributions and debt financing, can limit longer-term investment and growth strategies. Conversely, PE investments can be used to assist with recruitment, retention, succession planning, and capital-intensive investments in advanced technologies, including AI. PE investments can also fund a firm’s growth by funding acquisitions of other accounting firms, the expansion of existing service lines, and the entrance into new service lines. In addition, PE investments can accelerate a firm’s growth through rollup transactions. A rollup transaction “collapses years of traditional M&A into a single closing date and produces instant scale, which is precisely what PE [investors] prize in an environment where organic growth in accounting remains stubbornly slow.”³⁶ By increasing firm capacity, modernizing audit tools with advanced technologies, and creating efficiencies, the opportunities funded by PE have the potential to enhance a firm’s capabilities while also providing returns for investors.

By my count, as of January of this year, 12 of the 25 firms on Accounting Today’s 2025 list of top firms have taken a PE investment. Another two of those top 25 firms have non-traditional ownership structures. That is a significant change from 2020, when none of the firms on the corresponding list had PE funding.

PE firms typically hold their investments for between three and seven years and exit from those investments in one of three ways. First, a PE firm can sell its interest to another PE firm, which is known as a “flip.” Second, a firm with PE ownership can be acquired by a different and typically larger accounting firm. Lastly, the PE firm can take the accounting firm public through an initial public offering (IPO). We have already seen two flips and several rollups, and some suspect we will see an IPO in the next few years.   

A recent academic working paper published by the National Bureau of Economic Research discussing PE investments in accounting firms describes the phenomenon of PE investment as the “financialization of professionalism,” whereby accounting firms are transformed into “firms that look, behave, and monetize like the rest of the corporate sector.”³⁷

While this financialization of the accounting profession may benefit the investment in people, technology, and expansion, it may also have downsides. Based on reports of the impact on PE investments in other professions and businesses, I have concerns that an emphasis on commercialism can be at odds with audit quality. A report by Accountancy Europe highlighted this tension, stating that “The pressure to deliver high financial returns may encourage cost-cutting, aggressive fee negotiations, or rapid expansion strategies that strain resources and staff capacity.³⁸ In such circumstances, profitability could take precedence over the rigorous processes, resources, and professional judgment required to maintain audit quality.” Shifting incentives toward short-term profitability and growth may mean auditors place less emphasis on audit quality. Moreover, consolidation driven by PE-funded rollup transactions could impact competition in certain markets.

Time will tell if the effects of PE investment in accounting firms will ultimately be positive or negative. I do see how this trend may create an organizational shift, where growth is focused on the higher-margin businesses in non-audit and advisory services at the expense of audit quality. And I see how the trend may also lead to less competition among mid-sized accounting firms.

PE investments into accounting firms have been characterized as “modernizing…the capital structure…accounting firms are now being treated like any other private-equity-owned business: acquired, scaled, recapitalized, and repriced through institutional secondary markets.”³⁹

I am pleased that the PCAOB’s Division of Registration and Inspections plans to focus on the systems of quality control of firms that have accepted PE investments and those considering such investments.⁴⁰

AI – A Story of Innovation

As PE investments have introduced an evolution, or as some might assert the modernization in ownership structures of accounting firms, AI is likely to further revolutionize the financial reporting ecosystem, including the financial statement audit. As the story of AI and what it means for the financial statement auditor unfolds, the history of the Erie Canal is worth reflecting on.

The Erie Canal was an engineering and technological marvel when it was completed in 1825. Its construction had a profound impact on not just the city of Buffalo and western New York State but the entire country.

The Canal’s primary effect was making the transportation of goods and people between Albany and Buffalo more efficient by cutting the travel time roughly in half and reducing shipping costs by 90 percent.⁴¹ Together with the Hudson River and the Great Lakes, the Canal allowed for the transit of goods from Europe through New York State and further west to Detroit and Chicago. By 1853, the Erie Canal carried 62 percent of all trade in the United States⁴² and established New York City as a global center of commerce and finance.

As we know, however, the importance of the Canal to the United States economy changed with the rise of a new technology, the railroad. Similar to how the Erie Canal and the railroads transformed the transportation of goods, today AI is introducing what has the potential to be sweeping changes to the accounting profession. AI is not replacing transportation infrastructure, but rather human activities and most importantly human judgment. It is already being used to substantially run businesses that have traditionally required the exercise of significant human judgment to operate.

Take for example, Lemonade Inc.,⁴³ an insurance company that uses several AI agents to run nearly every major facet of its business. It has an AI agent named “Maya” that handles the onboarding of new customers, collecting information, personalizing insurance coverage, generating quotes, and facilitating secure payments. Another AI agent named “Jim”, processes claims filed by policy holders. Jim is empowered to analyze the claim and decide whether to deny or pay the claim, all without human intervention. Lemonade has other AI agents that respond to questions from customers and employees, as well as another to deploy and test new code.

The Use of AI and the Audit

AI has the ability to transform the financial statement audit as well. AI is being used to enhance risk assessment and, in some cases, efficiently analyze and test entire populations.

As the Lemonade insurance company exemplifies, AI agents are increasingly used not just for automating routine tasks but for exercising judgment. This will undoubtedly happen with accounting and auditing. As I have remarked before,⁴⁴ these changes come with risks. Recent research shows that AI use can erode users’ ability to think critically⁴⁵ and result in users placing too much trust in technology outputs.⁴⁶

The core question, to me, is how much cognitive work should audit teams delegate to AI agents? In addition to the mundane, time-consuming tasks, will the auditors delegate tasks that require the application of professional judgment and skepticism to AI? Although still in the future but given the rapid and seemly endless advances in AI, it is not hard to conceive of an entire financial statement audit performed by AI. But should the audit be performed solely by AI? What are the repercussions of replacing human judgment with AI? Surveys show that the public is skeptical, if not distrustful of AI adoption.⁴⁷ Are the efficiency benefits sufficient to risk the erosion of the public’s trust in the financial statement audit after the hard-fought gains made since the creation of the PCAOB?

I recently read an article⁴⁸ that, although not specific to auditing, illuminates these points by suggesting that “AI isn’t eliminating human work. It’s redistributing human judgement, away from the routine tasks and into the narrow zones where ambiguity is high, mistakes are costly, and trust actually matters.” Interestingly, the article further offers that “AI adoption doesn’t hinge on whether a system can do a task. It hinges on whether humans are willing to rely on its output without checking it. That gap between performance and reliance, the trust gap, is what ultimately determines where AI replaces work, where it augments it, and where humans remain indispensable.”

The article offers a useful framework to assess the risks of that trust gap. The framework measures the ambiguity that exists in a task against the task’s risks of error. When a task requires little judgment to perform and the stakes of failure are low, such as basic classification and tagging, “automation thrives.”⁴⁹ But contrast that with tasks that require interpretation, context, or judgment where the risk of failure is high, such as medical and financial interpretation. In these cases, humans are becoming more targeted, specialized and in demand. The article’s points are well made and most pertinent to the accounting profession and financial statement auditors.

Another article provides a useful analogy for this discussion.⁵⁰ This article quotes Steve Jobs, who called the computer “a bicycle for our minds” because of its ability to amplify a human’s abilities. In that analogy, the author argues, AI is like an airplane for the mind. The analogy works on another level as well. To paraphrase the author, the difference in scale between the consequences of a bicycle accident verses an airplane accident is the same “difference in scale that we face with AI agents.”⁵¹

I also want to highlight that the United Kingdom’s Financial Reporting Council recently issued guidance focused on AI stating that “generative and agentic AI tools have the potential to significantly enhance audit quality across a diverse set of audit procedures and activities. However, these technologies pose risk to audit quality too, relating to the risk of deficient outputs, the risk that outputs are misused and the risk that the audit methodology is not compliant with auditing standards.”⁵²

In summary, while I am very optimistic that AI can enable auditors to be more effective and improve audit quality, that outcome is not guaranteed. “The organizations that succeed with AI won’t be the ones that automate the most. They’ll be the ones that understand where not to automate, and that design workflows capable of pulling human judgement in at exactly the right moment, at exactly the right level.”⁵³ The use of AI in financial statement audits will require steady vigilance to determine where AI is used and where it should not be used.

PCAOB Strategic Priorities – Request for Public Comment

Before I conclude, last week the PCAOB held a public meeting to solicit input from stakeholders on the PCAOB’s strategic priorities.⁵⁴ The feedback will help inform the development of the PCAOB’s 2026-2030 strategic plan. To that end, we are currently soliciting feedback on seven areas, including the inspection information that would be most useful to stakeholders, topics for a standard setting agenda, how the PCAOB should consider deploying technology, and how the PCAOB can enhance transparency with its stakeholders. The comment period closes on May 15, 2026. I strongly encourage you, students included, to provide your thoughts and ideas on our priorities. Your insights will make us better.

Conclusion

In conclusion, I believe the accounting profession and, more specifically, financial statement auditors have reached a place in our society that Haskins described in his inaugural speech to the New York State Society of CPAs. Those first acorns - the New York State Society of CPAs, New York State, and the city of Buffalo - have all had important roles in making that a reality.

As history has shown, reaching this point, however, has not been without challenges and setbacks. Since 2002, the PCAOB has served an important role in advancing audit quality and restoring investor trust in financial statement auditing. Today, the accounting profession stands at a pivotal moment, shaped by rapid advancements in AI and shifting business models. While investor trust in the audit is high, the financial statement auditor cannot take that trust for granted. Instead, auditors must evaluate the potential benefits as well as risks posed by PE investments coupled with the impact both PE and AI will likely have on the business model of accounting firms. The need for auditors to maintain a balance between leveraging AI and preserving the integrity of the audit process will be crucial.

The financial statement auditor plays a critical role in our capital markets. The culture of the firm must ensure that profitability and commercial interests do not override the financial statement auditor’s sacred duty to the investing public.

Thank you and I welcome your questions and comments.