In the Arena: Financial Statement Auditors and the Academic Community

Remarks as prepared for delivery

Good morning and thank you, Zach [Kowaleski] for the warm introduction. It is a pleasure to be with you. I still recall our meetings many years ago when you started your research as a PCAOB fellow. It is wonderful to have the opportunity to share the stage with you this morning, and I am glad our paths continue to cross.

I also want to thank the American Accounting Association (AAA) for the invitation to be here and for the honor to start off the Auditing Section’s Mid-Year Conference.

I had the opportunity to participate in a fireside chat just a week ago at the AAA’s International Accounting Section’s Mid-Year Conference, so I feel doubly grateful to be with you again today.

I have seen many familiar faces already this morning, some of whom I saw just last week in Cincinnati and others at the PCAOB’s academic conferences this past fall. I look forward to continuing our conversations today and in the future.

More broadly, I am thankful for the tremendously important work that you, members of the AAA, do every day to advance scholarly research, learning, and education.

Your work helps to ensure that auditing will remain the noble, resilient, and vibrant profession it has been for well over one hundred years.

This event brings together the individuals who shape the intellectual foundation of the accounting profession: the researchers who push our understanding and learnings forward, the educators who prepare the next generation of accountants and auditors, and the financial statement auditors who help ensure that our capital markets remain strong, robust, and worthy of public trust.

Before I continue, please know that my remarks this morning 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.

Since we are here in the great state of Texas, in one of its oldest cities, San Antonio, and just a few miles away from the site of the Alamo, I want to start this morning by talking about the culture of Texas.

The author John Steinbeck wrote, “Texas is a state of mind.”¹

To me, part of that state of mind is a fierce commitment to independence, courage, and responsibility. Since its founding, these characteristics have been woven into the fabric of the state and the DNA of Texans themselves.

Those values – independence, courage, and responsibility – are not merely abstract ideals.

They come to life in the work of the financial statement auditor, and they are powerfully captured in Teddy Roosevelt’s description of the “man in the arena.”²

Over a hundred years ago, Roosevelt wrote about the person who steps forward, who engages, who takes responsibility; the person who chooses effort over ease, duty over comfort, and service over silence.

For the auditing profession, the arena is broad. It includes the students, who are learning not only the technical aspects of auditing, but also its foundations – professional skepticism and independence – and why both are so important. The arena includes researchers, who are testing assumptions and challenging conventional wisdom. It includes the financial statement auditor, who makes judgments that affect countless investors. It also includes standard setters and regulators, who provide frameworks for auditors and work to ensure the system remains fair and transparent.

Every person in this room is in that arena. It is hard work, but vital to the functioning of efficient capital markets. It is this work that ultimately provides trust for investors and supports our society and well-being. 

Keeping this “arena” top of mind, I want to spend our time this morning exploring the following four broad themes: First, the PCAOB, who we are and how we got here; second, the important role of the academic community; next, the opportunities and challenges of artificial intelligence (AI); and, finally, the PCAOB being a marketplace of ideas and the need for a definition of audit.

The PCAOB: Who We Are and How We Got Here

To understand the PCAOB’s role today, it helps to remember how we arrived at this moment in the history of financial statement auditing. The profession has evolved dramatically over the last century, and the PCAOB is a product of that evolution—a response to real challenges that demanded real solutions.

Throughout modern history, financial statement auditing has had several iterations or since we are in Texas, one could also refer to them as “frontiers.” The modern financial statement audit as we know it – independent, based on a framework of both accounting and auditing standards, and grounded in public transparency – is a relatively recent development. If you look back to the early 20^th century, the audit was a very different exercise. It was narrower, more mechanical, and far less standardized. The auditor’s role was still evolving.

The expectations of investors and the capital markets were still forming, and the profession was largely still defining itself.

Railroads emerged as the first private enterprises to undertake truly large-scale capital investments—made possible by investors from around the globe.³ This separation of those who managed the business from investors spurred the creation of “nearly all of the basic techniques of modern accounting.”⁴ As companies expanded across borders and markets grew more complex, the audit needed to evolve alongside business.

Each new frontier in business brought new questions about independence, accountability, and the role of the auditor in earning and sustaining investors’ trust. 

Those questions were not merely rhetorical. In the 1970s, following the failure of the Penn Central Transportation Company, the biggest bankruptcy ever at that time,⁵ Congress published the Metcalf Report that raised concerns about the profession’s independence, quality control, and ability to regulate itself.⁶ It highlighted how these problems in the accounting profession “contributed to a severe decline of public confidence in the integrity of American business”⁷ and recommended the creation of an independent oversight body, much like today’s PCAOB, with the power to set standards; review the quality of public company audits; and publish reports identifying an accounting firm’s lack of compliance with relevant standards.

The Metcalf Report also suggested that this oversight body be governed by an executive board comprised of individuals “from a broad spectrum of interests and backgrounds, including those outside the accounting profession . . . [to] help assure that the organization is responsive to the public's needs, and will not be controlled by the large accounting firms.”⁸

Leaders within the profession also recognized the need for change. The then CEO of Price Waterhouse, now PwC, John Biegler, wrote a report calling for reforms. Specifically, he urged that “public accounting firms with publicly held corporate clients be required to register with the U.S. Securities and Exchange Commission (SEC) to publish their annual financial results and the pay of top partners, to describe their internal quality control procedures, and, further, to submit to periodic reviews of the quality of their operations.”⁹

But the profession pushed back.¹⁰ The proposals were not adopted. And the moment passed.

In 1984, the Supreme Court would refer to the independent public accountant as a “public watchdog” and described the auditor’s role as one demanding “complete fidelity to the public trust.”¹¹

It was not until the turn of the century when the world was hit by the Enron and WorldCom scandals that things would change. While there have been a number of well-known financial failures throughout the twentieth century and to date in this century, the events of Enron and WorldCom were unprecedented in terms of their magnitude.

But the failures of Enron and WorldCom were not just financial. They were failures of governance, independence, oversight, and accountability.¹² They shook public confidence in the financial statement audit and raised fundamental questions about how the accounting profession was regulated, and most centrally, whether it could continue to regulate itself.

As we all know, Congress responded with the Sarbanes-Oxley Act of 2002, which mirrored many of the recommendations of the Metcalf Report by creating the PCAOB to be a regulator independent of the profession to protect investors by regulating the audits of public companies. 

This was a new frontier in auditing—not just for financial statement auditors, but for the entire system of financial reporting.

The authors of the Sarbanes-Oxley Act took pains to structure the PCAOB in a way that would ensure its independence from the profession and adequate authority to oversee the global nature of audit work. I believe that the PCAOB’s structure has been immensely beneficial for the investing public.

Five Fundamental Elements of the Sarbanes-Oxley Act

I want to highlight five fundamental elements of the Sarbanes-Oxley Act that, I believe, make the PCAOB such a unique protector of investors and support our overall effectiveness.  

First, we are led by a five-member Board, only two of whom may be CPAs, of which I am honored to be one. That balance – between technical expertise and public interest oversight – is essential. Similar to the Metcalf Report, it ensures that the Board understands the technicalities of accounting and auditing while being responsive to investors and other stakeholders.

Second, the PCAOB is funded by an accounting support fee (SEC) paid for by public companies and SEC-registered broker-dealers. This secure source provides the majority of funding and ensures our work is independent from the profession. 

Third, inspections and standard-setting are two of the PCAOB’s main oversight activities.

This structure reflects a deliberate recognition that effective auditing standards must be informed by what is actually happening in audits, not just in theory, but in practice. 

Fourth, issuance of firm-specific inspection reports is another unique feature of the PCAOB’s oversight model. Unlike more generalized or summary assessments, firm specific reports provide transparency for investors and other stakeholders as well as identifying specific findings and areas for firms to improve while offering them a clear and actionable roadmap to strengthen their audit practices.

Finally, the PCAOB has global reach. In 2024, in our most recently released inspections data, our inspectors inspected 171 firms and reviewed portions of 803 audits of public companies including inspections of 221 audits performed by 78 non-U.S. firms. Our non-U.S. inspections reach audit firms located across the globe. Since the inception of our inspection program, we have inspected firms located in 58 different jurisdictions.¹³

PCAOB Oversight Activity Pillars

Beyond those five fundamental elements, the PCAOB’s three pillars of standard-setting, enforcement, and inspections are vital to our mission.

I will begin with our standard-setting, which is one of the most important tools the PCAOB has to protect investors. It is how we adapt the audit and respond to new risks, technologies, and expectations from investors and other stakeholders.

As the auditing leader Robert Montgomery wrote in 1912, auditing is a developing science that must be continually examined and improved and the “auditor must adapt their work to changing conditions.”¹⁴

The same can – and must – be done today.

The Office of the Chief Auditor closely monitors the work of other regulators and standard setters, including the International Auditing & Assurance Standards Board (IAASB) and the Auditing Standards Board (ASB) to ensure that PCAOB auditing standards are clear, rigorous, and responsive to emerging risks.

The PCAOB Board Members and staff also meet with our two advisory groups – the Standards and Emerging Issues Advisory Group (SEIAG), and the Investor Advisory Group (IAG) – twice a year to hear their feedback as well as to discuss topical issues affecting the profession, such as AI and emerging technologies.

Additionally, last year, we formed the Smaller Firm Resource Group, which engages with PCAOB staff on current practices in auditing, standards, inspections, and economic considerations related to PCAOB oversight activities.

But standard-setting is not just about writing rules. It is about understanding how auditors work, how companies operate, how investors use information, and how risks and processes evolve. It requires research, analysis, and judgment. It also involves robust economic analysis, including before the issuance of new or revised standards to understand the costs, benefits, and potential unintended consequences. We also conduct post-implementation reviews to evaluate the overall effect of new auditing requirements.

All of which requires input from the academic community.

Another pillar in the PCAOB’s oversight activities is enforcement, which is how we uphold the integrity of the system. It is another way the PCAOB ensures that auditors follow the standards, maintain independence, and exercise due care.

When auditors fail to perform high quality audits, when independence is compromised, or when investors are put at risk, enforcement is an important tool the PCAOB can use to hold them accountable.

And finally, the third PCAOB oversight pillar is inspections.

Although many of you follow us closely, I want to spend a few minutes discussing our inspection program—the PCAOB’s most visible and impactful oversight activity. Our inspections are designed to assess a firm’s compliance with PCAOB auditing standards and rules, as well as the SEC and other regulatory and professional requirements.

Each firm inspection consists of both a review of selected audit engagements and a review of a firm’s system of quality control. At the audit engagement level, our inspection teams select audits and review portions of the work performed – including non-financial areas, such as independence – by reviewing audit workpapers. Our inspectors use both risk-based and random methods to select audits, and they focus their attention on audit areas believed to be of greater complexity, greater significance, or with a heightened risk of material misstatement, and areas of recurring inspection findings.

A firm’s system of quality control underpins a firm’s ability to meet standards and perform high quality audits. For the largest firms, our inspectors spend a significant amount of time understanding and assessing a firm’s system of quality control by considering and performing procedures in the following areas:

1. Tone at the top;
2. Practices for partner management;
3. Policies and procedures for considering and addressing risks;
4. Processes for overseeing the use of audit work performed by non-U.S. affiliates on the non-U.S. operations of U.S. issuer audits; and,
5. Processes for monitoring audit performance.¹⁵

These areas are not just checklists. They are indicative of firm culture, structure, and accountability and point to a firm’s ability to consistently perform high quality audits.

After the issuance of an inspection report, firms have the opportunity to remediate any quality control criticisms through our remediation process – a critical part of the inspection oversight process – which gives firms the opportunity to learn, adapt, and improve.¹⁶

Now, as you can imagine, our robust inspection program did not appear overnight. It has taken two decades of building, refining, and expanding – including the development of our international inspection program. Today, we inspect in dozens of non-U.S. jurisdictions, including China and Hong Kong. This global reach is essential. Investors rely on financial statements from companies that operate across borders. Audit quality must be consistent, regardless of geography.

I think we can all agree that audit quality has improved dramatically over the last twenty years,¹⁷ and I believe PCAOB inspections have been a defining factor in that progress.

PCAOB inspectors are working around the world—examining audits, asking hard questions, and driving continuous improvement in audit quality.

To maintain a focus on audit quality, the PCAOB must continue to evolve as well. The PCAOB inspection program adapts in response to our engagement with investors, the academic community, audit committee members, accounting firms, and others.

A focus on firm culture is one area I would like to highlight where the PCAOB has evolved. Firm culture is far more expansive than leadership and tone at the top. A solid tone at the top does not always trickle down to the staff performing audits. A firm’s entire culture can be undermined by the culture in a particular region or office based on local behaviors. For example, a culture where individuals across all levels of a firm turn a blind eye to setting unrealistic time budgets or more extreme actions, like sharing test answers, are indicators of a culture that is not ultimately conducive to audit quality.

In 2023, the PCAOB launched an initiative focused on audit firm culture. Our inspection program spent about a year conducting more than 150 interviews with partners at the six U.S. Global Network Firms examining firm culture and its impact on audit findings, which were published in a 2024 Spotlight.¹⁸ This work found, among other things, that firm culture has an effect on audit quality—for better or for worse.

That same year, the PCAOB adopted QC 1000, A Firm’s System of Quality Control¹⁹ (QC 1000), that emphasizes the importance of a firm’s culture.

The standard requires firms to obtain an understanding of the conditions, events, and activities that may adversely affect the achievement of its quality objectives. This step requires an understanding of the culture of the firm, and the extent to which a culture of integrity and a commitment to audit quality is promoted within the firm and embraced by firm personnel across all levels. As QC 1000 is implemented, the PCAOB will continue to adapt its inspection program to ensure that firms’ systems of quality control are not only designed effectively but also operating as intended.

The PCAOB’s evolution in its understanding of how firm culture shapes audit quality and its adoption of standards that push firms to focus on that issue is a good example of what the PCAOB is doing: engaging, learning, and iterating its approach to audit oversight. In short, being in the arena.

The Academic Community as the Auditing Profession’s Intellectual Engine

Moving onto our second topic, I believe that the work of the academic community is foundational to the PCAOB. You conduct research that informs standards and rules, train the next generation of auditors, researchers, and leaders, and provide the independent thought – sometimes challenging, sometimes uncomfortable – that informs the accounting profession and the PCAOB.

You are, in many ways, the early warning system for the capital markets, identifying emerging risks long before they appear in practice, and helping us all understand how markets are changing and how technology is reshaping the landscape.

Consider the increase of new exchanges, such as the Texas Stock Exchange. These developments could reshape where and how companies access capital. Understanding these shifts is vital, and that is where your research is indispensable.

The PCAOB needs rigorous, evidence-based insights, especially in emerging areas of private equity investments in accounting firms and technology. You help us understand what is coming before it arrives.

Academic research also helps enhance the understanding of the human side of auditing—how auditors make judgments, how they respond to incentives, how they navigate complexity, and how they exercise skepticism.²⁰ Research on auditor behavior, decision-making, and professional judgment has reshaped how we think about audit quality.²¹ And your teaching ensures that the next generation of auditors enters the profession with the skills, knowledge, and mindset needed to protect investors for years to come.

And that brings me to a topic that is reshaping the profession and society, perhaps more than any other: the adoption of AI.

AI and the Future of Audit Quality

A recent article caught my eye because it so well summarized the issue before us:

“While the Industrial Revolution unfolded over eight decades, this transformation is accelerating organizational adaptation dramatically. The organizations already redesigning themselves are building competitive learning moats that late adopters cannot replicate simply by deploying the same technology. And that clock is already ticking.”²²

Regarding the audit, the question is not whether AI will influence the audit because it already has. The question is how it is influencing the audit and whether it will strengthen audit quality or undermine it. Namely, will AI be a new tool that can be leveraged during the audit process, akin to the adoption of something like Excel, or will it fundamentally change how the audit is performed?

I have heard a number of firms talk about improving audit quality in various ways through the concepts of centralization, simplification, standardization, and automation. The expanded use of AI is, in many ways, a continuation of these concepts, and the ideal outcome is straightforward: AI should increase both efficiency and effectiveness. While AI offers extraordinary opportunities for the auditing profession, it has the potential to transform the audit in ways that were unimaginable even a few years ago.

First, AI can enable deeper insights. Traditional audit techniques often rely on sampling from a subset of transactions to test. AI allows auditors to analyze entire populations of data in ways that are faster, more precise, and more comprehensive than ever before. It may also allow for more real-time auditing of certain types of transactions.

AI can also make testing more efficient. A recent comprehensive review of more than 400 peer-reviewed studies found that AI is already improving the efficiency of audit procedures by enabling faster processing of large datasets and reducing the time required for traditional testing.²³ This increased efficiency has the potential to free auditors to focus on areas that require professional skepticism, critical thinking, and deeper analysis.

AI can also enhance risk assessment and fraud detection. Research in the Journal of Risk and Financial Management demonstrates that machine learning and AI frameworks significantly enhance fraud detection by identifying key financial risk indicators and providing transparent explanations auditors can use in their risk assessments.²⁴

These opportunities are significant and have the potential to transform the audit, strengthen audit quality, and enhance investor protection.

But they also come with great challenges that require careful thought and rigorous research.

Studies show the dangers of overreliance on AI. AI tools can be powerful, but they are not infallible. They reflect the data they were trained on and the assumptions built into their models. If auditors rely too heavily on AI outputs without applying professional skepticism, they risk missing critical issues.²⁵

AI systems can also inadvertently perpetuate or amplify biases presented in the data they are trained on.²⁶ In an audit context, this could lead to inconsistent risk assessments, flawed judgments, and an uneven application of procedures.

Additionally, as AI becomes more integrated into the audit, this shift has implications for education, training, and professional development. Auditors will need to expand their skills beyond the audit to include analytical, technical, and critical thinking skills to understand and challenge AI outputs.

Finally, AI presents challenges in accountability. AI may assist in performing audit procedures, but it cannot assume responsibility for the audit opinion. Regardless of how technology evolves, the auditor remains accountable to exercise judgment, skepticism, and independence. The human must always be in the lead.

A Focus for Regulators

Regulators, audit firms, investors, academics, and others should think carefully about what accountability looks like with the adoption of AI and other audit tools.

I recently met with another regulator who issued a report that identified areas where firms should have policies and practices in place to guide their use of audit tools such as AI. The report described these areas as “building blocks” that provide structure for adopting new technology in the audit, including having a robust framework, effective controls, and taking steps to ensure the reliability of data used to support the auditor’s opinion. The report argues that audit firms should consider what building blocks they need for the responsible use of AI and other technologies.²⁷

Ultimately, we are in a period of transition with AI, and it is not yet clear exactly how AI will be widely incorporated in the audit. The PCAOB is closely following developments in this area and exploring how we may need to evolve with this technology. For example, we do not want standards or rules to inadvertently inhibit the use of AI or other technologies that have the potential to improve audit quality. If you have identified such situations from your research, we would be interested in hearing from you.

When considering the use of AI, on a basic level, what we are talking about is a kind of delegated cognition,²⁸ deciding which parts of our thinking we hand over to machines.

Any steps to diminish the human role need to be taken very carefully with a clear understanding of what might be lost as well as what might be gained.

Auditors’ Skills for the Future

That is why academic research is critically important to this conversation.

We need studies that help us to understand the impact of delegation, what must remain solely in the hands of a human, and how those boundaries shift over time. 

We also need your leadership. You are preparing the next generation of auditors—a generation that will enter a profession transformed by technology. They will need to understand not only how to use AI tools, but how to question and challenge them as well as apply judgment alongside their use.

As we look to the future of the profession, there will be a need to rethink how auditors are trained. The increasing use of technology in the audit suggests there may be a role for individuals with non-traditional accounting or auditing backgrounds. This is a trend I have heard about in recent meetings, as engineers were hired and then trained on the job to understand auditing. Engineers, who are trained to test systems, identify failure points, and assess risk, might play a role in the audit of the future.

The PCAOB as a Marketplace of Ideas

Moving onto the last topic, despite decades of discussion, there is not a universally accepted definition of audit quality. Perhaps this is not surprising given that audit quality likely means something different to every stakeholder in the arena – as well as in this room.

To investors, audit quality may be about the ability to trust that the financial statements they rely on are accurate, complete, and free from material misstatement.

To auditors, audit quality may be about the consistent application of standards, the exercise of judgment, and the ability to stand strong in the face of pressure.

To academics, audit quality might be more of a construct that must be defined, measured, tested, and refined.

And to audit committee members, audit quality may be more about having assurance that the auditor has exercised true independence and skepticism and provided an unvarnished view of the company’s financial reporting.

Each of these perspectives is valid and each highlights a different dimension of what makes the audit essential to the functioning of our capital markets.

This is an area in which the academic community is uniquely positioned to help. You bring conceptual rigor, empirical grounding, and independence. And your work is not limited to the present. You help us think about the future—about how audit quality will evolve as technology changes, how business models shift, and as investor expectations grow more complex.

At the PCAOB, we are committed to transparency and clarity. We are committed to strengthening audit quality through inspections, standard-setting, and enforcement, but we cannot define audit quality alone, nor do we want to.

We want to be a “marketplace of ideas”—a space where research, practice, and regulation come together. The “marketplace of ideas” is not a metaphor. It is a necessity. It is how we ensure that the profession continues to evolve, continues to improve, and continues to serve the public interest.

And that brings me to my final point.

Conclusion

In closing, while the future of auditing is an unknown frontier, we know it will not be defined by technology alone. It will be defined by those in the arena.

That is why the work of the AAA matters so deeply. As we look ahead, I ask you to continue doing what you do best: Challenge us and inform us.

A core part of being in the arena is sustaining healthy pressure—the kind that sharpens judgment, reinforces skepticism, and ensures the focus is on the investing public.

Your research and insights help us do exactly that.

Thank you for your commitment to the public interest and your dedication to your students.

And thank you again for being in the arena.

I look forward to your questions.