Statement at the PCAOB Forum on Auditing in the Small Business Environment and on Auditing Broker-Dealers

Remark as prepared for delivery

Good morning and welcome. It's good to be in Texas, and it’s even better to be outside DC in a room full of people who do the actual work in our economy. I want to thank my PCAOB colleagues for organizing today's event, and especially thank all of you for being here. I know spending the day at a regulatory forum probably doesn't sound like something that would make your friends and family jealous. But I'm glad you attended today, because the people in this room have a perspective that regulators need to hear.

Before I begin, the usual disclaimer: the views I express today are my own and do not necessarily reflect those of the PCAOB, my fellow Board Members, or PCAOB staff.

Many of you audit smaller public companies or broker-dealers. You know from experience that something that looks like a modest requirement in Washington can look quite different by the time it reaches a small business or a small audit firm in Texas.

Today, I want to talk about two broad things that I believe are essential to good regulation: getting the size of regulation right and making regulation more transparent. We need rules that address real risks without imposing unnecessary burdens, and we need those rules to be transparent to inform the people who have to comply with them.

Right-Sized Regulation

If you handed a regulator the job of reducing car accidents, and that is the sole measure for their success, then the regulation would lean towards banning cars. But we know that would cause more harm than good. For example, if cars are banned then people would wind up dying if they couldn't use a car to get to the hospital quickly. Thus, regulators like PCAOB need to look at the entire cost-benefit of their regulatory regime.

Think about why this agency exists. In the early 2000s, Americans discovered that one of the country's most prominent companies had concealed enormous debts and losses. Enron collapsed, investors and employees suffered, and Arthur Andersen, one of the largest accounting firms in the world, ultimately disappeared as well. Those events and other scandals led Congress to pass the Sarbanes-Oxley Act in 2002 and create the PCAOB, replacing a system in which the auditing profession had largely regulated itself with independent oversight. I'm reminded of that history every time I go to work. The PCAOB's Washington headquarters is in the former Arthur Andersen building. It's a fitting reminder of what led to the PCAOB's creation and the importance of getting audit oversight right.

I came to appreciate that long before I joined the PCAOB.

The first time I walked into a PCAOB office, I wasn't a Board Member. It was back in 2019, while I was working for Senator Tom Cotton. One of the issues we were focused on was how the PCAOB's regulatory framework affected the smaller audit firms that serve broker-dealers. Senator Cotton felt strongly about the issue, and so did I. Broker-dealers were telling us they wouldn't have been founded in the first place if current rules had been in place, and that's something that creates real costs, via a smaller marketplace for broker-dealers. So back in 2019, my question was pretty simple: Does it make sense to subject an audit firm that audits a small, privately held introducing broker-dealer that doesn't carry customer assets to the same PCAOB regulatory framework that applies to firms auditing businesses with fundamentally different sizes, complexities, and risks? That wasn't a theoretical question. For a small audit firm, the cost of PCAOB registration, inspection, and compliance is spread over a much smaller practice. At some point, the question for that firm becomes very practical: Does it still make sense to perform these audits? That was the concern we raised then, and it is one I have not forgotten.

We at PCAOB are assessing what the knock-on effects are of our regulation on auditors, issuers, investors and broker-dealers. As mentioned last month by my colleague Mark Calabria, PCAOB is looking to issue a proposal to set up a permanent inspection program for auditors of broker-dealers sometime in the coming weeks, perhaps by year-end.¹

At year-end 2013, 754 PCAOB-registered firms audited broker-dealers. By the end of 2025, only 206 did. That is a decline of nearly 73 percent. To be clear, I am not suggesting that regulation alone caused that decline. There are undoubtedly other factors as well, such as economics, consolidation, liability, and succession challenges. But when the number of firms serving this market falls by nearly three-quarters, we should pay attention. And as a regulator, we should be willing to ask a hard question: Are our own policies part of the reason? 

Former SEC Chairman Jay Clayton told Senator Cotton in writing that a "one-size-fits-all" audit requirement may not suit certain broker-dealers. He recognized that different broker-dealer activities present different risks and that regulators should consider both benefits and burdens. And those differences matter.

No one disputes that fraud involving customer assets can cause devastating harm. The Madoff scandal is a reminder of that, and Congress expanded the PCAOB's authority over broker-dealer auditors following the financial crisis. But that doesn't mean every broker-dealer presents the same risk. A firm that carries or has custody of customer assets can present fundamentally different risks from one that doesn't carry them. Recognizing that distinction isn't weakening regulation. It's right-sizing regulation to the risk.

That issue stayed with me, and I'm now three months into the job as a PCAOB Board Member. From inside a regulatory agency, a requirement often looks perfectly reasonable. There's a policy objective, a process for complying with it and real-world harm to justify why the rule exists.

But somewhere outside Washington, there may be a firm with five or ten employees trying to figure out what we wrote and how to pay for what we required. The question for that firm isn't simply whether the regulator had a good reason for acting. It's whether the requirement makes sense for the actual risk posed by that particular business. That doesn't mean lowering our expectations for audit quality. If a requirement imposes real costs but provides little incremental investor protection for a particular category of firms, reconsidering that requirement isn't abandoning our mission. It's taking the mission seriously. And it's one reason events like today's are useful.

Let me be careful about what the PCAOB can and cannot do with regards to broker-dealers. We oversee the auditors of broker-dealers. We don't regulate the broker-dealers themselves. Congress decided that registered broker-dealers have to file audited financial statements, subject to exemptions established by the SEC, and the SEC decided that those audits have to follow PCAOB standards. The PCAOB cannot change those requirements. What Congress did give the Board is discretion over the scope of our broker-dealer inspection program, including whether to treat different kinds of broker-dealers differently. Any rule we adopted on that would need SEC approval, after public notice and comment, before taking effect. The point is that Congress recognized something important: not every business presents the same risks, and regulatory oversight should reflect those differences. And that principle isn't limited to broker-dealers. It matters just as much for smaller public companies and the accounting firms that audit them.

Transparent Regulation

Now let’s talk about transparency in regulation. SEC Chairman Paul Atkins has made revitalizing America's public markets a priority. He calls his agenda "Make IPOs Great Again." There is an important concern behind it. If we want more smaller companies to enter and remain in the public markets, we need to think about the entire ecosystem those companies depend on. A public company needs lawyers, access to capital, functioning markets and, of course, auditors. That last part deserves more attention than it sometimes receives.

There may not be a better place to have that conversation than Texas. We're here in Richardson, just outside Dallas, at a particularly interesting moment for Texas capital markets. Just this year, Nasdaq Texas began operating and the Texas Stock Exchange began trading. Capital formation can sound like a phrase only an economist could love or the name of a dorky rock band, but it isn’t abstract. It's somebody with an idea who wants to build a business. Then four employees turn into 40. The next factory costs more than the family can finance. Eventually, the owners decide they're ready to raise money from public investors. If we want that company to take the next step, we need a regulatory system that protects its investors without making the cost of becoming and remaining public unnecessarily high. And that includes making sure there are auditors willing and able to serve those companies.

One concern I have is that unclear rules can become a barrier to entry. We’re not supposed to dissuade competition, nor have regulation that leads to industry consolidation.

It's a challenge to us as regulators. Our rules should be clear enough that a competent auditor who reads them carefully can understand what we expect. If it takes three lawyers, two consultants, and somebody who used to work at the PCAOB to explain a requirement, then maybe the problem isn’t the reader. Maybe the problem, as is often the case, lies with the regulations themselves.

This is why I believe transparent regulation is just as important as getting the size of regulation right. To me, transparency means more than publishing a rule and expecting everyone to figure it out. It means being clear about what we're trying to accomplish, why we think a requirement is necessary, and what we expect from the people subject to it. It also means making our interpretations accessible to everyone, explaining our decisions, and being willing to listen when people tell us we've gotten something wrong. That’s how we help create an environment where audit firms of all sizes can thrive and businesses entering the public markets have access to the auditors they need.

And I want you to know that you can give it directly to me. My direct telephone number is 202-826-5343, and my email is [email protected]. Yes, those really go to me. If there is something we don't understand about your business, tell me. If one of our standards is unclear, show me where. And if you think I'm wrong about something, you're welcome to tell me that too.

Thank you for being here today. I look forward to hearing from you.