PCAOB Chair Williams Remarks on 20th Anniversary of Sarbanes-Oxley Act and Establishment of the PCAOB

Remarks as prepared for delivery

Jul. 28, 2022

Public Company Accounting Oversight Board (PCAOB) Chair Erica Y. Williams delivered the following remarks today at a virtual event hosted by Council on Institutional Investors (CII).          

Thank you, Jeff [Mahoney]. And thanks to the Council of Institutional Investors for hosting me today. I want to start with the standard disclaimer that the views that I express here are my own and are not necessarily the views of the other Board members or the PCAOB staff.

The work that CII does advocating on behalf of investors makes a difference. It makes a difference to your members, who represent more than $25 trillion in assets under management. And most importantly it makes a difference to main street investors — the retired schoolteachers and firefighters and workers who have trusted their hard-earned savings to your members’ judgment.

People are at the heart of our mission at the PCAOB, from workers saving for retirement to parents saving to put their kids through college, to anyone who depends on the soundness of our capital markets to invest and build their own version of the American dream.

When we talk about protecting investors, this is who we mean. When we strive to uphold the highest standards in audit quality, it is with investors’ families, savings, and futures in mind.

Protecting investors is what prompted the creation of the PCAOB 20 years ago, and it’s the mission that continues to drive us forward today.

At the end of 2001, Americans were still grappling with the tragic events of September 11th and their aftermath; our country had entered what would become the longest war in U.S. history; and our economy was just beginning to come out of a recession.

Then the Enron scandal broke.

At the turn of the Century, Enron was ranked seventh on the Fortune 500. Throughout the ‘90s, it had built a reputation as a blue-chip company, admired for its innovation.

But that reputation was built on fraud. Enron was lying about its earnings, while hiding billions of dollars in bad debt. And by the fall of 2001, it all came crashing down.

After hitting a mid-2000 high of $91, Enron’s share price was all but worthless by 2001. Investors lost billions of dollars in savings, 20,000 employees lost their jobs and their retirement, and trust in our markets eroded.

Enron’s collapse was followed by the failure of its auditor, Arthur Andersen, one of the largest audit firms in the world at the time.

And Enron wasn’t alone.

In 2001, Enron’s bankruptcy was the largest in U.S. history. Just a few months later it was dwarfed by the bankruptcy of WorldCom – yet another corporation caught cooking the books and leaving destruction in the wake of its scandal.

So, Congress took action.

Led by Senator Paul Sarbanes, a Democrat from Maryland, and Representative Michael Oxley, a Republican from Ohio, both parties came together to craft legislation that passed nearly unanimously with strong, bipartisan support.

And 20 years ago this week, President George W. Bush signed into law the Sarbanes-Oxley Act of 2002.

Among other things, the law we refer to today as “SOX” established the Public Company Accounting Oversight Board, or the PCAOB.

For the first time, investors would have an independent audit watchdog putting their interests first. The PCAOB would set clear standards to uphold the integrity of public audits, inspect for compliance with those standards, and enforce them to help restore trust in our capital markets.

Since its creation, the PCAOB has:

  • Registered over 3,800 audit firms,
  • Completed more than 4,300 firm inspections in 55 countries – reviewing more than 15,000 audits of public companies and over 1,000 broker-dealer engagements,
  • Issued more than 330 settled orders, and
  • Sanctioned more than 230 firms and 270 individuals.

The PCAOB audits the auditors. We don’t just assume the results speak for themselves. We want to see the receipts.

Multiple academic studies have found that PCAOB inspections improve audit quality, both here in the U.S. and in other countries where the PCAOB has inspection access.

And evidence shows that increase in audit quality has boosted investor confidence in the credibility of financial reporting.

A study published in the Review of Financial Studies compared the market response to earnings announcements and 10-k filings before and after the PCAOB’s existence.

They found both stronger stock price reactions and higher trading volume following the creation of the PCAOB – indicating investors have more confidence acting on the information they receive from financial reporting, knowing that the PCAOB is on the case.

The authors of the study note, “Our results show that public audit oversight can enhance reporting credibility and that this credibility is priced in capital markets.”

Continuing to strengthen that credibility is a top priority for today’s Board as we carry out our mission to protect investors.

And that mission is more important than ever.

Today, the combined market capitalization of just 10 equity issuers is nearly equal to the total U.S. equity market capitalization in 2002.

The PCAOB’s oversight helps to protect more than $40 trillion in investor exposure.

And we take our job of investor protection very seriously.

Reflecting on SOX five years after it was signed, Senator Sarbanes warned, “When things get better, companies tend to forget what happened or how serious it was at the time. Trying to maintain high standards is a difficult job.”

The PCAOB is up to the task.

We understand the integrity of our capital markets is not inevitable. It takes vigilance to guard against fraud that threatens to undermine our system.

We cannot forget the hard lessons learned 20 years ago.

At the PCAOB, we know exactly what’s at stake. And that’s what fuels our work to protect investors every day.

Today’s Board has identified three key areas where we plan to further the PCAOB’s investor-protection mission:

  1. Modernizing our standards,
  2. Enhancing our inspections, and
  3. Strengthening our enforcement.

High standards are the foundation for high quality audits.

That’s why earlier this year, the Board announced one of the most ambitious standard-setting agendas in the PCAOB’s history.

Just six months into my term, we are already actively working to update more than 25 standards within eight standard-setting projects.

And we are just getting started.

When the PCAOB was first getting off the ground in 2003, it adopted existing standards that had been set by the auditing profession on what was intended to be an interim basis.

Twenty years later, far too many of those interim standards remain unchanged.

The world has changed since 2003. And our standards must adapt to keep up with developments in auditing and the capital markets.

Our current short-term and mid-term projects will address more than half of the remaining interim standards from 2003.

And we don’t intend to stop there.

We also are actively engaged with investors and investor advocates about other standard-setting and rulemaking projects that we will advance.

We appreciate that Securities and Exchange Commission (SEC) Chair Gary Gensler has made updating these standards a priority, and I am grateful for his support of our ambitious agenda.

Our standards will continue to be clear and scalable to account for differences in the complexities and sizes of audit firms and the public companies and broker-dealers they audit. And our standard-setting agenda will be flexible and dynamic to meet the greatest needs.

Of course, none of this will happen without input from our stakeholders, including advisory groups and the investing public.

Already, we have reimagined the PCAOB’s approach to meaningful stakeholder engagement.

As our first major action as a Board, we established two new advisory groups: the Investor Advisory Group and the Standards and Emerging Issues Advisory Group. And we’ve elevated the voice of investors by hiring the first-ever Investor Advocate.

Inspections are one of the most important tools the PCAOB uses to protect investors.

The Division of Registration and Inspections is our largest division, and inspections are our primary method of interacting with audit firms and determining whether they are complying with our standards.

Each year, the PCAOB inspects approximately 250 audit firms and reviews 900 audits from across the globe. As our team likes to say, “the sun never sets on PCAOB inspections.”

Part of how our inspections process remains effective is by remaining nimble. Our team is constantly adjusting to be responsive to new and emerging risks across the globe.

For example, our inspection teams have prioritized inspections of audit engagements involving SPACs and de-SPAC transactions, cryptocurrencies, and how firms are addressing the effects of supply chain disruptions and rising costs on company operations.

Enhancing our inspections also means enhancing our transparency.

We will continue our efforts to increase the information contained in our inspection reports, and to share information, in a timely manner.

We will also continue to publish information to help firms proactively improve audit quality, including areas where we see common deficiencies as well as good practices to avoid them.

We expect firms to take meaningful action to address concerns in their quality control systems in a timely manner. And when they do not, we will act, by publishing quality control criticisms that firms have not remediated to the Board’s satisfaction within the required time period.

Over time, we’ve seen firms respond to our rigorous inspection process by improving their own internal quality controls, adding more layers to protect investors.

That brings me to our third key goal: enforcement. As you may know, I am an enforcement lawyer at heart.

We know our standards are only as effective as our ability to enforce them.

Removing bad actors from the profession and punishing wrongdoing protects investors and promotes deterrence.

We will not hesitate to hold wrongdoers accountable for breaking the rules.

We are just halfway through the first year of this new Board. Already we’ve more than doubled our average penalties against individuals compared to the last five years. This includes the largest money penalty ever imposed on an individual in a settled case.

At the same time, we’ve increased our average penalties against firms by more than 65%.

In the past five years, the PCAOB assessed penalties against individuals less than half of the time and firms only about 86% of the time. This year it’s 100%.

We are also pursuing enforcement actions involving certain types of violations for the first time.

And we are taking steps to proactively seek out wrongdoing by increasing the use of sweeps against firms where there may be a violation of our standards or rules.

Those who break the rules should know that the PCAOB means business.

We intend to use every tool in our enforcement toolbox and impose significant sanctions, including substantial penalties, to ensure there will be consequences for putting investors at risk.

Working together, strong standards, inspections and enforcement will reinforce each other and help keep investors protected.

Of course, none of this is possible without the expertise and hard work of our PCAOB staff.

I want to thank the staff for their dedication. They are the PCAOB’s most valuable asset. Supporting them supports our mission.

I would be remiss to close without addressing our ongoing negotiations with China.

Earlier, I mentioned studies have found that the PCAOB’s inspections improve audit quality not just in the U.S., but around the world where we have access.

The PCAOB has completed inspections in 55 countries. But China has continued to block our access.

The U.S. Congress sent a strong message with the passage of the Holding Foreign Companies Accountable Act: access to the U.S. capital markets is a privilege, not a right.

The PCAOB will follow U.S. law, and the law is clear that we must have complete access to audit work papers of any firm we choose to inspect or investigate – no loopholes and no exceptions.

While we will continue working with the People's Republic of China (PRC) authorities to reach an agreement that meets our mandate under U.S. law, it’s critical to remember that an agreement is just the first step. Our team must be able to go to China and test whether what’s written on paper works in practice.

Time is of the essence.

Twenty years ago, when he signed the Sarbanes-Oxley Act into law, President Bush noted that “the American economy depends on fairness and honesty.”

For two decades since, the PCAOB has helped ensure fair and honest auditing that supports sound capital markets.

Today’s Board will build on that legacy, by modernizing our standards, enhancing our inspections, and strengthening our enforcement.

And we will carry out our mission to protect investors keeping the people we serve at the heart of everything we do.

Jeff, thank you again for having me. I’d love to turn the program back over to you and take your questions.


About the PCAOB

The PCAOB is a nonprofit corporation established by Congress to oversee the audits of public companies in order to protect investors and further the public interest in the preparation of informative, accurate, and independent audit reports. The PCAOB also oversees the audits of brokers and dealers, including compliance reports filed pursuant to federal securities laws.


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