A Trusted Auditing Profession Needs a CART (Competency, Accountability, Resiliency, Transparency)

Remarks as prepared for delivery

Thank you, Alex, for that kind introduction.

It is a pleasure to be here with you today. 

Before I share some of my thoughts about the state of the auditing profession, I want to make clear that the views I express today are my own and do not necessarily reflect the views of the PCAOB Board, other PCAOB Board Members, or PCAOB staff.

One of the privileges I have as a PCAOB Board Member is to share my views. That carries a great deal of influence as well as responsibility. I therefore strive to share my views with humility and as a learner who asks questions, not assuming that I have all the answers. I feel honored to be here today because this audience represents the two vital professions in the world. No government, organization, or company can survive without good lawyers and accountants. Like all professions, accounting and legal professions have evolved with the problems of our times. Sadly, we have many problems today, complex problems. We are not going to solve them today, but I believe events like this can help us collectively explore some relevant questions about the auditing profession.

Last year, we celebrated the 20-year anniversary of the enactment of the Sarbanes-Oxley Act of 2002 (SOX), which established the PCAOB. I believe SOX and the PCAOB have helped improve audit quality for the benefit of investors and helped restore confidence in our capital markets ecosystem. And I want to do something unusual by thanking Congress; specifically, the 107^th Congress for its bipartisan support of SOX. I also want to thank my predecessors on the PCAOB Board who did much of the heavy lifting over the past 20 years to bring us to where we are today.

We recently reached another milestone – one not nearly as important as the enactment of SOX – but one that is referred to at almost every Investor Advisory Group Meeting and every Standards and Emerging Issues Advisory Group Meeting convened by the PCAOB. A little over 15 years ago, the U.S. Department of the Treasury’s Advisory Committee on the Auditing Profession – referred to by many as ACAP – adopted a final report containing more than 30 recommendations to improve the sustainability of the public company auditing profession. Treasury Secretary Hank Paulson announced the establishment of the ACAP in May 2007 as one of a series of initiatives to enhance U.S. capital markets competitiveness. Secretary Paulson stated that the ACAP will examine auditing industry concentration, financial soundness, audit quality, employee recruitment and retention, among other topics.¹ The ACAP’s final report was separated into three sections which included one related to strengthening human capital, and one related to concentration and competition with a focus on increasing audit market competition. ²

Against this backdrop, I want you to know that in addition to the PCAOB’s statutory mission of investor protection, I believe that a sustainable, resilient, competitive, and robust auditing profession will enhance investor protection. So many of my policy views were shaped by my time and experience as a career official at Treasury. With its broad mission to protect the U.S. economy and financial system, I learned that the best and most sustainable policy was one that optimizes the common good, which in the long run is most beneficial to the public and investors. That is precisely the principle I apply in considering every policy matter. The capital markets ecosystem is complex and needs policies that promote long term sustainability and trust. As Secretary Paulson stated more than 15 years ago, “Investor trust in the integrity of our capital markets is vital to the strength of the U.S. economy. Investor trust is based on accurate financial reporting, and a vibrant auditing profession is essential for a well-functioning financial reporting system.” ³ In my current role as an audit regulator, I often reflect on the key elements that would promote public trust in the auditing profession. Today I want to discuss with you four elements that I believe will promote public trust in the auditing profession, which are reflected in the acronym “CART”:

Competency

Auditing requires a high level of judgement and expertise. Competency directly impacts the quality of the audit and ultimately investor protection. There will be no audit quality without competent auditors. I started speaking about the CPA talent crisis over a year ago.⁴ Since then, we have seen further deterioration and more coverage of its impact.⁵ Can we afford a capital market without competent auditors? Is the competency expected of auditors consistent with their role and responsibilities? Are we making the auditing profession attractive to young talent?

The 107^th Congress gave the PCAOB a tool to help address this growing crisis. Specifically, SOX section 109 provides that the civil money penalties the PCAOB collects shall be used to fund a merit scholarship program for graduate and undergraduate students enrolled in accredited accounting degree programs.⁶ I am happy to report that the PCAOB has answered the call. In 2022, the PCAOB announced that 250 students were selected to receive a $10,000 scholarship for the 2022-2023 academic year.⁷ In 2023, the PCAOB announced that 369 students were selected to receive a $10,000 scholarship for the 2023-2024 academic year – a year-over-year 48% increase in the number of scholarships.⁸ I want to thank Chair Williams for her support in increasing the number of scholarships awarded, and I believe the PCAOB will likely be able to and should choose to award an even higher number of scholarships next year to respond to the accounting talent crisis.

On the other hand, I have expressed concern about PCAOB proposals that I believe have the potential to exacerbate the broader “accounting talent crisis.” For example, I recently supported with reservations the issuance of proposed amendments to a PCAOB Rule governing contributory liability.⁹ Under current PCAOB Rule 3502, an associated person of a registered firm can be held liable if such person directly, substantially, and recklessly contributed to a violation of certain rules or standards by the firm, but the firm can be held liable under a lower negligence standard. The proposal would close this gap or incongruity by replacing the recklessness standard with a negligence standard.¹⁰ I believe that proposing an alignment makes sense. However, in my statement titled “ The Cost of Unintended Consequences: Accounting Talent, Audit Quality, Investor Protection,” I expressed concern on how the proposal would be implemented and whether it will undercut our mission of investor protection by doing more harm than good for investors in the long run. The proposal’s economic analysis acknowledges that one potential unintended consequence is that it could unintentionally discourage auditors from accepting important audit roles if they fear being held liable, leaving those roles to be accepted by less cautious or qualified individuals. I stated that a more likely unintended consequence relates to retention in that junior audit professionals might choose to leave the public company auditing profession altogether. I stated that we need to exercise greater care so that we do not make the public company auditing profession so risk-ridden that the best and the brightest pursue careers elsewhere, and that we may be doing a disservice to investors in the long run if we make the public company auditing profession unattractive in the name of investor protection. 

The comment period on this proposal closes tomorrow, and I look forward to reading the comments we receive.

Accountability

Having competent auditors is not enough – it is only a baseline requirement. Auditors, like lawyers, also need to be individuals of the highest integrity and character. More importantly, investors need to be able to trust the auditors. Through the enactment of the Securities Exchange Act of 1934, as amended, Congress built-in an accountability framework whereby auditors are providing an independent certification of the financial reports prepared by public companies. In addition, the SEC was given the authority to provide oversight of both public companies and auditors. The enactment of SOX in 2002 gave the PCAOB significant responsibility over the conduct of public company audits, subject to SEC oversight. This expanded accountability framework clearly defines the roles and responsibilities of financial statement preparers, auditors, and regulators. It has been the bedrock of the trust built in our capital markets since then. Under Chair Williams’ leadership, the PCAOB has worked diligently and ambitiously in carrying out our investor protection mission. However, I believe that some of our recently proposed PCAOB standards and rules have sought to change the role of auditors and this long-standing accountability framework.

For example, on June 6, 2023, the PCAOB Board voted 3-2 to propose amendments to PCAOB Auditing Standards related to a Company’s Noncompliance with Laws and Regulations – colloquially referred to as “NOCLAR.” I voted against the proposed amendments, because they contain a breathtaking expansion of the auditors’ responsibilities, which I stated could, among other things: (1) cause considerable confusion on the appropriate role of auditors; and (2) reduce the resilience of the already highly concentrated audit marketplace and thereby hurt the investors the PCAOB is sworn to protect.¹¹ I also stated that the proposal’s requirement for auditors to identify the laws and regulations with which noncompliance could reasonably have a material effect on the financial statements would require an auditor to first identify all the laws and regulations applicable to the public company. I expressed concern that the proposal introduces ambiguities regarding auditor responsibilities to investors, by transforming the auditor’s role from one of providing reasonable assurance to one of performing a management function, and that the proposal could undermine the long-established accountability framework whereby management prepares and discloses financial information, auditors provide an independent certification of the disclosures, and regulators provide oversight of the public companies and auditors. I also noted that the proposal’s economic analysis acknowledges that the proposal would have a greater cost impact on mid-sized and smaller firms, which could create additional barriers to entry that investors and the auditing profession can ill afford. 

I have been reading the comment letters we have received, totaling nearly 140 comment letters. In the history of PCAOB, only four proposals (Auditing Standards 2 & 5 on Audit of Internal Control Over Financial Reporting; Auditor Reporting Model; and Audit Firm Rotation) received more than 100 comment letters. The level of public interest and the diversity of views expressed by the commenters is a recognition of the crucial role and impact of auditors. The dissent of two PCAOB Board Members, including me, reflects the diverse perspectives of the Board. I credit the SEC for appointing a Board with a diversity of views and the diversity that reflects the capital market stakeholders. This is what democracy is about. To quote Hubert Humphrey, “ Freedom is hammered out on the anvil of discussion, dissent, and debate.” I suspect that was part of the reason Congress stipulated a 5-member board for the PCAOB.

That’s why I am delighted to see the trust commenters have placed in our notice and comment rulemaking process because writing comments takes time and resources. I have been quite impressed with the thoughtfulness and quality of the comment letters. 

For example, one commenter wrote that the proposal essentially transforms the auditor’s role into, potentially, a management function to the detriment of the auditor’s core responsibilities of performing an independent assessment of the financial statements prepared by management. That commenter noted that for smaller firms, the costs of implementing the proposal could exacerbate current trends in which smaller firms are exiting, or considering exiting, the public company auditing profession. The commenter concluded that the proposal would not yield the results intended by the PCAOB and that the costs to all participants in the ecosystem would outweigh any benefits. 

Similarly, another commenter wrote that the proposal would expand auditor responsibilities and functions to such a degree that it would effectively give auditors oversight of and responsibility for company compliance functions, and that the proposal would require, in practice, auditors to survey nearly all laws and regulations that a company is subject to in order to determine which of those laws and regulations could reasonably have a material effect on the financial statements. 

A third commenter wrote that the proposal may entangle auditors in legal and managerial decisions beyond their scope, potentially impinging their ability to perform their assurance function. 

Now I recognize that I do not have a monopoly on wisdom, and as a result I want to make clear that I carefully read letters from commenters who do not share my concerns. For example, one commenter wrote that while some have raised concern that the proposal would require auditors to identify all the laws and regulations applicable to a public company, the proposal does no such thing, based on the assumption that competent and ethical auditors are already for the most part considering matters that could have a material effect on the financial statements when conducting their risk assessment.

Simple, right? We clearly have a lot of work ahead of us.

Resiliency

Resiliency is the ability of an ecosystem to manage and respond to change. It is vital to ensure the stability of the capital markets ecosystem in the face of unexpected and significant shocks. Concerns about audit industry concentration and a sustainable audit industry have been prominent since at least the demise of Arthur Andersen and, as noted above, a matter of concern for the U.S. Department of the Treasury in 2007. I share this concern today which was another reason I opposed the NOCLAR proposal as I mentioned earlier. I consider promoting and facilitating resilience and competitiveness in the audit marketplace the most challenging and systemic problem to solve. This prompts me to think increasingly about whether some of our policies and processes could inadvertently lead to higher concentration in the audit marketplace. 

Further, technology and the talent crisis could exacerbate the problem. With technology advancements and market evolution, auditing is becoming more complex and digital. I understand that the Big 4 audit firms are investing billions of dollars in new tools that incorporate advanced technologies such as artificial intelligence (AI). How can smaller firms with limited capital access technology like AI, which has the potential to improve audit quality and efficiency? I recently came across a 2017 news article about how one Big 4 audit firm created an in-house start-up that has developed audit technology that leveraged AI and was licensing such technology to smaller audit firms.¹² I believe that third-party technology providers have the potential to increase the resilience and competitiveness of the audit marketplace. Regulators have an important role, because innovative and visionary regulators can use policy intervention to facilitate systemic changes in marketplaces for the greater good. Almost one year ago, the PCAOB launched the Technology Innovation Alliance Working Group or “TIA,” whose membership consists of ten non-PCAOB professionals with expertise in emerging technologies, including technology used by financial statement preparers and auditors.¹³ I am grateful to Chair Williams and my fellow Board Members for their confidence in me as the TIA Chair. The TIA will be busy in the weeks and months ahead as it will make recommendations to the PCAOB Board in 2024 on potential policy interventions to advance the use of technology to improve audit quality. I believe that TIA will help the PCAOB be more forward looking and position the PCAOB to be even more nimble and farsighted in protecting investors by improving audit quality through responsible use of technology.

Transparency

My first role at Treasury was running the U.S. Treasury auction operations where it sells U.S. Treasury marketable securities to fund the federal government. To put this into context, in 2022 Treasury issued about $15 trillion in Treasury marketable securities,¹⁴ which are the most liquid and trusted financial instruments in the world. I believe that a key contributing factor to this high level of trust is the Treasury’s enduring principles of predictability and transparency in the auction process. Transparency and consistency facilitate trust. Investors need to trust the information provided by public companies and their auditors. As a long time open data advocate, I applaud our Division of Registration and Inspections’ recent effort in making our inspection data more accessible as part of a series of efforts in enhancing PCAOB’s transparency.¹⁵ The PCAOB is committed to making more relevant information accessible to facilitate investors’ understanding and trust in the audits as well as our programs.

Although CART provides a framework to assess our policies, it is not always straight forward. The four elements are not always aligned. At times, policy decisions could impact these elements in opposing ways. That’s why the public comment process is so critical and drives better regulations. I believe that my fellow Board Members and our staff believe in this process, and I remain hopeful that with active participation from all stakeholders, the PCAOB will select the approach that will advance our mission of investor protection while at the same time foster a sustainable, resilient, competitive, and attractive public company auditing profession. 

In closing, I want to share something personal about myself. I am the quintessential embodiment of the American Dream. I am an immigrant who proudly became an American citizen. I came here to go to college over 30 years ago to study accounting, and I became a CPA in 1994. I have been blessed with a diverse and impactful career. I started my career as an auditor, transitioned to the technology field at a Fortune 500 company, diversified my career as a financial policy and data executive in the federal government, was the interim CFO at a top 50 university with a $1.5B budget, led a data science consultancy with deep expertise in AI, and now I am a Board Member for the U.S. audit regulator and the first Asian-American woman appointed to the PCAOB Board. I attribute my successful and exciting career to my decision to join the accounting profession. As one of the two PCAOB Board Members who are CPAs, I feel a great sense of responsibility to make sure that this profession remains relevant and attractive to young talent for the benefit of investors and the future of our country.

Thank you again WilmerHale and CAQ for inviting me to this event, and I thank each of you in the audience for listening to my perspectives. I may have time to take a couple of questions, but I have to leave right after this. I am very interested in hearing the views of the rest of the speakers and the audience, and I look forward to the debrief from my staff.