An Opportunity for Genuine Collaboration to Advance Audit Quality and Improve the Resiliency of Our Capital Markets

Remarks as prepared for delivery

Thank you.

It is a pleasure to be here with you today. I look forward to answering your questions, but I would like to make some remarks about the role of the Public Company Accounting Oversight Board (PCAOB) in contributing to sustainable economic growth, and how you can help the PCAOB help you and the investors you ultimately serve.

Before I begin, the views I express today are my own and do not necessarily reflect the views of the PCAOB, other PCAOB Board Members, or PCAOB staff.

First, I believe effective regulation and supervision of public company and broker-dealer audits play an important role in U.S. economic growth. However, to maximize U.S. economic growth, our capital markets must be resilient. Regulation and supervision facilitate such resiliency by requiring that: (1) markets are fair and transparent; (2) investors are adequately protected; and (3) emerging and systemic risks are managed.

The PCAOB’s mission is limited by statute to investor protection and its authority extends to: (1) setting standards and rules for public company and broker-dealer audits; (2) inspecting such audits for compliance with, for example, PCAOB standards and rules; and (3) investigating potential violations and taking enforcement action when appropriate.

During this period of democratic transition where the political pendulum has swung once again, I want to share my general views on the direction I would like to see the PCAOB take over the next four years. As many of you know, I have dissented on several PCAOB proposed and final rules and standards, because I believed they were extreme in that they impose unnecessary or unworkable burdens on audit firms, without sufficient direct linkages to improving audit quality. Overly burdensome and excessive regulation can stifle growth in our capital markets and even damage the competitiveness of our capital markets. Conversely, lax regulation, supervision, and enforcement can also have negative effects, by allowing harm to investors and potentially threatening U.S. financial stability. I believe the answer between these two extremes lies in moderation, and my hope is that the PCAOB will pursue a more moderate path over the next four years, a path that provides investors with adequate protection while also avoiding imposing unworkable or unnecessary burdens.

So, what does “a more moderate path” mean? A “more moderate path” has three facets. First, our regulations and standards must be proportionate to the problem we are trying to solve. Second, our inspection approach must be risk focused. Third, our enforcement authority must be used strategically to protect investors and avoid needless harm to investor confidence in U.S. capital markets.

Let me elaborate further, specifically about: (1) PCAOB inspections; (2) what institutional investors, like you, can do to help prevent regulatory overreach in PCAOB rules and standards; and (3) PCAOB enforcement.

With regard to inspections, the PCAOB seems to want to instill fear instead of confidence in our capital market system. Two days ago, the PCAOB Chair gave remarks in which she accurately stated that there has been in recent years an increase in Part I.A deficiencies identified by PCAOB inspectors. But she lost all sense of proportionality by engaging in fear mongering, when she stated that “Part I.A findings are serious,” and provided examples such as the auditor “failing to perform any procedures at all to test revenue . . . .”¹ Her statement and stark examples seem designed to inspire fear about the state of public company audits, by suggesting that a PCAOB inspection report identifying even a single Part I.A deficiency is an ominous indicator of audit quality.  Fortunately, that’s not the case, and the PCAOB’s website provides a sense of proportionality that should inspire confidence and not fear if PCAOB inspectors identify one or more deficiencies. First, the PCAOB website makes clear that a PCAOB inspection report “is not intended to serve as a balanced report card or overall rating tool.”  Second, an audit deficiency in an inspection report is not “a determination by the Board as to whether the firm has engaged in conduct for which it could be sanctioned.”  Third, “inclusion of a deficiency in an inspection report – other than those deficiencies for audits with incorrect opinions on the financial statements and/or ICFR – does not necessarily mean that that the issuer’s financial statements are materially misstated . . . .”² I hope that the PCAOB over the next four years takes a fairer, more rational, and clear-eyed approach in its public pronouncements about the state of the public company auditing profession – one that inspires confidence and not fear. 

So what can institutional investors – both at the investment adviser level and at the investment company level – can do to help ensure our standards and rules are narrowly tailored and adequately protect investors. The answer lies in continual engagement during our rulemaking and standard setting process. I emphasize this because I believe that the PCAOB has allowed the investor narrative to be hijacked by a small number of unidentified “investor-related groups.”  For example, the Firm Reporting adopting release contains numerous references to unidentified “investor-related groups” supporting or affirming the need or usefulness of the proposed reporting requirements;³ never mind the fact that based on a trade association survey of 100 institutional investors – 41% of which had asset under management of $5 billion or more - it was far from clear whether real investors found the proposed reporting requirements helpful.⁴ In addition, the economic analyses of the standards and rules adopted under this Board perpetuated the sentiment that investors would be happy to have their portfolio companies pay additional audit fees associated with the compliance costs, without evidence and based on anecdotal comments from these unidentified “investor-related groups.” I am curious as to how you all would feel about paying additional audit fees.

I understand the challenges of continuous engagement with the PCAOB on standard setting and rulemaking because as investment company Treasurers and CFOs, you are busy; and you are not directly affected by PCAOB standards and rules. However, I believe that continuous engagement could make a difference, as evidenced by the PCAOB’s decision not to take additional action on NOCLAR this year while committing to continue engaging with stakeholders. SEC Chair Gensler stated recently that more than half of all American households invest in our $55 trillion equity markets.⁵ He cited an October 2023 Federal Reserve Board report, “Changes in U.S. Family Finances from 2019 to 2022 – Evidence from the Survey of Consumer Finances.”⁶ This report noted a sizeable increase in family stock ownership to 58% in 2022, compared to 53% in 2019, and 52% in 2016.  Significantly, the report noted that “indirect holdings” in the form of pooled investment funds and other managed assets, primarily in the form of tax-deferred retirement accounts, are much more common than direct holdings.⁷ Because more than half of American households rely on: (1) you to perform the important back-office functions for funds; and (2) investment advisers who make the investment decisions for the funds’ shareholders, your respective voices should carry considerable weight. At a minimum, you should leverage your own trade association to comment and to actively engage in the rulemaking process.

With regard to enforcement, I believe that scarce enforcement resources should be used in a strategic way to best serve the investors the PCAOB is sworn to protect. The focus should be on violations that are most likely put investors at risk, rather than what I colloquially refer to as parking or jay walking violations. The PCAOB Chair gave a speech on December 3, 2024, in which she endorsed this strategic approach to enforcement by stating that the “cases we investigate and ultimately decide to enforce involve complex and serious matters: from audit failures in cases involving financial statement fraud to taking on client work that firms can’t complete. . . .”⁸ Unfortunately, the numbers tell a different story. Between January 1, 2022, and November 19, 2024, approximately 25% of the PCAOB’s enforcement orders consisted of parking or jay walking tickets; specifically, failures by firms to comply with PCAOB reporting requirements.⁹ For example, on November 19, 2024, the PCAOB issued a news release announcing sanctions imposed on five firms. One of these firms failed to file multiple forms within the 30-day time-period meaning it filed the forms, but such filings were late.  Two firms failed to file multiple forms and ultimately did so but only after being notified of the delinquency by PCAOB staff. The sanctions for these three firms included civil money penalties of $25,000, $50,000, and $25,00 respectively. The news release stated that “[f]ailures to make required disclosures undercut the PCAOB’s ability to protect investors, and firms must not take these obligations lightly.”¹⁰ Now, I’m not excusing these firm reporting failures, but I believe the news release goes overboard when it describes these failures as undercutting our ability to protect investors. My biggest concern is that the PCAOB’s focus on writing parking and jay walking tickets and then issuing news releases trumpeting the PCAOB’s get tough approach carries the risk of needlessly undermining confidence in public company audits, with the potential knock-on effect of a loss of investor confidence in U.S. capital markets. As a District of Columbia resident, if the DC police department were to spend 25% of its resources on writing traffic tickets as opposed to fighting serious crimes, I would not feel very safe.

The PCAOB needs to do better, and I want to help it do better.

Thank you and happy holidays.

I would now be happy to answer questions.