Board Member Thompson Comments on The Importance of the PCAOB in the Capital Markets

Over 20 years ago, Congress established the PCAOB with investors in mind.  Our initial purpose was to oversee the audits of public companies to drive enhanced audit quality. Congress later gave the PCAOB authority to oversee audits of SEC-registered broker dealers.  Both bi-partisan congressional mandates were precipitated by significant financial scandals.

The current threat to the PCAOB and its mission of investor protection will have devastating ripple effects across the capital markets and the audit profession.

In the past two decades, the PCAOB has pursued its investor protection mandate in several impactful ways, including inspecting portions of hundreds of audits each year, crafting standards that enable auditors to be even more effective in their gatekeeper role, and enforcing our rules and standards to advance investor interests. 

I feel fortunate to have been given the opportunity to serve as a PCAOB Board member.  One of the highlights of my experience as a Board member is observing – up close – how our dedicated staff pursues our mission day in and day out.   For example, I have had the privilege of watching our inspections staff in the field.  I can attest to their professionalism, diligence, and expertise as they inspect to our standards.

No other oversight organization has the depth of audit expertise that exists at the PCAOB. 

That depth of expertise was developed over time.  It is important to note that, in the early days of the PCAOB, engagement with certain registered firms was challenging, as I believe firms were adjusting from self-regulation to having an independent external regulator.  Today, we are in a better place.  Registered firms, by and large, engage with the PCAOB in an effective and constructive manner, which ultimately benefits investors and drives audit quality forward.  For example, our inspections teams engage in iterative dialogue with the firms throughout the inspections process, giving firms multiple opportunities to support their audit work. This deliberative process, which has matured over two decades, ensures we include appropriate reviews and consultations to consistently apply all relevant standards and rules. Dismantling the PCAOB risks dismantling well-established expertise and processes that protect investors.

Our effectiveness as a regulator does not mean that our oversight function should be dismantled.

The work of the PCAOB is having a positive impact on audit quality.  A large body of academic research supports this view.¹  The PCAOB’s oversight of public company audits enables investors to have greater confidence in the financial statements they rely on when making investment decisions.  

While memories can fade, let us not forget why the PCAOB was first established with significant bi-partisan support in Congress. Many in our society suffered staggering economic pain in the early 2000s because of the collapse of Enron and other large public companies. For example, estimates suggest that investors lost between $60 billion to $70 billion in market value² as a result of just the Enron collapse. Further, the loss of a large audit firm substantially reduced competition within the audit profession, as thousands of public companies were forced to find a different auditor.³ And the impacts for people who lost their careers and retirement savings were severe.  We do not want to risk replicating that type of pain.

Over the past 20+ years, the PCAOB has expertly assisted in restoring trust in the U.S. capital markets. As many say, trust is hard to win, but easy to lose. We should seek to preserve the trust in our capital markets that the PCAOB has helped to rebuild.

In its oversight of audits, the PCAOB has sought to support audit committees as they carry out their financial oversight role. Our inspection activities, and the inspection reports that we issue, provide valuable insights to audit committees. Additionally, our inspections staff engages with more than 200 audit committee chairs annually to discuss relevant topics and subsequently publishes Spotlight documents summarizing key themes from such discussions. Disrupting the work of the PCAOB risks disruption to the insights regularly shared with audit committees.

Disruption of the PCAOB’s work would have far-ranging impacts. In my role as a Board member, I have had the opportunity to serve as the Vice Chair of the Investor and Other Stakeholders Working Group of the International Forum of Independent Audit Regulators.  My role has allowed me to collaborate with audit regulators from around the world.  There is considerable concern in the international community about the ripple effects of shuttering the PCAOB. 

Importantly, oversight of the auditors of international issuers that trade on U.S. stock exchanges would be disturbed. Our bi-lateral agreements with many countries could be at risk. Each agreement would have to be renegotiated, which could take years, if new agreements can be reached at all.  If PCAOB inspections and investigations are disrupted here and abroad, investors could be harmed, and the trust in our capital markets that the PCAOB has worked diligently to support over the last two decades could be significantly eroded.

The U.S. capital markets serve as a model around the world, given their scope and liquidity.  In that connection, the PCAOB serves as a model for other audit regulators around the world. 

I sincerely hope that the PCAOB will continue to have the opportunity to serve the public interest. For over twenty years, the PCAOB has kept investors in mind by seeking to drive audit quality forward, pursuant to the authority that Congress vested in us.

As we continue to monitor the legislative process, and wait for it to play out, the PCAOB remains diligent and steadfast in pursuing our investor protection mission across all of our oversight programs.