Chair Williams Delivers Remarks at Standards and Emerging Issues Advisory Group Meeting

Remarks as prepared for delivery. 

Barb [Vanich], thank you for the introduction. Good morning, everyone and welcome to our Standards and Emerging Issues Advisory Group (SEIAG) meeting. It is wonderful to be with you virtually today.

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

I want to begin today by thanking you all for your feedback and insights that were shared during our last meeting in May, especially the discussions around fraud.

Fraud is something we look at comprehensively at the PCAOB, as our standards require the auditor to consider fraud throughout the course of the audit, from the earliest stages of planning an engagement all the way to evaluating the audit results to determine whether the audit evidence obtained is sufficient and appropriate to support the opinion to be expressed in the auditor's report. I know this is an ongoing topic for the SEIAG, too, and appreciate the insights you shared at our last meeting.

In general, fraud continues to be a mid-term project on our standard-setting agenda. Recently, we developed a Fraud Risk Resource Page on our website to centralize and highlight important information for auditors and others. Specifically, it provides materials on our standards, PCAOB and SEC staff guidance, relevant enforcement actions, information on our tipline, as well as many other resources—and it is designed to be a living, breathing resource for users as we continue to update it.

Meanwhile, the PCAOB continues to explore how we can be a collaborative resource for firms and investors alike to deter and identify fraud, while we consider potential changes to our fraud standard, AS 2401, including better aligning the auditor’s responsibilities related to fraud with the auditor’s risk assessment procedures. 

I look forward to continuing our conversations on this topic.

Since we last met this spring, we continue to make progress against the three pillars within our strategic plan. I’ll briefly touch on the latest highlights since we last met, beginning with our standard-setting projects.

Standards

Under this Board, the PCAOB has issued proposals for 10 standard-setting and rulemaking projects and finalized six—including four since the last SEIAG meeting in May: Quality Control; AS 1000; Technology assisted analysis; and Rule 3502, which deals with contributory liability. Nearly all of these had not been updated in decades.

Barb will go over this work in detail shortly, so I don’t want to repeat what she is about to say, but I do want to take this opportunity to thank the SEIAG for your feedback on our agenda and individual projects.

The number of standard-setting and rulemaking projects on our agenda is ambitious. Although, as I just mentioned, we have made significant progress, significant work lies ahead.

We recently updated our standard-setting and rulemaking agenda, which makes clear our priorities for short-term and mid-term projects. Our expert staff are diligently working on proposals or adoptions – as the case may be. And they will move forward with recommendations to the Board when they are ready for the Board’s consideration.

The agenda is intended to be dynamic, and we are committed to getting it done, but I want to emphasize that in every project, our goal is not to rush. Rather, it is to get it right and to fulfill our investor protection mandate.

Our mission to protect investors is why, ahead of the effective dates for these recently finalized standards, we are committed to providing firms with resources to help them update their methodologies and train their staff on the upcoming changes. 

 For example, with the implementation date for our new QC standard set for the end of next year, we recently published a practice aid that outlines the changes to the standard that may go beyond the provisions of other standard setters’ quality control standards. This aid is meant to assist a firm in building upon their existing QC system to ultimately have a QC system that complies with PCAOB standards, as well as the quality control standards of others.

We also recently added to our website a “Knowledge Check” quiz, for users to test their understanding of the new standard AS 1000. Upon submitting responses, the tool provides participants with their results, including why an incorrect response was wrong.

Our goal in issuing these materials is to make sure firms are familiar with the changes, so auditors know what to do when the requirements become effective. And we want feedback on these materials. We want to know if you prefer one of these resources over the other—or if you think additional materials are necessary.

Firms can also reach out to us with questions by talking with our inspectors while they are in the field, initiating a standards-related inquiry through our standards’ website, or by simply giving us a call via the number that can also be found there. 

Put simply, the PCAOB is here to help firms be successful as these implementation dates get closer to taking effect—and we hope they take advantage of this time to prepare. Because if firms are prepared, knowledgeable, and ultimately successful, then investors are better protected. But I want to be clear: While the PCAOB wants to be as helpful as we can, preparing for implementation is the firms’ responsibility.

Inspections

Moving onto our inspections program, since we last met, the PCAOB completed fieldwork on its first inspection ever in mainland China. This action builds on the progress made in 2022 when, thanks to work of Congress through the Holding Foreign Companies Accountable Act (HFCAA), the PCAOB secured historic access to inspect and investigate firms headquartered in mainland China and Hong Kong.

We have used our access already to deliver historic sanctions holding China-based firms accountable. And we will continue to demand complete access, no loopholes and no exceptions. 

Regarding our inspection reports, since we last met, we released the 2023 reports. For annually inspected firms, the reports were published six months faster than last year, and nearly all of the reports for triennially inspected firms were published within six months of the completion of those inspections.

I am incredibly proud of our staff’s work to get this information into the hands of investors and other stakeholders as quickly as possible—especially as in recent years, the PCAOB has found that audit deficiencies, particularly Part I.A. deficiencies, are unacceptably high.

This troubling trend cannot be overstated. Part I.A. deficiencies mean the audit firm failed to obtain sufficient appropriate evidence to support its opinion, and audit opinions were signed without completing the audit work required to verify the accuracy of the financial statements. 

These deficiencies include things like failing to perform any procedures at all to test revenue or the costs of inventory, as well as instances where the auditor did not identify and test any controls over long-lived assets and depreciation expense. Simply put, Part I.A. deficiencies are not just serious, but they go to the heart of the audit.

That’s why we have been focused on reporting Part I.A. deficiencies, and other information, to provide investors, audit committees, and other stakeholders with key pieces of information to assist them in assessing the work of their audit firm.  

The PCAOB will continue demanding firms do better and deliver the high-quality audits investors deserve.

For our role in educating the market, the PCAOB is constantly seeking out new avenues to inform the investors, and the public at large, about our work. Just to name a few examples today:

• We expanded the tools available on our website to make it easier to find and compare deficiency rates across audit firms.
  
• We regularly publish Investor Bulletins and Advisories, which are specifically designed to help keep investors informed of the PCAOB's activities and observations.
  
• And we met with more than 200 audit committee chairs and provided audit committees with specific questions they should ask of their auditors. Additionally, we sent audit committee chairs who have participated in our Audit Committee Chair Dialogues the most recent inspection report of the firm that audited the company where they served on the audit committee.
  

Each of these examples plays a part in helping to improve audit quality and meet our mission of protecting investors. 

Enforcement

Finally, under this Board, we are expanding how we identify cases and are making sanctions count.

The PCAOB issued approximately $35 million in fines this year alone. We have also required functional changes to a firm’s supervisory structure for the very first time. And we have required firms to retain an independent monitor to drive improvements and best protect investors.

Enforcement has been a critical tool at our disposal, and we focus on cases that involve serious matters that put investors at risk: audit failures in cases involving financial statement fraud, taking on client work that firms can’t complete, altering work papers, and not performing sufficient work before signing audit opinions. 

We examine the facts and circumstances of every case and have not hesitated to impose bars on bad actors, revoke firms’ registrations, and impose civil monetary penalties—among many other options on the table under this Board.
 
These are, of course, just some examples of the serious sanctions that this Board has imposed in the name of investor protection. But all of the actions taken by this Board send the message loud and clear: If you put investors at risk, you will be held accountable. 

Conclusion

I know we have a lot of ground to cover today, so I will keep this short and stop there. I’m looking forward to today’s meeting and the opportunity to listen to and learn from each of you, especially on the ever-changing topic of technology.

This is something we are obviously watching very closely. Our staff, who are working on the data and technology project on our research agenda, are supported by experts with significant knowledge of this area from within our Office of Economic and Risk Analysis and our Office of Technology.

These individuals are at the forefront of the latest developments at the nexus of technology, innovation, and audit quality, and we continue to look for opportunities to leverage their vast knowledge as well as the expertise of our external partners when discussing the impact of emerging technologies on audit quality. We look forward to sharing more information on our efforts when we can.

Additionally, you may have seen that cybersecurity was a panel topic at our recent IAG meeting in September, and if you haven’t already, I suggest watching the recording of the meeting, which can be found on our website.

Again, thank you to the SEIAG for your work putting together today’s program and of course, all the feedback and insights you provide us with on an ongoing basis.

I also want to take a moment to especially thank the Emerging Issues in Auditing Subcommittee for setting the stage for a robust discussion today.

With that, I’ll turn it back over to you, Barb.