Chair Williams’ Statement on the Proposal of a New Rule on False or Misleading Statements on Registration and Oversight

Remarks as prepared for delivery

Auditors play a vital role in promoting trust in our capital markets.

Maintaining that trust requires transparency and accountability in how firms represent themselves and their work.

Unfortunately, we have seen too many instances of firms promoting their PCAOB registration in a way that could mislead clients, investors, and others.

Today, we are taking the first step to ensure there are consequences when firms or their associated persons misrepresent their registration status or what that status means with the new proposed PCAOB Rule 2400, False or Misleading Statements Concerning PCAOB Registration and Oversight. 

Let’s start by reviewing what PCAOB registration is and is not.

Firms are required by the Sarbanes-Oxley Act to register with the PCAOB in order to perform audits of publicly traded companies and SEC-registered broker-dealers, or to play a substantial role in those audits. 

Registration, and the accompanying annual reporting, allow the PCAOB to keep track of the firms who are eligible to perform those audits and to understand which audits, if any, they are performing. The PCAOB uses that information in planning its inspections and for other purposes.

PCAOB registration is not a “seal of approval” or “mark of excellence,” as some firms have advertised on their websites. The PCAOB does not sponsor, recommend, or endorse firms. And PCAOB registration is not a system for grading the quality of a firm’s professional work.

Additionally, just because a firm is registered with the PCAOB does not necessarily mean that all —or any—of that firm's work falls under the scope of PCAOB’s oversight authority. Nor does it guarantee its work is conducted in compliance with PCAOB rules and standards.

The PCAOB’s oversight authority extends only to a firm’s practice in connection with audits of public companies or SEC-registered broker-dealers.

Nearly half of firms registered with the PCAOB are not engaging in any audit-related work subject to PCAOB oversight.

And most others have some work that falls within the PCAOB’s scope and some that does not.

Proof-of-reserve reports offer just one example of services PCAOB registered firms may provide that fall outside of the PCAOB’s oversight authority.

Last year, in response to well-publicized examples of some service providers, including PCAOB-registered firms, issuing proof-of-reserve reports to crypto companies, the PCAOB’s Office of the Investor Advocate issued an advisory. The advisory alerted investors to the fact that proof-of-reserve reports, “are not within the PCAOB’s oversight authority . . . are not audits and . . . do not provide any meaningful assurance to investors or the public.” The Investor Advocate warned investors to, “exercise extreme caution when relying on proof-of-reserves to conclude that there are sufficient assets to meet customer liabilities.”

Firms must also do their part as trusted gatekeepers to ensure that the information they share with the marketplace is not false or misleading.

Under the proposed rule, a firm issuing a proof-of-reserve report and touting its PCAOB registration in that report would be considered misleading, unless the firm also states that its work on the proof-of-reserve report does not fall within the PCAOB’s jurisdiction.    

This is just one example. Proposed Rule 2400 would strengthen investor protections against false and misleading information by ensuring accountability in three ways:

• First, the rule would generally prohibit a registered firm and its associated persons from making false or misleading statements concerning the firm’s PCAOB registration status, including the extent of the PCAOB’s oversight of a firm’s services.
  
• Second, the proposal outlines a non-exhaustive list of scenarios that would violate the general prohibition, including implying the PCAOB sponsors, recommends, or otherwise endorses the firm or its services, or connecting PCAOB registration to services not subject to PCAOB oversight.
  
• Finally, proposed Rule 2400 would codify the Board’s current practice of considering any prior false or misleading statements made by a firm or its personnel regarding the firm’s PCAOB registration status, including the extent of PCAOB oversight of the firm, when reviewing a firm’s registration application.

The proposal also includes a new mechanism under existing PCAOB Rule 2107, Withdrawal from Registration, where if a firm fails to both file annual reports with the PCAOB and pay annual fees to the PCAOB for at least two consecutive reporting years, the Board can consider the firm to have withdrawn from registration.

PCAOB registration is not a marketing gimmick for firms.

This rule would protect investors from misinformation by ensuring there are consequences when firms misrepresent their PCAOB registration status or what it means.  

I encourage all our stakeholders to read the proposal and provide your perspectives.

I would like to express my gratitude to those individuals who have significantly contributed to this proposal.

Specifically, from the Office of the General Counsel, I want to recognize and thank James Cappolli, Vince Meehan, Matt Goldin, and Drew Dropkin.

From the Office of Economic and Risk Analysis, I want to recognize and thank Martin Schmalz, John Cook, Hanna Lee, and Min Ren.

From the Division of Registration and Inspections, I want to recognize and thank Carol Swaniker, Michael Stevenson, and Abena Glasgow.

I also want to recognize and thank Noah Berlin in the Division of Enforcement and Investigations, Karen Wiedemann in the Office of the Chief Auditor, and Ted Serafini in the Office of International Affairs. 

I would also like to thank my fellow Board members and their staff for their contributions to this proposal.