Chair Williams: “The PCAOB is Laser Focused on Our Mission of Protecting Investors”

Standards 

When we spoke in May, the PCAOB had recently issued proposed changes to modernize a suite of standards that address core auditing principles and responsibilities, including reasonable assurance, professional judgment, due professional care, and professional skepticism—known as AS 1000.  

The proposed changes will center investors by making clear that auditors have a fundamental obligation to protect them. 

That was on the heels of action we took late last year to finalize a new standard that strengthens requirements that apply to audits involving multiple audit firms and issue proposals on Quality Control and the confirmations process for public comment.  

The confirmation process touches nearly every audit, and Quality Control systems lay the very foundation for how firms approach everything they do, including performing audits.  

Since then, Barb and her team have been hard at work.  

This summer, we also proposed amendments to give auditors additional direction addressing specific aspects of designing and performing audit procedures that involve technology-assisted analysis of information in electronic form. 

And we proposed a new standard on noncompliance with laws and regulations, or NOCLAR. 

When sanctions, fines, and civil settlements directly affect a company’s bottom line, or reputational damage causes a company’s stock value to decline, investors pay a price.  

The proposed NOCLAR standard aims to better protect investors by strengthening the requirements for auditors to identify, evaluate, and communicate information that may indicate a company’s noncompliance with laws and regulations. 

In the fall, we issued a proposal on a rulemaking project that would hold associated persons accountable when they negligently, directly, and substantially contribute to firms’ violations.  

The proposal is designed to make sure our rules match what investors already expect: that when an associated person’s negligence directly and substantially contributes to firm violations that can put investors at risk, the PCAOB has tools to hold them accountable. 

Finally, the Board unanimously voted to adopt the new standard and related amendments on the confirmation process.  

The new standard will help auditors detect fraud and better protect investors now and into the future. Subject to approval by the SEC, the new standard will take effect for audits of financial statements for fiscal years ending on or after June 15, 2025. 

And before the year is complete, we expect to issue a proposal for public comment on follow-on disciplinary proceedings. 

In total, we have issued six proposals—with one more expected by the end of this year—and adopted two new standards and related amendments since I was sworn in as Chair nearly two years ago. 

This year alone, the Board has taken more formal actions on standard setting and rulemaking than any year in the last 10 years. 

Still, we have plenty of work ahead of us.  

The projects on our agenda address more than half of our standards in one way or another. 

Nearly all of the standards we are considering are so-called ‘interim standards,’ which the PCAOB first adopted in 2003 based on standards set by the profession on what was intended to be a temporary basis. Yet, they have not been significantly updated in at least 20 years. 

As you have heard me say before, our capital markets don’t stand still. They evolve constantly. Practices change. Technology advances relentlessly. And new risks emerge. 

To keep investors protected, our standards must keep up. 

That is why we are committed to getting this agenda done and getting it done right. The public comment period is critical to that process. And we appreciate everyone who shares their feedback.  

Inspections 

At the same time, our Inspections division has been hard at work on goal number two: enhancing our inspections. 

Our teams inspect roughly 800 audits in more than 30 jurisdictions around the world each year.  

Last year, we expanded the PCAOB’s reach even further by securing access to inspect completely in China for the first time in history. 

Our team likes to say that “the sun never sets on PCAOB inspections,” because at any given moment, odds are an inspection is taking place somewhere around the world. 

In May, we announced enhancements to make our inspection reports more transparent with a new section on auditor independence and a range of other improvements to make more transparent, relevant, and useful information available for investors, researchers, and others. 

In July, we rolled out new features on our website to help users compare inspection report data. 

This was just the beginning of our work to increase transparency and make PCAOB data more accessible. 

I recently read a passage from Congressional debates over the Securities Act of 1934 and I think, even 90 years later, this philosophy holds true today: “There cannot be honest markets without honest publicity.” ¹

Honest publicity or transparency is one of the most powerful tools the PCAOB has to improve audit quality.  

Sharing our inspection results empowers audit committees and boards of directors – which are responsible for hiring auditors of public companies – to hold audit firms accountable directly. 

That is more important than ever, as we are seeing audit quality for both domestic and international firms trend in the wrong direction for the second year in a row. 

When inspection reports are finalized, PCAOB inspectors expect that approximately 40% of the audits they reviewed in 2022 will have had one or more deficiencies where the audit firm failed to obtain sufficient appropriate evidence to support its opinion. 

That is up 6 percentage points from 2021, which was already 5 points higher than the deficiency rate in 2020. 

This means audit opinions were signed without completing the audit work required to verify the accuracy of the financial statements. That is a serious problem at any rate, and 40% is completely unacceptable. 

I have challenged auditors to sharpen their focus. Ultimately, the responsibility falls on firms to correct the problems that led to deficiencies in their audits.   

At the same time, we are also working to empower audit committees with the tools to hold firms accountable on behalf of investors.