Investor Protection and Understanding Audit Firms: Enhanced Firm Reporting

Remarks as prepared for delivery

The second item before the Board today is a staff recommendation to adopt enhancements to the PCAOB’s registered firm reporting framework.

In June 2008, the Board established the foundation of a reporting and disclosure system for registered public accounting firms.¹

The Board’s reporting framework included two types of reporting obligations: 

1) an Annual Report of basic information about the firms practice over the last 12-months; and

(2) a Special Report triggered upon the occurrence of certain events affecting the firm, such as certain legal proceedings, or the awareness of an issuer’s failure to report certain matters to the U.S. Securities and Exchange Commission, such a change in auditor or withdrawal of an audit report.

Much has changed since the Board set up this reporting regime 16 years ago.

The business landscape increasingly favors technology- and data-driven enterprises. 

Earlier today, the Board approved a final rule focusing on informative metrics to help make audit firms and their audit engagements more transparent to investors and the capital markets.

The staff recommendation now before us recognizes that the PCAOB performs its oversight in an increasingly data-driven world.

Accordingly, the PCAOB needs relevant and reliable operational data to inform our oversight of the audits of issuers and the examinations of brokers and dealers.

In my view, some crucial elements of this recommendation include:

• Through an updated Annual Report (Form 2), firms will now share more relevant information about the firm’s legal structure, its ownership, and governance. And, for the first time, firms will also provide details about network arrangements, and the largest firms will submit financial statements confidentially.
• Through an updated Special Report (Form 3), firms will report significant cybersecurity incidents and information about material events that have the potential to significantly affect the firm’s operation of its audit practice.

The enhancements to the audit firm reporting framework will contribute to effective monitoring and efficient deployment of the Board’s finite resources.

I am pleased that the staff, in response to comments, applied a principles-based approach with flexibility for firms. 

For example, the staff declined to prescribe the form and content requirements for financial statements, instead allowing firms to report in a manner of their choice as long as they report on an accrual basis and:

• disclose significant ownership interests,
• private equity investments,
• unfunded pension liabilities, and
• related party transactions, including those with other members of a global network. 

The staff also tailored the final rule to require the provision of financial statements by those firms issuing more than 100 audit reports each year. 

I am, however, disappointed that much of this information being reported to the PCAOB has been deemed “nonpublic.” 

While I recognize that most of this reporting is new for audit firms, investors and other stakeholders also have an interest in the changing dynamics of audit firms, including novel firm arrangements that include infusions of private equity. 

I hope the Board will conduct a review of the firm reporting framework at the proper time and reconsider the need to provide transparency to investors, other stakeholders, and the public. 

I want to commend the staff for their hard work on this project.

In particular, I would like to thank Katherine Kelly, Marc Francis, Damon Andrews, and Connor Raso from the PCAOB’s Office of the General Counsel (OGC).

Dylan Rassier also helped with the project from the PCAOB’s Office of Economic and Risk Analysis and Jessica Watts from our Office of the Chief Auditor.

Thank you, and I am pleased to support this staff recommendation.