Investor Protection and Understanding Audit Firms: The Proposal to Enhance Firm Reporting
Remarks as prepared for delivery
The second proposed rule we are considering this afternoon complements the first, and it is appropriate that they are presented at the same meeting.
The Metrics Release focuses primarily on the way audits are conducted, while the Firm Reporting Release focuses on enhancing the quality and type of information reported to the Board, so that is can better understand structural conditions that may affect a firm’s ability to perform quality audits.
Both proposals stem from the recommendations of the U.S. Department of the Treasury Advisory Committee on the Auditing Profession (ACAP). As the Proposing Release notes, the Advisory Committee recommended enhanced firm reporting and monitoring by the PCAOB and the need to understand the risks confronting audit firms.
The ACAP also recommended annual firm transparency reports, and it called for larger audit firms to file copies of their financial statements with the Board. All because of the critical role audit firms, especially the major firms, play in the integrity and efficiency of the capital markets.
I think it is worth noting that the Advisory Committee was composed primarily of people with substantial experience in business and the capital markets. One of its Chairs was Donald T. Nicolaisen, a former SEC Chief Accountant and senior PricewaterhouseCoopers partner; the other was Arthur Levitt, Jr., a former SEC Chair and Wall Street veteran.
Today's proposal is an enhancement of the existing PCAOB reporting requirements on the firm's Annual Report (Form 2) and the reporting of certain events that could impact a firm's operations (Form 3). It reflects the judgment of the staff after some years of experience that additional information is necessary to allow the public to understand the foundation on which audit firms provide for audit engagements and to allow the PCAOB to meet its responsibilities under the Sarbanes-Oxley Act.
Each of the reporting categories discussed in the Release meets that standard. Enhanced financial reporting, more detailed information about firm governance and network structure, and reporting of firm policies and procedures to manage cybersecurity risks - all will provide information that investors, audit committees, and others in the financial markets can use to better understand and evaluate their auditor and the audit process.
The information sought by the proposal would also boost the Board’s effectiveness significantly and is necessary for the performance of its mission. “Monitoring” audit firms, especially large firms, means understanding their structure and their finances. Planning inspections, shaping standards, and targeting enforcement all depend on knowledge of the audit firms involved, not merely of individual audits.
Before I close, I want to acknowledge and thank the team that put this thoughtful release together, in particular, from the Office of the General Counsel, Connor Raso, Katherine Kelly, Damon Andrews, and Marc Francis; and from the Office of Economic and Risk Analysis, John Cook, Dylan Rassler, and Carrie Von Bose. I also want to thank the staff members from the Office of the Chief Auditor, the Division of Registration and Inspections, and the Division of Enforcement and Investigations who were actively involved in helping with the Release.
I look forward to receiving public comment on this proposal.