Like a Sentinel Standing Watch, the Financial Statement Auditor Is Indispensable to the Capital Markets

Remarks as prepared for delivery

Good afternoon, and thank you, Mark [Shannon] for the generous introduction. It is a pleasure to join you this afternoon and to participate in this important year-end conference. I always welcome the opportunity to share my thoughts on the impact of the financial statement auditor and the PCAOB on investors and the capital markets.

Throughout my time at the PCAOB, I have been continually impressed by the exceptional talent, passion, and dedication of the PCAOB staff. You will hear directly from four of our best after my remarks – Barb Vanich, our Chief Auditor, Christine Gunia, our Director of the Division of Registration and Inspections, Bill Ryan, our Chief Counsel of the Division of Enforcement and Investigations, and Khalilah Imperatrice, Inspections Leader. It is an honor to work alongside them, and I continue to be grateful for their leadership and commitment to our mission of investor protection. 

Before I continue, please know that my remarks this afternoon are my own in my official capacity as an individual PCAOB Board Member and do not necessarily reflect the views of the full Board, my fellow Board Members, or the PCAOB’s dedicated staff.

I always take time during the holiday season to reflect, as I suspect many of you do as well. In particular, I have been reflecting on the importance of the accounting profession, its future, and the next generation of auditors.

Over the past few years, I have dedicated time to meeting with accounting students preparing to join the profession, and in many respects, I believe meeting with students has become an important part of my work at the PCAOB.

This year, I have met with nearly 20 student groups across the country, and in each meeting, I use the opportunity to remind them that financial statement auditing is a noble endeavor and vital to the capital markets, the health of our economy, and even the welfare of our country.

I also make a point to tell them that being an auditor comes with great responsibility, no matter where they are in their careers. In fact, in many instances, junior auditors may be the only individuals who review important documents that no one else in their firm may directly see.

My hope is that the students leave these meetings with an appreciation that being an auditor is a calling that serves as a central role for the investing public, like a sentinel standing watch. It is also inspiring to see the student’s enthusiasm for the profession and listen to their fresh perspectives and questions. I have heard financial statement auditing referred to as “the sport of kings”, and these students are preparing to take charge.

In my remaining time with you, I want to continue in the holiday spirit by both reflecting and looking ahead. The holidays are a nostalgic time for a lot of us. Like me, I am sure many of you have your own favorite Christmas-themed movies you like to watch. Of course, there are the classics like “A Christmas Story” and “Rudolph the Red-Nosed Reindeer.” There is also a more controversial option like “Die Hard.” But for me, you cannot go wrong with “It’s a Wonderful Life”.   

As a quick reminder, Clarence Oddbody is George Bailey’s guardian angel “second class” because he still has not earned his wings.

Clarence visits a despondent George who is overwhelmed with life’s responsibilities and tells him that he has come to deliver a “great gift…a chance to see what the world would be like without [him].” In doing so, Clarence shows George the impact he has had on the world.

Today, I want to do something similar – to talk about the things we would not have without the work of the PCAOB that, in my view, have strengthened the financial reporting ecosystem for the benefit of investors. Then, I want to look ahead to the opportunities and challenges for the profession and the importance of this time of year for auditors.

Life With the PCAOB

Similar to George Bailey’s experience of seeing a world without him in it, a world without the PCAOB would not include the following three pillars of investor protection.

The first is the PCAOB’s inspection program. On any given day, our inspection teams conduct inspections around the world. Our corps of inspectors is composed of technical accounting and auditing experts with extensive knowledge and practical audit experience across numerous industries and financial areas. The impact of the PCAOB’s inspection program has been the subject of various academic studies,^{1 2} including evidence of its importance to investors.

For example, research focused on our non-U.S. inspection activities has shown that “Companies audited by a PCAOB-inspected auditor raise significantly more external capital and increase capital expenditure following their auditor’s PCAOB inspection, if the auditor receives a clean inspection report from the PCAOB.”³

Before moving to the next topic, I want to provide a brief update on our 2025 inspection cycle: While 2025 inspection reports for the six U.S. Global Network Firms remain in process, preliminary results show a decrease in Part I.A findings from 2024. This early data suggests that the efforts by these firms during the past few years are positively impacting audit quality. Additionally, we can now say that preliminary 2025 results for the other annually inspected firms also show a decrease in Part I.A findings. I hope, and I am optimistic, that these trends will continue in the coming years.

The second pillar of the PCAOB’s efforts to protect investors is through the adoption of new and revised auditing standards.

Two of the most impactful standards that the PCAOB has adopted are, one, the audit of internal control over financial reporting, or ICFR,⁴ and two, QC 1000, A Firm’s System of Quality Control (QC 1000).⁵

In my view, the importance of audits of ICFR cannot be overstated. In an integrated audit, which consists of both ICFR and the financial statements, the auditor’s testing of controls should be designed to obtain sufficient evidence to support the auditor’s opinion of ICFR as of year-end, and to obtain sufficient evidence to support the auditor’s control risk assessments for purposes of the financial statement audit.

A public company’s strong and effective system of internal controls is the cornerstone of reliable financial reporting.

An accounting firm’s system of quality control is another area I believe is of vital importance. Maintaining an effective system of quality control requires continual attention and investment and, in many ways, helps to establish and maintain the firm’s culture. An individual engagement team’s ability to consistently perform high quality audits is dependent on a well-designed and effective system of quality control. It is the cement that serves as the foundation for quality audits.

In 2024, the PCAOB adopted QC 1000, which is designed to elevate audit quality by requiring registered accounting firms to design, and implement where required, a comprehensive system of quality control to respond to their specific risks.

While the effective date has been delayed until December 15, 2026⁶, I know from my meetings with firms that some have already moved forward with piloting aspects of QC 1000, and I encourage other firms who may be ready before the effective date to also consider piloting aspects or performing dry runs. Our staff in the Office of the Chief Auditor want to engage with these firms to understand their experiences and determine areas where further guidance may be necessary.

The third pillar of the PCAOB’s efforts to protect investors is by promoting transparency into the audit process through the adoption of Form AP and Critical Audit Matters or CAMs. In my view, the requirements of Form AP and CAMs are the PCAOB’s most significant actions to provide investors and other market participants with greater insights into the auditor’s work.

Form AP requires firms to provide information that is useful to investors, such as the name of the audit partner, participating other auditors, and the tenure of the audit firm. This information is available on our Auditor Search webpage, which is one of the most visited pages of the PCAOB website.

Similarly, CAMs represent an important element of the audit and a way that auditors can provide their unique insights into the audit to investors, thereby increasing the audit’s relevance. This ultimately increases trust.

That is why I have been reassured by the results of the Center for Audit Quality’s (CAQ) survey last year on CAMs, which found that 92% of investors use CAMs when making investment decisions, and 58% of investors would prefer to see more CAMs in an auditor’s report.⁷ These results serve to illustrate the importance of CAMs and the clear value the auditor can provide to investors.

Together, I believe each of these pillars has been a watershed moment for investors and the capital markets.

If we consider what life would be like in their absence, I strongly believe that investors would be worse off without PCAOB inspections, audit reports would be less informative, and less rigorous standards would govern audits. Each of these pillars of investor protection ultimately contributes to audit quality. 

Now as important as I believe it is to reflect on the past as George Bailey did, “It’s a Wonderful Life” is ultimately about facing the future with optimism – recognizing opportunities and preparing to meet the challenges before us.

Two areas of opportunity and challenge that I see for the profession are the emergence of new, potentially transformative technologies and new firm ownership structures.

The Opportunities and Challenges Ahead

Looking beyond 2025, I would list the rise of artificial intelligence (or AI) at the top of the accounting profession’s opportunities and challenges.

From what I have observed at this early stage of its adoption by accounting firms, AI has the potential to transform how audits are performed and to improve the quality of audits.

For example, AI can already enhance risk assessment and evidence gathering by making it possible to efficiently analyze entire populations in certain scenarios, which can significantly reduce the risk of missing irregularities or unusual patterns.

Overall, this points to a future where AI helps automate manual processes and thereby enables auditors to focus on areas that require judgment.⁸ Auditors may “find their work enriched. Tasks that are tedious have been [or will be] outsourced to machines.”⁹

However, research has also shown that a growing dependence on AI has the potential to erode qualities that go to the core of what it means to be an effective auditor. A recent MIT study found that using AI poses a risk to critical thinking, even going as far to suggest that the usage of large language models could actually harm learning.¹⁰

AI may also threaten auditors’ professional skepticism and judgment. There are academic studies that outline the risk of becoming reliant on agentic AI, warning auditors of placing too much trust in technology outputs.¹¹ These risks will also necessitate the identification of new and different paths for junior auditors to gain those important skills either from the academic community or after they are employed by accounting firms.

AI is only one force reshaping the profession.

Another trend is the continuing expansion of private equity investments in accounting firms both in the U.S. and abroad. 

In terms of opportunity, private equity capital arguably provides many benefits. It can be used to assist firms with recruitment, retention, and succession planning as well as to finance investments in technologies including AI.

Private equity investments can also accelerate a firm’s growth by funding the expansion of existing business lines of service, the entrance into new business areas, and the acquisition of other firms through individual purchases or as roll-up transactions. By increasing firm capacity, modernizing audit tools with advanced technologies, and creating efficiencies, these opportunities have the potential to enhance a firm’s ability to consistently perform quality audits.

But these opportunities also come with risks that, I believe, warrant further discussion and input from all market participants.¹² Private equity firms are ultimately seeking returns for investors by focusing on accelerating growth and looking ahead to selling their interests to another buyer in the private or public markets.

To be clear, seeking returns for investors is not inherently problematic, but that short-term focus may, overtime, begin to shift firm incentives so that profitability outweighs audit quality.

A recent paper by Accountancy Europe stated that “The pressure to deliver high financial returns may encourage cost-cutting, aggressive fee negotiations, or rapid expansion strategies that strain resources and staff capacity. In such circumstances, profitability could take precedence over the rigorous processes, resources, and professional judgment required to maintain audit quality.”¹³ By shifting incentives toward short-term profitability and growth, auditors may begin to compress the time that is necessary to exercise professional judgment and skepticism and possibly weaken controls to maintain independence.¹⁴

Moreover, consolidation driven by private equity roll-ups may reduce the number of accounting firms performing public company audits, thereby concentrating market power and potentially leaving smaller public companies with far fewer auditors competing to provide them with audits.

Both AI and private equity investments in accounting firms carry the potential to truly reshape the profession. Yet these opportunities come with clear challenges to ensure that overreliance on AI and the pressures of private equity do not jeopardize audit quality.

The Importance of Maintaining Vigilance

Now, I want to look ahead. As we enter the 2025 year-end financial reporting and audit season, I am reminded of the old proverb: “There is many a slip twixt the cup and the lip.”

In other words, even when the cup is in hand and a successful finish appears all but certain, that narrow space between the cup and lip is where risks live and where vigilance matters. Or said another way, this is where the sentinel must stand strong.

So, I want to encourage auditors to focus on the following five imperatives before the commencement of year-end fieldwork to avoid any slips between the cup and the lip.

The first imperative is safeguarding the accounting firm’s independence, in both fact and appearance. Independence is the linchpin of credibility, and without credibility, the audit loses its meaning. That is why independence must be embedded within the firm’s system of quality control, built into the policies, processes, and culture that drive every audit.

The second imperative is to encourage auditors to focus on ensuring that each member of the audit engagement team – from the partner to the most junior staff – has an in-depth understanding of the public company’s business, strategy, and operations. This understanding is essential for the auditor to appropriately identify and respond to risks in the audit.¹⁵

Third is encouraging each engagement team member to exercise professional skepticism with the widespread knowledge that the firm will support them. Every team member should know: if they raise a concern, the firm has an “I got your back” culture. That is how skepticism becomes embedded in the firm’s culture.

Fourth is reinforcing the need to have sufficient staff time scheduled to complete the audit and that the engagement team knows they have support from firm leadership if more time is needed, even if it means a delay in formal sign-off and issuing the auditor’s report.

Firm leadership must continually reinforce and signal that the integrity of the audit matters more than the deadline. That, too, is a part of the firm’s overall culture.

The fifth and final imperative is exploring the existence of any potential CAMs, which are not just disclosures; they are windows into the auditor’s most difficult judgments. CAMs show investors where the audit was most challenging, and they demonstrate the auditor’s willingness to shine a light on complexity.

These five imperatives represent guardrails that keep the audit engagement team from losing anything in the gap between the cup and the lip. They safeguard independence, deepen understanding, foster skepticism, and promote transparency.

The Significance of One More Degree

As I begin to close, I want to suggest firm leadership and engagement teams consider the power of “one more degree.”¹⁶ As you probably know, water boils at 212 degrees, and boiling water creates steam. Steam has the power to move turbines that create electricity and can power locomotives. Water at 211 degrees, however, is just hot water.

Pursuing that one more degree can be as simple as the auditor asking one more question. Taking the time for that one additional question – to “pull the thread” – may ultimately uncover an accounting error, lead to a material audit adjustment, or even identify a fraud.

That is the power of one more degree.

The challenge, of course, is engagement teams scheduling the time and individual auditors having the fortitude to remain vigilant during the year-end audit season when deadlines tighten and the pace intensifies. In these moments, it can be tempting to settle for “good enough.” That instinct is human.

But it is the responsibility of the auditor, with the support of firm leadership, to resist that temptation, to bring the heat of one more degree, and to deliver the additional effort and scrutiny.

Closing

In closing, I want to return to “It’s a Wonderful Life.” As Clarence shows George how his life unfolds without him, he remarks: “Strange, isn't it? Each man's life touches so many other lives. When he isn't around, he leaves an awful hole, doesn't he?”

Collectively, the work of financial statement auditors touches the lives of millions of people around the world.

It then must fall on each of you to be vigilant in resisting economic pressures and technological temptations to take short-cuts in the audit, always keeping in mind that it is vigilance – the vigilance of a faithful sentinel – that makes the difference between serving or disserving investors and so many others who depend on the existence of trust and confidence in the capital markets. 

So, as we move into the new year and another year-end audit season, let Clarence’s gift serve as a guide to see the difference your work makes and help you recommit to be the sentinel standing watch.

Thank you, and Mark, I welcome any questions.