PCAOB Chair Williams Delivers Remarks at 19th Annual Baruch Auditing Conference

Remarks as prepared for delivery

Thank you, Professor Davis-Friday, for your introduction and for having me back at Baruch today. I always enjoy our discussions, and I am thrilled to be with you all today.

I want to take a moment and acknowledge Rocky Srdanovic and Matt LePere and the team at Baruch whose hard work makes this conference such a success—my thanks to you both.

Before we begin, I must provide the usual disclaimer that the views I express today are my own and do not necessarily reflect the views of my fellow Board Members or the talented and dedicated PCAOB staff.

I am glad Baruch dedicated this year’s conference to exploring themes around ensuring integrity in auditing. And I am thrilled to be here today to participate in this larger conversation because restoring integrity in public audits is quite literally why the PCAOB was created—and what we have strived to achieve every day since.

Let’s back up to 2002 when President George W. Bush signed the Sarbanes-Oxley Act. He referred to SOX as an answer to the call for “greater corporate integrity” after years of economic upheaval and reckless accounting scandals that devastated far too many hardworking people and their families.¹ Furthermore, as President Bush explained, SOX charged the PCAOB with “upholding the integrity of public audits.”

The PCAOB takes this charge—and our mission to protect investors—incredibly seriously. Our work is performed by about 950 employees across the country who work, day in and day out, to “uphold the integrity of public audits.”

Our staff have dedicated their careers to serving investors—hardworking people saving for a house, for their kids’ college funds, for retirement, for an emergency fund.

Put simply, the incredible PCAOB staff come to work every day to help protect people saving for a better life. Their talented efforts and expertise, combined with our mission to serve, creates an incredible workplace. I could not be prouder to lead this organization, and I am extraordinarily grateful for our staff’s work.

The PCAOB backs up our work to “uphold the integrity in public audits” through our strategic plan, which lays out our goals to modernize our rules and standards, enhance our inspections, and strengthen our enforcement while keeping investors at the forefront of everything that we do.

This has been an incredible year advancing our progress under our strategic plan—and it’s not over yet. I want to spend some of our time together today talking about the progress the PCAOB has made this year on behalf of the investors we serve.

Standards and Rules

Under this Board, the PCAOB has issued proposals for ten standard-setting and rulemaking projects and finalized ten projects—including three just in the last three weeks.

With the recent adoptions of the Firm and Engagement Metrics and Firm Reporting projects, the Board has taken more formal actions on standard setting and rulemaking this year than any year since 2003 when the PCAOB was established—and when we were charged with “setting clear standards.” ²

By adopting Firm and Engagement Metrics, the Board is making strides to provide investors with access to transparent, reliable, and comparable information. Information that investors have been asking for since at least 2008—16 years ago—when the U.S. Department of Treasury’s Advisory Committee on the Auditing Profession (ACAP) issued its report. The insights in the ACAP report, along with over a decade of PCAOB staff’s regulatory experience, eventually led to a concept release approved by the Board in 2015.

PCAOB staff have been working on Firm and Engagement Metrics for decades, and if the project is approved by the SEC, this rule would provide investors, audit committees, and other stakeholders with valuable information on firms and their engagements to help them make knowledgeable decisions regarding audit firms and investment related choices.

For example, collectively, the information disclosed will provide a basis for investors to make more informed decisions when ratifying auditor appointments, electing board members, and allocating capital, and it will provide a basis for audit committees to make more informed decisions in retaining and monitoring auditors.

Providing audit committees with information as they engage in a robust dialogue with their auditors every step of the way, from auditor selection to completion of each audit, is indeed a method of protecting investors.

Engaged and informed audit committees serve as an effective force multiplier in promoting audit quality for the benefit of investors. While we do not regulate audit committees, we do empower them with information, and that is why the PCAOB is here to help audit committee members be an effective voice on behalf of investors as they have those conversations.

Regarding Firm Reporting—the PCAOB’s annual and special reporting requirements for collecting and publishing information from firms have not been substantively updated for 16 years.

And as with the Firm and Engagement Metrics project, several of the overarching themes and concepts in the Firm Reporting amendments were originally outlined in the U.S. Department of the Treasury Advisory Committee on the Auditing Profession Report in 2008. 

To put it another way, the PCAOB is carrying forward recommendations that have been talked about for 16 years. 

The amendments to this rule reflect lessons learned through years of work by the expert PCAOB staff, and if approved by the SEC, would amend the annual and special reporting requirements and facilitate the disclosure of more complete, standardized, and timely information by firms, such as enhanced fee, governance, and network information.   

Earlier in November, the Board adopted an amendment to our registration rules, which, if approved by the SEC, would enable the Board to treat a registered firm’s failures to both file annual reports with the PCAOB and pay annual fees to the PCAOB for at least two consecutive reporting years as a constructive request for leave to withdraw and to deem the firm’s registration withdrawn.

This is an important enhancement to our rules as the number of firms that fail to pay annual fees and file annual reports for at least two consecutive years continues to grow each year.

Firm registration is a cornerstone of the PCAOB’s operations. Firms are required by SOX 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.

If approved by the SEC, this new amendment would ensure that investors, audit committees, and other stakeholders have the most up-to-date information on firms registered with the PCAOB.

At the same time, a project that was not ready for the Board’s consideration this year is the Noncompliance with Laws and Regulations project. Since it was first proposed in June of 2023, we’ve reached out to stakeholders for their feedback, including hosting a public roundtable in March of this year, and we reopened the public comment period to hear from investors, firms, audit committees, and other stakeholders.

It takes time to process comments and feedback from stakeholders—and that’s what our expert staff have been doing. We are now determining our next steps as we analyze comment letters received on the project and responses to targeted inquiries of firms about their approach relating to noncompliance with laws and regulations or illegal acts.

In the meantime, our expert staff recently published staff guidance which, among other things, reminds auditors of their obligations under existing PCAOB standards regarding illegal acts by a company in an audit of financial statements.

While we have never been in a rush on this project—or any other project—it should be pointed out that if our expert staff tells us a project is ready for the Board’s consideration, we would be doing investors, the people whom we serve, a disservice by not putting it up for a vote.

While it is important that we get this agenda done, as far too many of the standards and rules are out-of-date and need to keep up and adapt with the world around us, it is more important that we get it done right. That means delivering modern, quality standards and rules that reflect our investor-protector mission.

In accordance with SOX, our rulemaking and standard-setting projects are not finalized until approved by the SEC after Board adoption. Since I last spoke at Baruch in May, the SEC approved four of our projects: Quality Control; AS 1000; Technology assisted analysis; and Rule 3502, which deals with contributory liability. To reiterate, nearly all of these rules and standards had not been updated in decades.

The existing standards the PCAOB adopted in 2003 were meant to be on an interim basis. What’s more, some of these standards, at that time, were already more than a decade old and largely unchanged when the PCAOB was created. 

Interim is not meant to be permanent…or static and never revised…or advanced forward. In a rapidly changing world, investors deserve better than what were originally designed to be temporary measures to ensure their savings...their retirements...their futures...are protected.

While the PCAOB has made significant progress, our work is not done. Part of that work requires robust economic analysis from our experts in the Office of Economic and Risk Analysis or OERA to help us see around the corner and anticipate the impact of our projects.  

To the academics in the crowd today, your insights and perspectives help us to build an understanding of the role of audit and audit regulation in our capital markets and how broader economic and technological forces may be impacting investors.

As such, we are always looking for insight and expertise from the academic community. Please reach out to us via our website if you have ideas, research, or a white paper you’d like to share.

Additionally, OERA is recruiting for full-time research positions, including roles focused on economic analysis of new rules and standards, and development of high-quality publishable economic research to inform PCAOB strategic initiatives. And there’s still time to apply. Applications are due for the 2025 – 2026 academic year by December 20. If you’re interested in learning more or applying, please visit our website.

I am glad you had a chance to hear directly from our Chief Auditor, Barb Vanich, this morning, and I don’t want to repeat what she said, but I do want to take a moment to highlight one of our standards that I previously mentioned was recently approved by the SEC, and that’s quality control or QC.

QC systems lay the foundation for everything auditors do. In order to achieve a quality audit, an effective QC system must be in place. If QC systems aren’t operating properly, investors are at risk.

We did not come at this new standard from a one-size-fits-all approach. We know that risks vary from firm to firm, so a one-size-fits-all approach is not the best way to keep investors protected. The new standard requires all registered firms to identify their specific risks and design a QC system that includes policies and procedures to guard against those risks.

As we crafted this new standard, like we do for every standard and rulemaking project, we asked for public feedback. This is a process that the PCAOB takes very seriously. We read every single comment letter we receive—and we value the insights and feedback we receive from the public.

For QC, one of the requirements in the new standard is for firms that audit more than 100 issuers annually to establish an external oversight function or EQCF, to promote independent oversight of the QC system.

Now, this is not a new idea. In fact, it’s something we have received extensive stakeholder input on over many years, going back, again, to the 2008 ACAP’s recommendation, which said that the PCAOB should consider “firms appointing independent members with full voting power to firm boards and/or advisory boards with meaningful governance responsibilities to improve governance and transparency of auditing firms.”

Certain firms have acknowledged the limitations of internal QC functions led by non-independent employees and have lauded the benefits of independent review. What’s more, many large firms already have independent monitors or advisors in place and highlight the work they’re already doing—which goes to show that this requirement is not only doable, but in fact, is already being done in some firms.

Ultimately, we believe the EQCF will help to drive improvements in a firm’s QC system, which would benefit investors, audit committees, and other stakeholders.

Our mission to protect investors is why, ahead of the effective dates for QC and other recently finalized standards like AS 1000, we are committed to providing firms with resources to help them update their methodologies and train their staff on the upcoming changes.   

That includes a recently published practice aid that outlines the changes to the standard that may go beyond the provisions of other standard setters’ quality control standards. This aid is meant to assist a firm in building upon their existing QC system to ultimately have a QC system that complies with PCAOB standards, as well as the quality control standards of others, when needed. We also published a recorded staff presentation and a comparison document. And, just last week, we published a comprehensive document that provides an overview of the requirements of QC 1000 and staff guidance for firms about how to comply with the standard.

Additionally, we recently created a “Knowledge Check” quiz for users to test their understanding of the new AS 1000 standard. Upon submitting responses, the tool provides participants with their results, including why an incorrect response was wrong.  Again, all of this can be found on our website.

Our goal in issuing these materials is to make sure firms are familiar with the changes, so auditors know what to do when the requirements become effective. We are also asking for feedback. We want to know if firms prefer one of these resources over the other—or if they think additional materials are necessary.  

Firms can also reach out to us with questions by talking with our inspectors while they are in the field, initiating a standards-related inquiry through our standards’ website, or by simply giving us a call via the number that can also be found there.   

Put simply, the PCAOB is here to help firms be successful as these implementation dates draw closer to taking effect—and we hope they take advantage of this time to prepare. Because if firms are prepared, knowledgeable, and ultimately successful, then investors are better protected.  

But I want to be clear: While the PCAOB wants to be as helpful as we can, preparing for implementation is the firms’ responsibility.

Inspections

As we move forward with implementing our SEC approved standards and as well as continuing the modernize the standards left on our agenda, we’re also enhancing our inspections program, which is one of the most important tools we have to keep investors protected.

The PCAOB is the only independent regulatory organization that inspects auditors of U.S. publicly-traded companies across the globe. No other organization has this exact mission—and not only that—but our more than 500 Division of Registration and Inspections (DRI) staff are the foremost experts in their field.

This year marks the third year in a row that the PCAOB has inspected audit firms located in mainland China and Hong Kong since securing historic access in 2022, thanks to Congress’ leadership in passing the Holding Foreign Companies Accountable Act (HFCAA) in 2022.

The PCAOB is the only non-Chinese organization with the authority to inspect audit firms in China, and the only one that has been on the ground in China conducting inspections and taking testimony for investigations of audit firms.

The work that our inspectors do sets the bar for the profession. They work around the clock, around the globe, and their meticulous, expert work highlights problems that demand attention.

As part of our inspections work, the PCAOB has an obligation to be accurate and precise in the way we communicate our inspections’ findings. In recent years, PCAOB inspectors have found that audit deficiencies, particularly Part I.A. deficiencies, are unacceptably high.

Part I.A findings are serious. It means the audit firm failed to obtain sufficient appropriate evidence to support its opinion, and audit opinions were signed without completing the audit work required to verify the accuracy of the financial statements. Examples of Part I.A findings include things like failing to perform any procedures at all to test revenue or the costs of inventory, as well as instances where the auditor did not identify and test any controls over long-lived assets and depreciation expense.

As you can see, these are serious violations that demand a response. Each Part I.A finding is described in our inspection reports, allowing the public to see for themselves the sorts of issues that we are finding when we inspect audit firms. 

In 2023, we had Part I.A findings in 46% of the audits we inspected. Simply put, in these audits, our inspectors found that auditors were not doing their jobs.

To be clear, measuring audit quality is complex and requires nuance. But Part I.A. deficiencies are fundamental to an audit, and they are a critical piece of information that can be used in assessing the quality of an audit. In particular, the descriptions provided in Part I.A deficiencies provide a clearer picture of what went wrong during the audit.  

While some have suggested that audit quality can be best measured by the number of issuer restatements and that a relatively low number of restatements translates to high audit quality, I disagree.

A properly performed audit should identify errors so that they can be corrected before the financial statements are issued and therefore prevent restatements.

And a poorly performed audit does not always mean that the financial statements are flawed. Management’s processes and controls may very well have resulted in financial statements that are materially correct, despite the auditor’s lack of diligence.

Poor audits may miss errors that may never come to light, particularly if the same auditor continues to perform the audit year after year. The risk that errors will not be caught and corrected is the risk that poor audits pose to investors.   

If you have ever experienced a leaky roof, you know that there is a risk that water is running down behind your walls. You may not know it is there, but you hope that the person you hire to fix the problem does their job and checks behind the walls to fix any problem before it affects the home’s foundation.

If they don’t, the problem continues and cracks in a foundation can lead to major failures in the home’s stability.

This example is not unlike Part I.A. deficiencies—and why we are focused on reporting them and other information to help provide investors, audit committees, and other stakeholders with critical information in assessing the work of their audit firm. 

As such, the PCAOB continues to assess how best to educate the marketplace, and our inspection program continues to evolve to keep pace with a changing market. 

Our dedicated Registration and Inspections staff are working diligently across the PCAOB – including with staff from the Office of Technology and OERA – to continue to ensure that our inspections program is providing the marketplace with critical information.

This work also means getting information into the hands of investors, audit committee members, and other stakeholders as soon as possible.

This is a top priority of this Board, and I am incredibly proud of our staff’s efforts to release the reports for annually inspected firms six months faster than last year, and to nearly publish all of the reports for triennially inspected firms within six months of the completion of those inspections. And I look forward to continuing to see staff’s progress on this task.

We also began including new information about independence and other matters in our inspection reports for the first time, and we expanded the tools available on our website to make it easier to understand our inspection results. 

We continue to evaluate other information that may be beneficial to investors, audit committees, and other stakeholders.

Enforcement

Finally, we are focused on a strong enforcement program because serious misconduct that puts investors at risk should have serious and strong consequences. 

In 2023, we delivered historic sanctions holding China-based firms accountable for violations including falsifying audit reports, failing to maintain independence, improperly adopting the work of another accounting firm as their own, and sharing answers to tests on mandatory internal training courses. And last month, we revoked the registration status of a China-based firm for repeated violations of PCAOB rules and for failing to cooperate with an investigation into those violations.

Earlier this year, we announced a $25 million fine against KPMG Netherlands for violations of PCAOB rules and QC standards relating to exam cheating and misinforming investigators. The growth and breadth of exam cheating in this case was enabled by the firm’s failure to take appropriate steps to monitor, investigate, and identify the potential misconduct.

The PCAOB does not and will not tolerate unethical behavior—or any other behaviors that erode trust and threaten the investor confidence our system relies on. The cases we investigate and ultimately decide to enforce involve complex and serious matters: from audit failures in cases involving financial statement fraud to taking on client work that firms can’t complete to altering work papers to not performing sufficient work before signing audit opinions—the list goes on.

All of these actions not only put audit quality in question, these actions put investors at risk.

Which is why, after examining the facts and circumstances of every case, this Board has revoked firms’ registrations, barred individuals, required functional changes to a firm’s supervisory structure, required firms to retain an independent monitor to drive improvements and best protect investors, and issued fines—including more than $35 million this year.

All of the actions taken by this Board send the message loud and clear: If you put investors at risk, you will be held accountable. 

It is also worth noting that, when Congress created the PCAOB, it had the wisdom to say that all of our penalties from enforcement actions would go to fund scholarships for accounting students.

This year, we awarded the highest number of PCAOB scholarships to help young people enter the field of accounting in history. More than half of those students are women, more than half are students of color, and many are transfer students from community colleges.

And, it should come as no surprise given the caliber of students that Baruch produces, but three Baruch students were awarded scholarships this year: Yulia Dmitrenko, Giavanna Genna, and Marisita Pellumbaj. Congratulations to you three, and all our scholars this year.

Having talented and diverse people from storied institutions such as Baruch join the accounting and auditing profession is key to the future of investor protection.

Conclusion

In a moment, I will turn the floor back to Professor Davis-Friday.

First, I would like to leave you with this quote, which I think fits into the theme of this year’s conference, “Ensuring Integrity”.

Senator Paul Sarbanes, who, if you’ll remember, was the co-author of the Sarbanes-Oxley Act, the bipartisan legislation which created the PCAOB.

A few years after SOX was signed, he warned: “If you don’t protect the interests of the investors, it deals a major blow to the workings of the economic system. The U.S. capital markets have established a reputation for integrity because we have a system designed to screen out people who are trying to cut the corners and rig the system.”

Everyone in this room is part of that system. You are part of instilling and maintaining integrity in auditing. And that means investors—people saving for retirement, for their kid’s education fund, or simply just saving for a better future—are depending on you.

For our part, investors depend on us, too. The PCAOB is the only organization doing what we do. Congress gave us an incredible responsibility to protect investors—and it is a responsibility our organization takes seriously. It is a responsibility I, personally, take seriously, as I am extremely proud to continue to lead this organization and work alongside so many talented individuals to fulfill our mission to protect hardworking people and their investments.

As I said when I began, it has been an incredibly busy year for the PCAOB, but also an incredibly fulfilling one working on behalf of investors, and we look forward to continuing this important work.

I’ll turn it back over to you, Professor Davis-Friday, and I look forward to our conversation.