PCAOB Chair Williams Delivers Remarks at CII Fall Conference
Thank you, Jeff [Mahoney] and everyone at CII for inviting me to be a part of your conference. And thank you for the work you do on behalf of Main Street investors from firefighters to schoolteachers.
Before we begin, I want to issue the standard disclaimer that the views that I express here are my own and are not necessarily the views of the other Board Members or the PCAOB staff.
The PCAOB inspects and investigates registered public accounting firms in more than 50 jurisdictions around the world. These inspections and investigations are two of the most important tools we use to protect investors.
But, for more than a decade, our access in mainland China and Hong Kong has been restricted, potentially putting investors at risk.
On August 26th, we took a first step toward opening up our access in mainland China and Hong Kong when I joined the China Securities Regulatory Commission and the Ministry of Finance of the People’s Republic of China in signing the most detailed and prescriptive agreement we have ever reached.
On paper, the agreement guarantees the PCAOB complete access to inspect and investigate any firm we choose, with no loopholes and no exceptions.
Specifically, there are three key provisions.
One: The PCAOB has sole discretion to select the firms, audit engagements and potential violations it inspects and investigates – without consultation with, nor input from, Chinese authorities.
I have said before, and I will say again: voluntarily delisting is not an escape hatch for avoiding PCAOB scrutiny. Our inspections and investigations are retrospective.
If a company delists this year, we still need to know whether wrongdoing occurred in previous years.
Two: Procedures are in place for PCAOB inspectors and investigators to view complete audit work papers with all information included and for the PCAOB to retain information as needed.
Any interference with our ability to retain information as needed is a dealbreaker.
Three: The PCAOB has direct access to interview and take testimony from all personnel associated with the audits the PCAOB inspects or investigates.
Now we must find out whether what we have on paper holds up in practice.
I want to be very clear: the time for negotiations is over. The agreement has been signed. And it must be followed completely.
Last week, PCAOB teams began arriving in Hong Kong where they will conduct inspections of firms in both mainland China and Hong Kong.
As with all inspections, they will look at various factors, including the audits of specific selected companies and the overall quality control systems of the audit firms themselves. They will review audit opinions that firms sign directly, and audit work those firms perform on behalf of others.
I have been asked many times how long this process will take. The answer depends in part on China’s cooperation.
Our team will work swiftly and thoroughly. China must cooperate just as swiftly and thoroughly in return.
One thing is certain: by the end of this year, the PCAOB will make determinations whether the PRC authorities have allowed us to inspect and investigate completely or they have continued to obstruct.
The Holding Foreign Companies Accountable Act demands complete access. The agreement we signed with our Chinese counterparts guarantees complete access. And the PCAOB will accept nothing less than complete access when we make our determinations by the end of this year.
When I say no loopholes and no exceptions, I mean none.
Before we move on, I want to thank our dedicated teams of PCAOB professionals who have stepped up to do this important work.
Their sacrifices will help keep investors protected. And protecting investors is what this is all about.
From workers saving for retirement to parents saving to put their kids through college, and anyone who depends on the soundness of our capital markets to invest and build for their future, protecting investors guides everything we do at the PCAOB.
And we have three critical tools to help us achieve that mission: standards, inspections, and enforcement.
Each of them serves a key function on its own. But they are strongest when they work together.
High standards set the foundation for high quality audits.
Quality inspections tell us where our standards could be improved, and they shine a light on audit deficiencies that can lead to investigations and enforcement actions.
Strong enforcement encourages compliance with our standards, and it informs where we should focus our inspections.
Together, all three help keep investors protected.
Last month, the Board released our draft strategic plan outlining goals to modernize our standards, enhance our inspections, and strengthen our enforcement.
Much of that work is already well underway.
For example, earlier this year, the Board announced one of the most ambitious standard-setting agendas in the PCAOB’s history. Nine months into the first year of this new Board, we are already working to update more than 25 standards within eight standard-setting projects.
Our inspections team is constantly adjusting to be responsive to new and emerging risks across the globe – whether it’s SPACs and de-SPAC transactions, cryptocurrencies, or how firms are addressing the effects of supply chain disruptions and rising costs on company operations.
Today, I’d like to focus on enforcement.
As our strategic plan makes clear, this Board is approaching enforcement with a renewed vigilance.
While we cannot talk about ongoing enforcement actions, I can assure you: we intend to use every tool in our enforcement toolbox and impose significant sanctions, where appropriate, to ensure there are consequences for putting investors at risk and that bad actors are removed. This includes substantial monetary penalties and significant or permanent individual bars and firm registration revocations.
We are looking at how we identify cases, the types of cases we pursue, and the sanctions we impose.
First, we are expanding our case identification process.
We are strengthening the process for our inspections team to refer potential violations they find for investigation and enforcement.
We are looking for patterns and conducting more sweeps. Sweeps enable us to get additional information from a number of firms at the same time on areas where we suspect that violations may be occurring. They make it harder for those violating our rules or standards to hide.
We are working closely with our fellow watchdog agencies to identify potential cases.
And we are encouraging the public to report potential violations. You can learn more about how to do so on the tips and referrals page at www.pcaobus.org.
Second, we are expanding the types of cases we are pursuing.
For any violation of PCAOB standards that is serious enough to put investors at risk, the excuse that “it only happened once” simply won’t cut it. We will not hesitate to bring cases that hinge on only a single, serious wrongful act, whether reckless or negligent.
We aren’t just pursuing individual wrongdoing – we’re holding firms accountable in more situations, including for failing to appropriately staff or respond to the risks of an audit.
And we are going after cases where firms’ quality controls aren’t up to standard to keep investors protected.
Third, we’re making sanctions count.
Under this Board, we’ve more than doubled our average penalties against individuals compared to the last five years. This includes the largest money penalty ever imposed on an individual in a settled case.
At the same time, we’ve increased our average penalties against firms by more than 65%.
In the past five years, the PCAOB assessed penalties against individuals less than half of the time and firms only about 86% of the time. This year it’s 100%.
Just last week, we announced a settled disciplinary order permanently revoking a firm’s registration and barring the firm’s owner, as well as imposing a significant penalty, for interfering with the Board’s inspection process.
It was the first settled action in PCAOB history with both a permanent revocation or bar and a significant penalty. And it demonstrates our commitment to remove bad actors from the profession and to deter misconduct.
Those who break the rules should know we won’t be constrained by the types of cases the PCAOB has pursued in the past. We won’t be limited to the level of penalties that have been seen before. And we will seek admissions of wrongdoing in appropriate cases – for example, where the conduct is intentional or egregious.
We mean business when it comes to enforcement because we can’t afford not to.
As Senator Paul Sarbanes said shortly after he joined Republicans and Democrats to create the PCAOB 20 years ago: “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.”
The PCAOB is proud to be part of that system Senator Sarbanes talked about because we know what’s at stake.
At the beginning of this speech, I told you the PCAOB inspects and investigates in more than 50 countries. That is because companies around the world seek out U.S. capital markets as the gold standard.
But the integrity of our capital markets is not inevitable. It takes vigilance to guard against negligence, recklessness, and fraud that threatens our system and the people who depend on it.
At the PCAOB we are working hard to bring that vigilance to our standards, inspections, and enforcement every day.