PCAOB Chair Williams Delivers Remarks at Investor Advisory Group Meeting

Remarks as prepared for delivery

Thank you, [Saba Qamar] and [Amy Copeland McGarrity]. And thank you to everyone participating today both here with us in this room and virtually. It is good to be back together, and we are looking forward to hearing today’s presentations.

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

Since we last met in March, our dedicated PCAOB teams have been hard at work continuing to further our key goals of modernizing our standards, enhancing our inspections, and strengthening our enforcement.

You will hear more about our progress on modernizing our standards in a moment from [Barbara Vanich].

Thanks to the hard work of Barb and her team, in March, we issued proposed changes to modernize a suite of standards that address core auditing principles and responsibilities, including reasonable assurance, professional judgment, due professional care, and professional skepticism, known as AS 1000. The proposed changes will center investors by making clear that auditors have a fundamental obligation to protect them.

Just yesterday, we proposed for comment a new standard on noncompliance with laws and regulations or NOCLAR.

When sanctions, fines, and civil settlements directly affect a company’s bottom line, or reputational damage causes a company’s stock value to decline, investors pay a price.

And the proposed new standard aims to better protect investors by strengthening the requirements for auditors to identify, evaluate, and communicate information that may indicate a company’s noncompliance with laws and regulations.

Much of the proposal is informed by recommendations made by the former Investor Advisory Group in 2017. Your feedback will be vital as we continue, and we look forward to working with you to facilitate that dialogue during the comment period.

Of course, we understand there is a direct relationship between the fraud standard and the proposed NOCLAR standard. Fraud is a type of NOCLAR. So, the proposed NOCLAR standard would govern the evaluation and communication of fraud and those requirements would be applied in the same manner as for other forms of noncompliance with laws and regulations.

Still, our fraud standard, AS 2401, Consideration of Fraud in a Financial Statement Audit, would continue to govern the auditor’s responsibilities with respect to the identification of information that may be indicative of fraud. And we continue to have a project related to AS 2401 on our mid-term agenda.

So, it is important to us that we hear from you on both. And I am looking forward to hearing from our panel on fraud today – specifically getting your input on the approaches or methods other professions like forensic consultants, academics, short sellers, and analysts have used to detect fraud – and how such approaches or methods to detect fraud might be applied in financial statement audits.

As much progress as we are making on standards, there is still much work ahead of us. In May we updated our agenda, moving important projects up to the short-term agenda, including Firm and Engagement Performance Metrics – which I know is a priority for many of you – and adding new projects, including several rulemaking projects.

At the same time, [George R. Botic] and his team in inspections have also been hard at work.

Our Inspections division is the largest division at the PCAOB, and inspections are one of the most important tools we have to keep investors protected. George and his team inspect roughly 800 audits in more than 30 jurisdictions around the world each year.

Of course, last year we expanded the PCAOB’s reach even further by securing access to inspect completely in China for the first time in history.

In May, we released the inspection reports for a firm located in mainland China and another firm headquartered in Hong Kong, which were both inspected in 2022.

The deficiencies we found are unacceptable. And we are using every tool we have to hold the firms accountable for fixing them, including shining a light through our public reports, and referring inspection findings to our enforcement team where appropriate. If enforcement violations are found, we will not hesitate to order sanctions, including imposing significant money penalties and barring bad actors from performing future audits.

The fact that our inspectors found these deficiencies is a sign that the inspection process worked as it is supposed to.

Of course, last year was only the beginning of our work. Firms in China and Hong Kong will be inspected on a regular basis going forward.

Inspectors have begun fieldwork for China and Hong Kong firms for 2023’s inspections. We anticipate fieldwork will continue off and on throughout most of the year, which is common practice for inspections such as these in jurisdictions around the world.

The two firms we inspected in 2022 audited 40% of the total market share of U.S.-listed companies audited by Hong Kong and mainland China firms, and we are on track to hit 99% of the total market share by the end of this year.

We are continuing to demand complete access with no loopholes and no exceptions. Should People’s Republic of China (PRC) authorities obstruct or otherwise fail to facilitate the PCAOB’s access – in any way and at any time – the Board will act immediately to consider the need to issue a new determination.

As you know, enhancing our inspections is a key priority for the Board, and we look forward to hearing your ideas today. We are committed to making our inspection reports as useful as possible for investors, audit committees and others by including more information and getting them out as quickly as possible.

The timeliness of issuing the China and Hong Kong reports is just one example of how hard our team is working to speed up the timeline of when we issue reports.

There is no question we have more work to do. And our staff started laying the groundwork last year by working overtime to clear out the backlog of reports from previous years. In 2022, the PCAOB issued 283 inspection reports, representing a 73% increase over 2021 and the most reports the Board has approved in one year.

That is no small feat, and it shows the dedication of our hardworking Inspections team.

Of course, our recent enhancements to the transparency of inspection reports are another important step forward. This was just a first step, not a final step. We are continuing to look for more ways we can expand the information available to investors.

But there is no question that shining a greater light on independence violations will provide new and relevant information to investors. And we thank members of the IAG who specifically flagged independence violations as information you would like to see included in our reports.

It is worth noting that our inspectors have also uncovered a troubling trend in audit quality that many of you have heard me speak about - an increased number of Part I.A deficiencies. One-third of the audits we inspected in 2021 had deficiencies of such significance that PCAOB staff believe the audit firm failed to obtain sufficient appropriate audit evidence to support its opinion on the public company’s financial statements or internal control over financial reporting.

In December, I challenged auditors to sharpen their focus and prioritize their efforts to increase audit quality and ensure investors are protected.

We are working to hold firms accountable for improving audit quality by modernizing our standards, enhancing our inspections, and strengthening our enforcement.

But we need your help.

Encourage investors and audit committees to review our inspection reports and make use of their findings – especially for firms that audit companies where they invest or serve on the board. Encourage them to take note of which firms are consistently complying with PCAOB standards – and which firms are not.

We continue looking for ways to improve the information we share and tools to help investors analyze that information. But we also know investors and audit committees can do a lot with what is already there. And that can go a long way toward pressuring firms to improve.

In April, George and his team released a Spotlight outlining their inspection priorities for this year, and it tackles the challenges we are seeing to audit quality head on.

I encourage everyone to take a look at that Spotlight if you haven’t already.

Finally, I cannot wrap up without mentioning one of the most critical ways we are holding firms accountable to improve audit quality: enforcement. As you know, this Board has committed to strengthening enforcement so that bad actors know there will be consequences for anyone who puts investors at risk.

Last year, we imposed the highest penalties ever, and we doubled the number of enforcement orders from the previous year. And in March, we were proud to announce Bob Rice has joined us as our new head of enforcement.

Bob has more than 30 years of white-collar litigation and investigations experience, including in the private sector, and a long history of public service in government. He has hit the ground running, and his decades of experience holding wrongdoers accountable are already proving invaluable to our continued efforts to keep investors protected.

Thank you all for being here and for all the hard work you’ve put into today’s presentations. Now I would like to turn the floor back over to Saba and Amy to get us started on today’s agenda.