PCAOB Chair Williams Delivers Remarks at PCAOB Conference on Auditing and Capital Markets

Thank you, Michael [Gurbutt]. And congratulations to you and your colleagues in the Office of Economic and Risk Analysis (OERA) on putting together another great program for our guests today and tomorrow.

To our guests: thank you for being here and for the important work you do every day.

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.

This summer marked 20 years since Congress created the PCAOB.

In the early 2000s major accounting scandals from Enron to WorldCom rocked our markets. Corporations were lying about their earnings and hiding their debt. And when it all came crashing down, investors lost billions, workers lost jobs and retirement savings, and trust in our markets was eroded.

So, Congress acted. Led by Senator Paul Sarbanes and Representative Michael Oxley, both parties came together to pass the law that we affectionally refer to as “SOX” with near unanimous bipartisan support.

The world has changed over the last 20 years. And, like all of you, I am looking forward to learning more from our distinguished speakers about what those changes mean for the future of auditing.

But one thing that has not changed is PCAOB’s mission to protect investors.

Protecting investors prompted our creation 20 years ago, and protecting investors is what continues to drive us forward today.

Reflecting on SOX in the years after it was signed, Senator Sarbanes warned: “When things get better, companies tend to forget what happened or how serious it was at the time. Trying to maintain high standards is a difficult job.”

The PCAOB is up to the task. But we need your help.

We depend on Michael and his incredible team for high-quality, evidence-based analysis that helps us ensure that our decision-making is infused with the best available data, information, and research. And they depend on you for expanding our knowledge and understanding of the economic impact of auditing and audit regulation on our capital markets.

As Michael mentioned, we have identified three key goals:

• Modernizing our standards,
• Enhancing inspections, and
• Strengthening enforcement.

High-quality economic analysis plays a critical role in each one.

Goal number one: Modernizing our standards.

High standards are the foundation for quality audits. That’s why earlier this year, the Board announced one of the most ambitious standard-setting agendas in the PCAOB’s history.

Less than a year into this Board’s term, we are working actively to update more than 30 standards within 10 standard-setting projects.

And every single one of them requires economic analysis to ensure we get it right.

Our evidence-based approach starts with understanding the current environment – asking what is needed to ensure investors are best protected and what changes may be needed to achieve that goal.

When the PCAOB was first getting off the ground in 2003, it adopted existing standards that had been set by the auditing profession on what was intended to be an interim basis.

Twenty years later, far too many of those interim standards remain unchanged. Our current short-term and mid-term projects will address more than half of them.

We know the world has changed since 2003. Robust economic analysis will help us understand those changes, so we can adapt our standards to keep up with developments in auditing and the capital markets.

Economic analysis also helps us see around the corner and anticipate a standard’s impact. Among other things, we review a standard in terms of its likely economic benefits, costs, competitive effects, and potential unintended consequences.

But simply anticipating impact isn’t the end of the story.

After a standard is approved, we often continue to examine its impact through our post-implementation review process by analyzing public and non-public data.

We also conduct surveys and interviews to collect quantitative and qualitative information about the impact of standards on key stakeholders, such as investors, audit committees, and audit firms.

And, of course, we rely on researchers like you. Reviewing the work of academics outside the PCAOB is critical to shaping our understanding of the audit and its role in supporting trust in our capital markets.

If our evidence-based approach sounds like a lot of work, I can promise you that it certainly is. And I want to thank the dedicated staff who carry this work out every day.

Their work has proven its worth in helping us to understand whether our standards are effective once they are applied by the firms.

Let’s take a specific example: critical audit matters, or CAMs, where auditors communicate to investors certain matters arising from an audit of the financial statements that involved especially challenging, subjective, or complex auditor judgment.

In 2017, the PCAOB adopted a new CAMs standard, bringing the most significant changes to the auditor’s report in decades.

The centerpiece of the new standard, of course, was the requirement for the auditor to determine and communicate CAMs in the auditor’s report.

During the comment process prior to adoption, we heard concerns and questions about the potential impact of CAMs.

Some people wondered, for example:

• How would identifying and communicating CAMs affect the workload of audit engagement teams?
• Would CAMs lead to reduced communication between audit committees and auditors?
• Would investors find CAMs useful?

When the PCAOB adopted the standard, the team studied the best available evidence and acknowledged the potential impact on workloads. The PCAOB’s view was that the standard was scalable, and the PCAOB expressed doubt that CAMs would chill communications. The PCAOB also described several types of anticipated direct and indirect benefits to investors of CAMs.

But our team was not content with just resting on these predictions. They wanted to know – were they right? What were the benefits and costs of the standard, and did any of the unintended consequences play out?

And so, our economists got to work.

They conducted quantitative and qualitative analyses and reported out initial findings in an interim report released two years ago, with a follow-up report that we plan to release in the coming months.

One of the findings in their 2020 analysis was that individual audit engagement teams spent, on average, 1% of total audit hours identifying, developing, and communicating CAMs.

Additionally, they found no evidence of CAMs inhibiting or chilling the communications between the auditors and audit committees. In fact, less than 2% of the 900 audit engagement partners surveyed reported that CAMs constrained communications with the audit committee, while 41% reported that CAMs enhanced them.

As for investors, our economists found that investor awareness of CAMs was still a work in progress. But they also observed that some investors were using CAMs — and finding the information beneficial.

And benefitting investors is what this project — and all our standard-setting projects — are all about.

Of course, standard setting is just one pillar of the PCAOB’s oversight. Another critical component of our work is inspections. That’s why our second major strategic goal is to enhance our inspections.

Our team likes to say that “the sun never sets on PCAOB inspections,” because each year, the PCAOB inspects approximately 250 audit firms and reviews 900 audits from across the globe.

This reach means that our inspections team must constantly adjust to stay responsive to new and emerging risks and issues around the world – whether it’s SPACs and de-SPAC transactions, cryptocurrencies, or how firms are addressing the effects of supply chain disruptions and rising costs.

To stay responsive, our inspectors need data, analysis, and high-quality economic research.

So, Michael and his team help our inspectors with that. They collect data from the information provided to us by firms, from third-party data providers, and from internal sources, and aggregate and analyze that data to help identify areas of risk and point our inspectors in the right direction.

They also develop economic models to further guide how we direct our inspections resources. For example, our economists have developed a portfolio of models that predict the probability of future financial restatements, which, as you know, can have a huge impact on investors.

This portfolio includes models focused on size, as well as models for specific industries and audit firms.

Our modeling team economists use academic research to identify potential inputs for their models and to guide their modeling design. They stay up to date with all the latest research you produce, which helps us improve our accuracy of our models over time.

For our inspectors, all this work makes a big difference. It helps inspectors adjust their inspections approach, whether that’s focusing their selections on relevant risks or making changes to the way they look at crucial concepts, such as auditor materiality judgments.

That brings me to our third key strategic goal: strengthening enforcement.

This Board is approaching enforcement with a renewed vigilance.

We are rethinking how we identify cases, the types of cases we pursue, and the sanctions we impose.

We’ve more than doubled our average penalties against individuals compared to the last five years. This includes the largest civil money penalty against an individual in PCAOB history, which we announced earlier this week.

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%.

We intend to use every tool in our enforcement toolbox.

And one of those tools is high-quality research and data analysis.

Specifically, our enforcement team works with OERA’s Risk Analysis team to develop a list of risk factors to focus on.

Using these risk factors and other criteria, our analysts develop lists of audit engagements that our enforcement team can use to find the most likely enforcement matters, ensuring those that fail to comply with our standards and laws are identified and action is taken to promote audit quality and investor protection.

Examples of the screening criteria used to develop these lists include significant corporate events, auditor events, or characteristics of the issuer, among others.

Economic research is critical to achieving our mission and keeping investors protected.

And we can’t do that without you.

Michael mentioned our speaker series and our fellowship program, which allows the PCAOB to hire academics for a one-year appointment to work on staff projects and to perform original research using our non-public data.

I encourage you to get involved. We’d love to work with you.

We are also fortunate to receive the benefit of the insights and knowledge of academics participating on our two new advisory groups: the Investor Advisory Group and the Standards and Emerging Issues Advisory Group. Both groups bring together extraordinary experts from across the world of auditing and financial reporting.

Before I close, I want to ask one favor of you: help us engage the next generation of auditors and public servants.

As academics, whether in the classroom or the research field, you have an outstanding platform to reach the best and brightest minds – young people who are on the cusp of their careers.

When I was practicing law, I noticed there was not enough of a pipeline of diverse law students going into certain areas of securities law. So, I went to the Dean of Howard Law School and offered to create a class on investment management.

She agreed, but only after telling me I had to come up with a catchy title, or no one would sign up. So, we called it “More Money, More Problems: Regulating Private Equity and Hedge Funds.” And I am proud to report our class was full all four years I taught it.

I am still in touch with many of those students, and many of them chose to make careers in securities law.

So, I have experienced just a tiny fraction of the influence you all have on the next generation of young professionals, and it is powerful.

Your students and research assistants are the future of accounting and auditing. Through them, we will continue to improve audit quality, to uphold the integrity of our markets, and to protect investors.

To do that, we need to bring more young people into the field and expand the types of young people who see accounting as a path for them.

At the PCAOB we are working to do our part through our scholarship program. This academic year, we awarded 250 students from U.S. colleges and universities with $10,000 each to pursue accounting degrees.

More than half of the scholarships in the last five years went to diverse applicants. These scholarships help make careers in auditing possible for the best and brightest students, no matter their backgrounds.

But we must do more. Just last week, the Board heard an important presentation about diversity from one of the academics on the advisory panels I mentioned: Jennifer Joe of the University of Delaware.

And we want to hear from you too.

Bring us your ideas for ways the PCAOB can help build a strong, diverse pipeline of students choosing to make a career in accounting and help protect the next generation of investors.

Thank you very much for joining us today, and for all the work you do to help inform the work of the PCAOB.

We look forward to our continued partnership. I wish you all a productive conference.