PCAOB Chair Williams Remarks at PCAOB Forum for Auditors of Small Businesses and Broker-Dealers in Chicago

Remarks as prepared for delivery

Thank you to [Kent Bonham] and the rest of his team in our Office of Communications and Engagement – in particular, Brian Goodnough – for their work in putting this event together.

And I must recognize the expert staff from our Office of the Chief Auditor and our divisions of Registration and Inspections and Enforcement and Investigations, who will be leading in-depth sessions with you later today. Finally, I want to thank the staff from both the SEC and FINRA who will be participating.

To everyone in Chicago and watching online, on behalf of the PCAOB, a very warm welcome. It’s my pleasure to begin today’s forum with a few remarks, but I must first provide the standard disclaimer that the views I express today are my own and not necessarily the views of the other PCAOB Board Members or the talented and dedicated PCAOB staff.

At the PCAOB, we have always appreciated the importance of auditors of small businesses and broker-dealers.

Smaller public companies are essential to our economy, driving job creation and innovation. And broker-dealers facilitate the efficient functioning of our capital markets.

Auditors of smaller businesses and broker-dealers are just as essential. In these dynamic and occasionally volatile segments of the marketplace, auditors can apply solid expertise that is grounded in professional judgment, care, and skepticism. Effective auditing strengthens the reliability of financial information, which is so important to protecting investors.

Recognizing this key role, the PCAOB has held forums for auditors of small businesses since 2004 and broker-dealers since 2011. And this year, my fellow Board members and I are hosting a series of five in-person forums across the country.

I’m thrilled to be kicking off that effort here with you in Chicago.

Today, we will share resources and information designed to support your work and help improve audit quality. We are also eager to hear your views and questions.

Before we get there, though, I’d like to set the stage by touching on two things:

• First, I want to give you a big-picture view of the work our staff is doing to advance our mission.
• Second, I want to share a few thoughts on how the PCAOB stays mindful of smaller-firm challenges as we pursue that work.

How We Are Advancing the PCAOB’s Mission and Strategic Goals

Let’s start with the big picture.

The PCAOB is working hard on many fronts to advance the mission that the U.S. Congress gave us back in 2002: to protect investors and further the public interest in the preparation of informative, accurate, and independent audit reports.

Two and a half years ago, our Board adopted a new strategic plan to advance that mission and guide our efforts through 2026. The plan has four simple but essential goals:

• Modernizing our standards,
• Enhancing our inspections,
• Strengthening our enforcement, and
• Improving our organizational effectiveness.

The talented and dedicated PCAOB staff has been firing on all cylinders to advance each of these goals, and I am so glad that they will have a chance to brief you today on their efforts.

First, we are modernizing our standards and rules, many of which haven’t been substantially revisited in years, if not decades. Last year the Board took more formal actions on standard setting and rulemaking than any year since 2013. That work continues in 2024. So far this year, we’ve issued three proposals to modernize, clarify, streamline, and strengthen our rules and standards. We’ve also adopted new standards and amendments through two projects that have been informed by robust input from a wide variety of stakeholders, including small firms.

We understand that small firms have unique needs and challenges. We want to ensure our rules and standards are scalable for firms of all sizes. That is reflected in our recently adopted quality control standard.

We know that risks vary from firm to firm, and effective QC systems should too. A one-size-fits-all approach is not the best way to keep investors protected.

So, the proposed 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.

Similarly, the recently adopted project related to General Responsibilities of the Auditor in Conducting an Audit includes amendments that require firms to assemble a complete and final set of audit documentation for retention not more than 14 days after the report release date. We understand that while many larger firms are already operating within this window, smaller firms may need more time to make the change. So, we are taking a phased in approach to implementation.

Second, on inspections, we are not just inspecting hundreds of registered audit firms around the world each year – we are sharing more of our inspection information and observations than ever. This sharing is happening through enhanced inspection reports, new features on our website, and through new publications with helpful insights. I’ll return to this point in a moment.

Third, we are strengthening enforcement, which is a pillar of our oversight. Strong enforcement helps us send the message that there will be consequences for anyone who puts investors at risk by breaking the rules. In April of this year, we announced the largest civil money penalty in the history of the PCAOB – a $25 million fine against KPMG Netherlands for violations of PCAOB rules and quality control standards relating to exam cheating and misinforming investigators.

Finally, we are also focused on improving the PCAOB’s own organizational effectiveness. A big component of achieving this strategic goal is enhancing our engagement with our stakeholders. And it’s that desire to better engage that has brought me and my colleagues here to Chicago today.

So now let’s zoom in on the topic of the day: auditing in the small business and broker-dealer environments.

How the PCAOB Stays Attuned to Auditors of Smaller Businesses and Broker-Dealers

We all know that the biggest global networks tend to get most of the attention in the media and elsewhere.

At the PCAOB, we don’t just pay attention to big firms. We stay mindful of smaller firms, meaning those that issue audit reports or that play a substantial role in the audits of 100 or fewer issuers. The PCAOB inspects firms in this category at least once every three years.

We are focused on smaller firms, because they are such an important part of the auditing landscape. Today, there are more than 500 triennially inspected PCAOB-registered audit firms that either audit or play a substantial role in the audits of over 3,200 public company issuers.

As it relates to the audits of broker-dealers, more than 280 registered firms audit approximately 3,300 SEC-registered broker-dealers.

So how do we maintain a sharp awareness of smaller firms?

One way is through research.

Of course, we are continually monitoring developments with smaller firms through our inspections. Those observations help inform our rulemaking and standard-setting activity.

But that’s not the only way we get smaller-firm perspective. We also get input from representatives of smaller firms who serve as members on our Standards and Emerging Issues Advisory Group, or SEIAG. And we engage with smaller firms in other settings, such as conferences or even occasionally through interviews and other direct outreach.

Alongside this engagement, an integral element of our standard-setting and rulemaking is economic analysis. Our economists and analysts always consider the impact of our rulemaking actions on smaller firms, because we know that certain issues – such as high fixed implementation costs — tend to have a bigger impact on smaller firms.

In this vein, we do additional analysis when it comes to emerging growth companies. These companies tend to use smaller auditors more frequently than larger issuers do.

All this research and outreach shapes our proposals, but the process doesn’t end there. Once we’ve proposed a new or amended standard or rule, we look for more perspective through the public comment process. We encourage small firms to give us their unique perspectives.

This input is incredibly valuable for us, and it shows up in our rules and standards.

The recently adopted projects related to Quality Control and General Responsibilities of the Auditor in Conducting an Audit I mentioned a moment ago are just two examples.

Once a new standard, rule, or related amendments becomes effective, we don’t stop considering the views of smaller firms. Through surveys and other means we continue gathering information about the impact on firms of all sizes. We want to know how implementation is going and whether any challenges are developing.

How about inspections? As I’ve mentioned, our inspectors don’t just look for audit deficiencies. They are continually sharing their knowledge to help firms improve audit quality.

You will see that drive for improvement in action today, as our inspectors will share experiences, illustrative examples, and good practices that can help firms that audit small businesses or broker-dealers.

I’ll also point to our Spotlight publications, which don’t just present our inspection findings – they also share good practices we have observed.

To take one example, consider our January Spotlight: “Insights Into the PCAOB’s Interim Inspection Program Related to Audits of Broker-Dealers.”

This Spotlight rightly emphasizes that overall deficiency rates in broker-dealer engagements remain unacceptably high. We need to see improvement, and that’s why the Spotlight also provides insights that can help auditors address challenges, such as deficiencies related to an insufficient understanding of the broker-dealer industry or lack of professional skepticism.

Even more recently, we released a Spotlight focused on root cause analysis, which can help firms identify and correct the underlying causes of deficiencies to improve quality moving forward. This is just the first of many Spotlights designed to provide insights and resources for all firms, but small firms in particular.

Overall, we have more than doubled the number of Spotlight publications issued on an annual basis under this Board.

Today’s Dialogue About Your Important Role

Let me close by repeating what I said earlier: auditors of smaller businesses and broker-dealers play an essential role – in our economy, in our markets, and in protecting investors.

At the PCAOB we want to help auditors play that role to the best of their ability, for the benefit of investors. I look forward to taking your questions.

Thank you.