PCAOB Chair Williams Urges Firms to “Keep Up Momentum” as PCAOB Inspectors See Significant Improvements in Aggregate Deficiency Rate at the Largest Firms

Remarks as prepared for delivery

Thank you, Julie (Bell Lindsay), for the introduction. For more than 50 years, this conference has provided an important opportunity for those who care about the accounting profession to reflect on its future in our markets, and I am honored to join you again this year to also reflect on the challenges and opportunities before us.

Before I begin, I must provide the usual disclaimer that the views I express today, in my official capacity as PCAOB Chair, are my own and do not necessarily reflect the views of my fellow Board Members or PCAOB staff.

Over the last few years of speaking to the members of the AICPA, I have raised concerns about the unacceptable rise in deficiency rates that put investors at risk. And I have issued a challenge to you to resist complacency and do better on behalf of the investors that we all serve.

Today, I am pleased to stand before you and deliver the news that PCAOB inspectors are seeing significant improvements in the aggregate Part I.A deficiency rate from the largest firms.

With this news, it appears our staff’s work is bringing about positive change as it is now being reflected in the results of our inspections activities.

Ultimately, it is on firms to address and reduce the number of deficiencies, and from what we are seeing, many of you are accepting and addressing this challenge.

I urge you not to let this momentum slip away. There remains an incredible amount of work to be done to fully reverse the trend of high deficiencies.

Those of us in this room know all too well investor trust can be earned and lost in between the clanging of the opening bell and the close of the business day. Today, the profession now faces the challenge and the opportunity to advance the work done so far to enhance investors’ trust—and build upon it.

For our part, the PCAOB is working to highlight the importance of the audit—to make sure it is valued as critical to our capital markets. An audit is not a commodity, and it never should be viewed as such. The audit, and the auditors who carry it out, protect investors. And so do our staff at the PCAOB.

The PCAOB takes the opportunity before us very seriously. We employ about 950 employees across the country who work, day in and day out, around the world to uphold our mission to protect investors. I learn something new from our expert staff every day, and it is truly an honor to lead an organization with such incredibly talented employees who have decades of experience and have put in the time to hone their craft in order to achieve our investor-protection mission.

One of the ways I think about the PCAOB’s progress is through a story that President Kennedy used to tell about the French army general Marshal Lyautey. As Kennedy told it, Lyautey went to his gardener one day and asked him to plant a certain tree. The gardener objected because the tree grew slowly and would not reach maturity for a century.

“In that case,” the Marshal replied, “there is no time to lose. Plant it this afternoon.”¹

The work of protecting investors is urgent work. Investors—hardworking people who are saving for their future —deserve actions now that will protect their hard-earned money. And today, the work of the PCAOB —so far—has planted the roots that will serve the investors well into the future.

Inspections

Our inspections program 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. Not to mention, we are 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.

I have been fortunate to observe our inspectors in the field—and it has been a privilege to see them at work. 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 derives audit quality.

Some of you in attendance have interacted with our inspectors. You know firsthand that our inspectors are focused on driving quality audits, not just through reports and remediation, but through a constructive dialogue with firm leaders and engagement teams.

When our teams have finished their inspections, they issue reports.

In 2025, we will publish reports detailing the results of our 2024 inspections at the largest firms. The 2024 inspections cover audit work that mostly occurred in 2023 and early 2024. Because this Board arrived in early 2022, the audit work that occurred in late 2023 and early 2024 just begins to address the direction and guidance provided under this Board.

Consequently, PCAOB staff has indicated that they expect the results of these inspections to provide the first glimpse of progress made by firms in response to calls for improvement of audit quality under this Board.

The utility of our inspection reports depends on their timeliness. Our inspections teams worked extremely hard to dig out of a backlog of reports left over from the pandemic to ensure this critical information gets into the hands of investors as soon as possible. When I started my position, there was a significant backlog of inspection reports from prior years.

In our first year, this Board approved more than 280 inspection reports as it cleared this backlog, representing a 73% increase over the prior year, and the most reports the Board has approved in any given year. I am happy to report we have resolved all of the backlogs.

Moreover, six months faster than last year, our staff worked diligently to enable the Board to issue, and then publish in August 2024, the inspection reports, covering our 2023 inspections results for annually inspected firms—and to publish nearly all of the reports for triennially inspected firms within six months of the completion of those inspections.

As you well know, in recent years, PCAOB inspectors have found an increase in audit deficiencies, particularly Part I.A. deficiencies. Now, it must be repeated that Part I.A. findings are serious. They mean 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.

The audit work performed in our most recently published reports, the 2023 inspection reports, was performed in 2022 and early 2023—which means that most of this Board’s initiatives designed to drive audit quality forward had yet to be implemented.

Now, it is worth repeating again because promising news is always worth repeating: Today, three years into this Board’s tenure, our inspectors are seeing significant improvements from the largest firms. Results will be reflected in the 2024 inspection reports. To be clear, it will take some time for firms to fully reverse this trend. However, this news signals that the work of this Board is taking root.

Of course, we are also seeing a rise in restatements. According to an article published just yesterday, “the number of US companies forced to withdraw financial statements because of accounting errors has surged to a nine-year high.”²

Now, I have been clear that audit quality is complex and defies simplistic explanations or proxies. Restatements are one variable to take into consideration. And here too, with the increase in restatements, we are beginning to see the results of the slippage of audit quality in prior years. But again, our staff is already seeing improvements. Moreover, we expect even greater improvements when some of our standards, including QC 1000, are fully implemented by the firms.

Investor trust and confidence is not inevitable. It must be earned and maintained—and one way that is achieved is through quality audits. So, I must remind you now: This is not the time to lose focus. Rather, this is the time to continue this progress on behalf of investors.

Moving forward, we expect that PCAOB inspections staff will continue to regularly engage with firm leadership and continue to provide resources to firms like staff Spotlights and a variety of implementation materials for new standards, among many others, to support firms as they work to prevent future violations and enhance their quality control systems and the execution of their audits.

Firm Culture

There is a larger question at play in terms of what continues to drive these deficiencies, how firms can explore the potential causes, and how firms can explore solutions moving forward.

When deficiencies persist, or when we see deficiencies across a wide range of audit areas, we start to wonder whether the firm’s culture is promoting and prioritizing the professional skepticism and care that is required to perform an audit.

Our inspections team spent the last year conducting more than 150 interviews with partners at the six U.S. Global Network Firms (GNF) for a new initiative the PCAOB launched to examine firm culture and its impact on audit quality.

Through these interviews, as well as our ongoing inspections of firms’ quality control systems, we developed several key findings related to firm culture and audit quality.

Ultimately, the results of our interviews indicate that culture can, in fact, have an effect on audit quality, for better or for worse.

The second key finding we uncovered is, unsurprisingly, that personnel have a big impact on audit quality. In fact, we found that longer partner tenure among those we interviewed was correlated with fewer Part I.A deficiencies. Given that, firms may want to explore whether and how turnover affects culture, learning and development, and ultimately, audit quality.

We also found that centralization of the audit firm structure and standardization of audit processes, tools, and templates were correlated with better audit quality. Firms may wish to examine whether they would benefit from centralization and standardization of their audit processes and procedures.

Additionally, those we interviewed told us that the remote and hybrid work environment impacted their apprenticeship model for on-the-job training, the dissemination of culture, and professional skepticism.

As firms continue to consider their operating model, the impact of remote or hybrid work on the development of audit professionals may be an important consideration.

Another key finding relates to accountability. Rather than accepting responsibility for negative audit quality events, respondents from all six audit firms pointed to the complexity of their audit clients as a reason for the increase in audit findings. A minority of respondents from five out of the six audit firms also pointed to external factors for the increase in audit findings—and we found that when firms disagreed with our findings, their staff were often not held accountable.

Firms need to promote a culture of accountability that supports audit quality.

Through our interviews, we also learned that some partners had concerns about the competency of certain firm personnel and their ability to appropriately staff engagements. Those we interviewed also expressed concern that the push for the use of shared service centers is removing foundational skills and experiences from firm personnel.

This lack of experience in basic audit skills could lead to additional difficulties as those individuals continue on in their careers. So, firms must continue to assess how they train and develop staff as they consider departures from the traditional model of starting new auditors with the least complex areas of the audit.

More senior auditors, including engagement partners and those who assist them in managing the audit, must remember that it is their responsibility to ensure that audits are appropriately staffed with personnel possessing the necessary skillsets to complete the audit, that the audit is properly supervised, and that the audit is executed with the requisite care and professional skepticism.

Finally, some respondents indicated that audit firm leaders send mixed messages to engagement partners and other firm personnel about incentives and penalties for positive and negative audit quality events. In their view, audit firms need to ensure that the factors that drive adjustments to compensation are aligned with behaviors that promote audit quality and that all needs to be clearly communicated back to firm employees.

I want to add that I have personally had the opportunity to get to know many of you over the last few years. I believe the vast majority of you are honest, ethical leaders who are truly trying their best to produce quality audits in service of investors. And it is apparent from the candid responses we got from firm partners that many of you here today are actively working to improve the culture within your firms to drive audit quality.

Thank you for your efforts, and I hope the findings from our culture initiative serve you as you continue your own work in these areas.

Leading organizations in today’s increasingly complex and ever-changing world is a challenge. That is why firm leaders and the culture they set play a vital role in ensuring that the nobility and integrity of this profession is not traded for the bottom line.

The accounting profession was founded on its obligation to the public. And it continues today on the premise of serving the public interest, honoring the public trust, and demonstrating a commitment to professionalism.

And so, the question remains: Will the profession rise to the challenge?

For the PCAOB’s part, this initiative is just beginning. Our recently published staff Spotlight provides even more insights into firm culture than what I outlined, and I highly recommend checking it out on our website, if you have not already.

Transparency

Over the past two decades, it has become increasingly apparent that transparency enables all participants in the audit ecosystem to do their work most effectively. As such, our inspection program continues to evolve to assist other stakeholders in driving audit quality, including investors, audit committees, and other users of financial statements, have more information regarding the audit.

That is why the PCAOB has made transparency a priority.

We continue to work to better tell the story behind the inspection reports—what they mean for investors, how firms can improve, and ultimately, how users can better understand the results.

We began including new information about independence, among other items, in our inspection reports, and we followed that up by expanding the tools available on our website to make it easier to understand our inspection results.

We have also made incredible efforts to engage with audit committees to call on them to do more to hold firms accountable for high-quality audits and encourage them to have their firms commit to quality, not just cost.

That includes conversations with more than 200 audit committee chairs each year and providing audit committees with specific questions we encourage audit committee members to ask of their 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.

Further, increased transparency provides valuable information to investors, so they can confidently make decisions while participating in the marketplace, and that is why the PCAOB is committed to this goal.

Standards

When I was sworn-in as chair of the PCAOB, 54 standards were largely untouched from when they were originally written in the 1980’s and 90’s, and frankly, many were unresponsive to what investors need to participate confidently in the markets today.

As I stand before you today, this Board has updated 27 standards and rules. This year alone, the Board has taken more formal actions on standard-setting and rulemaking than any year since 2003 when the PCAOB was created—actions that investors deserve as they make decisions about their investments in the marketplace.

One of the standards the Board adopted, and the SEC approved this year, is AS 1000, or General Responsibilities of the Auditor—which is the first standard in the list of all PCAOB standards.

The very first paragraph of the standard, which the Board adopted in May of this year, states that:

“The auditor has a fundamental obligation to protect investors through the preparation and issuance of informative, accurate, and independent auditor’s reports. This responsibility transcends an auditor’s relationship with management and the audit committee of the company under audit, providing the foundation for an objective and independent audit.”

A fundamental obligation to protect investors. Although this obligation is not new, we felt it was important to specifically include it in the first paragraph of the PCAOB’s very first standard to remind auditors of their upmost responsibility—protecting investors.

A clear reminder of the critical role of auditors—and the work performed by all of you here today.

Next, our quality control (QC) standards. Updating the QC standards was a priority under this Board, as QC systems lay the foundation for everything auditors do.

We believe QC 1000 will set the foundation for quality audits for the future. A firm’s QC system influences virtually all firm activities. When QC systems operate ineffectively, investors are put at risk. But, when QC systems operate effectively, quality audits performed in accordance with applicable professional and legal requirements are likely to follow – leaving investors better protected.

It strikes a balance by introducing a risk-based approach that can be applied by firms of varying sizes and complexity, while also imposing requirements to ensure each QC system is designed, implemented, and operated with an appropriate level of rigor. Then it sets up a feedback loop, based on monitoring and remediation, designed to drive continuous improvement.

The required annual evaluation on QC system effectiveness will ensure accountability; further driven by the personal certification by both the individual assigned ultimate responsibility and accountability for the firm’s QC system as a whole and the individual assigned operational responsibility and accountability for the QC system. Simply designing elaborate processes on paper will not be enough. Firm leadership will have a personal stake in delivering results and additional incentives to fix problems in a timely manner.

QC 1000 also requires firms that audit more than 100 issuers to establish an external quality control function or EQCF, to promote independent oversight of the QC system.

Certain firms have acknowledged the limitations of internal QC functions led by non-independent employees and have lauded the benefits of independent review. What is more, many large firms already have independent monitors or advisors in place and highlight the work they are already doing.

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

We know many of you are already hard at work updating the design and operation of your quality control systems in anticipation of the requirements under the new standard.

As you do this, and as more firms take on this work to prepare for the changes ahead, the PCAOB is ready to help firms prepare.

The new standard will officially take effect in December of 2025, and we are providing resources to assist firms as they prepare for the upcoming changes. We created an implementation page on our website with many different types of materials for firms—from staff guidance documents, to recordings featuring our expert staff, to quizzes that test your knowledge on the upcoming changes to QC as well as AS 1000, and other newly adopted standard-setting and rulemaking projects. Please take advantage of this and reach out to us if you have any questions.

I also want to point out that we are always working to ensure our standards and rules are scalable for firms of all sizes. For example, this work is reflected in the new QC standard. A one-size-fits-all approach is not the best way to keep investors protected. So, 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.

Similarly, AS 1000 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 prepare for the change. So, we are taking a phased-in approach to implementation.

Recognizing the unique nature of smaller firms, we are working to provide information and resources specifically for them. For example, we hosted four in-person and virtual forums around the country this year for auditors of smaller issuers—with another to come in Q1 of next year.

Our expert staff have also included information specific to small firms in recent Spotlight publications and will continue to look for more ways to address the specific challenges of small firms.

This work is just the beginning. We will continue to explore ways that we can be responsive to small firms as they work to advance their audit practice.

While the PCAOB has made great progress on our agenda, there is still critical work ahead of us to ensure investors are protected.

With the Board’s recent adoptions of the Firm and Engagement Metrics standards and Firm Reporting rules, this Board is making strides to provide investors with the level of transparency they have been asking for since at least 2008, as outlined in the U.S. Treasury Department 's Advisory Committee on the Auditing Profession (ACAP) report’s recommendations.

Firm and Engagement Metrics 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.

We believe these two projects provide valuable information to all market participants to enable, among other things, price discovery, and a market-oriented approach to improving audit quality.

These projects represent an unbelievable opportunity for private ordering. Recent academic literature has supported the link between equity prices and the quality of audits based on PCAOB inspections.³

We believe this information will help investors in their capital allocation, but it also will benefit other aspects of capital formation. Of course, you have heard me say that in addition to the PCAOB and the firms, investors and audit committees also play a significant role in demanding quality audits. This information further empowers them.

For example, if approved by the SEC, 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.

It was the late Kofi Annan who said that “Knowledge is power...[and] education is the premise of progress.”⁴ The PCAOB is indeed making progress on behalf of investors with these adoptions. 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 2008 ACAP report.

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.

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 have 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.

Public feedback is absolutely vital to our work. We read each and every comment letter we receive, and by listening to and learning from this feedback, our expert staff are considering adjustments. Based on the staff’s evaluation of the feedback, we decided we need more time before moving this project forward.

We are in the process of determining our next steps for this project.

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

Our goal continues to be getting the standards right. That means delivering quality standards and rules that reflect our investor-protector mission—and are responsive to the feedback provided.

Technology

I want to turn to a subject that is at the forefront of all our minds—technology. And I want to talk about our approach to technology as the PCAOB’s CEO and share some of my insights on our own technological implementations.

Technology is rapidly evolving. And, at least in our experience, it is evolving faster than many organizations can keep pace. It’s easy to reference buzz words like Gen AI, Machine Learning and Large Language Models, but using those technologies to implement meaningful change can be a real challenge. When we cut through the noise, in engaging with many of you and many technologists, it appears, at least to me, that technology is evolving significantly faster than the realities of the implementation on the ground.

But here, too, there are both risks and significant opportunities. So, I wanted to briefly talk about the lessons learned from our staff’s technology initiatives.

We have been fortunate to have recruited staff with experience leading developments in the cutting edge of technology. Our technology efforts are being led by Martin Schmalz, who is the Director of the Office of Economic and Risk Analysis, and Pam Dyson, who is our Chief Information Officer and Director of Technology.

Dr. Schmalz is Oxford University’s Academic Director of the Blockchain Program and Co-Director of AI in Fintech and Open Banking Program. Those familiar with advancements in data and technology may also know him from his important book on this topic titled “The Business Of Big Data: How to Create Lasting Value in the Age of AI.”

We are also grateful to have Director Dyson who has decades of experience modernizing federal regulators including, most recently, the New York Federal Reserve.

Under their supervision, we created a bottom-up approach to technological innovation. The first, and arguably the most important, has been to focus on data.

Data is central to benefiting from the AI revolution. Without effective governance and controls in place, and without a thorough understanding of the inner workings of the data infrastructure, there would be great difficulty in tapping into technology.

These core principles are what started us on our "data to intelligence" journey.

It started with researching and selecting an innovative and secure enterprise data hub that provided us with the ability, not just to meet technological demands, but to grow and expand our in-house capabilities to be a data-driven regulator.

As part of this journey, teams of PhDs and quantitative specialists have spent countless hours cleaning, wrangling, and documenting the data to ensure one source of truth within the organization. Along the way, self-service tools and analytics have replaced many cumbersome and manual processes, with more being developed on an ongoing basis.

There has also been considerable focus and attention spent on developing prototypes of advanced artificial intelligence and machine learning tools including proprietary large language models and natural language process models to assist us in responsibly, efficiently, and effectively carrying out our mission of protecting investors. As we develop these cutting-edge tools, we also inventory use cases to ensure that we align our resources with the most impactful projects.

The journey that we are on has already begun to create synergies both within and across our departments and offices, and these foundational analytical tools are just the beginning.

But none of this would have been possible with a top-down approach. Focusing on data, governance, and controls is not necessarily exciting, but it is necessary.

I know many of you are on the same journey, so I wanted to share some of our experiences and, hopefully, we will soon be in a position to share more. And, of course, our Inspections staff is always ready and willing to engage with you on your use of technology in audits.

Enforcement

To effectively and credibly meet our critical, fundamental responsibility to protect investors, firms must enforce the highest ethical standards. When PCAOB rules and standards are not followed, and investors are put at risk, we have not and will not hesitate to open investigations and bring enforcement proceedings.

We focus on cases that involve serious matters that create risks for investors: audit failures in cases involving financial statement fraud, taking on client work that firms cannot complete, altering work papers, and not performing sufficient work before signing audit opinions.

This year alone, we announced major enforcement matters involving exam cheating and misinforming investigators. And we enforced serious matters in China. We revoked the registration of a China-based firm for repeated violations of PCAOB rules and for failing to cooperate with an investigation into those violations. Separately, we barred two partners of a China-based firm from practicing and imposed practice limitations on another partner of the same firm for violating PCAOB standards.

When firms do not comply with our standards and rules, we will take appropriate action.

Conclusion

I want to close today with this: I believe the auditing profession has a bright future.

At the end of the day, the historical purpose of the audit has always been to communicate a basis for trust to investors. And that is something that should matter to all of us who have a role in the markets. Without the public's confidence, our markets, which are the envy of the world and an engine of our national prosperity, would cease to operate.

I believe the vast majority of this audience believes in this premise. And I am confident you are all up for the opportunity of driving forward better audit quality, and in turn, a brighter future for the profession.

For the PCAOB, Congress gave us an incredible responsibility: To protect investors. It is an honor to continue to lead the PCAOB and our almost 950 employees, who come to work every single day thinking of how they can better protect investors. It is extraordinary to witness their innovation and commitment to our important mission, and I want to take a moment to thank them for their remarkable work.

Thank you for the opportunity to speak today, and I look forward to now joining my fellow Board Members on stage for a discussion.