Statement in Support of Firm Reporting Proposal

Remarks as prepared for delivery

Thank you, Chair Williams.  I support seeking public comment on proposed enhancements to audit firm reporting requirements.

The current firm reporting regime has been in place for well over a decade.  Over time, our regulatory observations suggest that we may be able to drive audit quality by requiring greater and standardized transparency from registered firms.  This Firm Reporting proposal is made in contemplation of a number of factors, including:  data obtained through PCAOB oversight activities; developments in firm practice and culture; modern technological realities, including the prevalence of nefarious cybersecurity incidents; and the lack of standardization in current transparency reporting by audit firms. 

The proposed enhancements to reporting requirements, if adopted, could potentially yield significant benefits.  For example, by requiring standardized financial, governance, and firm network information, the PCAOB may be able to more effectively monitor registered firms.  Indeed, we may be able to engage with them about potential risks or fissures that could impair audit quality or that could potentially cause disruptions in the capital markets. The importance of this monitoring function cannot be overstated, particularly considering that the aggregate market capitalization of issuers audited by just the annually inspected firms identified on the PCAOB website exceeds $50 trillion.

Through our inspections and enforcement programs, we continue to observe the cascading impact of the “tone at the top.” In that regard, if we can better understand how firms are governed, we can better assess whether there are frameworks in place that support and emphasize audit quality, from one engagement to the next. 

Another potential benefit from this proposal is that investors and other stakeholders, including audit committees, will have more information to consider in their evaluation of firms.  This is particularly important in the common public company process that leads to the appointment of an audit firm, and then shareholder vote on ratification of such appointment. 

Under the proposal, elements of the information that would be solicited are already publicly disclosed by firms in voluntary transparency reports or in transparency reports required by other regulators.  There are, however, some disclosure elements in the proposal that would garner highly sensitive information, including financial statements of the largest registered firms.  To balance our oversight function and the public interest in disclosure, this proposal has been thoughtfully crafted to limit the disclosure of such sensitive information to the Board only.  We are cognizant that, in certain limited contexts, public disclosure may not be appropriate.

In closing, my hope is that greater and more immediate transparency reporting will lead to more effective oversight, and that more effective oversight will advance investor protection. 

It goes without saying that our rulemaking and standard-setting function is strengthened when we can garner perspectives and insights from various stakeholders.  Thus, as we strive to appropriately calibrate firm reporting disclosure requirements, public input is essential.  With those considerations in mind, Chair Williams, I reiterate my support for issuing the Firm Reporting proposal for public comment.

Before I conclude, I want to acknowledge the dedicated staff from our various divisions and offices who contributed to this proposal.  First, my thanks to the staff from the Office of General Counsel, including James Cappoli, Connor Raso, Katherine Kelly, Damon Andrews, and Marc Francis.  From the Office of Economic and Risk Analysis, I want to thank Martin Schmalz and Dylan  Rassier.  From the Office of the Chief Auditor, my thanks to Jessica Watts, Lisa Calandriello, Linnette Klinedinst, and David Ellam.   From the Division of Enforcement and Investigations, I want to thank Kristin VanFossen, John Abell, Kyra Armstrong, Brett Collings, and Tina Bell.  From the Division of Registration and Inspections, my thanks to Christine Gunia, Tim Sikes, Carol Swaniker, Michael Stevenson, Alan Kerwin, Pamela Robinson, Eugene Theron, Kathleen Ostasiewski, Kevin Taylor, and Abena Glasgow.  In addition, I would like to thank my fellow Board members and my staff for their efforts on this project.  And, finally, my thanks again to the staff in the SEC’s Office of the Chief Accountant for their engagement and support on this proposal.