Statement in Support of Proposed Changes to Certain PCAOB Registration Rules

Remarks as prepared for delivery

Good afternoon and thank you, Chair Williams.

The PCAOB’s registration provisions provide the gateway for accounting firms to perform audits of public company financial statements and to serve their vitally important role to support our capital markets. This access has been correctly called a privilege for those firms that register with the PCAOB. As such, the registration rules have a unique, and perhaps disproportionate, role to play in allowing us to fulfill our statutory mission of investor protection and furthering the public interest in the preparation of informative, accurate, and independent audit reports.

Firms that register with the PCAOB are authorized to issue audit reports for issuers and broker-dealers and to play a substantial role in an audit. That authority, in turn, means the firm is subject to PCAOB inspection and other oversight activities.

A firm’s choice to register with the PCAOB, to retain that registration, and to convey that status to the public comes with responsibilities. Today’s proposal spells out some of those obligations. In particular, firms that hold themselves out as PCAOB-registered must make sure they are doing so accurately and fairly.

For example, a firm’s registration does not mean that its entire professional practice is then subject to PCAOB oversight. Large swathes of that practice may remain outside our purview, or only be subject to our oversight on occasion. And just because the PCAOB inspects a firm or an audit engagement, does not mean we endorse that firm or its work.

How a firm represents its registration status to clients, prospective clients, audit committees, and other members of the public can lead to mistakes and confusion about the PCAOB’s regulatory oversight. Today’s proposal is about avoiding this misimpression.

How to Consider a Proposal

As I have read through this proposal, I asked myself two main questions:

• First, how does this proposal align with the PCAOB’s mission, vision, and values? Is its focus to protect investors, increase transparency, and/or raise audit quality? In other words, what is the “Why”.
• Second, how would the proposal impact various stakeholders? What would be its effect on the public, on investors, on issuers, on audit committees, on firms, and on the PCAOB itself. This is the “How”.

In the proposal before us, the “Why”, as I see it, is that auditors have an important responsibility placed on them by investors and the capital markets, one that necessitates transparency to maintain trust. This proposal is about enhancing that transparency and protecting that trust by offering clients, prospective clients, audit committees, and the public greater clarity on what PCAOB registration means, and, perhaps even more importantly, what it does not mean. The confidence of those who invest in our capital markets turns, in part, on the knowledge that the PCAOB is playing a role in overseeing the auditors’ work. We want to clarify that role to ensure such confidence is not misplaced or undermined.

As for the “How”, my focus is on what the impact of the proposal would be on those most involved in its implementation.

I welcome hearing from all commenters but want to emphasize a few groups in particular. First, the general public and investors among them. This proposal is focused on you and your understanding of and confidence in auditors’ work, in our own work, and in the capital markets more broadly. Second, firms, and in particular smaller firms. This proposal may well change how you present yourselves and your work; we want to hear your thoughts on that potential impact. Third, public companies, broker-dealers, and other firm clients. Are there ways to make this proposal useful that we have not considered?

Now, let me highlight a few key features of this proposal.

Proposed Rule 2400

As the release indicates, Proposed Rule 2400 consists of three main parts.

First, there is a general prohibition on false or misleading statements about a firm’s registration status when marketing or otherwise holding itself out to clients and the general public. This is a broad prohibition, but it is limited by subject matter – only with regard to registration – and by communication type – marketing and other similar statements. As a public-focused prohibition, this rule should not affect how firms do their work internally, just how they present that work, and themselves, to others.

Second, the proposed rule offers specific direction to firms about how to design marketing materials that accurately reflect the extent of PCAOB oversight and avoid the suggestion that the PCAOB is sponsoring or otherwise endorsing their work. The proposal makes clear that firms would have to assess for themselves whether they fall into a variety of categories before mentioning their PCAOB registration status.

          Third and finally, the proposed rule makes clear that false or misleading statements about a firm’s registration may have consequences for future applications for registration. This was already the case, and I appreciate efforts to make our practices more transparent by codifying them.

Proposed Rule 2107(h)

We are also considering a rule amendment for a new “constructive” withdrawal mechanism. Proposed Rule 2107(h) would allow the PCAOB to consider a firm that has failed both to file annual reports and pay its fees for multiple years, as having effectively requested to withdraw from registration.

The proposal offers some context: there are 87 firms that have neither filed annual reports nor paid fees for the past two years. 13 of these firms have not done so for over a decade. If this rule is adopted, that period of delinquency after adoption would be grounds for implementation of the withdrawal process.

Conclusion

I am pleased to support the proposal. It endeavors to ensure transparency in registered firms’ public communications and emphasizes our mission of investor protection and the public interest.

I would like to end where this meeting began, focused on our dedicated staff. Their hard work and creative thinking on this project and, in particular, the discussions and other support they have provided to me during my review, is very much appreciated. Thank you to James Cappoli, Matt Goldin, Drew Dropkin, and Vince Meehan in the Office of the General Counsel, to Martin Schmalz, John Cook, Hanna Lee, and Min Ren in the Office of Economic and Risk Analysis, to Carol Swaniker, Michael Stevenson, and Abena Glasgow in the Division of Registration and Inspections, to Karen Wiedemann in the Office of the Chief Auditor, and to Ted Serafini in the Office of International Affairs.