Statement on the Proposals Regarding False or Misleading Statements Concerning PCAOB Registration and Oversight and Constructive Requests to Withdraw from Registration

Remarks as prepared for delivery

Thank you, Chair Williams.

The proposals we are voting on today include two separate PCAOB rules.

The first proposed rule would amend existing PCAOB Rule 2107 (“Withdrawal from Registration”) by adding a new subsection (h). I believe this proposed new subsection (h) is a “good housekeeping” matter by which the Board could deem registered firms that have not fulfilled certain statutory obligations under the Sarbanes-Oxley Act of 2002 (hereafter “SOX”) to have constructively withdrawn from registration. Under SOX, registered firms have both privileges and obligations. Perhaps the biggest privilege that registration with the PCAOB affords is the authority to lawfully issue or participate in the preparation or issuance of audit reports for any issuer, broker, or dealer.¹ Conversely, two obligations that registered firms have under SOX are to submit an annual report and pay an annual fee to the PCAOB to cover the PCAOB’s costs of processing and reviewing annual reports.² Under this proposal, the Board could elect to treat a registered firm’s failure to both pay annual fees and file annual reports for at least two consecutive years as a constructive request by such firm for leave to withdraw from registration and to deem such firm’s registration withdrawn. The proposal contains important procedural safeguards and quantifies the problem to be solved. For example, 87 registered firms - or approximately 6% of all PCAOB registered firms - failed to both file annual reports and pay annual fees for reporting years 2022-2023. The proposal states that its focus is on registered firms that have ceased to exist or are non-operational, and that one of its benefits is for the PCAOB and the public to have a more accurate list of operating registered firms. Emphasis added. I can support this rationale based on the “good housekeeping” principle, but I do wonder whether it will “move the needle” in terms of advancing our statutory mission to protect investors and further the public interest in the preparation of informative, accurate, and independent audit reports. 

 

The second proposed rule would establish a new rule - PCAOB Rule 2400 titled “False or Misleading Statements Concerning PCAOB Registration and Oversight.”  Proposed Rule 2400 would prohibit false or misleading statements by registered firms and their associated persons. Specifically, a registered firm and its associated persons, in statements to clients, potential clients, and the public, must not mislead them about the significance of the firm’s registration status, including the scope of PCAOB oversight over the firm and its services. The purpose of Proposed Rule 2400 is described as preventing firms from making false or misleading statements to clients, potential clients, and the public that could influence their decisions and ultimately confidence in the capital markets. Staff has attempted to quantify the extent of the problem by conducting a review of 167 registered firm websites representing approximately 10 percent of all registered firms. The results of staff’s quantitative analysis reflected in the proposal suggest that approximately 17% of the 167 firms could be found to have violated PCAOB Rule 2400 if it was in effect today.³ Since the sample selection of 10 percent was a judgmental sample as opposed to a random sample, the extrapolated percentage of violations is likely to be lower than 17%, consistent with the proposal’s statement that “the sample may be biased towards selecting firms that could have false or misleading statements on their websites.” Again, I wonder whether proposed Rule 2400 is a solution that warrants the staff time spent to date and the staff time to be spent, especially when staff time could be better spent elsewhere to meaningfully advance our investor protection mandate.

In addition, I am concerned that we are not mindful of the limited capacity of some of our stakeholders to respond to our ongoing stream of proposals with short comment periods. I am particularly concerned about smaller firms having the capacity to review the proposals and provide comments. A likely scenario is that they would not even comment because they are resource constrained. One purpose of the PCAOB’s notice and comment rulemaking process is to adopt better regulations after considering stakeholder comments to help make sure that their perspectives on both the policy objectives and the granular details of our proposals are not overlooked. Without stakeholder input, we would be at risk of adopting regulations that may not fully consider all issues.

While I will support these proposals, I look forward to reading the comment letters, especially on whether commenters believe that the proposals will “move the needle” in furthering our investor protection mandate. 

I want to thank the Office of General Counsel staff, particularly Vince Meehan, and Office of Economic & Risk Analysis staff, particularly Hanna Lee and Min Ren, for their hard work and their responsiveness to my questions.

Thank you.