The “Custodians of Audit Knowledge”: The Need for Academic Research and The Longstanding Relationship Between the PCAOB and the Academic Community

Good afternoon. Thank you, Josh [White], for the kind introduction, and my heartfelt thanks to the entire Office of Economic and Risk Analysis (OERA) for the incredible work that makes this conference possible. Without you, we would not be here.

I want to extend a warm welcome to all of you, today’s participants, for being here and presenting your ideas, and I also want to acknowledge the editors at Management Science for partnering with OERA on this event—thank you. Your collaboration elevates our shared mission of rigorous academic research that will assist us with our audit oversight activities and investor protection mission.

Before I continue, please know that my remarks this afternoon are provided in my official capacity as an individual PCAOB Board Member and do not necessarily reflect the views of the full Board, my fellow Board Members, or the PCAOB’s dedicated staff. 

I understand that there are several students in the audience today. It is wonderful you made time to join us, and your thoughts and ideas are equally important and welcome in our discussions.

Speaking to students pursuing careers in accounting and auditing is, personally, one of the most meaningful parts of being a Board Member.

So far this year, I have spoken to 13 student groups around the country with two more scheduled for next week.

Each of these conversations is a reminder that the future of financial integrity and public trust rests in the hands of curious, principled auditors who will not only uphold the standards of this noble profession but will elevate them.

The importance of financial statement auditing cannot be overstated. In fact, a former colleague referred to auditing as the “sport of kings”, and after my interactions with students from across the country, I am pleased to report that the future of our profession—the future of the “sport of kings”—is in good hands.

But make no mistake, this is not by chance. It is the result of the dedication and commitment of the academic community and those who educate, mentor, and prepare students to enter the accounting profession. I want to thank you for all you do for the students. 

When I was thinking about today’s conference, I was reminded of Bernard Baruch—the successful financier, trusted advisor to seven U.S. presidents, and the namesake of Baruch College. He is largely attributed to saying, “Millions saw the apple fall, but Newton was the one who asked why.”

I tell this story because today I am in front of the very people who ask why. Academics do not just record the fall; they analyze the forces at play—identifying where auditors succeed, where they stumble, and where the next blind spot might emerge.

During my time, I want to explore the following three topics: first, the longstanding relationship between the PCAOB and the academic community; second, why rigorous scholarly research matters to our work; and third, how we can deepen our partnership going forward.

The Long-Standing Relationship Between the PCAOB and the Academic Community

The PCAOB’s collaboration with the academic community began during our earliest days—with the establishment of the PCAOB’s own in-house research office in 2004—just one year after the organization was officially formed.

Twenty-two years ago, I was an inspector when the organization was just getting off the ground. At that time, the impetus for establishing what was then called the Office of Financial Analysis and Risk Assessment was to have an established division of accountants, analysts, and economists within the PCAOB to provide the Board with advice and expertise on financial reporting trends and economic analysis.¹ 

More than two decades later, that sentiment remains the same, and we have been fortunate to recruit an incredible cohort of established, respected, and revered financial academics to the PCAOB over the years, from Doug Carmichael and Gary Holstrum, to Luigi Zingales, Christian Leuz, and Martin Schmalz, to name but a few.

I would be remiss not to add our current team within OERA to that list. These are renowned scholars who are frequently invited to speak at conferences all over the world to present their findings and share their insights. I am grateful to count them as my colleagues at the PCAOB.

At the same time, the PCAOB is no stranger to hosting its own conferences. The first PCAOB academic conference took place in 2004. A decade later, the Conference on Auditing and Capital Markets was launched. This year’s conference will be held on October 16 and 17 in Washington, D.C. Please consider joining us if you have not already.

While today’s event, OERA’s Registered Reports Conference, is a newer venture, the momentum behind it is growing. Last year’s Registered Reports Conference generated such enthusiasm that we received more than one hundred proposals in advance of this year’s conference, which the team in OERA and the editors of Management Science had the incredibly difficult task of whittling those down to the nine submissions on the agenda today.

Earlier, we heard from the editors of Management Science about the PCAOB’s impact as an effective regulator. Academics lending their time and expertise to help inform our work hearkens back to the synthesis projects conducted in the early years of the PCAOB. The first was conducted from 2005 to 2008 and resulted in 10 research synthesis papers. The second project was from 2011 to 2015 and resulted in 13 papers. These efforts have greatly benefited our standard setting projects.

The PCAOB’s advisory groups have long benefited from the perspectives of numerous academic participants over the years² including several who authored papers being presented today: Colleen Honigsberg and Shiva Rajgopal, both Standards and Emerging Issues Advisory Group (SEIAG) members, and Nemit Shroff, an Investor Advisory Group (IAG) member. We will also hear from Robert Knechel, a former SEIAG member, who will be a discussant later today.

The PCAOB’s Economic Research Fellowship program brings academic economists to the PCAOB for a year, during which they work with PCAOB staff on projects and pursue a Board-approved research proposal. We have now seen 18 PCAOB fellows come and go through our doors, and they have authored 13 published papers and 12 additional working papers.

For example, these scholars have examined topics such as how the allocation of audit hours shapes audit quality,³ the consequences of small and midsized firm mergers on public company audit market competition,⁴ and the association between auditors’ use of in-house specialists and audit quality.⁵ They have quantified the link between waived audit adjustments and the audit process,⁶ studied how partner industry expertise⁷ and mandatory partner rotation affect audit outcomes,⁸ and explored how firms’ use of shared service centers⁹ and quality control systems¹⁰ influence audit quality and fees.

Over the years, this work has influenced and informed the PCAOB’s decision making including in our inspection program and standard setting and rule-making activities.

Why Research Matters to the PCAOB

Which brings me to the second topic: why research matters to the PCAOB.

Let me start by exploring how research improves decisions. When we draft or update auditing standards, we make choices that come with real costs and benefits. Evidence from scholarly research informs those choices. We need to understand how auditors perform key tasks, how public companies respond to those audit tasks, how investors interpret and use disclosures, and how the structure of the audit market shapes incentives.

Academic findings help inform auditing standards by providing conceptual and empirical support to compare the expected costs and benefits of the standards. If you look at our economic analyses, you will see that OERA staff carefully and comprehensively review the academic literature and its findings.

For example, in our release adopting AS 1000, the economic analysis carefully considered the academic literature related to professional skepticism and how it relates to PCAOB standards.¹¹

After we adopt auditing standards, your research helps us in our post-implementation review analysis to evaluate whether expected costs and benefits materialize and deepen our understanding of a standard’s impact on audits of public companies and broker-dealers. Research also provides insights into unintended consequences, both positive and negative.¹²

Next, speaking more broadly, is how research improves our oversight activities.

Academic work helps assess the impact of the PCAOB’s inspection program. For example, scholarly research studies on how PCAOB inspection access to non U.S. auditors are associated with audit quality,¹³ and whether initial international inspections improve the audit quality for those auditors’ other engagements.¹⁴ That work informs us when we plan and communicate inspections across jurisdictions.

The overarching point I want to make today is that research improves our foresight by anticipating changes in the audit profession itself. For example, how private equity investment, ownership structure, and firms’ financing models are being reshaped and reconsidered, and how ongoing firm consolidations can affect competition and choice and potentially audit quality.

Another emerging trend to consider is how technology is changing how audit work is performed. There is growing evidence that investors and analysts are using AI tools to interpret financial information as they make investment decisions.¹⁵ These tools offer the possibility of synthesizing information from Form 10-Ks, Form 10-Qs, earnings releases, and transcripts of earnings calls.

Yet, a July report from Goldman Sachs analysts pointed out that “the vast majority of [U.S.] companies have not incorporated AI into regular workflows”.¹⁶

So, while the research appears to show that AI has yet to be fully adapted by companies, there is no question that technology is evolving and advancing every single day, and we all need to be able to adapt and shift along with it.

Advancing The PCAOB’s Partnership with the Academic Community

This calls to mind Professor Eldar Maksymov’s recent paper on audit academia at a crossroads.

He wrote that as “the custodians of audit knowledge”, audit academics find themselves at a fork in the road as it pertains to AI: “Our role is not to mirror the profession’s present, but to help define its future.” He continued, “It is an invitation to join forces with practitioners and regulators to revitalize our shared mission: Strengthening capital markets through timely, high-quality assurance and insight that serves the public interest.”¹⁷

Professor Maksymov’s sentiments that engagement of academics, practitioners, regulators, and I would include investors, to join forces could not be better stated.

We need rigorous academic research on these topics, including evidence that shows not only how and whether emerging issues from private equity investments in accounting firms to AI impact audit quality, but also where they may introduce new risks and new opportunities.

The academic community’s generous expertise helps the PCAOB to understand how broader economic and technological forces may impact audits and audit quality - and ultimately - how investors are affected.

As I conclude, I encourage you to continue collaborating with the PCAOB and providing your work, your ideas, and your feedback. Share your early-stage research as well as your peer-reviewed research. Participate in our conferences. Submit your proposals. Recommend colleagues to become PCAOB fellows or apply to become one yourself. And most importantly, continue asking the tough questions.

Let us go back to Mr. Baruch, millions may watch the apple fall, but those who ask why unlock and discover the deeper truths.

It is these truths that academics, “the custodians of audit knowledge”, dedicate their careers to pursuing. And it is these truths that we at the PCAOB need to hear and learn from in order to continue fulfilling our mission to protect investors.

Thank you for your dedication and commitment to scholarly research and your students. I look forward to learning more from you and to continuing our partnership.

I welcome your questions and any comments you may have.