The Cost of Unintended Consequences: Accounting Talent, Audit Quality, Investor Protection

Remarks as prepared for delivery

Thank you, Chair Williams.   

I support the release of the proposed amendments to PCAOB Rule 3502 governing contributory liability, but I do so with considerable reservations.      

The primary reason I support this proposal is that the SEC has existing authority to discipline an associated person for negligently causing or contributing to a registered public accounting firm’s violation of laws and rules pertaining to the preparation and issuance of audit reports. I therefore believe proposing an alignment makes sense.  

That said, I have concerns about the lack of discussion on how the proposed amendments will be implemented, and I am thus concerned about whether it will do more harm than good for investors in the long run. My concerns about the proposal have three facets: (1) discouraging auditors from accepting important audit roles; (2) exacerbating the accounting talent crisis; and (3) causing smaller audit firms to exit the public company auditing business.    

First, the proposal’s economic analysis acknowledges that one of the potential unintended consequences of the proposal is that it “could unintentionally discourage auditors from accepting important audit roles if they fear being held liable, leaving these roles to be accepted by less cautious or less qualified individuals.” Emphasis added. I share this concern, but I believe a more likely unintended consequence relates to retention in that “junior” or “less important” audit professionals might choose to leave the public company auditing profession altogether rather than continue to serve in junior audit positions for the duration of their professional careers. If this unintended consequence comes to fruition, investors will in the long run be harmed if, as the proposal notes, less cautious or less qualified individuals rise to fill “important audit roles.” I look forward to reading the comments we receive on the economic analysis’ “potential unintended consequences.” 

Second, the proposal acknowledges that the Board has discretion in deciding whether to bring charges against associated persons for violations of Rule 3502. However, it is silent as to whether the Board expects to bring charges under the proposed negligence standard against individuals holding junior audit positions like associates and senior associates. While I understand the concept of prosecutorial discretion and the prudence of making decisions on a case-by-case basis and I appreciate Chair Williams’ statement today on this point, I am concerned that a failure to signal our expectations up front in the proposal may exacerbate the “accounting talent crisis.” About one year ago, I spoke about the talent crisis facing the accounting profession.¹ I noted the chronic decline in accounting graduates and CPA candidates since 2016. Most recently, we heard reports that just over 67,000 people took the CPA exams in 2022, a historic low over the past 17 years.² In fact, the number of people sitting for the CPA exams has declined by 34% since 2016 when a little over 100,000 people sat for the CPA exams.³ In addition, the Wall Street Journal reported last year that over 300,000 U.S. accountants and auditors have left their jobs in the past couple of years, a 17% decline in industry employment.⁴ At the same time, the Bureau of Labor Statistics projected about 126,500 openings for accountants and auditors each year, on average, over the next decade.⁵ If this trend continues, the U.S. labor market will soon have 50% or more of the accountant openings unfilled each year. Why is the accountant shortage crisis relevant to investor protection? Fewer accountants and auditors mean fewer checks and balances, and more errors and fraud. If this Board (or future Boards) decide to routinely sanction associates or senior associates under the proposed negligence standard, the public company auditing profession will become even less attractive, especially in light of the cumulative steps this Board has taken to “sharpen the bite of its penalties,” for example, by including language in its settled enforcement orders that prohibit associated persons from seeking any form of reimbursement, indemnification, and the like, from any source for PCAOB imposed civil money penalties.⁶  

Third, the proposal’s economic analysis acknowledges that its costs “may have more impact on smaller firms where direct costs and distractions are less absorbable by the firms’ other activities or personnel.” The proposal notes that the costs could in part be passed on to audit clients but then goes on to say that “any such audit fee increases are ultimately borne by investors.” I understand that some believe that investors do not mind bearing such additional costs if, as the proposal states, audit quality is improved, and investors can have a higher level of confidence in a company’s financial statements. But I am an investor and spent eight years at the U.S. Department of the Treasury protecting not just investors but all Americans who rely on U.S. economic and financial stability, and I have reservations about sweeping statements that describe what investors like me and each of you want, particularly when it relates to granular PCAOB proposed rules and auditing standards where there is no quantitative analysis of the costs and benefits. The proposal further recognizes the possibility that some firms could ultimately decide to cease conducting issuer and broker-dealer audits, which “could further consolidate the market for issuer and broker-dealer audit services.” I have previously expressed concern that investors and the auditing profession can ill afford a reduction of competition in the audit marketplace.⁷ I look forward to reading the comments we receive on the economic analysis’ “Costs.”    

In sum, I support the PCAOB’s rejuvenated focus on its investor-protection mandate by: (1) modernizing our auditing standards; and (2) taking vigorous and fair enforcement actions to promote accountability and deterrence. However, I feel that we need to be more judicious and exercise greater care so that we do not make the public company auditing profession so risk-ridden that the best and the brightest pursue careers elsewhere. If we make the public company auditing profession unattractive in the name of investor protection, we may be doing a disservice for investors in the long run.  

I want to thank the staff for their hard work on this proposal, including staff in the Office of the General Counsel and the Office of Economic and Risk Analysis. 

Thank you.