The Legacy of Audit Committees

Remarks as prepared for delivery

I am grateful for the opportunity to be here with you. Before I begin, I need to say the required PCAOB disclaimer. The views I express here are my own and do not necessarily represent the views of the PCAOB Board, other Board Members, or PCAOB staff. This year, I began to increase my engagement with audit committee members and chairs given their important role in audit quality, and especially in light of their responses to the NOCLAR proposal. I have been impressed by their business acumen and their deep expertise in accounting and finance. Most importantly, they are deeply committed to, and understand the importance of, audit quality.

I recently read a speech given by former SEC Commissioner Philip Loomis, Jr. in 1978 about audit committees.¹ I learned that the origin of the non-management audit committee concept could be traced back to the 1930s, but it was not until the late 1970s that most public companies established audit committees. Their rapid growth was largely attributed to the SEC’s recommendation in 1972 and the NYSE’s requirement in 1978 for all listed companies to have audit committees comprised entirely of independent directors. Over two decades later, section 301 of the Sarbanes-Oxley Act of 2002 (SOX) amended section 10A of the Securities Exchange Act of 1934 by adding a subsection on the role, responsibilities, and authority of audit committees.

Since its origin, the audit committee was designed to play a vital role in corporate governance by, in the words of former SEC Commissioner Loomis, “serving as a check on management control” by “providing a separate channel of information to the board of directors” through its independent oversight. That is why I want to emphasize how crucial your role is in maintaining trust and confidence in U.S. capital markets. I want to highlight three specific ways audit committees can impact the future of audit quality.

1. Engage with the PCAOB during its rulemaking and standard-setting process: PCAOB standards and rules have a real impact on audit committees. Although these standards and rules are directed to auditors, the consequences often spill over to audit committees who are statutorily responsible under SOX for oversight of the work of the auditor. Your voice and perspective are crucial in helping us understand what would truly be helpful to you and investors. I know many of you in this community have been engaged on the NOCLAR proposal, but please invest your efforts in commenting on the other proposals as well. Everything the audit firms do or do not do will have a direct impact on you. For example, we just released two proposals a few weeks ago on firm and engagement metrics and firm reporting. These proposals stated that they were intended to help you and investors. I hope you will share your perspectives with us based on your expertise to help us get it right.
2. Challenge management and your auditor on how technology such as artificial intelligence (AI) could be leveraged to promote the preparation of financial statements and enhance audit quality. AI has risen to the top in all the firm-published audit committee priorities for 2024. AI is no longer mere hype and now has tangible regulatory implications, especially since the President issued the Executive Order (EO) on AI at the end of October 2023² and the European Union Parliament formally adopted the AI Act in March 2024. If there was any doubt or debate about how significant AI technology is and will be to the global economy, welfare, and liberty, these two significant actions put that debate to rest. Last November at Rutger University, I spoke about specific areas where AI could impact audit quality.³ These areas include the consistent and efficient execution of routine and repetitive audit tasks, proactive fraud detection, and continuous risk assessment. As an audit committee member, you have a tremendous amount of knowledge and influence. Asking questions is a great tool to influence beneficial outcomes. It is easy for preparers and auditors to get bogged down in the day-to-day challenges on financial reporting and accounting processes, and it may be easier to just repeat the same things and not dedicate more time on innovation, especially those that require experimentation. Your interest can challenge them to think outside of their day-to-day routines. Since financial reporting and accounting are backend functions, they may not always be prioritized to receive investment capital in technology. Your support could change this trend.
3. Use your platform to speak to young people about the profession: Another top 2024 priority for audit committees is the talent pipeline. The talent crisis can present challenges to both the preparation and auditing of financial statements. Without strong talent within an issuer, quality of the management reports, internal controls as well as internal audit could suffer. Without talented audit practitioners, the audit quality will be negatively impacted. I have been working with my team to analyze the data on accounting graduates and the number of CPA candidates within the past ten years and forecasting the talent trend for the next ten years. Using basic regression, we are projecting a 10% decline in the number of accounting graduates in the next ten years compared to the last ten years, and a whopping 30% decline in CPA candidates. I have been speaking about the talent crisis as a threat to audit quality since my first year on the Board. Each of you has a unique story about your career journey and your associated passions. I encourage you to use your platform to share your professional adventures with young people to excite them about this profession.

The accounting profession is at a pivotal moment because of technological advancements, coupled with the continued talent crisis. We can either maintain the status quo and risk becoming irrelevant, or we can leave a legacy of being innovators, problem solvers, and truth tellers. Your experience, influence, and wisdom are needed more now than ever to challenge, inspire, and shape this profession for years to come. Investors and this profession are fortunate to have people with the breadth and depth of your expertise. I thank you for your commitment and contributions to fostering the highest audit quality.

Thank you.