The PCAOB Needs to Revisit Its Approach if It Genuinely Wants to Help Small Public Company Auditors

Remarks as prepared for delivery

It is a pleasure to be here with you today. Anyone who has been following my public statements in the past four years knows that I have been a strong advocate for small audit firms. I look forward to answering your questions and I want to hear your views, but I will first make some remarks about how and where the Public Company Accounting Oversight Board (PCAOB) can improve its performance in fulfilling its statutory mandate to protect investors, particularly as it relates to smaller audit firms.

Before I begin, the views I express today are my own and do not necessarily reflect the views of the PCAOB, other PCAOB Board Members, or PCAOB staff. I also want to thank the PCAOB staff for their hard work organizing and participating at  this event. We have staff represented here from all of our major programs including inspections, enforcement, and standard-setting. I have expressed criticisms about PCAOB in the past and I want to note that my criticisms were not a reflection of our staff’s hard work.

As a threshold matter, I believe in the PCAOB’s regulatory, inspection, and enforcement programs, because regulation and supervision of public company and broker-dealer audits play an important role in U.S. economic growth and capital formation. However, to maximize U.S. economic growth and capital formation, the PCAOB must take a more focused and measured approach in its standard setting, inspections, and enforcement programs, to ensure both adequate investor protection and a robust, resilient, and competitive public company auditing profession – one that is attractive to smaller firms and to students at institutions of higher education.

Standard Setting

When it comes to standard setting, I use the idiom “keep your eye on the prize.”  So, what do I mean by that? What’s the “prize?”  The prize is audit quality where for every new standard or rule, I ask myself will it advance and improve audit quality?  On my PCAOB report card, I give the PCAOB a low grade, because it has lost its focus in multiple respects. 

First, PCAOB has recently proposed and adopted rules where there are no clear and direct linkages to improving audit quality. For example, I was the lone dissenter on two midnight rulemakings that the PCAOB adopted on November 21, 2024. One was the Firm Reporting rule where I pointed out how the required firm disclosures would not have a direct relationship to improving audit quality.¹ The PCAOB submitted the rules the next day to the SEC for its approval, but withdrew the rules on February 11, 2025, after many stakeholders including firms submitted comments to the SEC.² This is a prime example of waste and abuse on the part of the PCAOB, because the end result of the PCAOB withdrawing the two rules was entirely foreseeable. 

Second, in my Firm Reporting dissenting statement, I referenced concerns about the pace and volume of the PCAOB’s standard setting activities and the tremendous strain we are imposing on the personnel and the financial resources of small firms, where the collective implementation of all the new PCAOB standards and rules will not only detract focus from audit quality but also accelerate the exit of smaller firms from conducting public company audits. Others seem to share my concerns. For example, in a February 26, 2025, Accounting Today article, one of the original members of the PCAOB Board was quoted as stating that if you are a small auditing firm and “you only have a handful of public company clients, you look at . . . the cost of complying with new auditing standards and regulations, [where] firms may well conclude that they’ll simply leave this space and concentrate on private company auditing . . .” while also noting that it will have a spillover effect on smaller public companies who will “have less auditor choice, and probably increased audit fees as a result.”³ Such increased audit fees and less auditor choice could also play a role in private company decisions not to go public via IPOs, which would result in households having fewer opportunities to diversify their retirement savings portfolios and achieve their long-term financial goals.

According to the SEC’s Office of the Advocate for Small Business Capital Formation’s Annual Report for Fiscal Year 2024, small public companies, totaling 2,630, represent almost half of all public companies.⁴ The report also states that “[s]mall exchanged-listed companies continue to account for the majority of the decline in the number of exchanged-listed companies.” It further notes that one of the largest contributors for this decline seems to be regulatory costs. Similarly, the number of PCAOB registered firms in the U.S. has been declining. By my back of the envelope math, it has declined by nearly 20% since 2021.

Based on a published report on audit fees, average audit fees in 2022 for: large accelerated filers was over $5M, accelerated filers was about $1.5M, and non-accelerated filers was over $600k.⁵ Apparently, size and complexity drive the cost of audits. Small public companies generally hire small audit firms. This means that small audit firms are a crucial component of the capital market ecosystem. Consequently, ensuring the resiliency of the audit marketplace and the vibrancy of small audit firms could provide more options for small public companies and reduce the barriers preventing companies from going public. Unfortunately, PCAOB’s activities in the past few years have had the opposite effect.

Third, the PCAOB’s publicly available standard setting agenda needs to focus more on one of the biggest potential drivers of audit quality today - Artificial Intelligence or AI. This might be because the PCAOB’s standards have historically been technology neutral in that they do not encourage, discourage, or endorse any existing or nascent technologies. But today that is short-sighted and perhaps even wrong. In terms of short-sightedness, the PCAOB should focus on technology-driven standards to improve audit quality, while perhaps first testing them through a pilot. In terms of the PCAOB possibly being wrong, at least one commenter on the PCAOB’s most recent standard setting proposal wrote that the proposal seems to limit the adoption of a more technology-based, data-driven approach.⁶ Now, the PCAOB does list “Data and Technology” as a research project, but I believe its outputs to date have not come close to moving the needle in terms of improving audit quality. 

In short, the PCAOB can no longer do things the same old way. It must adapt its standard setting approach to take advantage of rapidly changing technologies, like AI, by conducting pilots with large and small firms to advance the use of technology in furtherance of improved audit quality. 

Inspections

The PCAOB’s Division of Registration and Inspections or DRI is the largest division at the PCAOB. I once considered it to be the most important program within the PCAOB to help public company auditors improve audit quality, but I now have doubts. Specifically, the publicly available inspection reports identify deficiencies but there are no severity ratings, meaning an investor cannot read inspection reports to discern whether a deficiency has an impact on the financial statements and the relevant assertions and cannot discern the materiality of the deficiency. This is important because not all deficiencies are the same. Some deficiencies may reflect a disagreement between PCAOB and firms on the firms’ exercise of judgment, where in many cases reasonable minds can disagree. Because our statutory mission is to protect investors, our inspections program must first focus on identifying deficiencies that clearly have a significant impact on investors and distinguish between severe deficiencies on the one hand and, for example, those that reflect a disagreement on a firm’s exercise of judgment on the other hand. Otherwise, we might confuse and undermine investors’ trust in the capital markets. 

Enforcement

I have long been concerned about the way the PCAOB carries out its enforcement program. As reflected in the PCAOB’s Strategic Plan for 2022-2026, the PCAOB Board decided to take a more assertive approach in its enforcement program by imposing more meaningful sanctions to help deter wrongdoing by audit firms and audit professionals.⁷ I supported this more assertive approach. 

However, the PCAOB has taken other steps to sharpen the bite of its enforcement program that I believe are excessive if not mean spirited. Let me give you one example. Beginning in late 2022, the PCAOB included language in its settled enforcement orders that prohibits, for example, professional audit staff from seeking any form of reimbursement, indemnification for, or other offset, to PCAOB civil money penalties. This means that if an engagement partner agrees to pay the PCAOB a civil money penalty because of audit deficiencies under his or her watch, that engagement partner cannot be reimbursed by his firm or by D&O insurance. 

To put into context why I believe this indemnity bar was excessive and mean-spirited, let me tell you what the PCAOB does when it has a settled enforcement order with one or more members of a firm’s professional audit staff. First, the PCAOB places the settled order on its website where the public can see the name(s) of sanctioned professional audit staff, a description of the wrongdoing, and the agreed upon sanctions. Second, the PCAOB issues a media news release, which can result in media coverage. Third, the PCAOB reports the sanctions to the SEC. Fourth, the PCAOB reports the sanctions to the state boards of accountancy where the professional audit staff is licensed. Shouldn’t all that be enough to deter individual wrongdoing?  Why did the PCAOB feel the need to extract an extra pound of flesh from professional audit staff?

Furthermore, the PCAOB issued a news release last week announcing settled orders with nine foreign affiliates of a Global Network Firm, for filing inaccurate Form APs, among other things.⁸ In many instances, the foreign affiliates filed amended Form APs after having identified the inaccuracies themselves. For example, in the case of KPMG Israel, the Settled Order states that “[f]ollowing reevaluation of its Form AP reporting, . . . KPMG Israel filed amended Form APs . . . to report the participation of the other accounting firm(s) . . . .”⁹

So even though KPMG Israel identified its Form AP filing errors and took steps to correct such errors, the PCAOB decided it was appropriate to shakedown KPMG Israel for a $250,000 civil money penalty.

In sum, I believe our enforcement program needs to focus more on violations that are material and most significant to real investors and less on shaking down firms for infractions like late reporting. 

I now want to hear from you on: (1) any questions you may have; (2) your suggestions on how we should set standards regarding the use of technology given its rapid evolution; and (3) what the PCAOB can do better to help you improve audit quality.

Thank you.