The PCAOB’s Value to Investors and the Intersection of the Financial Statement Auditor and the Chartered Financial Analyst

Remarks as prepared for delivery

Good morning and thank you Steve [Percoco] for the warm introduction and for the opportunity to participate in the CFA Society [of] New York’s 32nd annual conference on financial reporting. It is a pleasure to be with you this morning and add my voice to this important event. The long tenure of this annual conference embodies one of the ideals of Benjamin Graham, the distinguished co-founder of the CFA Society [of] New York, who envisioned the society as a professional forum where analysts could exchange ideas, enhance their knowledge, and promote ethical standards in the investment community. With this aspiration in mind, I always welcome the opportunity to discuss the activities and important work of the PCAOB. Together with the responsibility of the financial statement auditor to perform high-quality audits, the PCAOB’s mission of protecting investors is a critical tool to serve our capital markets by ensuring reliable financial information.

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

As I was preparing to be with you, I reflected on the role of the financial statement auditor and the need for the Chartered Financial Analyst (CFA) to have readily available and reliable financial reporting. While the financial statement auditor and the CFA have different and distinct responsibilities, both have important duties to investors and the capital markets. In fact, the financial statement auditor and the CFA have complementary roles within our capital markets, a thought I will come back to.

I am especially pleased this conference is taking place in New York City, the recognized global center of investment and finance and home to the largest and most vibrant capital markets in the world. Over the long shadow of two centuries,¹ our capital markets have been a vital engine of America’s prosperity.

It has been said that the “Romans built roads, the British created railways and underwater cables, and the Americans developed electricity, highways and telecommunications.”² In each case, the building of society’s necessary infrastructure would not be possible without deep, efficient capital markets that undergird the efficient allocation of capital. One only has to read the daily headlines to see that the allocation of capital is becoming more important given the rise of advancements in technology, including artificial intelligence (AI), and the corresponding capital requirements. Healthy capital markets are built on sound financial reporting, for which the financial statement auditor has a responsibility to support.

I believe the ultimate benefit of the audit profession is trust. The financial statement auditor possesses the unique characteristics of exercising due professional care and an objective, independent, and skeptical mindset. These characteristics enable the auditor to carry out the professional responsibilities that serve a broader objective than that of company management. These principal attributes build this trust and is why the public can rely on the auditor to discern the complete, accurate, and informative story of a company’s performance through its financial statements. As I have highlighted in previous remarks, the work of the financial statement auditor and the auditing profession is vibrant, resilient, and noble.

George O. May, a leading voice in the accounting profession, spoke to this trust in 1932 when he proclaimed that an auditor must

be willing to exercise his judgement objectively and dispassionately, the accountant must be a man of high character, prepared to recognize and observe high ethical obligations even to his own immediate disadvantage. To be able to do so he must be free from any relation to the subject matter or to the parties in interest which might cloud his judgement or impair his loyalty to the investors to whom his paramount duty is owed.³

Complementing the work of the financial statement auditor, the CFA also tells their own story through their analysis. In his seminal book published in 1949, “The Intelligent Investor”, Benjamin Graham said “[t]he stock investor is neither right or wrong because others agreed or disagreed with him; he is right because his facts and analysis are right.” Audited financial statements are a critical input that helps the CFA ensure the facts and analysis are right with a goal of making informed investment decisions. The similarities of financial statement auditors and CFAs do not end there. In fact, from what I have heard and supported by my research, there is a sizable overlap of CFAs and auditors, with many CFAs beginning their careers either as accountants or with an accounting degree.

Investment in our capital markets has reached its highest levels since 2007. Approximately 62% of U.S. adults owned stocks in 2024.⁴ All market participants, whether they are a sophisticated investor such as a CFA, or they are ordinary individuals investing for retirement or college tuition, require trust in order to participate in our capital markets.

In my remaining time, I want to highlight several of the PCAOB’s significant accomplishments over our 22-year history that have protected investors and improved audit quality. While not only interesting, these are areas of our work that I would encourage CFAs to understand and study.

Significant Accomplishments of the PCAOB’s First Two Decades

It is all too easy to take the work of the financial statement auditor and the trust that is afforded to the capital markets for granted. But, the impact when this trust is misplaced can have devastating consequences.⁵ One only has to consider the audit failures of Enron and WorldCom. While there have been a number of well-known financial failures throughout the twentieth century and to date in this century, the events of Enron and WorldCom were unprecedented in terms of their magnitude. The failure of Enron resulted in the loss of 25,000 jobs⁶, approximately $67 billion⁷ in market value to shareholders and more than $2 billion⁸ in retirement assets to its employees. The failure of WorldCom cost shareholders more than a staggering $180 billion.⁹

Since its founding 22 years ago, the PCAOB has played an important role in protecting investors and building trust in our capital markets by raising the bar for audit quality. In 2002, former U.S. Securities and Exchange Commissioner Harvey Goldschmid extolled the creation of the PCAOB by stating that: “[t]he new PCAOB is a godsend to the economy, the quality of our disclosure, and to the accounting profession itself. . . . [E]ven more importantly, the PCAOB is developing high standards for quality control and rulemaking.”¹⁰

The overarching mission of the PCAOB is to protect investors and further the public interest in the preparation of informative, accurate, and independent audit reports. The four statutory duties of the PCAOB are to register public accounting firms that prepare audit reports for public companies, establish and adopt rules and other standards relating to the preparation of audit reports for public companies, perform inspections of registered accounting firms, and conduct investigations and disciplinary proceedings concerning registered public accounting firms and individuals associated with those firms. 

I submit that three areas of our work most directly promote high quality audits and protect investors. Or, said differently, these are specific areas where the PCAOB has raised the bar. These accomplishments include, first, establishing and maintaining an inspection regime with a global reach; second, standard setting activities related to internal control over financial reporting (ICFR), a firm’s risk assessment, and a firm’s system of quality control; and third, efforts to increase transparency including Form AP (Auditor Reporting of Certain Audit Participants) and Critical Audit Matters (CAMs). 

Inspections

Of these three areas, let me begin with inspections, specifically the establishment and maintenance of a strong inspection regime with a global reach. Here, the PCAOB is unique. We routinely conduct inspections around the world, including in China and Hong Kong.

Our corps of inspectors is composed of experienced technical accounting and auditing experts with extensive knowledge across numerous industries and topical areas. Inspections are designed to assess an audit firm’s compliance with applicable laws, rules, and standards and include reviewing specific audit engagements and elements of the firm’s system of quality control.

In 2024, our inspectors inspected 171 firms and reviewed portions of 803 audits of public companies including inspections of 221 audits performed by 78 non-U.S. firms. Our non-U.S. inspections comprise audit firms located across the globe. To date, we have inspected firms located in 54 different jurisdictions.

On Monday, we issued our 2024 inspection reports for the six U.S. Global Network Firms as well as the annual Spotlight: Staff Update on 2024 Inspection Activities(PDF). I am pleased to report that this is the earliest we have issued all six U.S. Global Network Firm inspection reports. I am also pleased that the aggregate Part I. A¹¹ deficiency rates for the U.S. Big Four firms have decreased to 20% in 2024 from 26% in 2023 and the aggregate Part I.A deficiency rates for the six U.S. Global Network firms have decreased to 26% in 2024 from 34% in 2023. Actions firms have taken to drive improvement in audit quality include more in-person work, more focused training for junior staff, strengthening national office resources, and more focused and timely supervision and review. Areas with common inspection findings include those I suspect are aligned with the CFA’s areas of analysis – revenue, inventory, accounts impacted by business combinations, investment securities, allowance for credit losses, and long-lived assets, including goodwill and intangibles.  

The positive impact of the PCAOB’s inspection activities to enhance overall audit quality is well recognized and has been the subject of various academic studies. Research focused on our non-U.S. inspection activities has shown that “[c]ompanies audited by a PCAOB-inspected auditor raise significantly more external capital and increase capital expenditure following their auditor’s PCAOB inspection, if the auditor receives a clean inspection report from the PCAOB.”¹²

Standard Setting

Next, I want to turn to our standard setting activities. From an audit performance perspective, I offer that three PCAOB standards have dramatically changed how audits are conducted and raised the bar for higher quality. The first, in my view, is ICFR.¹³ The importance of a company’s internal controls cannot be overstated. In an integrated audit, which consists of both ICFR reporting and the financial statements, testing of controls should be designed to obtain sufficient evidence to support the auditor's opinion on ICFR as of year-end, and to obtain sufficient evidence to support the auditor's control risk assessments for purposes of the financial statement audit. A strong system of controls not only ensures the accuracy and reliability of the financial statements, it prevents fraud and errors.

The second is the suite of eight auditing standards, adopted in 2010, that relate to the auditor’s assessment of and response to risk in an audit.¹⁴ These risk assessment standards emphasize that the process of identifying and evaluating risks is not static, but continues throughout the entire audit. Once risks are identified, the auditor should design specific audit procedures to address those risks. By integrating the auditor’s consideration of fraud throughout the audit, the risk assessment standards make it clear that the auditor must consider fraud as part of the audit. Both the risk assessment standards and ICFR have enhanced the ability of auditors to perform high quality audits and better serve investors.

And third, a firm’s system of quality control is another area where PCAOB standards are raising the bar. An effective quality control system is perhaps the single most important “puzzle piece” in the performance of consistent high-quality audits.

In 2024, the PCAOB adopted QC 1000, A Firm’s System of Quality Control¹⁵ (QC 1000). I consider QC 1000 to be a generational standard that will provide tangible benefits to audit quality by requiring registered accounting firms to design, and implement, where required, a comprehensive system of quality control to respond to their specific risks. I also believe an important aspect of QC 1000 is its emphasis on firm culture. QC 1000 not only requires firms to obtain an understanding of the culture of the firm, it also has provisions that protect individuals that make allegations or complaints from retaliation. Both these provisions are vital to promoting cultures of accountability and audit quality at all levels.

Transparency

Last, the third area consists of the PCAOB’s efforts to increase transparency into the audit process. I view the requirements of Form AP and CAMs to be the PCAOB’s most effective transparency actions to date. These transparency efforts provide valuable information not previously available to all stakeholders with a specific focus on meeting the needs of investors.

Form AP requires firms to provide useful investor information such as the name of the audit partner, participating other auditors based on percentage thresholds, and identifying the tenure of the audit firm. This information is available on our Auditor Search webpage, which has become one of the most visited pages of the PCAOB website.

Similarly, CAMs represent an important element of the audit and a way that auditors can provide their unique insights into the audit to investors, thereby increasing the audit’s relevance. This ultimately increases trust. I remain particularly focused on CAMs and encourage firms and engagement teams to make every effort to identify all CAMs for inclusion in the auditor’s report. I am pleased our Office of the Chief Auditor is continuing to research whether additional efforts are needed to ensure the standard is functioning as intended.

Before leaving transparency efforts, I want to briefly mention several other areas that benefit investors and other stakeholders. In 2023, the content of our inspection reports was expanded to include graphs reflecting inspection data based on firm and audit partner tenure, as well as incremental findings on independence matters.¹⁶ We also increased the usability of our website with new search features for firm data and inspection reports.¹⁷ In addition, in 2024, new charts and graphs were added to our website that help illustrate the key data and inspection results for annually inspected firms.¹⁸ And finally, we also have continued to increase the number and frequency of staff Spotlight documents that focus on inspection activities and highlight good practices and potential topics for audit committee members. These documents are designed to both inform and aid audit firms as they consider their audits. I could not be more proud of our staff’s creativity with our transparency efforts and I continue to encourage creative measures to increase transparency and access to our inspection data going forward.

Advisory Groups and Stakeholder Engagement

As we think about areas of focus and to ensure the Board and staff can make well informed decisions across all of our oversight activities, outside input and perspectives are necessary. Specifically, I believe it is important for us to speak with and hear from outside stakeholders including investors, audit committee members, audit firms, and the preparer and academic communities. This outreach is important to ensure all points of view are heard and considered.

Our Investor Advisory Group and the Standards and Emerging Issues Advisory Group formally meet twice a year. These meetings are public, which allow all interested parties to hear the discussion. A few weeks ago, we announced the new advisory group members for 2025¹⁹. Interestingly, seven advisory group members hold a CFA designation.

The formal meetings with the advisory groups are in addition to the less formal meetings with various stakeholders that occur throughout the year. I always look forward to these meetings and greatly appreciate the time individuals are willing to spend with me and share their insights and perspectives. I continually reflect on these discussions as I focus on the work we do at the PCAOB. 

Looking Ahead

Before I close, I want to offer a few thoughts on how technology is impacting financial reporting and auditing today and its potential future impact. The pace of technological change and its adoption into the audit process is accelerating and will only quicken with the advancement of new AI models which are getting closer to mimicking the human mind.²⁰

Last year, the PCAOB adopted changes to our standards to support the auditor’s use of technology-based tools and the sufficiency and appropriateness of audit evidence in situations involving technology-based tools.²¹ We focused on making principles-based amendments to account for how automation, data analytics, and other processes are currently used in audits, while retaining enough flexibility to account for their inevitable evolution in ways we cannot anticipate.

The adoption of AI in the audit may usher in unanticipated changes and raise questions for auditors and the PCAOB. Namely, will AI be a new tool that can be leveraged during the audit process, akin to the adoption of something like Excel, or will it fundamentally change how the audit is performed? It reminds me a little of the development of electric vehicles in the auto industry, which has required car companies to develop new manufacturing processes and to source new materials, as compared to the century old process to manufacture internal combustion vehicles.

While still in its infancy, cars can also be driven without humans now. Conversely, I believe educated and skilled independent financial statement auditors will always be needed to exercise professional judgement and skepticism in the performance of high-quality audits that support trust in the capital markets. At the same time, I am pleased that our staff in the Office of the Chief Auditor have a research project focused on the impact of technology on the audit. The PCAOB must continue its work to ensure that the financial statement audit meets the needs of investors no matter the technology being used.

Conclusion

In closing, I want to leave you with three key takeaways:                                                                                            

• First, over the past 22 years, the PCAOB has worked tirelessly to protect investors across all of our oversight activities, to address new and emerging risks, and raise the bar of audit quality.
• Second, the financial statement auditor and the CFA have complementary roles that inform the decisions that drive capital formation and support our capital markets.
• And third, our engagement efforts are essential to ensure that the PCAOB is informed to meet the needs of all our stakeholders. I encourage CFAs to continue to be an active part of this ongoing dialog.

Reflecting on the work of the PCAOB, former Chairman James R. Doty summarized it well when he said, “[w]e’ve been able to create a body like the PCAOB that actually has some ability to reflect back on what it has seen, relate that to what it’s seeing now, and decide what needs to be done to enhance the quality of the audit.”²² This flexibility to react and adjust to market activity is one of the hallmarks of the PCAOB.

The ability to the meet the needs of current and future investors further supports the promise inherent in Benjamin Graham’s wise reflection, “[t]o be an investor you must be a believer in a better tomorrow.”²³

Thank you for your attention and I welcome your questions.