A group of 11 investors has asked new Securities and Exchange Commission chair Gary Gensler to perform a major housecleaning at the Public Company Accounting Oversight Board.
The investors, former members of the PCAOB’s Investor Advisory Group (IAG), accuse the PCAOB of “drifting away” from its “core mission of investor protection” in the past for years and say urgent action is needed to “restore investor trust and confidence in the quality of public company audits in the United States.”
In an April 19 letter to Gensler, the group called on the SEC to (1) fill the one vacancy on the PCAOB with someone “who is independent of auditing firms, highly competent, and historically supportive of investors’ concerns relating to audit firm oversight and independence”; (2) appoint that person chair of the Board; and (3) restore the PCAOB’s advisory groups, including the IAG.
“There is considerable heavy lifting ahead to return the PCAOB’s focus to its primary mission of investor protection,” the letter reads. “Given their track record, we do not believe the current PCAOB Board members are up to the task of re-focusing the PCAOB on its core mission because they are responsible for the dramatic shift away from what investors expect.”
There is a note of political reprisal in the pressure being applied on the SEC and PCAOB. In 2017, in the wake of the KPMG-PCAOB cheating scandal, Trump SEC Chairman Jay Clayton installed a new chair and three new Board members (one vacancy still exists), even though traditionally members have served for more than one five-year term. (A 2010 Supreme Court decision, Free Enterprise Fund v. PCAOB, gave the SEC the power to fire any PCAOB board member at any time.)
Progressive political groups, including Americans for Financial Reform and Public Citizen, have backed the call to undo the changes made at the Board under the Trump administration.
The April 19 letter contains an extensive list of those changes, among them that the PCAOB has failed to hold regular board meetings and make public its agenda when there was a meeting; has ceased holding roundtables and public meetings when proposed concepts are up for discussion and debate; and has eliminated the solicitation of public comment on PCAOB rulemaking “as evidenced by the PCAOB’s recent failure to seek public comment on the material revision of the PCAOB’s auditor independence rules.”
The investors also say that the PCAOB has failed to act on investor recommendations concerning needed standards reform in the areas of “disclosure of audit quality metrics, auditing non-compliance with laws and regulations, going concern audit opinions, and the need for auditor involvement with other information in filings with the SEC, such as disclosures of the impact of climate change and non-GAAP measures.”
The letter also notes that in 2018 the PCAOB reduced its own budget “including for its critical inspections function.” The move has “significantly hampered the Board’s ability to revamp its old interim auditing and quality control standards, inspect the audits of each of the largest public companies on a realistic timetable, and take timely, transparent enforcement actions,” according to the investor’s group.
A recently released Cornerstone Research analysis pointed out that PCAOB enforcement actions fell 46% in 2020 over 2019 and that the number of PCAOB actions disclosed was the lowest in six years. In addition, for the second year in a row, the PCAOB did not disclose any actions about audits of broker-dealers.
“The PCAOB finalized fewer actions in each quarter of 2020 than the corresponding quarter in each of the last three years, and PCAOB enforcement activity for 2020 as a whole was the lowest of any year since we have been reporting on the data,” said Alison Forman, a principal at Cornerstone Research who co-authored the report.
SEC Chair Gensler has not commented on the investor letter or the enforcement numbers. But PCAOB spokesperson Jackie Cottrell told Accounting Today that “[the PCAOB’s] strategic approach is to prevent audit violations from occurring in the first place, which if we do effectively, will naturally lead to fewer enforcement cases. That’s a good thing for audit quality and investors. We continue, of course, to prioritize and pursue vigorously cases involving violations of PCAOB standards, PCAOB rules, and related securities laws. Our investigative pipeline remains consistent with prior years.”
While the PCAOB has no known plans to restore the IAG, on March 30, it did approve the formation of a new standards advisory group (SAG) that will include stakeholders outside of the audit profession. The 18-person SAG will include investors, audit committee members or directors, financial reporting oversight personnel, and academics.
Signers to the April 19 letter included Amy C. McGarrity, chief investment officer of the Colorado Public Employees’ Retirement Association; Anne Simpson, managing investment director of the California Public Employees’ Retirement System; and Lynne Turner, former SEC chief accountant.