Since we posted our take last week about the Trump administration’s fiscal year 2021 budget proposal to eliminate the PCAOB and fold its duties into the SEC by 2022, we’ve gotten some emails from accountants about what they think of the PCAOB. Most of them have been negative, like this one:
Reducing or better yet, eliminating this tyrannical organization is long overdue.
I think any criticisms of the PCAOB are merited, especially of late with all the inactivity in standard setting, issuing inspection reports, holding public meetings, and other dysfunction going on there.
But calls for the PCAOB to be kept around as an “independent” audit watchdog are getting louder, even from one of its biggest critics.
In a column for the Financial Times yesterday, Francine McKenna wrote that even though the PCAOB hasn’t exactly been the most effective regulator through the years, the solution to fixing auditor oversight isn’t to bury its duties into the SEC. If anything, the SEC is part of the problem, she says:
Combining the two would make it much harder to scrutinise how well audits are performed, reducing individual accountability of auditors and their overseers. The SEC would never be able to replicate the focus and activity of a dedicated regulator and the administration’s proposed budget increase is much smaller than the amount of funding the PCAOB currently receives. The practical effect would be to reduce the budget of auditing oversight and push accounting issues below those the SEC considers more pressing. In addition, the SEC is full of lawyers and accountants who previously worked for either law firms that defend auditors or the audit firms.
While stripping the PCAOB of its powers would probably put smiles on the faces of audit partners all throughout the Big 4, Francine cautions them not to celebrate too fast:
The watchdog provides the auditing industry cover from all kinds of criticism, and allows it to blame “regulatory bureaucracy” for higher fees. …
Without a dedicated independent regulator, audit firms and the SEC will find themselves squarely in the line of fire after the next catastrophic accounting fraud.
She also tweeted this earlier today:
“The solution is not to submerge the PCAOB into the SEC. The commission already oversees the auditing watchdog and, if anything, is part of the problem.” Why expect the SEC to rein in Big 4? Regulators afraid to preside over another AA if too tough. Goldilocks regulation… pic.twitter.com/Gbs28ceDBq
— Francine McKenna (@retheauditors) February 18, 2020
And then there’s the “but audit quality will suffer without the PCAOB” crowd:
The big key here, I think, is that, similar to the defunding of the IRS, such a move would surely limit the scope of the pcaob and almost definitely result in lower quality audits overall.
No one wants that! https://t.co/FIDsXZQFUg
— Chris Geno, CPA (@ChrisGenoCPA) February 18, 2020
Former SEC chairman Arthur Levitt echoed something that Jeffrey Cohen, professor of accounting at Boston College, told me last week, that the proposal was “representative of the deregulatory overkill that the country is experiencing now,” Levitt told the Wall Street Journal:
“The independence of the PCAOB is very important. It would be a mistake to fold it into SEC.”
Chad Stefaniak, associate professor of accounting at the University of South Carolina, told me that the consolidation of the PCAOB into the SEC makes some sense, but quite a few things would need to be worked out prior to the consolidation.
“For instance, the SEC does have extant authority to do several of the PCAOB’s primary missional activities (inspection, enforcement, etc.), so if the consolidation saved taxpayer money I can see how eliminating some of the administrative overhead could align with the budget’s six goals of reducing spending,” he said. “There are also concerns like the standard-setting process. Currently, the PCAOB promulgated auditing standards for registered public accounting firms. Will the PCAOB maintain this function, or would the SEC begin to initiate, develop, and implement auditing standards?”
Then there are CPAs like Keith Kauffman who are all for the PCAOB being killed off:
@AccountingToday @BillSheridan it should be. It was established for political reasons to pacify the people after Enron & now it has no teeth. What’s it going to do, shut down a big 4? The Gov. watchdog group that is overseeing it has said it needs to do better. I say fold it. https://t.co/EjBet6anPE
— KeithKauffman (@KeithSKauffman) February 15, 2020
@atulkshah @retheauditors completely disagee. It’s already weak. Fining and shaming auditors into submission has failed. And you can’t shut a big 4 down so what use is the PCAOB. It’s not working. Let’s try something else. Like fixing GAAP. https://t.co/Z1d6eM7nBp
— KeithKauffman (@KeithSKauffman) February 17, 2020
In the Feb. 18 Cloud Accounting Podcast that he co-hosts with David Leary, Blake Oliver called the proposal to eliminate the PCAOB “the best thing Trump has ever done,” citing statistics from a recent report from Project on Government Oversight.
Since 2003, the PCAOB has identified 808 instances in which Big 4 firms performed audits that were “so defective that the audit firms should not have vouched for a company’s financial statements, internal controls, or both,” according to POGO. Yet, despite those 808 alleged failures, the PCAOB has brought only 18 enforcement cases against the Big 4 or employees of those firms. Those cases involved a total of 21 audits.
And during that time, the PCAOB could have fined the Big 4 more than $1.6 billion; instead, the PCAOB has fined the Big 4 a total of just $6.5 million, according to POGO—less than one half of 1% of the potential fines.
Oliver said on the podcast:
“Individual fines? The PCAOB is no joke. They have the power to levy individual fines on accounting firm management who fail to reasonably supervise lower-level staff, so the partners. They’ve imposed a total of $410,000 in fines in 16 years, which is less than the salary of one Big 4 partner. What a waste of money, right? What a giant freakin’ waste of money the PCAOB is. How could anyone justify keeping them around when this is their track record in 16 years? Just shut it down.”
Are you on Team PCAOB or Team Trump on this issue? Let us know in the comments or feel free to reach out to me and Adrienne using the contact info below.
Weakening the oversight of US auditing is a very bad idea [Financial Times]
White House Proposal for SEC to Absorb Audit Watchdog Raises Concerns [Wall Street Journal]