The chair of the Public Company Accounting Oversight Board, Erica Williams, issued a warning Tuesday after the House Financial Services Committee introduced draft legislation that would effectively eliminate the PCAOB by transferring its responsibilities to the Securities and Exchange Commission.
Speaking at a meeting Tuesday of the PCAOB’s Investor Advisory Group, Williams discussed the improvements in the PCAOB’s 2024 inspection findings for the largest auditing firms, but said the board’s work is far from over.
“Like many of you, I am deeply troubled by draft legislation being considered by the House Financial Services Committee that proposes to eliminate the PCAOB as we know it,” she added, noting that she had previously worked at the commission. “The SEC was my professional home for 11 years. I have deep admiration and respect for the incredible professional staff there. They are excellent at what they do. It is different from what we do here at the PCAOB. The unique experience and expertise built up by the PCAOB over decades cannot simply be cut and pasted without significant risk to investors at a time when markets are already volatile. The disruption to inspections alone while a new program gets up and running could last years.”
Williams pointed to the accounting scandals of the early 2000s at companies like Enron and WorldCom that led to passage of the Sarbanes-Oxley Act of 2002 and the creation of the PCAOB.
“It takes a minimum of 480 experienced staff to conduct the inspections required by the Sarbanes-Oxley Act in addition to many others who are essential to supporting their work, and hiring them would come at considerable cost to the SEC — that is assuming it is possible to hire them at all,” she added. “There is currently an industry-wide shortage of accounting and audit talent, and our team members are some of the most respected and employable members of the profession.”
PCAOB inspections staff members average 22 years of experience, including a decade in public accounting before they ever join the PCAOB, she added. Staffers have experience in over 30 different industries, expertise across 40 different subject matters from revenue recognition to derivatives and technology, and speak 33 different languages.
“That language expertise is necessary because the PCAOB regularly conducts inspections in more than 50 jurisdictions around the world,” said Williams. “Local laws in many of those countries require cooperative agreements that the PCAOB has secured over years of negotiation to ensure we have the access necessary to inspect and investigate completely.”
Those agreements are not necessarily transferable to the SEC, she pointed out.
“None of the agreements contain provisions that would allow the PCAOB’s privileges and responsibilities under the agreements to be transferred to the SEC,” said Williams. “They would have to be renegotiated before inspections could be conducted, which could take years.”
For instance, the PCAOB had struggled for years to gain access to China to conduct inspections of firms located there.
“Of course, this includes China, where for the first time in history, the PCAOB has been successfully inspecting and investigating completely, holding Chinese firms accountable and bringing historic enforcement cases,” said Williams. “The PCAOB secured every concession we demanded from China in the statement of protocol that facilitates our access to inspect and investigate completely. We have their feet to the fire. Scrapping that agreement and starting over gives China the opportunity to exploit the uncertainty in order to avoid scrutiny of its audit work once again, to the detriment of investors.”
She foresees other challenges that would be caused by eliminating the PCAOB, including enforcement and standard-setting.
“Of course, our inspections program is strengthened by tough enforcement carried out by our expert investigators,” said Williams. “And without the talented team working to keep PCAOB standards up to date, there is nothing to inspect against. Every member of the PCAOB team plays a critical role in executing our mission of protecting investors on U.S. markets. And they are irreplaceable.”
