Public Company Accounting Oversight Board chair Erica Williams described the work the PCAOB has been doing to overhaul out-of-date auditing standards and increase its inspections and penalties during a conference Tuesday.
“As our work to strengthen enforcement shows, the PCAOB will not hesitate to take action to hold those who put investors at risk accountable,” said Williams during a remote speech at the Baruch College Zicklin School of Business audit conference in New York. “We are making sanctions count. We are expanding how we identify cases. And we are expanding the types of cases we are pursuing. Last year, we imposed the highest penalties in PCAOB history. This year, we have already surpassed that record, and the year is not done. For the second year in a row, our total penalties under this Board are higher than the total penalties in each of the five years before I was sworn in as chair. Anyone who puts investors at risk should know we mean business. We mean business when it comes to enforcement because we can’t afford not to.”
Ahead of the speech, the PCAOB announced a series of sanctions against several auditing firms, mostly firms abroad that audit companies whose shares trade on U.S. markets. They include three audit firms that failed to disclose who worked on audits and three other firms that failed to make all of the required disclosures, such as whether they were the subject of any administrative or disciplinary proceedings and restrictions on one firm’s authorization to engage in the business of auditing or accounting.
The PCAOB’s fines have doubled in recent years and the board has cracked down on a series of firms recently.
Williams noted that the PCAOB has also expanded its inspections, including the ability to finally inspect auditing firms in China.
“Our team likes to say that ‘the sun never sets on PCAOB inspections,’ because at any given moment, odds are an inspection is taking place somewhere around the world,” said Williams. “In May, we announced enhancements to make our inspection reports more transparent with a new section on auditor independence and a range of other improvements to make more transparent, relevant, and useful information available for investors, researchers and others. In July, we rolled out new features on our website to help users compare inspection report data. This was just the beginning of our work to increase transparency and make PCAOB data more accessible.”
The PCAOB has also been working to update several of the auditing standards that it inherited after passage of the Sarbanes-Oxley Act of 2002 led to the establishment of the audit overseer in 2003.
“We proposed a new standard on noncompliance with laws and regulations, or NOCLAR,” said Williams. “When sanctions, fines and civil settlements directly affect a company’s bottom line, or reputational damage causes a company’s stock value to decline, investors pay a price. The proposed NOCLAR standard aims to better protect investors by strengthening the requirements for auditors to identify, evaluate, and communicate information that may indicate a company’s noncompliance with laws and regulations.”
She noted that this fall, the PCAOB issued a proposal on a rulemaking project that would hold associated persons accountable when they negligently, directly, and substantially contribute to firms’ violations.
“The proposal is designed to make sure our rules match what investors already expect: that when an associated person’s negligence directly and substantially contributes to firm violations that can put investors at risk, the PCAOB has tools to hold them accountable,” said Williams. “Finally, the Board unanimously voted to adopt the new standard and related amendments on the confirmation process. The new standard will help auditors detect fraud and better protect investors now and into the future. Subject to approval by the SEC, the new standard will take effect for audits of financial statements for fiscal years ending on or after June 15, 2025.”
Before the end of the year, she expects the PCAOB to issue a proposal for public comment on follow-on disciplinary proceedings.
“In total, we have issued six proposals — with one more expected by the end of this year — and adopted two new standards and related amendments since I was sworn in as Chair nearly two years ago,” said Williams. “This year alone, the Board has taken more formal actions on standard setting and rulemaking than any year in the last 10 years. Still, we have plenty of work ahead of us. The projects on our agenda address more than half of our standards in one way or another. Nearly all of the standards we are considering are so-called ‘interim standards,’ which the PCAOB first adopted in 2003 based on standards set by the profession on what was intended to be a temporary basis. Yet, they have not been significantly updated in at least 20 years.”
She pointed out that the capital markets don’t stand still and evolve constantly. “Practices change, technology advances relentlessly, and new risks emerge,” said Williams. “To keep investors protected, our standards must keep up. That is why we are committed to getting this agenda done and getting it done right.”
She added that the public comment period is critical to that process and she asked members of the audience to share their feedback with the PCAOB.
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