High-quality, independent audits are essential to investor protection and companies’ efforts to access capital, and they are not possible without firm and fair regulatory oversight.
At the American Institute of CPAs, the leading member organization for accounting professionals in the United States, we support tough, transparent and focused regulation if it protects the investing public and the benefits outweigh the costs. We have deep concern about the cost of sweeping rules adopted by the Public Company Accounting Oversight Board on audit firm and audit engagement metrics, which — if approved by the Securities and Exchange Commission—would cause many small and midsized audit firms to exit the public company marketplace.
The PCAOB’s rules would require firms that audit certain categories of public companies to publicly report to the board a range of firm metrics including industry experience, workload, training hours, and partner and management involvement, which are challenging to compile and of limited utility. In addition, these metrics must be reported at the engagement level, too.
Collectively, this data would be open to misinterpretation without context, costly to implement, and potentially at odds with client confidentiality agreements. The PCAOB hasn’t established the potential efficacy or demand for this kind of information by audit committees (which oversee auditors, financial reporting and internal controls) or other stakeholders, and it has ignored calls for a more targeted approach.
No one, including the PCAOB, disputes that a mandate for new data collection systems and processes will add significant costs, particularly for smaller firms. Yet audit committees themselves say they are currently getting all or most of the information they need from their auditors.
A potential contraction in the audit marketplace and reduction in the diversity of firms that provide services are serious matters. If a single audit firm serving smaller companies were to exit the market, 10 issuers on average would need to find a replacement auditor, calculations based on publicly available data from Ideagen suggest. Multiply that impact by dozens of firms and it’s clear the shifts could trigger greater challenges and higher costs in meeting necessary audit requirements to access U.S. capital markets.
The PCAOB has described some mitigating factors that may reduce the burden on smaller firms and the potential impact of firms exiting the marketplace. We find most of them unpersuasive: Delaying the implementation time of the new rules, for example, merely postpones the potential harm. And the presumed reshuffling within the market of public company audit providers that the PCAOB predicts will occur to fill the void doesn’t account for the specialization, resources and scalability required to meet critical audit needs.
We have other concerns about the PCAOB’s rules, including the board’s decision to use the proposed metrics in its inspection and enforcement programs, increasing the risk of penalties for minor, unintentional errors in reporting. Common sense would dictate some threshold for the severity of offense in reporting errors, but the board declined to impose one. The result: higher risks for firms and, with higher costs, lower rewards. These are troubling and unnecessary signals to send about the auditing profession at a time when the CPA talent pipeline is under pressure.
CPAs play a critical role in our capital markets, and we understand and fully embrace that our auditing duties require strict oversight. But a cardinal test of any new regulation should be: “Do the benefits outweigh the potential consequences?” On this question, the PCAOB’s firm metrics rules fall short, and the Securities and Exchange Commission should either reject them outright or substantially revise them.
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