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The US audit regulator on Monday said a House Republican plan to dismantle the agency and hand over its duties to the SEC would weaken a critical backstop that protects investors.
“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,” Erica Williams, chair of the Public Company Accounting Oversight Board, said in a statement.
The House Financial Services Committee plans to consider a bill on Wednesday that would add auditor oversight to the to-do list of the Securities and Exchange Commission and sunset the funding for the PCAOB. The move is part of a budget process that aims to find billions in spending cuts and adopt President Donald Trump’s agenda.
But it would unwind a key provision of an Enron-era law that aimed to restore investor trust in corporate accounting. The 2002 Sarbanes-Oxley Act created the PCAOB as an independent watchdog of auditors who vet the revenues and balance sheets that drive trillions in corporate stock value.
Prior to that, the industry was “grossly under-regulated,” Dennis Kelleher, co-founder, president & CEO of Better Markets, said in a statement. “Killing the PCAOB will endanger not just companies and investors, but also financial stability because it will take the only independent cop off the accounting beat, resulting in less accurate and reliable financial information for everyone.”
The PCAOB is caught in the crosshairs of a presidential administration that has eliminated federal offices and fired leaders of independent agencies. At the same time, auditors have grown increasingly frustrated with their regulator—from its methods of reviewing their work to the volume of new standards.
Those concerns only grew under Board Chair Williams, who took a more aggressive stance with auditors—tripling enforcement penalties, calling out auditors to curb inspection findings, and setting a blistering pace for rewriting PCAOB’s rulebook.
“If you don’t move anything out and you don’t collapse it into the SEC, you need to reform the philosophy and attitude and approach of the board,” said Jeff Johanns, an associate professor at The University of Texas at Austin and a former PwC audit partner. “And then bring back the voice of the profession to a meaningful position.”
The proposed budget bill would end the overlapping enforcement authority shared by the SEC and board. It could also provide opportunities for other needed changes to auditor inspections and standard-setting, Allison Henry, vice president of professional & technical standards at the Pennsylvania Institute of CPAs, said in an email.
Two industry groups—the American Institute of CPAs and the Center for Audit Quality—said they support oversight of auditors. Both pledged to work with policymakers as they consider alternatives that the center said should “preserve and enhance” the independence and expertise necessary for “effective oversight.”
But SEC auditor supervision, while competing with other commission priorities, is likely to pale in comparison to the board’s current scrutiny. The PCAOB reviewed more than 900 public company audits last year with an inspections staff of about 430 people.
The GOP bill would eliminate the support fees that US listed companies and broker-dealers pay to fund the PCAOB’s operations—totaling $375 million this year—and prevent the SEC from collecting such fees in the future. That could crimp the Wall Street regulator’s ability to hire more staff to handle functions currently performed by the PCAOB.
Like other federal agencies, the SEC has seen its own 5,000-person staff contract since Trump took office for his second term, through layoffs and voluntary buyouts. More spending cuts are possible.
The SEC declined to comment about its possible expanded role.
“Can the SEC really pick this up and be an effective regulator in the absence of the PCAOB? I think that is a really fair question,” said Steve Soter, vice president & industry principal at Workiva, which provides financial reporting software.
But the SEC has been able to reallocate resources to meet past congressional mandates including new authorities handed to the commission in the wake of the financial crisis. The SEC could the do the same to tackle any new auditor dictate, said Mike Piwowar, executive vice president of finance at the Milken Institute and a former Republican commissioner.
“Not only can they handle it, it will actually be more effective and more efficient,” Piwowar said.
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Financial Reporting Quality at Stake in Plan to Fold Audit Board – news.bloombergtax.com
