US PCAOB Vows a Tougher Oversight Regime

A recent article in CFO noted that, at the November 7 and 8 Financial Executive International’s Corporate Financial Reporting Insights conference in New York, the PCAOB and the SEC, its parent regulator, made it clear that the PCAOB will be (1) increasing enforcement activity and imposing stiffer penalties and (2) holding auditors responsible for failures to spot fraud perpetrated by issuers, particularly fraud that harms investors.

At the FEI event, PCAOB member Duane DesParte   said the board’s audit inspectors work to have constructive, open dialogues with audit teams and avoid “a gotcha kind of approach.” 

But enforcement holds people accountable, DesParte also said, and drives “deterrence for similar behavior in the future. To drive the optimal behavior of the auditor, you really have to keep the carrot and stick in balance.”

One of the five primary goals of the PCAOB’s 2022-2026 strategic plan is to “strengthen enforcement.” In September, after the draft plan’s release, PCAOB Chair Erica Williams promised “renewed vigilance” to ensure that “there are consequences for auditors that put investors at risk and to be certain “that bad actors are removed” from serving as public company auditors. Williams also vowed substantial monetary penalties and significant or permanent individual bars and firm registration revocations.

Indeed, the strategic plan states that the PCAOB will consider enforcement actions even in instances of violation where it has never brought charges before. And, according to Williams, “it will seek admissions of wrongdoing in appropriate cases – for example, where the conduct is intentional or egregious.”

While few auditors reject strong standards enforcement, the article notes, some in the industry see a move away from the traditional “supervisory approach” of the PCAOB, which emphasizes audit inspections and standard-setting.

The article also cites PwC’s comment to the strategic plan, which pointed out that, because responding to investigations can be time-consuming and costly, “enforcement inquiries and investigations should be reserved for those facts and circumstances where addressing issues through the inspection process is unlikely to be sufficient.”

The other battlefront being opened up, says the article, comes from the Securities and Exchange Commission, in particular by Paul Munter from the office of the chief accountant (OCA), whose professional practice group oversees the PCAOB.

Munter released an in-depth statement on October 11 underscoring the need for audit firms to catch corporate malfeasance during external audits.

A critical aspect of the independent auditor’s role is the responsibility with respect to fraud detection, he said. “This is particularly true [now] because any changes to the macroeconomic and geopolitical environment in which companies operate may result in new pressures, opportunities, or rationalizations for fraud,” Munter wrote.

He pointed out that auditors have always had a responsibility to detect material misstatements in the financials, whether due to error or fraud, “obviously, subject to reasonable assurance.” 

But, he added, Neither the SEC nor the PCAOB are signaling a change in the scope of the auditor’s responsibilities. Munter insisted. His October statement was intended to be a reminder of responsibilities “and a reinforcement of the need to be unbiased [and] maintain an appropriate level of professional skepticism.”

For more, check out Audit Regulators Vow a Tougher Regime (cfo.com).