The End of the PCAOB: Point vs. Counterpoint

For policy wonks inside the beltway—and maybe a few financial nerds outside D.C.—February means the federal budget process has begun.

Each year, Congress follows a multistep process to solidify this budget, starting with the President's Budget (a blueprint of spending requests from the executive in chief), all the way down to Budget Reconciliation, where the rubber stamp meets the road.

President's Budgets predictably contain pie-in-the-sky cuts and additions that don't make it to the end result. This is not shocking.

The FY 2021 President's Budget, however, has one item that may shock risk and compliance professionals: the consolidation of the Public Company Accounting Oversight Board (PCAOB) into the Securities and Exchange Commission (SEC).

An SEC PCAOB? OMG!

For those unfamiliar with the history behind Sarbanes-Oxley, the PCAOB, and the SEC, the National Law Review offers a good summary:

"The Sarbanes-Oxley Act of 2002 established the PCAOB as a nonprofit corporation to oversee the audits of public companies in order to protect investors and the public interest by promoting informative, accurate, and independent audit reports...in response to accounting scandals at major companies such as Enron and Worldcom. The SEC has oversight authority over the PCAOB, including the approval of the Board’s rules, standards, and budget."

In short, they're fundamentally an inspection body: "a congressionally chartered, private, not-for-profit corporation—like the Boy Scouts," said Dan Goelzer, former PCAOB Board Member, in a 2006 speech. While the SEC is concerned with the reports themselves, the PCAOB is concerned with oversight.

The checks and balances and segregation of duties innate to the PCAOB are critical to prevent another Enron, but the opposite camp argues that the Board has lost its purpose over the past 20 years.

Let's dip into the arguments, both for and against, the end of the PCAOB.

An Argument in Favor: Let's get rid of the PCAOB

While no risk or compliance professional could argue against oversight—that's kind of our thing—there's a point to be made that the Board just doesn't have teeth when it comes to scaring wrongdoers from straying from the straight and narrow. 

As an article from the Project on Government Oversight explains, the PCAOB is empowered to penalize audit firms as much as $15 million per serious violation. Since 2003, the PCAOB has found 808 instances in which the Big Four have performed defective audits of major public companies, a potential total of $1.6 billion in fines. However, the PCAOB has only fined those firms $6.5 million—just 0.4% of that capacity.

The funding for the PCAOB comes from a special accounting support fee levied on the public corporations who interact with the Board based on their sizes. In FY 2020, it cost businesses a collective $270.2 million—cold cash that could be added back to businesses' bottom lines.

More conceptually, the PCAOB is already overseen by the SEC. The commission handles the PCAOB's operations, appoints or removes members, and approves the PCAOB's budget and rules. Doesn't it make more sense to have them manage it all outright?

An Argument Against: Keep the PCAOB

When investors are confident, they want to pour more money into the markets, keeping the flywheel of the economy humming along. The PCAOB builds confidence through oversight. Simple as that.

Investor confidence has increased since the establishment of the PCAOB, and the Board’s inspection process has contributed to improved audit quality. The increased investor confidence supports the conclusion that the act is working and that the PCAOB’s vital role in the administration of that law has been successful.

As Goelzer explained in his speech, the Board "oversees the auditors of public companies (and) protects the interests of investors...through inspections, standard setting, and enforcement." Even if the teeth of the Board fail to get the billion-plus dollars in fines it's capable of acquiring, the inspections and standards it issues keep the entire function in check.

In a less concrete sense, closing the PCAOB muddies the water for investors. In this time of declining global business confidence, can we afford to strip away mechanisms that contribute to quality? And what message does it send to investors to dull the fangs from a regulation with "vast, quantifiable" benefits?

Conclusion: Time will tell

Again, this is an early stage of the budget process, and it's possible the PCAOB's end may not become reality. We won't fully know until later this year, and the Board wouldn't reach its end until 2022.

Still, there's no harm in preparing for impact. Since its inception, SOX professionals have wrestled with proving the value of their function (as KPMG's Sue King explains in her recent article). The PCAOB's sunset won't make things better there.

Neither will it make things easier for reporting professionals. The PCAOB sets standards for external auditors (most notably, the Big Four), and it's the accounting teams (with the SOX auditors) that bear the brunt of those high standards.

No matter which way the wind blows, now is a good time to evaluate your organization's preparedness to keep up with a changing compliance and risk landscape. Help your organization be at the ready for any market or industry shifts.

Want to learn more about the inner workings of the PCAOB? Check out our recent webinar with Former Board member Jeanette Franzel, Everything You Always Wanted to Ask the PCAOB.