Overhauled Auditing Watchdog Expected to Boost Industry Scrutiny and Focus on Investors

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SEC picks four new members of accounting oversight board to replace ousted panel

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The appointments come after the SEC sacked former PCAOB chairman William Dunke in June. The PCAOB, which regulates audits of public companies, has been grappling with organizational problems in recent years. A report in January said there was “an atmosphere of fear and mistrust” among employees, which led to the whistleblower allegations.

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Mr Duhanke declined to comment.

Under its new leadership, PCAOB could potentially revive two groups that have consulted investors in the past. In 2018 the PCAOB stopped holding meetings of those groups, resulting in criticism from investors who said the board did not adequately consider their response. It continued to hold other events with investors. Under Chairman Gary Gensler, the SEC has focused on corporate disclosure, particularly on climate and governance issues, to provide more information for investors.

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“If they maintain the status quo, this board will be seen by investors as a failure,” said Tyler Gelash, executive director of investor trade group Healthy Markets Association and former lawyer for PCAOB board member Kara Stein. SEC Commissioner.

Former regulators and investors said PCAOB is expected to promote transparency around its oversight and enforcement processes, possibly by providing more details on audit shortcomings or by increasing the number of sample audits. The watchdog sets audit standards, oversees audits and disciplines audit firms for violations.

The PCAOB revamped its framework for oversight under Mr. Duhanke, placing greater emphasis on the quality of its auditing systems – a factor on which the largest audit firms generally perform well. The Big Four firms have generally outperformed in their oversight for 2020, published earlier this month, compared to recent years.

For example, the PCAOB will discuss whether the partner in charge of the audit is required to sign the report that appears in the companies’ annual financial statements, said James Cox, a law professor at Duke University and a former member of the PCAOB. . Dissolved Permanent Advisory Group. Such a requirement would put a spotlight on the past work of the individual audit partners. “Having that person’s identity will give an idea of ​​how big of audits this person is overseeing and how many of those very good audits are,” Mr. Cox said.

PCAOB also needs to develop a methodology for indicating the different severity levels of audit deficiencies that will be reflected in audit-firm inspection reports, said Kathleen Haim, a former PCAOB board member from 2018 to 2019. For example, one of the most serious drawbacks is when an audit fails to uncover a material error that leads to a company’s financial recast. Less serious deficiencies can include when an auditor attempts to verify a company’s accounts receivable via emailed responses without examining the source of the responses. “Investors should not be left to guess what those loopholes mean,” she said.

PCAOB is instrumental in enforcing a law banning foreign companies from US exchanges if their auditors are not overseen by US regulators. The SEC this month approved the PCAOB’s framework to decide whether it is able to investigate auditing firms in jurisdictions such as Hong Kong and China.

In addition to Ms. Williams, the new chair, the SEC has appointed Ms. Stein, Christina Ho and Anthony C. Thompson to serve as board members. Duane Desparte, currently Acting Chairman, will remain on the board.

Ms. Ho, who most recently worked at data analytics firm Elder Research Inc., previously served as deputy assistant secretary for financial transparency and accounting policy at the US Treasury Department and as senior manager at professional-services firm Deloitte & Touche. Worked in Finance roles. LLP. Like Mr. Despart, Ms. Ho is a Certified Public Accountant.

Ms. Williams served in the SEC from 2004 to 2015, as deputy chief of staff to Democratic chairs and as assistant chief litigation counsel in the Enforcement Division’s trial unit on cases involving accounting fraud, among other issues.

“In the enforcement department, Erica Williams saw the terrible audit results for the first time,” said former SEC Chair Harvey Pitt, who wrote a report earlier this year on the problems at PCAOB. “She knows the damage that happens when the audit is not done in a thorough and meaningful way.”

“This will be an active group of board members with an interest in furthering the profile of the accounting profession and ensuring standards are high,” Mr. Pitt said.

Mark Maurer at [email protected]

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