Part I.A. Like It’s 1999: Statement at the Open Meeting to Consider the Public Company Accounting Oversight Board’s 2025 Final Budget and Accounting Support Fee

Thank you, Mr. Chair. Welcome, Chair Williams. The PCAOB has a vital, though deliberately limited, core mission: to “protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports.”[1] The Commission has oversight authority over the Board, which includes reviewing the budget and annual accounting support fee. Commission oversight is important. Issuers and broker-dealers bear the direct costs of funding the Board, some of which get passed on to investors. If the PCAOB fails to use its budgeted resources wisely, investors, the economy, and the audit profession pay indirectly in the form of impaired functioning of the capital markets.

The PCAOB is asking for nearly $400 million for 2025.[2] While only a 4% increase from 2024, it is 40% higher than 2020’s $285 million request.[3] At this rate, the budget five years from now will be $560 million. The increase is striking, but even more important is whether the PCAOB is having a net positive effect on audit quality. Are the dollars the PCAOB is spending working? The PCAOB paints a picture that does not look a lot better than pre-PCAOB days. PCAOB staff reports that “aggregate deficiency rates have continued to increase across all inspection programs, and 46% of the engagements reviewed in 2023 had at least one Part I.A deficiency, excluding broker-dealer audit inspections.”[4] At the firms that “collectively audit approximately 80% of the market capitalization . . . aggregate Part I.A deficiencies held steady at 26% in 2023 after previously jumping from 12% in 2020 to 16% in 2021 and 26% in 2022.”[5] Chair Williams noted recently that restatements by public companies are at a nine-year high: 140 public companies issued restatements for the first ten months of 2024, “up from 122 in the same period last year and more than double the figure four years ago.”^[6] The PCAOB’s $35 million in fines this year[7] reflect a 75% increase from last year, which was itself 80% higher than 2022’s levels.[8] The standard-setting pace has also climbed : “the Board has taken more formal actions on standard setting and rulemaking this year than any year since 2003 when the PCAOB was established.”[9] It is hard to know what to make of these numbers. Are the audit deficiencies uniformly serious, or is the PCAOB fixating on foot-faults? Do they really compromise audit integrity? Is the increase in fines attributable entirely to real problems, or are some cases punishing imperfect form filing?[10] Is overhauling the rulebook all at once necessary to address current problems, or would a slower pace of change be better for audit quality? The PCAOB’s heavy-handed approach might look good at first glance, but a more nuanced approach is needed.

Whatever one makes of those numbers, the PCAOB’s trumpeting of them as evidence of the importance of its work is misguided and its approach to audit oversight is destined to drive inspection deficiencies and enforcement fines even higher. A preferable approach relies on carefully implemented principles-based standards designed to afford room for auditors’ professional judgment, the deployment of inspection staff to assist firms proactively in improving audit quality, and the use of enforcement only when serious violations have occurred. Audit oversight is difficult work. Getting it wrong risks transforming the audit profession from one where accounting professionals exercise informed, independent judgment to interpret and apply principles-based standards into a mechanical exercise where risk-averse, robotic auditors engage in a box-checking exercise focused on insulating themselves and their clients from liability based on the hindsight of regulators. Such a fundamental change would undermine audit quality to the detriment of investors and the capital markets. A moderated course, as Board Member Ho has suggested,[11] would achieve the PCAOB’s goals more effectively than the path this budget sets.

Despite my concerns, I commend the PCAOB for some of its initiatives, including its outreach events for auditors of small firms and broker-dealers, the shorter timeline on getting inspection reports published, its continuing work on China-based audits, and its Spotlight guidance series. Chair Williams, I have a number of questions for you:

1. Since 2020, the SEC’s budget—which is subject to the congressional appropriations process—has increased by around 21%,[12] compared to the PCAOB’s 40% increase. How do you justify this disparity?
2. The 2025 budget requests around $34 million for consulting and professional fees.[13] This is $3 million less than last year[14] but almost $18 million more than 2020.[15] Last year, you explained that this expenditure was a “one-time investment” that was necessary for improving the PCAOB’s registration and inspection systems. Why have consulting and professional fees persisted at relatively high levels? Should we expect them to drop significantly next year?
3. As Board Member Ho has suggested, the PCAOB “should be held accountable for good stewardship and outcome-based performance.”^[16] By what performance metrics should the PCAOB be judged? Should the PCAOB be judged by deficiency and restatement rates? Should the PCAOB be judged by enforcement statistics or number of standards promulgated? Does some other metric better capture the PCAOB’s contributions to audit quality?
4. Prescriptive standards and an enforcement agenda that punishes foot faults could force audit firms to direct their resources toward check-the-box compliance efforts that are disconnected from audit quality. Do you share my concern? If so, what are you doing about it?
5. You noted recently that “PCAOB inspectors are seeing significant improvements in the aggregate Part I.A deficiency rate from the largest firms”^[17] Why are smaller firms not also seeing deficiency rates drop? Research suggests that there is room for improvement in the PCAOB’s work with smaller firms.^[18] What have you done to work with these firms on remediating deficiencies identified in audits?
6. In a recent Spotlight on Staff Priorities for 2025 Inspections and Interactions With Audit Committees, the PCAOB staff singled out crypto assets and explained that it plans to “continue to focus on identifying public companies and broker-dealers that have material crypto asset holdings and significant transactions related to crypto assets.”[19] In recent weeks, regulatory efforts to dissuade regulated entities from serving the crypto industry and its participants or otherwise engaging in crypto have come to light.[20] How do you ensure that the PCAOB appropriately considers risk in selecting audits for inspection without dissuading auditors, issuers, and broker-dealers from engaging with crypto?
7. The PCAOB frequently cites enforcement statistics such as the number of cases and the size of penalties to tout the effectiveness of its enforcement agenda. Do these metrics accurately capture the effectiveness of the enforcement program, or do they risk encouraging a quantity over quality mindset? What tools does the PCAOB employ before escalating to an enforcement action?
8. The ongoing shortage of qualified auditors^[21] coupled with industry consolidation^[22] presents a troubling dynamic. Board Member Ho expressed “profound[] worry” about the PCAOB’s adverse effect on competition.[23] Smaller public companies are finding it particularly difficult to secure reliable, high-quality audit services. Larger firms may find the lower fees from smaller engagements less appealing, and fewer individuals are entering the auditing profession overall.^[24] What are you doing to mitigate the problems faced by the smaller public companies that are least able to find qualified auditors?
9. How much of the budget is being spent on implementation assistance for recently adopted standards?

Thank you for that discussion. Thank you for your work, Chair Williams. Thank you also to your team, the other Board Members, the PCAOB staff, and the SEC’s staff in the Offices of Chief Accountant, Financial Management, General Counsel, and Information Technology. Although I cannot support the PCAOB’s current approach as reflected in the budget and accounting support fee before us, I look forward to continued work with the PCAOB in the pursuit of improved audit quality.