03 Dec Jewish Baby Strollers Writes U.S. Audit Watchdog Could Ramp Up Oversight Under New SEC Leadership
New leadership at the Securities and Exchange Commission is expected to spur increased oversight of public-company audits, according to former regulators and auditors.
The SEC, which is the U.S. securities regulator, supervises the Public Company Accounting Oversight Board, an independent watchdog that sets audit standards, inspects audits and disciplines audit firms for violations.
Those two positions play a major role regulating companies, from enforcing federal securities laws to writing new rules for corporate disclosures.
President-elect Joe Biden is expected to nominate a replacement for Mr. Clayton who would likely demand increased regulatory scrutiny, compared with President Trump’s stated penchant for less government regulation. This would affect public companies and other market participants such as broker-dealers.
Mr. Biden’s transition team declined to comment.
Regulatory experts said new leadership at the SEC could influence the PCAOB’s agenda, which is expected to eventually reflect the goals of a new administration. Those could include elements such as mandatory audit-firm rotation or stricter rules for auditors.
The SEC and the PCAOB each set their own rules, with the former approving the latter’s. Even though they are not required to align on standards, they strive to do so on certain issues where their responsibilities overlap, such as auditor independence.
“Through regular engagement with the PCAOB and its staff, the SEC has focused its oversight on improving audit quality and strengthening the PCAOB’s critical programs, including registrations, inspections, standard-setting, and enforcement,” said an SEC spokesperson in a statement.
Changes at the top of the SEC typically don’t automatically trigger management turnover at the PCAOB. Chairman William Duhnke and the other four board members are expected to fulfill their terms, according to a spokeswoman for the audit watchdog. J. Robert Brown Jr.’s term is the next one to end, in October 2021, followed by Mr. Duhnke’s in October 2022.
Mr. Brown at a Nov. 19 PCAOB meeting said reduced investor input at the PCAOB was a “disquieting” trend, a public rebuke of the organization. He has called for changes to the PCAOB’s rules and structure to better incorporate investor feedback.
The SEC in recent years has eased certain rules for companies as part of a shift toward more principles-based, company-specific disclosures that are aimed at simplifying information for investors.
Investor groups said they also hope a PCAOB influenced by new SEC leadership would pay more attention to shareholder concerns. Under Mr. Duhnke, the PCAOB in 2018 stopped holding meetings of two groups that consulted investors due to what the board described as ineffectiveness. Instead, the board now hosts investor roundtables and holds meetings with asset managers and owners, according to a PCAOB spokeswoman.
“When the PCAOB does change…there will be more opportunities for public and investor participation in the PCAOB processes,” said Daniel Goelzer, a former general counsel at the SEC who is also a former PCAOB interim chairman.
A proposal for mandatory audit-firm rotation, which limits the years in a row that a firm can audit a public company, could be revisited over the next few years. The PCAOB abandoned the idea in 2014 after executives and board members voiced concerns that it could result in lower audit quality. Audit-firm rotation became mandatory in the European Union in 2016.
Other initiatives dealing with the role of auditors in assessing companies’ disclosures about climate risk and other nonfinancial information could come up for discussion, former regulators say. The board also might consider tighter standards around audit miscues or a more aggressive inspection program, said Harvey Pitt, chief executive of consulting firm Kalorama Partners LLC. Mr. Pitt is a former SEC chairman who advises the agency on governance issues at the PCAOB.
The SEC appoints the PCAOB’s board members for five-year staggered terms. It can, in certain cases, remove the board, as it did in 2017, after a scandal involving the leak of confidential inspections data. Congress established the watchdog with the Sarbanes-Oxley Act of 2002 following accounting scandals at Enron Corp. and other now-defunct firms.
The SEC also signs off on the PCAOB’s annual budget, which is supposed to grow to $287.3 million in fiscal 2021, up 0.9% from fiscal 2020.
The regulator’s authority over the PCAOB’s spending plan could give it leverage, Mr. Pitt said. “An SEC chairman could have a fairly significant impact on how the PCAOB goes about doing its business, even without any change in composition,” he said.
Write to Mark Maurer at [email protected]
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