By: Amelia Okulewicz
Volume X – Issue II – Spring 2025
INTRODUCTION
PCAOB stands for the Public Company Accounting Oversight Board. It was established in 2002 by the Sarbanes-Oxley Act of 2002 to oversee audits of publicly traded companies. [1] The main goal behind its establishment was to put forth the interests of investors in these publicly traded companies by having these companies release “informative, accurate, and independent audit reports.” [2] PCAOB states that they currently oversee about 900 of these audit engagements in 37 jurisdictions and even issues reported for firms located in China and Hong Kong. In 2023 alone, they have imposed over $20 million in fines, making it one of the largest years in terms of fines. [3] However, recent reports from Senators Elizabeth Warren and Sheldon Whitehouse raise questions about the board’s effectiveness in imposing accurate audits. In 2023, the deficiency rating of reporting rose to 33% compared to 27% in 2022. The statistic implies that the board does not have the appropriate measures in place to regulate the original audit process; [4] companies seem to omit the board’s regulations and continue with inaccurate reporting.
Therefore, the PCAOB’s efficiency and need is highly questionable, as its sole duty to oversee has been clearly omitted given the level of discrepancy uncovered. The question arises of why firms feel some level of comfortability to surpass regulation from the PCAOB under the SEC. The standards presented by PCAOB itself and the legal doctrine that created this agency comprise specific obligations PCAOB must follow. This in conjunction with recent excessive fines given out to auditors exhibits a height in audit deficiencies, clearly delineating that PCAOB has deviated from its original purpose and currently serves as no more than a figurehead in the United States. Under PCAOB’s current practices and failures, investors lose the governmental support that once ensured truth and security.
I. OVERVIEW OF THE PCAOB
PCAOB currently reports four primary duties:
1. “Register public accounting firms that prepare audit reports for issuers, and SEC-registered brokers and dealers.
2. Establish or adopt auditing and related attestation, quality control, ethics, and independence standards.
3. Inspect registered public accounting firms' audits and quality control systems.
4. Investigate and discipline registered public accounting firms and their associated persons for violations of specified laws, rules, or professional standards.”[5]
Overall, the goal remains to keep transparency for investors, allowing them to know exactly what activities are occurring in the company. PCAOB performs audits that allow publicly traded companies to comply with the Form 10-K. This form contains financials, like income statements, balance sheet, and cash flow statements as well as other facets like risk, history, threats, and Management’s Discussion and Analysis (MD&A) on a yearly and quarterly basis, respectively. The financial statements, specifically, must be audited by PCAOB-registered auditors. [6]
PCAOB distinctly provides an attestation to protect shareholders against potential fraud and misrepresentation of finances. However, given recent inaccuracy in reporting, facets like quality control, ethics, and adequate discipline to combat deficiencies have been clearly ineffective. Without increased monitoring of the auditors, the PCAOB’s purpose becomes disposable. PCAOB seems to lack effort in upholding the very crux of its mission.
II. CREATION OF PCAOB BY SARBANES-OXLEY ACT OF 2002
Title I of the Sarbanes-Oxley Act of 2002 focuses strictly on delineating PCAOB, its power, its and function. It includes methods of establishment of the board, obligations of the board, and registration processes for publicly traded companies. However, it also expresses the limitations that PCAOB must follow for auditing, quality, and ethical standing.
Most notably, under 15 USC §7213 2(B) PCAOB should have quality control standards in place that includes:
1. “monitoring of professional ethics and independence from issuers on behalf of which the firm issues audit reports;
2. consultation within such firm on accounting and auditing questions;
3. supervision of audit work;
4. hiring, professional development, and advancement of personnel;
5. the acceptance and continuation of engagements;
6. internal inspection;
7. such other requirements as the Board may prescribe, subject to subsection (a)(1).” [7]
In the last few years, this additional monitoring and inspection seems to have dissipated as the board ages. With the level of inspection further detailed in the Sarbanes-Oxley Act of 2002, this board should act as a mediator between potential future discrepancies between investors, truthful information and reporting, and publicly traded companies. The section clearly details that the board is subject to upholding the highest of standards for the auditors that perform audits on the company, in turn serving the investors rather than the corporations.
The law explicitly states that PCAOB is to monitor, consult, and supervise auditors to ensure compliance auditing standards are upheld. Nevertheless, the question then arises to what extent PCAOB is currently following the legal procedure that created them under the SEC in 2002. There is no doubt that if adequate monitoring, consulting, and supervising were present among its 900 audit engagements, the likelihood that this agency would reach a record-high amount of fines is unfeasible. Rather than a focus on proactivity, PCAOB instead gave out $34.7 million worth of fines, when the Sarbanes-Oxley Act of 2002 suggested action to closely work with auditors to ensure truthful reporting prior to submission of reports8 . PCAOB no longer provides its intended purpose to the American public but rather prolongs effective due diligence that was intended to ensure truthfulness in auditing
III. CONGRESS’ EXPOSURE OF PCAOB’S INEFFECTIVENESS
Amid distinct legal duties that must be fulfilled by PCAOB, recent years have shown significant discrepancies in this area. Companies like BDO Global, a public accounting and tax consulting firm, had deficiency rates in 86% of audits they assessed, and Grant Thornton had audit deficiency rates of over 50%. Furthermore, 'Big Four' firms KPMG, Deloitte, Ernst & Young, and PwC contain high audit deficiency rates of around 26%. [9,10] Though these findings are present, PCAOB has consistently downplayed the current deficiencies. [11] The consistent findings of deficiencies, including the rise in reporting deficiencies, show that the current practices in place are not holding auditors to the standards delineated in the Sarbanes-Oxley Act of 2002. [12] Simply because they are finding these discrepancies when the audit is submitted does not mean that lawful reporting will be accounted for in the future. This also manifests itself through deficiencies in the internal controls over financial reporting, which is the place that the aforementioned auditors should have control and agency over to ensure accountability. Recent reports indicate that ineffective internal controls over financial reporting increased from 20.9% in 2020 to 28.4% in 2021, or a 35% increase overall, delineating the deeply held issue that PCAOB should ensure standard modernization. [13]
As previously mentioned, the increases in deficiencies suggest that auditing is unregulated, violating both the intended purpose described in the Sarbanes-Oaxley Act of 2002 and the very mission reported by PCAOB itself. In an alleged attempt to combat auditing deficiencies, PCAOB recently updated its standards to be applicable after December 15, 2024. However, areas eligible for penalty by the auditors have been clearly defined, including when auditors should respond to illegal acts or misrepresentation of information. These procedures but the extent to which they are followed seems minimal. The heightened amount of deficiencies alludes to auditors no longer abiding by these standards, and holding any qualms in false reporting. This may be because the potential for payment from these large companies seems more favorable than the potential repercussions given by PCAOB. Upon violation, “PCAOB may impose sanctions, including censures, monetary penalties, and limitations on a firm’s or an individual’s ability to audit public companies or broker-dealers.” [14] However, this raises the question of whether the severity of these penalties is enough to mitigate incorrect auditing. Given that the rate of inaccurate audits has risen, the signs point to a needed change.
The fines themselves may affect smaller auditing firms and evoke proper action and future due diligence, yet larger corporations incurred “modest” fines that showed ineffectiveness given repeated offenses. For the “Big Four” auditing firms, the fines imposed by PCAOB affect the partner’s salaries by approximately 7 to 8% and those that received suspension found employment in similar positions shortly after or were near retirement. [15] To ensure the fiscal safety of the public PCAOB efforts cannot stop at surface-level fines. Instead, PCAOB should take further action to ensure that corrupt auditing is halted before the same deficient process begins repetition.
IV. POTENTIAL IMPROVEMENTS TO PCAOB
A previously suggested potential solution includes PCAOB’s merger into the Securities Exchange Commission (SEC) under H.R. 5489 called the Streamlining Public Company Accounting Oversight Act, which would essentially revoke PCAOB’s standing as an independent body. [16] It would create a new body called the Office of Public Accounting Oversight. The major effect of the absorption of PCAOB would be less autonomy. At the current moment, perhaps more regulation of this regulatory body is necessary. The ongoing growth in deficiencies suggests that this could be a viable option to hold PCAOB to the highest standard. Another improvement to PCAOB would be to improve the U.S. GAAP system, which could be the main cause of audit deficiencies. The main discrepancy with the U.S. GAAP system is the complex and opaque nature of its regulations, which cause confusion among auditors when forming financial reports. Perhaps more transparency and directness in current requirements would allow for better reporting. [17]
Though these hypotheses may be valid points of discussion, restructuring and heavier regulation from PCAOB to firms may be the most efficient way to ensure accurate reporting. If PCAOB is more involved in the process and provides itself as a resource to publicly traded companies rather than its opposition, there is a possibility to uncover errors and false reporting before simply issuing fines. Fine issuance could end in more intricate circumventing of PCAOB rather than for publicly traded companies to work alongside it in harmony
V. CONCLUSION
The current proceedings of PCAOB and their trusted firms that complete these audits have displayed clear deficiencies in the last few years. The light penalties are clearly not enough incentive to perform corrective actions to ensure publicly traded companies are honest with their stakeholders. The potential for these audit deficiencies to grow has great possibility if standards continue to be omitted without repercussions. Clearly, some of the most structurally significant auditors are omitting key proceedings that PCAOB should address and penalize. Given the recent U.S. senators testimonials and letters to PCAOB officials, it is indicative that the audit deficiencies have the potential to significantly impact investors on a global scale, while corporations seemingly neglect key regulations. Without proper restructuring of the penalization process, PCAOB’s inability to regulate auditing firms at the core becomes cyclical and a threat to transparency for investors.
Endnotes
[1] PCAOB. “About the PCAOB.” Pcaobus.org, 2019. https://pcaobus.org/About.
[2] PCAOB. “About the PCAOB.” Pcaobus.org, 2019. (repeat)
[3] PCAOB. “About the PCAOB.” Pcaobus.org, 2019. (repeat)
[4] Whitehouse, Sheldon & Warren, Elizabeth. Sheldon Whitehouse & Elizabeth Warren to Erica Y. Williams, October 9, 2024. In Final Letter from Warren, Whitehouse to PCAOB on Audit Deficiencies. https://www.warren.senate.gov/imo/media/doc/final_-_warren_whitehouse_letter_to_pcaob_re_audit_deficiencies.pdf.
[5] PCAOB. “About the PCAOB.” Pcaobus.org, 2019. (repeat)
[6] Grassi. “PCAOB Audit Services: Your Essential Guide to Going Public - Grassi.” August 13, 2024. https://www.grassiadvisors.com/pcaobguide/.
[7] Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (2002).
[8] Soyoung Ho. “PCAOB Enforcement Higher during Biden Years than Trump’s First Term – Report.” Thomson Reuters Tax & Accounting News, February 28, 2025. https://tax.thomsonreuters.com/news/pcaob-enforcement-higher-during-biden-years-than-trumps-first-term-report/.
[9] Foley, Stephen. “BDO Sinks to Bottom of US Audit Quality League Table.” Financial Times, August 15, 2024. https://www.ft.com/content/3457990d-21cc-4051-894f-33891ae01617.
[10] Whitehouse, Sheldon & Warren, Elizabeth. Final Letter from Warren, Whitehouse to PCAOB on Audit Deficiencies. (repeat)
[11] Whitehouse, Sheldon & Warren, Elizabeth. Final Letter from Warren, Whitehouse to PCAOB on Audit Deficiencies. (repeat)
[12] “SPOTLIGHT Staff Update on 2023 Inspection Activities.” PCAOB, 2024. https://assets.pcaobus.org/pcaobdev/docs/default-source/documents/staff-update-2023-inspection-activities-spotlight.pdf.
[13] Mintz, Steven. “Do PCAOB Audit Inspections and ICFR Assessments Protect the Public Interest?” The CPA Journal, May 10, 2023. https://www.cpajournal.com/2023/05/10/do-pcaob-audit-inspections-and-icfr-assessments-protect-the-public-interest/.
[14] “Enforcement.” PCAOB, n.d. https://pcaobus.org/oversight/enforcement.
[15] Soyoung Ho. “What Are the Consequences of Auditors Subject to Regulatory Enforcement Actions? Apparently Not Much.” Thomson Reuters Tax & Accounting News, February 12, 2024. https://tax.thomsonreuters.com/news/what-are-the-consequences-of-auditors-subject-to-regulatory-enforcement-actions-apparently-not-much/.
[16] Congress.gov. “Text - H.R.5489 - 117th Congress (2021-2022): Streamlining Public Company Accounting Oversight Act.” October 5, 2021. https://www.congress.gov/bill/117th-congress/house-bill/5489/text.
[17] Soyoung Ho. “What Are the Consequences of Auditors Subject to Regulatory Enforcement Actions? Apparently Not Much.” Thomson Reuters Tax & Accounting News, February 12, 2024. (repeat)