Sec Speeches Cryptocurrency SEC.gov | PCAOB’s Ballooning Budget

The Public Company Accounting Oversight Board (“PCAOB”) is requesting $349.5 million for its 2023 budget and a $329.4 million accounting support fee to fund it.[1] Sarbanes-Oxley gave the Securities and Exchange Commission (“SEC”) responsibility for approving the PCAOB’s budget, and the associated accounting support fee levied on companies and SEC-registered broker-dealers to fund the budget.[2] I cannot support the PCAOB’s 2023 budget and accounting support fee, which—continuing the PCAOB’s budget expansion—are substantially higher than the 2022 numbers and may facilitate mission-creep at the PCAOB.

Because the PCAOB budget is nonpublic, it is insulated from public accountability. A summary published by the PCAOB,[3] however, provides us a sense of some trends:

• The 2023 budget is $349.5 million, 12.6% higher than last year’s $310.3 million.
• The 2023 accounting support fee of $329.4 million is 10.6% higher than 2022’s $297.9 million accounting support fee, 21.9% higher than 2020’s $270.2 million accounting support fee, and 40% higher than 2018’s $235.3 million accounting support fee.[4]
• Budgeted personnel costs for 2023 are approximately $27 million higher than 2022 personnel costs (an 11.9% increase) and $46.5 million higher than 2020 personnel costs (a 22% increase). The 2023 budget also includes funding for 926 employees, an almost 15% increase from the 807 actual employees as of the PCAOB’s latest annual report.[5] While the types of professionals the PCAOB needs are in high demand, the PCAOB offers employees a high degree of flexibility, attractive salaries, and a compelling mission.[6]
• Budgeted non-personnel costs for 2023 are $33.8 million higher than in 2018, a 58.7% increase. While increased travel costs and inflation in general likely account for some of this change, the increase over five years is nevertheless notable.

The PCAOB plays a vital role in the U.S. economy. Well-audited financial statements – which the PCAOB’s oversight of auditors helps facilitate – encourage investor confidence in our capital markets. We are seeing the PCAOB’s value, for example, in connection with its work in mainland China and Hong Kong, which the PCAOB was able to do for the first time earlier this year.[7] PCAOB Chair Erica Williams explained the importance of this development:

This historic and unprecedented access was only possible because of the leverage Congress created by passing the Holding Foreign Companies Accountable Act. Congress sent a clear message with that legislation that access to U.S. capital markets is a privilege and not a right, and China received that message loud and clear. . . . I want to be clear: this is the beginning of our work to inspect and investigate firms in China, not the end. The PCAOB is continuing to demand complete access in mainland China and Hong Kong moving forward. . . . Today’s announcement should not be misconstrued in any way as a clean bill of health for firms in mainland China and Hong Kong. It is a recognition that, for the first time in history, we are able to perform full and thorough inspections and investigations to root out potential problems and hold firms accountable to fix them.[8]

In addition to this step forward on the international front, the PCAOB has an active standard-setting agenda, some of which is warranted, such as the PCAOB’s recent proposal to amend the Quality Control standard, which builds on a 2019 concept release.[9] The PCAOB also plans to focus on other key initiatives, such as continuing efforts to ensure “more timely issuance of inspection reports” and to “deliver useful guidance to the audit profession.”[10]

Despite the importance of some of the PCAOB’s recent work, other parts of its plans raise concerns. A smaller budget might assist the PCAOB in being more selective, hewing more closely to its narrow mandate, and better stewarding its resources. For example:

• The PCAOB should avoid reopening standards without a clear, standard-specific justification. As one commenter on the PCAOB’s draft strategic plan explained, the PCAOB should not automatically assume that interim standards “are not fully fit for purpose” or are “in need of updating.”[11] There may be “sound reasons” for not updating these standards, which “may not necessarily be out of date, irrelevant or deficient simply because they have not been revised.”[12] Instead, the PCAOB should focus its efforts on the standards that really do need updating. An overly ambitious agenda could result in insufficiently considered standards and inadequate bandwidth for sound implementation of new standards and subsequent post-implementation review. The PCAOB will struggle to manage the consequential projects on its agenda if it also pursues inconsequential changes to old standards that are working well.
• The PCAOB does not have authority to oversee issuers or broker-dealers, but it nevertheless plans to “increase transparency in settled enforcement actions by more frequently naming the issuers or broker-dealers whose audits are implicated.”[13] The PCAOB does not regulate companies or broker-dealers and so ought not call them out by name because of an auditor’s failure. Not only does this type of transparency exceed the PCAOB’s mandate, but it may lead to unwarranted doubts about the accuracy of an issuer’s or broker-dealer’s financial statements.[14]
• While an effective enforcement program helps foster audit quality, the PCAOB’s recently approved strategic plan suggests an intention to use enforcement tools when other tools might be more appropriate.[15] The strategic plan promises, for example, to pursue “violations that result from negligent conduct.”[16] As Chair Williams has noted “a single, serious wrongful act, whether reckless or negligent” can be “serious enough to put investors at risk,”[17] but an approach to oversight that relies on enforcement actions with hefty penalties and other remedies to prevent such acts from happening is unlikely to be successful. Such an approach could devolve quickly into bringing enforcement actions for minor infractions rather than “prioritiz[ing] those enforcement matters likely to have the greatest benefit for investors and most likely to deter improper conduct,” the approach embraced by the PCAOB’s superseded 2020-2024 strategic plan.[18] The PCAOB has set for itself an objective of “[i]mpos[ing] more significant penalties and other relief,”[19] which could deter well-qualified people from joining the profession and undercut audit quality.[20] The smallest firms could suffer disproportionately, diminishing competition in an industry already dominated by several large firms.

Conclusion

The ongoing ballooning of the PCAOB’s budget and associated accounting support fee is not a trivial matter. The accounting support fee adds to the cost of being a public company or an SEC-registered broker-dealer. As former SEC Commissioner Michael Piwowar explained:

The accounting support fee is a tax . . . assessed by a non-profit corporation under authority granted by Congress. The Commission represents the only safeguard to an otherwise unilateral ability to impose the accounting support fee tax on companies and broker-dealers. Companies and broker dealers are required, under penalty of law, to pay money to the Board for the privilege of merely existing. These costs are not ultimately borne by companies and broker-dealers, but rather their shareholders and customers.[21]

The PCAOB budget process is a clunky accountability tool, one ill-suited to assess the appropriateness of a tax that now tops $300 million. As the PCAOB’s budget and the accounting support fee continue to creep higher, a structure that would afford Congress more direct oversight of the audit regulator could enhance its efficacy and accountability.[22]