About the Speaker
The conference concluded with a “fireside chat” with newly installed PCAOB chair Erica Y. Williams. Williams was sworn in as the chair of the PCAOB in January 2022, coming from Kirkland and Ellis, where she was a litigation partner. Previously she was a special advisor and associate counsel to President Obama, advising the President as his senior advisor on legal and constitutional issues. Before becoming chair, Williams spent 11 years at the SEC serving as deputy chief of staff. The following is an edited transcript of Chair Williams’s conversation with Paquita Davis–Friday, Senior Associate Dean and professor in the Zicklin School of Business at Baruch College, New York, N.Y. The views expressed are her own and not necessarily those of the PCAOB, other board members, or the staff.
Please tell us, have you made, or do you plan to make, any changes to how the Board is organized? For example, have responsibilities been allocated among the Board members? And will there be an opportunity for our students to intern with the Board at some point?
We have been very busy, and there’s a lot of work that’s getting done by our talented staff to advance the mission of investor protection.
You asked about the board’s operations, and also its organization. The board’s operations are governed by our bylaws; currently, we don’t make plan to make changes to the way that the board is organized. But I can say that what we are focusing on is collaboration and communication among the board members in order to take into account all of our diverse perspectives.
It’s important to note that this is the most diverse board of any regulatory body in the history of the financial regulatory system. And it’s true not just of traditional diversity considerations, but also just the diversity of our backgrounds.
My fellow board member Tony Thompson has come to the board with decades of experience in executive and operational management. Board member [Kara M.] Stein has decades of experience as a securities lawyer and is a fierce advocate for investor protection. And board members [Duane M.] DesParte and [Christina] Ho, our CPAs on the board, in addition to being subject matter experts, also have decades of experience in the private and public sector.
As chair, what I think is one of my most important jobs is to be able to make sure that we utilize the diversity of all of our experiences to the fullest potential. And in doing that, while we’ve only had a short time together, I think we are working very well together, and we’re working diligently to protect investors and advanced audit quality. To your question about student internships, we are looking to provide students internships with the board. And we expect to have an announcement on that very soon. In the meantime, though, I encourage students to look at the PCAOB website, because there are intern opportunities and positions, and various offices and divisions that will be posted there.
“As chair, what I think is one of my most important jobs is to be able to make sure that we utilize the diversity of all of our experiences to the fullest potential.”
Given your former role as deputy chief of staff at the SEC, you are particularly well qualified to explain to us how the PCAOB and the SEC interact. Would you please let us know a little bit about that relationship?
I spent a long time at the SEC, I was there for almost 12 years, and the SEC is still near and dear to my heart. While I was there, I was a trial attorney for about seven years, and then I served as deputy chief of staff for three chairs. I have made friends there that will last me a lifetime, and so I really have a fond affinity for the SEC, and the PCAOB has a lot of SEC alums as well. Board member Stein was a Commissioner at the SEC, one of my counsels is from the SEC, and we have many former SEC alums on our staff.
I think it’s fair to say that those who come from the SEC, and our staff in general, we share something in common, and that is the mission of investor protection. Our relationship with the SEC is governed by the Sarbanes Oxley Act, and under that at the SEC is required to consider and approve our rules and consider and approve our budget. They also appoint board members, so all of us who are currently serving on the board were appointed by the SEC. Our mission is to protect investors; so, while we have that common mission, we do recognize that the SEC is really our regulator. We are working to make sure we have a very productive relationship with the SEC on a range of issues, from standards setting to budgeting, and I very much look forward to continuing to work with them.
Do you think that major changes will be necessary to maintain the high quality of audits? And does the PCAOB plan to develop relationships and more communication with representatives from the major accounting and auditing firms?
Overseeing the audit profession is challenging, but I will say that our staff is up to the task, and they have been doing an excellent job in that area for nearly 20 years now.
I don’t think that major changes are necessary in order to effectively oversee the audit profession, but of course we’re trying to continuously improve and grow, and evolve as the capital markets and the audit profession evolves and grows. For example, in the last 20 years, companies and businesses have become more global, and consequently audits have become more global. The pandemic has obviously had an impact on audits. Audit teams are no longer necessarily able to be there in person with their clients, as they were previously.
These are just a couple of ways that the audit profession as a whole is changing, and we’re not just trying to respond to those changes, but we’re really trying to be proactive and leading changes. That includes adjusting, if needed, our rules and standards and putting out guidance and information to auditors and also adapting our inspections process.
Yesterday, we published our update to our standards setting and research agendas, and I think that it’s fair to say that this is one of the most ambitious standards setting agendas in the PCAOB’s history. One of the things that we are focused on in updating that agenda is trying to make sure that we are adapting and evolving to the changes in the profession. For example, one of the standards that’s on our agenda is directly related to globalization. We’re looking to update the standard on the use of other auditors, and we want to make sure that we are addressing the challenges that are involved with supervising audits, including the work that’s done by other auditors around the globe.
In addition, our inspections teams are always taking into account the changing environment. If you think about our priority areas as a result of the pandemic in 2021, we were really focused on how that pandemic is affecting public companies. And we selected for review companies that were experiencing significant disruption as a result of COVID-19, including those in the transportation, entertainment, manufacturing, and certain aspects of the retail sectors, in addition to companies involved in commercial real estate. When selecting the audits to review, we also focused on certain financial statement items, including impairments, going-concern assessments, allowance for loan losses, and the increased risk of fraud.
We’re also considering how auditors were completing their documented procedures and compliance with our standards. We thought about things like remote work, and time constraints, and the availability of information, and access to public company management. In addition to that, we also have new requirements that were related to estimates, and the auditing and accounting use of estimates, and, when applicable, the use of specialists.
“We are very focused on making sure that the standards are modernized, streamlined, and fit for purpose.”
You also asked about our relationship with the firms. The firms are one of our most important stakeholders, they are just as important as the investor advocate, and audit committee members and financial statement preparers, members of Congress. We want to make sure that, with all of our stakeholders, we are continuing to have an open line of communication. One of the ways that we are looking forward to continuing that line of communication with various stakeholders is through our newly reconstituted advisory groups. We announced a new investor advisory group and a new standards and emerging issues advisory group, and I’m looking forward to those first meetings in the coming months.
Can you tell us where the PCAOB is on looking at the audits of foreign companies and the issues that have arisen with regard to audits of foreign companies listed on U.S. exchanges?
“The board is thinking creatively about using all of the tools in our toolbox in order to protect investors.”
We are dedicated to overseeing audits of companies who are availing themselves of the U.S. markets, regardless of where those companies are located, and regardless of where the firms are located. Auditors in foreign countries that perform audits must be registered with the PCAOB, and we have to be able to fully investigate and inspect them. Congress recognized the importance of PCAOB inspections and investigations when they passed the Holding Foreign Companies Accountable Act, the HFCAA. The Board is going to continue to make determinations under the HFCAA as required, if we find that the PCAOB is not able to fully investigate or inspect because of actions or policies by a foreign regulator.
As you may have seen in the press, we are continuing to negotiate with the Chinese regulatory authorities related to our ability to inspect and investigate completely in China. At this time, we haven’t yet reached an agreement. If we do reach an agreement, we will also need to be able to test out that agreement.
We are also actively monitoring the situation in Russia and Ukraine. We recently put out a spotlight, which you can find on our website, which includes considerations for audits affected by the war in Ukraine.
There has been some board turnover, which I assume is natural, given the transition in leadership, but also possibly a little bit of polarization of the board’s activities. Can you just tell us a little bit about the plans for making sure that the members of the board remain and improving morale?
I can’t speak to what has happened in the past with the board, but I can tell you what we’re doing today, and that is first, our staff, which is excellent, is very committed to enhancing audit quality. And they are very committed to the PCAOB’s investor protection mission.
It’s clear that audit quality has improved since the inception of the PCAOB 20 years ago. One thing when it comes to investor protection and our mission to improve our quality, is that it’s not a Republican or Democratic agenda. Ensuring that investors have fair and accurate information to make their investment decisions is not partisan. And making sure that our parents and grandparents are able to have some protection for their retirement, that’s also not partisan. It’s really what drives me, it drives the Board, it drives our staff, and that’s what we are really focused on.
With regard to morale, our staff are very most important asset. We are very firmly committed to making sure that the staff have what they need in order to do what they do best, which is drive audit quality. And to that end, this board is really not running a top-down approach, we’re running a bottom-up approach. We want to hear from our staff. We want to know what is going to make them happy and best able to fulfill their job and the mission of the organization. And we want to hear their voices.
One of the things we’re doing right now is that we are drafting a new strategic plan for the PCAOB. As part of that plan, we are directly engaging with the staff, because it’s not a board strategic plan, it is a full organization strategic plan, and it should represent everyone at the PCAOB. We want to make sure that we incorporate the staff view in that plan, and that the plan is well informed.
My colleagues and I in academia are particularly interested in having access to inspection reports. Do you see any room to make the reports available on a more timely basis?
We have been working to make those reports available on a more timely basis, and that is very much a priority for me. As you know, over the last couple of years we changed the format of the reports, and we did so because we wanted to make them easier to read and more informative. And as a result of that change, we did slow the process a bit in getting those reports out. But we’re back issuing the reports on a more typical schedule, and hope to have the reports issued more quickly in the future.
With respect to retaining and recruiting great inspectors and other employees, that’s another one of my top priorities. We need great people to execute our mission. We definitely know that talent is our most important resource, and so we’re striving every day, as I mentioned, to make the PCAOB be a great place to work. We’re listening to our employees, we want to make sure that we’re providing them with the things that they need to make their job easier, and also we want to make sure that the PCAOB is an enjoyable place to work.
One of the things that we’re focused on right now is diversity and inclusion. We want to enhance our D&I programming and D&I is extremely important to me, so we’re expanding the programming that we’re offering.
We’re also looking to expand our benefits, and one thing that I want to do is have a shameless plug for the PCAOB right now for qualified professionals out there who are interested in forwarding the PCAOB’s important investor protection mission: We are hiring in a number of different areas, there are plenty of opportunities to join our team, right now there are postings on the website, we’re going to be putting more up as opportunities present themselves
Setting the Agenda
You mentioned that you and the board have enacted what you think is one of the most ambitious standards setting agendas in the history of the PCAOB–can you give us an idea about what you’re currently considering in that agenda?
As I mentioned, we just posted our updated agendas yesterday, both our standard setting and research agenda. If adopted, these standards are going to greatly improve audit quality, and the way that audits are performed for decades to come.
If you look at the agendas, what you will see is that we took a new approach to how they are represented on the website and how we plan to update them. Specifically, these agendas are going to be dynamic. They will change in response to developments from the PCAOB’s oversight activities and our engagement with stakeholders, including our advisory groups. And they’re going to be updated as needed, but at a minimum we will update them semiannually to provide information about the status and timing of those standards-setting and research projects.
On the previous agenda, we had other auditors and quality control as two projects. We’ve added four projects to what we’re calling our short-term standard setting projects. “Short-term” means that we’re looking to have some sort of action taking place in the next 12 months. Those four projects are noncompliance with laws and regulations, attestation standards and updates to those, going concern, and confirmations. And then we also added four projects to what we’re calling our mid-term project agenda; by “mid-term,” we don’t anticipate action necessarily the next 12 months, but we are actively looking to move these projects. Those four projects are substantive analytical procedures, fraud, an update to our interim ethics and independence, standards, and then updates generally to other interim standards.
Then for a research agenda, we added two projects. The way that we’re thinking about the research agenda now is that those are projects where we’re evaluating whether or not we need to have standard-setting or other regulatory responses. If we decide that there needs to be a standard-setting project that’s appropriate, then a project will move from the research agenda to the standard-setting agenda. And if a project is going to continue on the research agenda for more than 12 months, we are going to provide an update. Currently, we have two research agenda projects: data and technology, and audit evidence.
Of course, you know we are eager to hear from our stakeholders, and we want to make sure that the board lands in the right place on these projects and that we are really driving audit quality and investor protection, so we look forward to hearing from all of our stakeholders. For the research agenda, we actually have an email address that we have put up for stakeholders to share with us any analysis or data that they have related to those research projects.
“The staff is very collaborative with the board, and board members are very focused on making sure that we’re considering our standards and thinking out of the box.”
What are your plans for streamlining the standard setting process so that you could reach those short-term and mid-term goals?
I will say that it is an ambitious and agenda, and we’ve really had to think creatively about how we are going to meet and accomplish the goals.
With respect to standard setting, one of the things that we’ve done is we’ve created standard-setting teams for each project, and we are hiring new staff in our Office of Chief Auditor in order to work on these projects. But we are also taking actions that we believe will move the standards to the board at a more deliberate pace, and we’re also increasing our collaboration and discussion among me and my fellow board members and the staff.
We are very focused on making sure that the standards are modernized, streamlined, and fit for purpose. And we are also very much looking forward to engaging with our stakeholders to make sure that our priorities are aligned with the needs of our stakeholders and investors.
You mentioned that there’s the new investment advisory and standard and emerging issue advisory groups—what role do they play in the standard-setting process, how soon will they have access to standards in the process, will they receive advanced drafts? And with more outreach comes more risk, what kind of safeguards will you put in place to make sure that you can maintain that neutrality that you talked about with regard to standard setting?
I’m really excited about us standing up our new investor advisory group and our standard and emerging issues advisory group. We’re going to be working closely with these advisory groups. We really want to hear from the groups and have them provide their views on the standards as they evolve through our standard-setting process.
We are very focused on making sure that the advisory groups are transparent, and so the meetings are going to generally be public, and the materials that are provided to the groups were are also generally going to be made public.
You asked about how we are going to ensure that the groups aren’t what I will call “politicized.” We are going to do that by having a diverse group of key stakeholders that make up the groups. The Investor Advisory Group will comprise individuals with relevant expertise in investing in public companies—like institutional investors, pension fund managers, investor advocates academics—and they’re also going to be focused on individuals with expertise and experience regarding broker-dealers. And then we have for the Standards and Emerging Issue Advisory Group some of the same qualities and experience, but we also are going to add to that group auditors and financial statement preparers and audit committee members and academics who are focused on auditing issues.
To try to make sure that we’re not politicizing those groups, the board members were required to vote on the Advisory Group members, and we want to make sure that we are getting a wide range of perspectives and that is definitely a focus of the board—and the Board also approved charters for these groups. The charters are designed to make sure again that we are driving transparency, that we are making sure that the groups are transparent and open to the public, so we can have everyone be able to observe how the groups are working collaboratively with the PCAOB, and we can hear all of the members’ opinions.
The board announced that it would be meting out sanctions against Scott Marcello, former KPMG auditor. Would you tell us why you believe this disciplinary action was so important?
First, the matter involved serious misconduct on the part of Mr. Marcello, and I felt it was really important to hold him accountable for that misconduct. The matter is also very significant because the civil penalty that we meted out in that particular settlement is the largest civil penalty we have ever imposed against an individual in a settled matter. The amount that was imposed, $100,000, reflects the seriousness of Mr. Marcello’s conduct, and it also reflects the board’s approach to enforcement.
I want to make sure that our penalties reflect the seriousness of the matters, and that they are a deterrent for anyone who is considering violating our rules or standards. Auditors who violate our rules are going to be held to account, and they should really be expecting more substantial penalties going forward, because deterrence is a very big focus.
I think the third reason that the Marcello matter is significant is because it is the first time that the PCAOB has brought a case for failure to supervise under section 105(c)(6) of the Sarbanes-Oxley Act (SOX). Now to be clear, we had brought through the failure to supervise matters under other provisions, but this is the first time we’re bringing one under that provision. Mr. Marcello’s position made him responsible for setting the appropriate tone at the top of his audit firm, and he failed to take action to do so. When he learned of serious wrongdoing, he just he did not take in our opinion the appropriate action.
The board is thinking creatively about using all of the tools in our toolbox in order to protect investors. We are very much committed to bringing cases under regulations and standards that perhaps haven’t been used before.
Where did the ideas for the potential projects come from? How does the PCAOB prioritize and decide on which projects to take on and which ones to pass on?
We receive information from our stakeholders—that is one key way that we receive information on potential standard setting projects. We are really looking forward to engaging with our Investor Advocacy Group and also our Standards and Emerging Issues Advisory Group. I think that we’re going to receive a lot of information through those groups about what standards they are looking for, and how those standards can improve audit quality.
We also have talented professionals on our staff that are continuing to inspect. And through our inspections, we learn about areas where standard-setting projects may be useful. Either there’s a standard that may need to be clarified or it may need to be updated.
In general, you know the staff is very collaborative with the board, and board members are very focused on making sure that we’re considering our standards and thinking out of the box, and so there are just a wide variety of ways that we are determining what standard setting projects to forward, but engagement by our stakeholders is absolutely a key part of that consideration.
Why does the PCAOB still not reveal the company whose audit work papers are reviewed? Shouldn’t investment advisors and other stakeholders know about critical audit deficiencies and, as a consequence, the potential for bad corporate behavior?
In our inspection process, we do have, in an accordance with SOX, the ability to identify particular audit firms when we are required to, under SOX. So if we are looking at a particular inspection and the audit work papers revealed that there was something that was not done in accordance with the audit, we are definitely making that clear.
With respect to the issuers themselves, that is a consideration—look, we’re always trying to be transparent, but we are only revealing the issuers when it is appropriate. And it’s something that we are considering all the time: Should we be naming the issuers in certain matters because investors need to know that this particular audit involved an issuer that had some sort of audit failure?
We as a board are considering those matters, and we are trying to do that in accordance with SOX. This is definitely something that we are considering going forward. I can’t speak to what the board did in the past, but with respect to going forward, transparency is a priority.
How does the PCAOB monitor CPA firms that have high staff turnover or employees working excessive hours during busy season?
One of the things that we were doing in our 2021 inspections was considering high-risk areas, so some of those high-risk areas did have to do with remote work, with the ability for audit firms to be in person with the clients that they were auditing. We are considering that, and staff turnover, and the like can be part of those considerations.
We want to make sure that we are driving audit quality; the way we consider the items mentioned in this question is in response to the way that we select which audit areas to focus on and also which firms to inspect. We are going to definitely continue to keep an eye on things like remote work, time constraints, and turnover when we are evaluating whether and how the auditors completed their procedures and compliance with our standards.
What are some educational efforts from the PCAOB to educate the public and profession to understand the standards and standard-setting process?
The PCAOB frequently puts out what we call “spotlights,” and that provides guidance on our standards and our standard-setting process. One of the spotlights that we recently issued has to do with audits of companies in the Ukraine.
We’re always trying to consider how we can provide more information. We also have a standard-setting page on our website. I mentioned that we just updated our standard-setting and research agenda, so that can provide a little bit more context on our standard-setting process. There’s more information on there, for example, about our interim standard updates that we are going to be focused on in the mid-term standard-setting agenda that we just published. We also have various conferences and other outreach. I also really encourage anyone who’s interested to log on to our standard and emerging issues advisory group meetings and our investor advisory group meetings, because that is another way that you can learn more and actually provide input to our standard-setting process as a member of the public.
The PCAOB chooses audits of companies using a risk-based approach. Does the PCAOB look back at companies who have committed misdeeds to see whether its approach is effective and does in fact protect the public interest?
We definitely use a risk-based approach; on occasion, we also will use a random approach in determining which companies we are going to be looking at the audits of. We consider all of these factors, so performance of the company and the like in determining how we are going to use our risk-based approach. So, a lot of factors go into the risk-based approach. And you may, if you have had issues in the past, based on our risk assessment, end up being inspected again in the future.
You mentioned that there’s hiring at the PCAOB. How much further do have to go to have enough inspectors to be able to carry out the inspection program effectively?
We are right now carrying out our inspection program—I wouldn’t just say “effectively,” I would say that our program is exceptional. We can always do more, and as you know, there is a war on talent right now; so, we want to make sure that we are both retaining our current staff and also attracting additional staff. We’re always looking for additional talent, because the more people you have, the more you can do. I think we are doing an excellent job, right now in our inspection program and driving audit quality. We are hiring and always looking to bring in new talent, to help join our ranks and also forward our investor protection mission.