About the Speaker
PCAOB chair Erica Y. Williams attended the conference for a “fireside chat” during the luncheon keynote. 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 that, 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, professor of accounting in the Zicklin School of Business at Baruch College, City University of New York, alongside conference chair Norman Strauss. The views expressed are her own and not necessarily those of the PCAOB, other board members, or the staff.
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Erica Williams:
It’s really a pleasure to be here with all of you in person today. Since we last connected in the fall, the PCAOB has been hard at work furthering our three strategic goals of modernizing our rules and standards, enhancing our inspections and strengthening our enforcement.
All of this is in service to our mission to protect investors. Last year, the board took more formal actions on standards setting and rulemaking than any year in the previous 10 years. If you followed our rule-making agenda, then you know nearly all of the standards that we are considering our so-called interim standards were set by the PCAOB in 2003 and intended to be a temporary basis. Yet they have not been significantly updated in the past 20 years.
In order to keep investors protected, our standards must keep up, so we have committed to the most ambitious rulemaking agenda in the PCAOB’s history. That work continues in 2024, with three proposals so far this year.
In February, we proposed a new rule to protect investors from misinformation about firms’ PCAOB registration status. Unfortunately, we have seen too many instances of firms promoting their PCAOB registration in a way that could mislead clients, investors, and others. PCAOB registration is not a seal of approval or a mark of excellence, as some firms have advertised. The PCAOB does not sponsor, recommend, or endorse firms. PCAOB registration is not a system for grading the quality of firms’ professional work, and it certainly is not a marketing gimmick. This rule would ensure that there are consequences when firms misrepresent their PCAOB registration status, or what it means.
In April, we issued two proposals designed to empower investors, audit committees, and others, with more consistent, comparable data about audit firms and their audits. Both proposals reflect input from our standards and emerging issues advisory group and our investor advisory group, who told us that better information is needed to help investors make more informed decisions.
The firm and engagement metrics proposal is more than 10 years in the making. It sets out a standardized set of 11 metrics for every firm that audits at least one public company, classified as either an accredited accelerated filer or a large accelerated filer, to disclose each year. The metrics are grounded in countless hours of research by our professional staff. They include information about firms’ overall audit practice, for example, how partners’ quality performance ratings affect their compensation and information about individual engagements, such as the time incurred by partners and managers on the engagement team related to areas of significant risks, critical accounting policies and practices and critical accounting estimates. Collectively, these metrics would help investors make more informed decisions about how they invest their money, and they would provide audit committees with consistent data to analyze and compare as they are selecting and monitoring audit firms.
The firm reporting proposal would modernize the PCAOB’s framework for collecting information from audit firms by amending annual and special reporting requirements that have not been substantially updated since 2008. It would facilitate the disclosure of complete, standardized, and timely information by firms to empower investors and audit committees through greater transparency, while also strengthening the PCAOB’s work to protect investors.
At the same time, our inspections team has been hard at work conducting inspections around the globe. Unfortunately, we continue to see deficiencies trend in the wrong direction. Although all of our 2023 reports are not yet finalized, I can say overall deficiency rates are still far too high, and the PCAOB is continuing to demand firms improve at the same time. We’re starting to see some small signs of improvement in our 2023 reports. Preliminary results indicate a modest improvement in Part 1a deficiencies at some of the six U.S. global network firms, and we are also seeing a decline in the number of deficiencies for certain of these firms’ quality control systems.
It will take time for the quality control improvements to take root, but because a firm’s systems of quality control lay the foundation for how they perform audits, quality control improvements often signal a first step toward improving overall deficiency rates.
We are also continuing to strengthen enforcement, so bad actors know there will be consequences for putting investors at risk.
Last month, we announced the largest civil penalty in the history of the PCAOB: a $25 million fine against KPMG Netherlands for violations of PCAOB rules, quality control standards relating to exam cheating, and misinforming investigators.
As of this month, the PCAOB has imposed $34 million in penalties in 2024, and we’ve only just begun. We set a record in 2022. We broke that record in 2023, and we broke it again just four months into 2024.
We want this to be a clear warning that if you put investors at risk there will be consequences.
Recent Proposals
Paquita Davis-Friday:
One project that’s received a lot of attention is the board’s proposal regarding non-compliance with laws and regulations, or NOCLAR. In response to the overwhelming interest, PCAOB staff recently reopened the comment period and held a public roundtable to collect more input. Why did you feel the roundtable was important? And what did you learn?
Unfortunately, over the years we have seen far too many instances of firms touting their PCAOB registration status in a way that we thought was misleading to investors.
Erica Williams:
Public comment is absolutely essential to our standard setting and rulemaking process. We take all the comments very seriously. We read and absorb all of them. In order to keep investors protected, it’s really critical that we hear from stakeholders, and—as you noted—the NOCLAR proposal did generate a lot of interest, which is why we held a roundtable and reopened the comment period.
There were three areas that our expert staff thought could really benefit from having more information to inform their work. Those included how the auditors might identify non-compliance with laws and regulations, the auditors’ assessment of NOCLAR, and then the cost and benefits of the proposal. We were very fortunate to have experts to participate in the roundtable and provide us with really valuable information. Our staff is absorbing the information that we received during that roundtable, and at a certain point they’ll provide us with a recommendation on how to move forward. I will say that one key takeaway is that while there were definitely a variety of perspectives, there was a lot of opportunity for agreement.
Paquita Davis-Friday:
The most recent proposals the board put forward relate to projects that would add new requirements for the information firms have to share with the PCAOB and the public. Can you share more about those proposals, and why you think they’re important?
Erica Williams:
The two proposals are the firm and engagement metrics and the firm reporting proposals. Both projects are based on years of research. About 15 years ago, the U.S. Treasury Department Advisory Committee on the Auditing Profession put forward recommendations on additional information that the PCAOB should collect. We are considering those recommendations. There have also been discussions from our Standards and Emerging Issues Advisory Group and our Investor Advisory Group on these potential changes. Based on that information and the research that we gathered, the staff recommended these two proposals.
A lot of the big firms already collect certain data and put it forward in their transparency reports. But we’ve heard from investors is that there’s a lack of consistency and inability to really compare that information. So that’s something we’ve taken into consideration.
Our firm reporting standards haven’t been updated since 2008, and one of the things that we’re considering is that the world has changed a lot since that time. One of the metrics that we’re looking at here is cyber security, and we all know that cyber security has changed a lot.
Paquita Davis-Friday:
There’s a proposal the board advanced this year that would tighten the rules around what firms can and cannot say regarding their PCAOB registration. Why did the board feel that this was important to pursue at this time?
Erica Williams:
Unfortunately, over the years we have seen far too many instances of firms touting their PCAOB registration status in a way that we thought was misleading to investors. As I noted in my remarks, PCAOB registration isn’t a seal of approval; it’s not a mark of excellence. We don’t sanction any particular firm’s quality of work. We thought it was important to be able to provide a potential rule, so that there are consequences for misleading investors if you misrepresent the nature of your PCAOB registration status.
Nearly half of registrants don’t conduct audits that are under the PCAOB’s oversight authority. The PCAOB has oversight authority over audits of public companies and registered broker dealers, and some of the firms that are registered with us don’t audit any public companies or registered broker-dealers, and many of our registrants audit both public companies and non-public companies.
Because of that, investors may be confused. One good example of that is proof of reserve reports: Proof of reserve reports are not subject to the PCAOB’s oversight authority, and last year our Office of Investor Advocate put out an advisory informing investors of the fact that proof of reserve reports are not audits. They are not done in accordance with PCAOB standards. They don’t necessarily mean that the company has sufficient assets to cover liabilities, and under our proposed rule, if an audit firm did a proof of reserve report, they would then also need to notify investors that that proof of reserve report was not done in accordance with PCAOB standards and was not part of PCAOB’s oversight authority.
Paquita Davis-Friday:
Can you tell us about the process that you go through to consider the feedback that you receive?
Erica Williams:
Our guiding light is how to protect investors, and whether the proposal is going to move forward investor protection. When we put forward a proposal, we want to make sure that what we’ve written on paper is actually going to work in practice, and we encourage as much public feedback through the comment process as possible.
We want to know what practitioners think, as far as, how is this going to work? We want to know from investors, is this a proposal that is going to actually provide additional investor protection?
And I just want to encourage all stakeholders who are listening today that if you have comments to provide, we want to receive them.
Inspections and Audit Quality
Paquita Davis-Friday:
For the past two years we’ve heard your warnings about increased deficiency rates in PCAOB inspection reports. Can you give us a little bit of a preview of what you’re seeing so far in the upcoming reports?
Erica Williams:
Absolutely. We’ve put out some of our 2023 reports. What I can tell you is that, preliminarily, we are seeing deficiency rates that are still too high, and the firms still do have work to do.
At the same time, we’re starting to see some small signs of improvement at some of the U.S. GNF [global network firms]. We have seen a decline in the Part 1a deficiency rates. And we are also seeing a decline in the Part 2, or the quality control deficiency rates, for certain of those firms.
It is still early for those quality control improvements to take root, but I will say that our hope is that those quality control improvements will have an impact on all of the work that the firms are doing and will then lead to an improvement in overall audit quality.
It is marginal right now, but there are some small glimmers of hope, and we are going to continue to challenge the firms to improve these deficiency rates and deliver the high-quality audits that investors deserve.
We want our stakeholders, investors, audit committees, and others to take a look at our inspection reports and use them, and for firms to know that transparency is out there because we really want them to compete on quality.
Paquita Davis-Friday:
What else is the PCAOB doing to help drive improvements in quality?
Erica Williams:
I think we’re doing quite a bit. First, transparency: We put out our inspection reports to provide transparency to investors, and we’ve been shining a light on the fact that the deficiency rates are too high and challenging firms to do better.
We want our stakeholders, investors, audit committees, and others to take a look at our inspection reports and use them, and for firms to know that transparency is out there because we really want them to compete on quality. I think that when they compete on quality, quality improves.
We’ve also made additional information available in our report. We have an independence section that’s new. And we also have updated our website, so that it’s much easier to compare the results of inspections between firms.
Our remediation process is something that we’re very focused on. Firms have 12 months to try to remediate quality control criticisms. During that 12 months, our inspection team is providing feedback and trying to make sure the firms know whether or not the steps they’re taking are really remediating the quality control criticism. That feedback, that interaction between us and the firms, helps to drive audit quality and helps the firms to improve that quality control system, which again provides a foundation for everything that they do.
Last year, we met with 200 audit committee chairs. I think that it’s important for audit committees to hold our audit firms accountable. There’s nothing like your client holding you accountable to help you improve. Our engagement with audit committees is something the board is very focused on. We have provided an inspection preview that has a list of questions that audit committees can ask their auditor, and we’ve been encouraging them to do so.
We also have been putting out more spotlights. They include information about areas that we think need to be improved. They have key risks; they have best practices that firms can use. We put out our inspection preview spotlight for 2024 at the end of last year, and it included areas of focus that we are encouraging firms to focus on, to make sure that their quality continues to improve. Last week, we put out one on root cause analysis to help firms try to get to the root cause of these efficiencies so that they can try to fix them.
The last thing that I’ll mention is a new initiative this year, which is a culture review. We have a team in our division of registration and inspections that is looking at the culture of firms: the tone at the top that comes from leadership and how that might impact audit quality. They’re running procedures and gathering information from the firms which we are interested in seeing. It’s a new initiative, so we don’t know what the conclusions are going to be yet. But that is another area of focus for us to try to figure out how we can be more helpful to firms in improving audits.
Enforcement is the deterrent. In order to deter, there has to be strong accountability. And so that’s why the board has a focus on strengthening enforcement.
Paquita Davis-Friday:
For those who might not have had an inspection yet in 2024, is there any hint about what the inspectors will be focusing on this year?
Erica Williams:
That preview spotlight from December lists a few areas of focus, like audits with repeat deficiencies. We’re also continuing to look at the impact of interest rates on audits. Last year, we had a focus on audits in the financial services sector that might be impacted by interest rates or inflation or volatility in the digital currency market and other areas. We’re continuing to focus on financial institution audits.
One of the things that I think is important from that spotlight is that we’re notifying firms about what we think. The key risks are to make sure that they’re focused on those as they go into their audits for 2024. And they also include best practices that firms can consider using.
Enforcement
Paquita Davis-Friday:
I want to shift gears to enforcement. The board continues to break records for enforcement penalties under your leadership. Do you believe that this increased enforcement is making a difference in audit quality?
Erica Williams:
I’m an enforcement litigator by training. I spent seven years at the SEC as a trial attorney, and during that time I literally had investors calling me crying because they had lost their life savings. I carry those stories with me, and I think that enforcement is an important tool: people need to know that there are serious consequences for putting investors at risk.
Enforcement is the deterrent. In order to deter, there has to be strong accountability. And so that’s why the board has a focus on strengthening enforcement. We are not going to be at the same level of penalties in the past. We’re not sticking to the same types of cases that we brought. At the same time, we don’t have any specific number that we’re going for with penalties. Penalties are really a deterrent and a tool, and we apply the facts to every case and the law. Our team decides what they think the appropriate deterrent would be, and sometimes it’s penalties, and there are other tools we use as well.
Paquita Davis-Friday:
What types of cases are you seeing especially that generate these larger penalties?
Erica Williams:
The significant penalties that we’ve gotten in the last couple of years have been generated from a number of different types of cases.
First, we’re seeing cases where audit paperwork has been altered improperly. We also have cases where there are audit risks and auditors haven’t applied the appropriate professional skepticism or due professional care. There have been quality control violations, where firms have taken on clients without having reasonable assurance that they have capability and expertise to do those audits. And then, unfortunately, we’ve seen a lot of cases that involve exam cheating.
Paquita Davis-Friday:
You were saying that penalties are deterrents, but they aren’t the only tool that the PCAOB has when it comes to enforcement. Can you talk more about the other types of sanctions you are pursuing?
Erica Williams:
Some of the sanctions that I think are very impactful are when we bar wrongdoers from being able to conduct public company audits. We’ve also revoked firm registration. In a number of cases, we required functional changes in a firm’s supervisory structure. We’ve had a number of cases where we’ve required internal monitors. Those are just a few of the tools that we’re using in addition to penalties.
Paquita Davis-Friday:
On the largest penalty ever, I understand there was quite a bit of coordination with the PCAOB counterpart in the Netherlands. Can you share more about how important this type of international cooperation is to the PCAOB’s enforcement work around the world?
Erica Williams:
Our work doesn’t stop at our borders. We conduct 800 audits every year in more than 50 jurisdictions, and we have cooperative arrangements in 30 jurisdictions. In this particular case, the coordination that we had with our counterparts in the Netherlands was really extraordinary. We brought parallel investigations, and we were able because of our coordination to bring relief that was comparable. The PCAOB implemented a record-breaking penalty, but our Netherlands regulatory counterpart implemented enhanced supervision. The enhanced supervision is sort of like a monitor, and they are going to be monitoring that firm to make sure that they are implementing long-term remediations that are going to improve the ethical and quality control functions of a firm. That parallel investigation was just one example of the extraordinary cooperation that we have around the world.
Paquita Davis-Friday:
This Dutch case involved exam cheating, and according to what I see, it’s the ninth enforcement action involving exam cheating the PCAOB announced in the last few years. Why do you think these types of ethical violations matter? And what more can the PCAOB do about them?
Erica Williams:
Our capital markets really are founded on trust, and nothing erodes investor confidence more than cheating and ethical violations. I wanted to be very clear in this case and going forward that the PCAOB will not tolerate ethical violations and cheating, and that’s why we thought it was important in this particular case, based on the facts and circumstances, to send a strong message. Investors really need to have trust in our capital markets. And you know we’re hoping that the strong deterrent message that we’ve sent will prevent these types of cases going forward; but if they do not, we will seek out wrongdoers, and we will have really strong sanctions against them for cheating.
Paquita Davis-Friday:
You mentioned that you don’t have a set number in mind for penalties. How would you measure success then?
Erica Williams:
We have a strategic plan that has a number of different goals. I mentioned them: modernizing our standards, enhancing our inspections, and strengthening our enforcement. Our guiding light is investor protection. People are at the heart of everything we do, and so ultimately to measure success we need to make sure that in each of those areas we’re putting forward standards and we’re engaging inspections—and we have enforcement that is pushing forward investor protection. With respect to penalties, there is not a certain amount, it’s about deterrence, and it’s about making sure that in order to deter people, folks are held accountable, and our staff applies the facts and circumstances in the law to every case. Every case is different, and then the board votes, on the recommendation of the staff. And in doing that we are always just trying to focus on our guiding light, which is—does this protect investors?
