A Conversation with SEC Chief Accountant Kurt Hohl

Returning to Public Service

Douglas Carmichael: Why did you decide to return to the SEC, at what many people call a very pivotal time? Why are you returning now?

Kurt Hohl: I have been lucky enough to have had an interesting career doing a lot of different things. I reached the mandatory retirement age for a partner at EY in 2023, and I went into their retired life, which they try to prepare you for as much as possible. I did what a lot of retired partners do. I did a little bit of consulting, I tried to restart my golf game, pretty much without success. And I wrote a book. Then we had a change in administration. I’ve had the opportunity to have worked with Chairman Paul Atkins for 30-plus years. We worked together, we met each other during my first stint at the SEC in the late 80s, early 90s, when he was working for Chairman Breeden and then for Chairman Levitt. We got to be good friends; we kept in touch over the years. And he basically asked me to do this job.

At that time, as I think everybody knows, the One Big, Beautiful Bill had a provision in it that called for the elimination of the PCAOB and merging those activities in with the SEC. So I thought to myself, “Wow, this is a really important time.” It’s a critical time for not only the profession, but also the whole capital markets ecosystem in the US. This has to be done right, or it’ll have systemic effects on everybody. So I agreed to come back. I think it’s really important. It helped that my wife was still working fulltime, and we had no kids in the house, but the importance of this time is the reason for going back. It’s really important that we be responsible about what kind of changes might be coming.

Carmichael: With your extensive background, how do you think that’s going to influence your role as a principal advisor to the commission?

Hohl: Some days I wake up and say, “Why did Paul ask me to do this job?” I’ve really been fortunate to have done a lot of different things in my career. I started back at Deloitte, Haskins, and Sells when there was this new thing in auditing called the computer. I got bored of accounting, I didn’t really want to go into accounting; I was going to go to business school, and I said, “Well, maybe I’ll go work for the SEC.” We were working on filings for this nascent industry called the cellular phone business, which had dozens and dozens of companies. I had the opportunity to do that and progressively work my way up, and I spent six years as associate chief accountant, where I wrote the financial reporting manual, which is now still widely used by a lot of people. I got a really good sense of the SEC, how it works, the federal securities laws, and how they apply to accountants and auditors.

Then I was hired as a direct admit partner at EY, and I helped run their SEC group during the dot-com boom. I got to see a lot of different companies and a lot of challenges associated with the dot-com era. I honed my accounting skills more as a professional practice director with EY on the technical risk management side. And then, probably one of the worst decisions of my life, I agreed to be EY’s global representative on PCAOB matters. It was a very challenging time for the profession, but I learned a lot, and it was a very humbling experience for me.

The commission is focused on international issues. The chairman has raised some concerns about governance and focus of global standards-setting regulators. Many people don’t know that international standards on auditing are the basis for most firm audit methodology and are used as the baseline for the AICPA and the development of auditing standards in the United States. There’s great interest for my office in the development of international standards of auditing. There are some problems there in terms of funding, and challenges in terms of governance that we will try to address.

With all the activities going on with respect to auditing, what are we going to do about the PCAOB? What do we do about innovative changes in technology? I think that those 40 years of experience kind of fit nicely with the task ahead of us.

Carmichael: Do you foresee changes in agency policy related to auditors?

Hohl: The PCAOB is the primary regulator of the audit practice in the United States. We’re going to continue to work closely with the PCAOB, just like prior administrations have done. I think that’s an extremely important organization, and the collaboration between the SEC as the oversight body for the PCAOB is extremely important. People have talked about changes in enforcement. I don’t know what’s going to happen there for sure yet. We have a new director of enforcement. I think you’ll see changes in the international space one way or another. I don’t see our role in terms of how we set standards for auditors changing significantly in the near term. I think things work pretty well.

Emerging Issues

Carmichael: I read something where you were quoted as wanting to make sure auditing standards setters would keep up with the times and address emerging issues, like digital assets, promptly.

Hohl: One of the first things I did when I came into the Chief Accountant role was talk to the team and say: “We’re a public service organization, and we need to make sure that we respond to people timely and fairly; let’s rethink the way we do things here.” I speak with Rich Jones at the FASB at least twice a week to talk about developing standards that are going to meet the business issues of today. We have digital asset issues, we have issues with respect to AI. What I don’t want is to spend two years developing a standard, and then that issue is old and cold by the time we get out the standard. We need to figure out a way to quickly address the issues that are present in the marketplace now.

The same thing applies to the audit industry, maybe even more so than accounting. We talk about digital assets, but I think that the one that’s probably the most significant right now is artificial intelligence. We’ve had companies come in and say, “We’re experimenting with having an agentic AI system calculate reserves for us and prepare footnotes in the financial statements for us.” The question there is, how does an auditor react to that? Do we have standards and guidance to auditors to help them through the process?

Those same auditors say, “Can you show me how to do it? Do a manual recalculation of it?” And it drives the companies crazy, because if I was going to do it manually, well, then I’d continue to do it manually. There’s a lot of learning that has to take place here, but things are happening at a lightning-fast pace.

We need to work with the PCAOB to come up with interpretive guidance, we need to work with other standard setters around the world to address some of these business issues. Auditors are using artificial intelligence in new and creative ways. Beyond basic machine learning, like document identification. They’re wondering if they can use AI for their risk assessment process, for their accounts receivable process with no human intervention.

We need guidance to help auditors through this to make sure that these tools are being used responsibly. I was reading a research study indicating that students using AI to write essays, shortly after completing the essay, did not remember what they had written. They were not engaged, and there was a huge difference between students who had used AI and those who had used their own independent thinking to create an essay.

Carmichael: Do you think there could be a danger in using AI in accounting, auditing, risk identification, and so on, that they won’t be as engaged in thinking about the risks and responding to them?

Hohl: I’ll answer that in a couple different ways. One, I’m a big fan of AI. As everybody knows, it’s a lot easier to edit something than to generate something. What I always did with the AI tools that I used was test it. I knew the answer to something, gave it to an AI, and you come back, and it’s the wrong answer. There’s a risk that you’re going to over-rely on AI, and that’s a huge risk. There is also, I think, a risk to the apprenticeship model at accounting firms. With the development of AI, I think you’re going to see the potential for the bottom of the pyramid to shrink. There’s a risk that people are not going to be adequately trained on some of the things that we all learn through the apprenticeship model if there’s an over-reliance on a machine doing it. The machine might do it better. But the question is, how do you know the machine’s doing it consistently and giving the right answer?

Standards Setting Priorities

Carmichael: What would you say your priorities are in auditing standards?

Hohl: I mentioned the need for AI and digital assets. I would really like to see a change in the standard setting process. If you look at regulators around the globe, many of them go through deliberative processes to determine what should be on their agenda with outreach to different stakeholders. FASB has its agenda consultation process.

International influence is also really important for me when it comes to standard setting. All firms practicing in the United States use some form of international standards. Back when Chairman Atkins was at the commission and he approved the use of IFRS unreconciled to US GAAP, there was a big push towards convergence. I’d like to see a greater push for convergence on the auditing standard side, but you’re never going to get absolute convergence. A perfect example is “K” KAMs versus “C” CAMs. There will be disagreements, but by and large, the development of PCAOB standards can leverage international standards on auditing. I’d like to see more proactive participation by the PCAOB in that standard-setting process, so that we can achieve harmonization.

In my view, those different international standards in auditing create risk. I saw it when I was the global client service partner on multinational engagements. They have to learn the international standards, and they have to learn the PCAOB standards. These practices in some of these countries are so small that it’s not economical for them to make huge investments in their SEC PCAOB practice. To the extent that we can reduce the differences between international standards and PCAOB standards, I think it’s going to greatly reduce risk, because you’ll have more consistency on engagement teams around the globe.

Carmichael: As you mentioned earlier, the audit manuals are usually first based on the AICPA standards, which are coordinated with the IAASB standards, and then there are add-ons for the PCAOB’s additional requirements. All those standards setters are important, but when you’re talking to auditors, what should they be paying attention to?

Hohl: The IAASB just passed the fraud standard; that’s a big one to look at. Obviously, fraud’s always going to exist, and I give credit to the IAASB for taking up the fraud standard and developing that. I think that’s the big project that is top of mind right now.

We at the SEC will have to work with the PCAOB board and the staff there to figure out the best way to get standards out quickly that are most meaningful and most needed in the profession. Fraud always comes to top of mind, but I can’t stress enough that we need clarity on AI. It’s a very complicated issue. We are struggling with it at the SEC ourselves in terms of how we should provide guidance to preparers in terms of disclosure controls and procedures, or ICFR reporting. The challenge with AI is that it’s so broad and narrowing it down is extremely difficult.

The other thing that I think is critically important from an auditing standpoint is responsiveness to participants. Thinking about the SEC, there’s accounting standards out there, and some of those accounting standards are difficult to apply in different fact patterns, so people reach out and talk to us about developing issues. We provide guidance to them, because our goal is to make sure that people who are preparing financial statements do it right the first time. I think the same thing can be beneficial in the audit environment, where the PCAOB takes a proactive approach at working with auditors to develop solutions to emerging practice areas. That was one of the primary drivers when I was asked to create the financial reporting manual—the staff training manual—at the SEC.

We need to get the word out to people so that they understand how we think about these emerging and developing issues. The standards are written broadly on purpose. You can’t really design a standard that’s going to address every single fact pattern that you encounter. Being able to provide guidance to practitioners is going to be really important going forward.

Carmichael: The auditing standards are hugely important. But it’s also the case that implementation of those standards is important. And there are differences in culture among different countries that may affect implementation. Do you have any thoughts on that?

Hohl: I completely agree. At EY, we had 153 different member firms in the network. With 153 countries, you definitely saw differences in culture. When IAASB sets standards, they have to consider that, because the stakeholders are around the globe. They’re gaining the benefit of interacting with all the different foreign stakeholders to get different perspectives and viewpoints on how something like culture might affect a fraud standard. I think there’s a lot of benefit to stakeholder outreach. That process can’t take forever; but I think it is greatly beneficial to try to get different perspectives.

Carmichael: When we talk about ethical standards—especially maintaining independence and evaluating all relationships with clients from the perspective of a reasonable investor—what kind of initiatives do you think are necessary?

Hohl: Obviously, ethics is an important issue. The independence standards are extremely important as well, and the SEC plays a role in ensuring independence and objectivity in the audits of public companies. There was an interesting article in the Financial Times, “Who Audits OpenAI?” And that question is part of two phenomena that cause me to want to do more investigation into our independence rules and how they work.

One of them is AI. We have fairly rigid standards that say, for example, if I audit SAP, I can’t enter into a joint business relationship with them. That’s fairly easy. Where it gets challenging, is what happens if SAP hooks up with Microsoft, or OpenAI, and there’s components within their offering that involve a lot of different companies. We’re recognizing challenges if we interpret our independence rules exactly the way they are. We could get to the situation where large companies don’t have a choice in auditor. We’re going to take a look at that and figure out what, if anything, needs to be done there.

The second thing is the rise in private equity acquisitions of accounting firms. The issue is that private equity does more than make an investment in an accounting firm. They make a whole bunch of other different kinds of investments. It is not only about the terms and structure of how these transactions work, but also about ensuring that accounting firms that take private equity are making the required investments to be a public company auditor. When I consulted after retirement the message I would give to private equity firms was, if you want to be in this space, you’re going to have to make some investments in quality, because the PCAOB and the SEC will insist on that. We have to make sure that issue is addressed.

What I don’t want to see happen is the commission trying to increase the number of companies that are public. When I was at the SEC before, we had twice as many public company registrants as we do today. If we’re going to try to encourage people, they need to have a choice of who their auditor is going to be. I see a lot of private equity firms say, “We’re going to exit the public company audit practice. It just costs too much money, and it doesn’t fit in with our rate of return.” That reduces choice.

There’s a lot of these issues that need to be studied. I’m not saying that we’re going to change anything, but it requires some further examination to figure out whether the market conditions and the economic conditions we’re experiencing in the capital markets makes our rules continue to be fit for purpose, or whether they need to be changed or modified to meet the challenges in the marketplace.

Questions from the Audience

Carmichael: Let me paraphrase this question from the audience: Are we messing things up by weighing in on digital assets and some of these things?

Hohl: There’s not a day that goes by where we don’t talk about digital assets. It’s a very challenging area. What I find most interesting from an accounting/auditing perspective is that you can’t really give an answer that applies to a lot of different transactions that may have the same attributes. For example, what is the revenue recognition model for staking? Well, the first question is, what platform is it on? What block-chain? What are the parameters? You get a different answer depending on different factors. We try to provide as much guidance as we can, and we’re transparent about that, too. We encourage people to come in and every week they come to talk to us about digital asset issues. We do the best we can to come up with a reasonable answer that can provide clarity. One of the challenges with the digital asset world is the lack of clarity, and auditors are reluctant to work with digital assets/crypto entities because of it.

This commission is focused on providing some of that clarity so we can encourage innovation and development, rather than stifle it. Some people might say we’re making it more complicated, some would say we’re adding clarity in the space.

Carmichael: We have a question from the audience that relates to the consultation process. It’s asked in terms of how the SEC could help companies address new and complex accounting matters. Given companies’ fear of consulting with the SEC, I thought you might address that, to the extent you can. And also talk a little about the consultation process, and how you might encourage companies to use it.

Hohl: I think one of the greatest things the SEC does is to add clarity in the marketplace. That is why we encourage public companies to come in and talk to us before they do something, rather than after. It’s a little bit harder after the fact, but come in before you do something, and we’ll study the issue. We get literally dozens of consultations a month from companies. The submission process requires you to defend your issue or articulate a position, similar to the way the old Emerging Issues Task Force (EITF) used to throw out all those different options, figure out which one makes the most sense. Which one is supported by the literature, which one is supported by the facts particular to your transaction or business situation, what are the views of your auditors? That’s really important.

Then it will come into the office of the chief accountant, and we’ll disperse it to the right team. We have specialist teams that specialize in different areas, like revenue recognition. We’ll call the company, and we’ll call the auditors. We’ll do our own research. We have well over 50 years of information for our consultations that we’re trying to “AI-ify” so we can use that information better. Then we’ll have dialogues with other stakeholders, just to make sure that we get the right answer. Because it’s important that we give the company the opportunity to make their position, and then we’ll basically go back to them and tell them that we either agree or disagree—and if we disagree, we’ll tell them why.

The process can take a long time. People have to do the transactions they need to do, but we need to be thoughtful and make sure that we get the right answer so that the process works. That’s why I encourage other regulators around the globe to do the same type of process, because it helps registrants before they make a transaction or prepare a document, rather than after the fact bringing in enforcement or making them restate., That’s not a good way to run a capital market system.

Carmichael: This question is not exactly in your area, but I think people would appreciate your thoughts, particularly the students and academics in the audie nce: What’s your wish on curriculum design to equip students to meet the needs you see coming, such as SEC needs and capital markets needs?

Hohl: I do have an answer to that. I’m a graduate of James Madison University, in Virginia, and I’ve been active at that school since I graduated. Probably a week ago, I sent the dean of the school of accounting an article that talk-ed about preparing students in the world of AI. It touched on the comment that you raised earlier: How are people going to get the skills necessary to be successful in the career? If you’re a staff auditor, you’re going to do an inventory observation sometime, or you’re going to foot tables, or write out accounts receivable confirms, or do similar tasks, and it builds on one another as you progress in your career. That’s how you learn. The challenge today is: If a machine can do all these rudimentary tasks entry level people do now, how are they going to learn how to be partner 10-15 years from now? It’s a real big challenge, and I think schools need to focus on how they’re going to prepare their students for that type of environment. How are they going to teach them the skill sets that they need to learn to be professionals in an automated world?

Carmichael: This is an audience question on integrating cybersecurity risk into financial reporting. Beyond identifying an incident and disclosing it, in a more general sense, what do you do?

Hohl: I know I’ve said the word “AI” a lot during this presentation, but to be honest, AI actually increases cybersecurity risk. We need to be more diligent than ever, in terms of how companies and auditors deal with cybersecurity risk. You have cyber risk from the outside and fraud risk from the inside. People that are inside, who know how the system of quality control works at a particular company, may be able to design an AI tool that works around the control environment. We need to be ever mindful and vigilant from an audit perspective and from a preparer perspective in terms of threats within and outside of a company.

Carmichael: You were talking about a greater convergence between international standards and US standards; how do you feel about it? Is it going far enough?

Hohl: This is one of the first things I talked to Rich [Jones, FASB chair] about when I got back. I don’t think you’re ever going to have pure convergence, it’s just not possible. English is not the first language in many of the countries that use the standards. You have different terminology that’s been used for decades in different jurisdictions. It’s going to make true convergence impossible—but you can get as close as possible, and there’s significant benefits to that. What I tell Rich Jones at FASB is that we need convergence-like activities, and more importantly cooperation. If I look at some of the agenda items on here, the IASB might be taking up an issue that FASB will take on later, so they can benefit a lot from the research that was gleaned from the international regulator, and vice versa, so they can benefit from all the stakeholder dialogue, and hopefully get some closer level of convergence on the accounting standard side. I think that’s equally important as it is on the audit side.

Carmichael: I’d like to move into a few more reflective questions. You mentioned Rich Jones, Chair of the FASB. When you were appointed, he said he was delighted to congratulate you on your appointment. I just wondered if you had any thoughts about who else would be delighted—and who might be less than delighted?

Hohl: Well, I hoped Rich would be delighted. I worked with him for over 20 years, and he helped me out of a couple jams in the intervening time frame. I hope everybody will be delighted that I’m here. I have a public interest mindset to try to make improvements, and I try to be both reactive and proactive in terms of developments to make our capital markets in the United States the best markets in the world. If I can make that contribution, that’s what appeals to me. I hope no one would be disappointed or concerned with my appointment, but there inevitably always will be. Any that would have a reason to fear? No. There has been a range of chief accountants at the SEC. There have been some that are very activist, like Sandy Burton, and others less so who just maintained the status quo.

Carmichael: Where would you put yourself on that?

Hohl: Well, I don’t know that I could ever compare myself to Sandy Burton, but I have a very ambitious agenda of things that I’d like to accomplish, and they range across every single activity in the office. Whether it’s convergence and cooperation on accounting standards, getting accounting issues relevant to the marketplace out quickly, or re-looking at the way the PCAOB does things. I am a big change agent. I always try to look at things in the current environment, because what I was doing a few years back isn’t really relevant today. Looking at things like: Is the registration process at the PCAOB still the right one? Is the inspection process the right one? There‘s been enormous progress in audit quality over the 20-something years that the PCAOB’s been in existence, and it’s because of the PCAOB.

There have been a number of recent standards I think have had a profound effect on the audit profession. At the top of my mind is ISQM 1 and QC 1000. They’re game changers in terms of shifting responsibility, particularly as it relates to inspections, and taking some of the burden off of the individual partner and engagement team, and placing more of the responsibility and accountability where it belongs—with the leadership of the firm, and how they operate their practice. I think the quality control standards provide the PCAOB a unique opportunity to think about changing their inspection program. The reporting will likely change with that.

I’ve asked audit committees, which is one group I like to spend a lot of time with, and there’s a lot of questions about how useful the audit report is to outside stakeholders besides the accounting firm. I am thinking about whether we could make changes to the inspection reporting cycle to make it more useful to a broader stakeholder group.

Enforcement is probably something that we’ll take a look at as well. We have somewhat duplicative enforcement mechanisms. I work very closely with the acting PCAOB Chair, George Botic; I think he’s a terrific individual. He’s really conscientious about trying to think about how we make changes that are responsible and reflect changing market conditions and how the profession operates. I look forward to working with George and whoever the new board members are on that issue.

We also have a RegFlex agenda that is pretty ambitious. There are quite a few items in there that are likely to have an impact on preparers and auditors. The thing that comes to mind is quarterly reporting and filer status. We have an alphabet soup of companies that file at different times with different requirements. That’s all on the RegFlex agenda.

I think my biggest challenge is that I have so many things that I want to take a look at, I only have pretty much three years to do it. Whether I’m going to be successful with that is determined by getting really good quality people inside the building and engagement with stakeholders on the outside.