Attention FAE Customers:
Please be aware that NASBA credits are awarded based on whether the events are webcast or in-person, as well as on the number of CPE credits.
Please check the event registration page to see if NASBA credits are being awarded for the programs you select.

PCAOB Board Member Brown Sole Dissent on Budget, Strategic Plan, Independence Votes

Chris Gaetano
Published Date:
Nov 20, 2020
The Public Company Accounting Oversight Board (PCAOB) approved its 2021 budget, its five-year strategic plan and a change to align the board's independence rules with those of the Securities and Exchange Commission (SEC). On all three measures, one board member, J. Robert Brown, was the sole dissenting voice.

The proposed budget for the PCAOB is $287.3 million, which would fund 859 positions, as well as processes and technology. It is the Securities and Exchange Commission (SEC), though, that will ultimately need to approve the budget.

Most board members approved of this proposed budget. For instance, Rebekah Goshorn Jurata said that it reflects the fiscal prudence needed of regulators during a time of economic scarcity.

"It's through all of our successful activities to date, that we can do more without significantly expanding our budget," she said in her statement. "I believe the modest increase, of less than one percent, to our 2021 budget appropriately reflects the current economic climate and the Board's commitment to prudent fiscal governance."

Duane M. DesParte added that while the increase is small, it shifts around costs to bring more personnel on board, including audit staff, and, like Juarata, he thought it was an example of the PCAOB being able to do more with less.

"Notably, the 2021 Budget reflects targeted increases in the staffing of our Office of the Chief Auditor function, to appropriately support the ongoing projects to update our standards on Quality Control and Supervision of Audits Involving Other Auditors," said DesParte. "This increase in staffing will also help ensure we continue to advance our Data and Technology and Audit Evidence research projects."

Yet Brown, as the sole 'no' vote, said that there were a number of issues with the budget that prevented him from supporting the measure. For one, he thought that resources devoted to the Office of the Chief Accountant were inadequate to enact a modernization of the PCAOB's auditing and quality control standards, which he said is "probably the most important, effective and efficient mechanism for improving audit quality." He also the resources were inadequate to craft a meaningful standard-setting agenda. He additionally pointed out that staffing for the Division of Registration and Inspections has remained flat for the past two years, and that, even before the pandemic, there weren't enough people to conduct the necessary number of inspections. With the pandemic, inspections have plunged by 14 percent, and he warned that staff will need to play catch-up next year.

Brown also believes that the board's cash reserves are inadequate, saying that the 2021 budget provides about five months' worth. Historically, the PCAOB sends out billing invoices in April and collects most of its assessments in May. This, he noted is an "exceptionally right" time frame. He noted that, this year, the pandemic hit just as the new billing cycle was starting up and it was only through "extraordinary efforts by the staff" that  billing and collection went on as normal.

"The PCAOB may not, however, be so lucky the next time," he said, noting that a black swan or green swan-type event, or any other development that throws off the timeline, could actually result in the PCAOB running out of money.

Brown also assailed what he thought was a lack of transparency in the budget process. He thought that the proposed budget should be made public, but said the rest of the board was unwilling to do this.

Finally, he pointed out that, despite being legally required to do so under the Dodd-Frank Act, the budget does not allow for the formation of an Office of the Investor Advocate or an Office of Minority and Women Inclusion, which he thought the board would benefit from having.

Strategic Plan Tension

The five-year strategic plan was another point of disagreement.

The plan is premised on addressing further progress on audit quality, responding to new advancements in technology and data collection, and engaging more effectively with investors and other stakeholders. Broadly, it centers around five goals:

* Drive improvement in the quality of audit services through a combination of prevention, detection, deterrence and remediation;
* Anticipate and respond to the changing environment, including emerging technologies and related risks and opportunities;
* Enhance transparency and accessibility through proactive stakeholder engagement;
* Pursue operational excellence through efficient and effective use of our resources, information, and technology; and
* Develop, empower, and reward our people to achieve our shared goals.

Chair William D. Duhnke III, as well as all the other board members except Brown, praised the strategic plan as a sound way for the organization to advance its mission.

"The PCAOB has made significant progress in executing our strategic plan and advancing our vision for the organization," said Duhnke “I look forward to working with my fellow Board members and our dedicated staff as we continue to strive for forward-looking, responsive, and innovative oversight."

Brown, however, thought that the plan lacked any sort of response to changing circumstances, noting how similar it is to all the other plans.

"The priorities of the PCAOB set out in the Strategic Plan have hardly changed over the last three years, as if the pandemic, the collapse of a number of significant public companies overseas, and the global debate over audit quality, had never occurred," he said.

And while the plan specifically discusses stakeholder engagement, Brown argued that the PCAOB has actually become less responsive to stakeholder input over time, and the now-approved plan only confirms that. He noted that the Standing Advisory Group and the Investor Avisorty group have both been shuttered, which means that "decisions on key projects, including changes to the standard setting agendas, are resolved without adequate investor input."

"As made clear today, notice and opportunity for public comment on changes to the PCAOB's standards, something expected by the investor community, are no longer assured but can be eliminated at any time by a majority of the Board," he said.

He referenced, as an example, changes to the PCAOB standard-setting agenda, in which he had similarly been the sole dissenter. He said that the PCAOB did not adequately consult with investors on these changes, and in fact dropped matters that investors asked the PCAOB to include. Even on the vote to align independence standards with the SEC's, he said, investors were not invited to comment.

Independence rule changes

Brown was referring to the vote at the same meeting on a proposal to align the PCAOB's independence standards with those of the SEC, which approved a loosening of the rules last month. Essentially, the vote narrows the types of relationships between an auditor and an audited entity that would constitute an independence violation. For example, it amended Rule 2-01(c)(3) to replace the reference to “substantial stockholders” in the business relationships rule with the concept of beneficial owners with significant influence.

The majority, including board member James Kaiser, said that the change would cut down on confusing differences between PCAOB and SEC rules.

"These changes will help avoid differences and duplicative requirements, and provide greater regulatory certainty to auditors," Kaiser said. "This, in turn, will allow auditors to more easily comply with this aspect of the independence framework, and auditor independence can better be maintained."

Jurata, in her own statement, also just generally favored the SEC's revised rules. 

"For example, it has become apparent that an auditor's independence is unlikely to be impaired by the auditor continuing to pay their student loans taken to attend college before starting their career, when they happen to work in the office that audits the lender. Regularly reviewing rules to see if they are working as intended is not only a sign of good governance, but is also critically important," she said.

Brown, however, thought that the change amounts to reducing PCAOB authority over auditor independence, which is exactly what he titled his own statement, saying that it "effectively cedes away much of the PCAOB's distinct and separate authority over independence standards." He also disliked how the new rules allow audit firms to engage in an expanded set of services to some affiliates of their audit clients and to allow certain "inadvertent" violations of auditor independence requirements.

Much of his ire, though, was aimed not at the change itself but at the process. Like the changes to the research and standard-setting agenda, as well as the strategic plan and the budget, Brown said that the public had no opportunity to weigh in on the proposal. Further, he said, the board chose to approve the amendments without any sort of economic or policy analysis, calling the whole process rushed.

"The hurried nature of these actions also means that the Board is not adequately considering the impact of these changes on audit committees and on its own role in auditor oversight, a failure that will likely generate confusion and uncertainty in its wake," said Brown.

Brown also pointed out that, with the PCAOB adopting the SEC's rules, many PCAOB-specific standards on topics not covered by the new independence regulations have been called into question. He noted, for example, that "[t]he Board is silent about what, if anything, and when, if ever, audit firms should communicate these matters to audit committees." He added that the new rules also say nothing about whether firms should document their assessment of, and conclusions about, the immateriality of client affiliates, the effect of such a determination on a firm's risk assessment, their determination that an independence violation was "inadvertent" or that an "inadvertent" violation could not be addressed prior to the client merger.

"The decision to forgo public comment will not make these issues go away—rather they may become more pronounced," Brown said. 'As soon as these changes become effective, audit committees and audit firms will confront the confusion that will almost certainly arise from unexplained effects on the communication requirements. Inspection teams will struggle the uncertainties over the unexplained expectations with respect to documentation requirements and the impact on assessing compliance." 

Finally, he noted that the changes still leave in place 2003 legacy independence rules, which would seem to undermine the goal of updating the standards.

Click here to see more of the latest news from the NYSSCPA.