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PCAOB Member J. Robert Brown Jr. Critiques Board Over Changes to Research and Standard-Setting Agendas

Chris Gaetano
Published Date:
Oct 14, 2020
Untitled design (57)

J. Robert Brown Jr., a member of the Public Company Accounting Oversight Board (PCAOB), has released a statement critiquing his organization for changes to its research and standard-setting agendas that he thought do not adequately take into account the American investor, adding that the decisions were made with little transparency or public input.

"With respect to investor expectations, the revised agendas mostly disregard them. The agendas removed matters repeatedly identified by investors as important—matters that have only grown in significance in a COVID-19 environment," he said.

Brown said that the removed matters, which investors have repeatedly identified as important to them, include an audit firm's role in providing assurance on non-GAAP measures, key performance indicators, XBRL tags, and metrics relating to environmental, social and governance (ESG) matters; the obligation of audit firms with respect to illegal activity uncovered during an audit; and consideration of an entity's ability to continue as a going concern, which he  thought was particularly important in the pandemic era.

He accused the rest of the board of essentially choosing to follow rather than lead, saying the new agenda overlaps neatly with that of international standard-setters such as the International Audit and Assurance Standards Board. While such coordinated efforts "are important and can be useful sources of input," he said they should not come at the expense of the concerns particular to the U.S. investing public.

He also assailed what he saw as a lack of innovation in the revised agendas. With the exception of quality control, Brown said the new agendas mostly leave in place the legacy standards the board adopted on an interim basis in 2003, which "were written by the audit profession during the era of self-regulation, with little input from the public and were sharply criticized during Congressional hearings." He said that the board was not interested in revising "the out-of-date requirements that do not adequately reflect the interests of investors and fail to take into account significant changes in the system of financial reporting that have occurred since the PCAOB opened its doors in 2003," much to the detriment of the public.

To do so, he conceded, would need a lot of work and a lot of time, but "our revised agendas, however, do not even hint at this need, much less suggest a timetable for doing so."

Overall, he said that the PCAOB has a "serious transparency problem."  While traditionally, changes to the board agenda have been preceded by public meetings of the PCAOB's Standing Advisory Group and Investor Advisory Group, that didn't happen this time. He said there were no public meetings on this or any other matter for almost two years, with both groups having been on hiatus since November 2018.

"Neither group has had an opportunity to publicly weigh in on the decisions to remove from the agendas the very projects that they asked us to include. Nor have they had an opportunity to address whether the PCAOB should emphasize the standard-setting priorities of an international body rather than the priorities that they recommended," he said.

On top of this, the revised agendas, he said, "do not adequately explain the reasons for the removal of these items or include any discussion of how investor concerns that caused them to be added to the agendas in the first place were addressed."

He warned that this lack of transparency could undermine public confidence in the audit process, which in turn will lead to less trust of the entire system of financial reporting, ultimately hurting capital markets.

"Revisions to the PCAOB's project agendas should only be made after adequate public engagement with investors, including public meetings of our advisory groups," said Brown. "Were we to take these steps, the standard-setting and research priorities would likely be very different and better suited to the needs of investors and other participants in the capital markets,"

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