A Dec. 8 article from The Wall Street Journal reported that the SEC is now evaluating whether to change rules on conflicts of interest for auditors and their clients. It is also reconsidering rules on how PCAOB tackles accounting firm inspections and on what it will cost firms to comply with these requirements.
In remarks made by SEC Chief Accountant Kurt Hohl at a Dec. 8 conference in Washington, DC, he said that the accounting standard setters have to examine more closely the costs of disclosures for companies applying new rules. “What we don’t want to happen is essentially a high compliance cost to dissuade companies from accessing the public market,” Hohl noted.
Hohl has been the SEC's chief accountant since July. He advises the SEC on accounting and auditing issues and oversees interpretation of accounting rules.
He is involved in the SEC’s candidate search for five positions on the PCAOB. The PCAOB was spared from being eliminated after the Senate passed a tax bill that omitted the measure in July.
The Senate parliamentarian determined that including the provision in the bill was a violation of budget reconciliation rules. Hohl discussed some of the key issues he’s looking out for in an interview with the WSJ Leadership Institute’s CFO Journal. His answers have been edited for length and clarity.
He talked about the change he wants to see with the SEC’s auditor independence rules. The regulator last eased these rules in 2020. He characterized the independence rules as "fairly clear." He noted that "you can’t have direct business relationships with audit clients."
He explained it becomes complicated where "you basically are partnering with a nonaudit client and that nonaudit client uses an audit client as part of their service delivery."
Hohl said that this is what makes the situation more complicated. Finding out how pervasive that is, making sure, and discussing with firms to understand how that impacts their monitoring while enforcing their independence requirements is something that is a priority.
The Journal asked him whether auditor independence was a greater issue amid companies’ AI partnerships and private-equity money pouring into accounting firms. "There are complications that AI adds to the business development relationship required under the auditor independence rules."
He also mentioned that private equity is purchasing some of these smaller accounting firms and making the decision that they do not want to serve in the public company market anymore due to the fact that it’s too expensive for them to operate in that space.
Hohl emphasized that auditor choice is a priority. "We want to make sure that companies accessing the public markets—we’re trying to encourage companies to come to the marketplace—have a choice of audit firms in which to pick from," he said.
He also talked about the PCAOB folding into the SEC and whether he anticipates lawmakers to revive that push. He stated that audit regulation is very important. He said that high-quality auditing standards are needed to have a healthy capital market in the US.
He also talked about the fact that it will take a very long time for lawmakers to fold the PCAOB's functions into the SEC. "Whether it’s part of the SEC or part of the SEC’s oversight of the PCAOB, it’s critically important to our ecosystem. I don’t follow Capitol Hill very closely, but based on the fact that we were closed for 43 days and we couldn’t even get a simple vote on a continuing resolution, I doubt if we’re going to basically see PCAOB elimination and folding into the SEC anytime soon," he stated.