Thursday, October 03, 2019

Board Member Brown discusses ways in which PCAOB could be more transparent

By John Filar Atwood

Although the PCAOB is not subject to federal transparency laws such as the Sunshine Act, the Freedom of Information Act, and the Administrative Procedure Act, Board Member J. Robert Brown, Jr. believes the board should choose to be more open with its information and decisions. In remarks at the Fall Conference of the Council of Institutional Investors, Brown noted that a participant at the board’s recent Investor Advisory Group meeting called the PCAOB “completely opaque,” and Brown suggested a number of steps to improve that perception.

Before outlining his recommendations, Brown acknowledged that the board has taken some steps to be more open. He pointed out that the board adopted a strategic plan that includes the promise of increased transparency and provided the opportunity for public comment on the plan. He also noted that the PCAOB has created a new position designed to engage in outreach and is developing a new approach to inspection reports that should provide investors and the public with results that are more accessible.

Transparency recommendations. In Brown’s view, these steps offer only limited additional insight into the PCAOB’s role, and more can be done. He suggested the creation of a board corner on its website where it would disclose relevant correspondence from third parties, as well as any responses, keeping confidential anything required by statute or otherwise exempt under the FOIA. He believes the corner could include calendars for the full board that shows the outside groups who met with the PCAOB, including the agendas for the meetings.

He also recommended that the board provide a mechanism that would allow any stakeholder to petition for a change in board standards or rules. The board would post the petition and any comments thereon. He also would like to see the PACOB post memoranda identifying outside groups that discussed any ongoing rulemaking matters with the board.

In Brown’s opinion, the PCAOB could better take into account the informational asymmetries between those it oversees and the public. He cited an example of when the board alters its approach to inspections, and how regulated entities will often become aware of the changes when they are implemented. The board can do a better job at making this type of information available to the public on a more routine and fulsome basis, he said.

He suggested that the board provide an explicit invitation on its website to investors and stakeholders about scheduling meetings with the PCAOB, and that it take an inventory of information that it has kept confidential and reconsider the approach given the passage of time. Brown emphasized that it is not the number of documents that are disclosed that is important, but to create a culture of openness with respect to the PCAOB’s thought process and approach to its mission.

Accountability. Brown also addressed the issue of accountability, using the Division of Registration and Inspections (DRI) as his focus. The PCAOB is primarily an inspections organization, he noted, with 60 percent of its personnel accounted for by the DRI. Given its importance to the board, he believes the DRI is doing an excellent job improving audit quality and building trust in the financial disclosure system.

According to Brown, each year the DRI inspects about 160 audit firms in the U.S. and in 30 foreign jurisdictions. It reviews portions of over 700 public company audits, not including the more than 100 broker-dealer audits. The DRI’s inspection program is has raised audit quality both domestically and globally, he said.

New approach to inspections. Past accomplishments do not ensure future success, Brown said, so the DRI is developing approaches that will help increase the quality of audits going forward. One example is how the DRI is conducting a deeper review of the system of quality control employed by the largest firms. DRI is looking into the design and operating effectiveness of each system, he noted, and improvements to these systems could improve quality at the engagement level.

He pointed out that DRI also is using a new “target” team that is performing inspections on specific procedures across a number of audit firms. The team, which is made up of about 10 inspectors, will allow DRI to be more agile and responsive, and focused on topics that involve current or emerging risks, in Brown’s opinion.

DRI also is increasing accountability through greater involvement with audit committee chairs, Brown said. DRI has implemented a policy of reaching out to more audit committees, with interviews of more than 250 chairs conducted by the end of August. This allows audit committee chairs to gain insight into the role of the PCAOB and the importance of the inspection process and provides the board with information it needs to help advance audit committees’ gatekeeper function, Brown noted.

Brown also commended the DRI for its role in ensuring proper implementation of critical audit matters (CAMs). Now that the requirement has become effective, DRI is inspecting the audit reports for many of the 70 large accelerated filers that had fiscal years ending on June 30, the effective date for CAMs. Brown hopes the PCAOB will learn from DRI inspections of the approach to the determination of CAMs and how they were communicated in the audit report.

Looking ahead, Brown said that another area that needs to be addressed is the board’s engagement selection process. The PCAOB cannot inspect every audit given its limited resources, Brown noted. He hopes the board will examine whether, when determining which audits to inspect, it is using the right criteria to make the selections, and whether should focus more on audits where there is a higher risk of accounting violations in the financial statements.