Friday, June 10, 2022

PCAOB’s newly reconstituted Investor Advisory Group meets for first time since 2018

By John Filar Atwood

The PCAOB yesterday began to follow through on Chair Erica Williams’ promise to be more transparent and to actively seek engagement with stakeholders with its first public-facing Investor Advisory Group (IAG) meeting in four years. Williams reiterated the importance of having a dedicated forum for investor advocates and expressed her hope that the IAG will provide ongoing feedback on the PCAOB’s oversight activities.

The IAG had not met since 2018, and ultimately was dissolved in March 2021 by former Chair William Duhnke III in favor of a standards advisory group whose meetings were not open to the public. Williams reestablished the IAG and the Standards and Emerging Issues Advisory Group in January after taking over as PCAOB Chair.

IAG members seemed to welcome the PCAOB’s renewed focus on stakeholder engagement. Lynn Turner, a member of the previous IAG who is now with Hemming Morse, said that recently the Board has garnered a reputation of being a “bastion of darkness” and expressed his hope that the advent of the new IAG will begin to change that. PCAOB Member Kara Stein assured Turner that with the IAG’s help the new Board intends to be a “bastion of transparency.”

In addition to organizational matters, at the meeting IAG members began to offer recommendations on what they believe should be Board priorities as it seeks to enhance its role in protecting investors.

Audit quality indicators. Jack T. Ciesielski, president of R.G. Associates, believes the PCAOB should focus on providing, in machine-readable format, audit quality indicators (AQIs) to provide some color on how an audit firm is doing. The current pass/fail model is insufficient in his opinion. Investors will not be engaged unless you give them data to work with, he added.

Turner agreed with Ciesielski, noting that AQIs were first raised as a possibility in the 2008 Treasury Department report prepared in the wake of the global financial crisis. Turner’s advice for the current Board is that it go back and review the recommendations in that report, and work toward adopting some of the initiatives that were never acted upon, including AQIs.

He noted that several years ago there was a push for AQIs, including a 2015 concept release, but the effort ultimately went nowhere. He recalled that at that time the Standing Advisory Group discussed how the Board should go about determining audit quality and to his surprise some people argued that the PCAOB could not define or measure audit quality. IAG member Sandra Peters, head of global advocacy at the CFA Institute, recalled that debate and said it is time to push past those objections and put AQIs in place.

Gina Sanchez, CEO of Chantico Global, believes it is imperative that the PCAOB focus on the usability of its data, especially its inspection reports and enforcement actions. Those are currently provided as PDF documents, which is an extremely search-unfriendly format, she said. She asked the Board to consider putting its information into a data architecture that is more easily searchable. Bill Ryan, deputy director in the PCAOB’s Division of Enforcement and Investigations, responded by noting that the search feature has improved in recent months but the staff is discussing how to further improve accessibility in the future.

Climate concerns. David Pitt-Watson, a visiting fellow at the Cambridge Judge Business School and former chair of the U.N. Environment Program’s Finance Initiative, recommended that the PCAOB take steps to require climate disclosure. For all of the advantages of the U.S. auditing system, this is one area where it is lagging behind its international peers, he said.

Pitt-Watson said that for many companies climate is already a clear financial risk. The International Auditing Assurance Standards Board has been clear that it wants companies to report material issues in their disclosure, he noted, and the PCAOB should move in that direction. It is a critical issue for investors, and the risks need to be disclosed and the assumptions shown, he stated.

Jeff Mahoney of the Council of Institutional Investors asked the Board to consider that disclosure surrounding critical accounting matters (CAMs) is much better in the U.K. than in the U.S. He recommended that the PCAOB study why the U.K. CAM disclosure is so much closer to what investors want than what is being reported by U.S. firms. Mahoney suggested that one underlying reason is that U.K. auditors report what they found in an audit, while U.S. auditors report what they did in an audit.

Independence. Mary Bersot, CEO of Bersot Capital Management, pointed out that there is still a prevailing perception that auditors are not independent. They work many years with the same companies and same personnel, she said, noting that auditor rotations were never implemented in the U.S. She asked the PCAOB to explain what independence is, especially as the Big Four firms have returned to a business model where consulting services are driving their revenues.

Kara Stein concluded the forward-looking discussion by reiterating that the PCAOB and the new IAG are starting with a clean slate, and the Board is open to any and all ideas. Technology and data are revolutionizing the way people invest, she said, so should the PCAOB change the way it regulates? Stein said the Board eagerly anticipates out-of-the-box discussions with IAG members on key issues going forward.