By John Filar Atwood
For the second time in its history, the PCAOB has released for public comment a draft of its five-year strategic plan. The first instance was in 2018, covering operational years 2018 through 2022. The new five-year plan covers 2022 through 2026 and outlines the four major goals of modernizing standards, enhancing inspections, strengthening enforcement, and improving organizational effectiveness.
The board noted that the release of the plan continues a busy year in which it already has announced an ambitious standard-setting agenda, hired its first investor advocate, and re-established the Investor Advisory Group and the Standards and Emerging Issues Advisory Group. The PCAOB also has more than doubled the average penalty against individuals this year and increased the average penalty against firms by more than 65 percent compared to the last five years.
PCAOB Chair Erica Williams said that in developing the five-year plan the board consulted with the SEC, PCAOB staff members, the board’s two advisory committees, and various other stakeholders such as auditors and financial statement preparers. The board received input about its programs and the changing landscape of the capital markets as it drafted the plan, she said.
Modernizing standards. At the top of the PCAOB’s five-year to-do list is modernizing the standards that apply to audits, attestation, quality control, ethics and independence. The board noted that some of these standards have not been updated since before the PCAOB’s formation in 2003, so desperately need updating.
Board member Duane DesParte said that the board must ensure that its standards reflect advancements in the use of data and technology in preparing and auditing financial statements. He considers the project to strengthen quality control standards to be of particular importance since it has the potential to drive significant improvements in overall audit quality.
In the five-year plan, the PCAOB commits to adopting standards that are clear and scalable, to account for differences in the complexities and sizes of audit firms and the public companies and broker-dealers they audit. In addition to considering new standards, the PCAOB expects to review existing standards to determine if they are outdated.
The PCAOB plans to develop new standards through regular engagement with stakeholders, and an ongoing evaluation of advances in data and technology. The board expects to receive and consider insights from its two advisory groups as part of the standards modernization project.
Enhancing inspections. A second key objective of the PCAOB in the coming years is to enhance and improve its inspections. The board intends to achieve this by, where the law allows, making publicly available relevant information from its inspection reports.
The staff also plans to publish from time to time spotlight reports and other materials that describe observations from its inspection activities, including areas where it finds common deficiencies. The staff also expects to continue to highlight “good practices” by audit firms to support auditors and audit committees in trying to improve audit quality.
The board intends to place a greater emphasis on the expectation that firms take meaningful remediation actions when needed. The report states that in accordance with the requirements of the Sarbanes-Oxley Act, the board will publish all quality control criticisms that the firms have not remediated to the PCAOB’s satisfaction within the required time period.
Strengthening enforcement. Over the next five years, the PCAOB intends to continue to enforce rigorously the laws and regulations under its purview. The board committed to taking an aggressive approach to enforcement, and to use all of its statutory tools to the maximum extent possible. This will include penalties, bars, suspensions, and other relief that will incentivize audit firms and professionals to perform their roles with the utmost integrity, according to the report.
The board plans to increase transparency in settled enforcement actions by more frequently naming the issuers or broker-dealers whose audits are implicated and by increasing transparency around penalties. It also will continue to collaborate with other regulators on enforcement matters, including bringing concurrent enforcement actions with the SEC where the attorneys and accountants in the PCAOB’s Division of Enforcement and Investigations can provide expertise in bringing cases against audit firms and individual auditors.
Organizational effectiveness. In the next five years, the PCAOB also is committed to improving its own performance by focusing on employee engagement. Specifically, the board intends to invest in professional development, foster a diverse and inclusive workplace culture, and promote employee well-being. This will include allowing working arrangements that provide flexibility, autonomy, and opportunities for meaningful employee interaction.
According to the five-year plan, the PCAOB will strive to make external engagement an institutional capability. The board views the reestablishment of its advisory committees and the hiring of an Investor Advocate as first steps in this process. The PCAOB believes that engagement with investors, investor advocates, audit firms, individual auditors, and other stakeholders ultimately will make it a more effective regulator.