Friday, December 08, 2023

PCAOB chair urges heightened industry vigilance against negligence, fraud

By Suzanne Cosgrove

In a speech delivered Monday in Washington, D.C., to an AICPA & CIMA Conference on SEC and PCAOB developments, PCAOB chair Erica Y. Williams called for the enhancement of current accounting standards and rules, adding “the PCAOB is working to do just that.”

Nearly all standards the PCAOB is considering updating are so-called “interim standards” adopted in 2003, Williams said. While the world changed dramatically in the period that followed, those standards have not been significantly updated in at least 20 years–and in some cases decades longer, she said.

New standards adopted. “To keep investors protected, we must keep up,” Williams said. To that end, she noted the Board has issued six proposals—with one more expected by the end of this year—and has adopted two new standards and related amendments since she took office two years ago.

As reported previously by Securities Regulation Daily, the Board’s proposals include amendments that give auditors added direction on how to address specific audit procedures that involve technology-assisted analysis of information in electronic form. In addition, the Board proposed a new standard on noncompliance with laws and regulations (NOCLAR).

“When auditors fail to identify noncompliance with laws and regulations that have a material impact on a company’s financial statements – or fail to take the proper steps to evaluate and communicate that noncompliance–investors pay the price–retirees, families, hardworking people whose futures and savings are on the line,” Williams told the group.

Wells Fargo a prime example. To reiterate her point, Williams cited a case settled earlier this year in which Wells Fargo agreed to pay $1 billion to settle a class-action lawsuit from investors who alleged the banking company made misleading statements about compliance with consent orders imposed by federal regulators.

As reported in May, Wells Fargo investors had alleged the bank lied that it was “in compliance” with court orders in enforcement actions, when in fact the regulators had rejected the bank’s compliance plans and the bank was nowhere near compliance. The investors said Wells Fargo shareholders lost over $54 billion in market capitalization when the truth was revealed and the bank’s stock price plummeted.

A lawyer for those investors underscored who gets hurt when these incidents happen, Williams said: “state employees, nurses, teachers, police, firefighters and others — whose critical retirement savings were impacted by Wells Fargo's fraudulent business practices.”

Deficiency rates up. “As we meet today, our inspectors are working hard to finalize reports for our 2022 inspections,” Williams said. “And deficiency rates are trending in the wrong direction for both domestic and international firms for the second year in a row. … This is unacceptable,” she added.

“The PCAOB is using every tool in our toolbox to protect investors and drive audit quality improvements, including remediation. And I encourage firms to do the same,” Williams said.

“When PCAOB inspections identify quality control deficiencies, by law we do not make them public in the initial inspection report,” she noted. Instead, firms have a year to correct or remediate the problems before the Board makes its findings public.

“Remediation provides firms with a tremendous opportunity, not only to improve their quality control systems, but to improve their overall audit quality,” Williams said. “Take full advantage of it,” she warned.

Making sanctions count. Williams said the PCAOB “will not hesitate to take action” against those who continue to put investors at risk. Last year, the Board imposed the highest penalties in PCAOB history, and this year, the PCAOB nearly doubled that record with penalties totaling more than $20 million.

“When firms fail to enforce a culture of honesty and integrity, they aren’t just risking an enforcement action, they are threatening the investor confidence our system relies on,” she said.

“Confidence is what powers our capital markets,” Williams said. “So, choose vigilance over complacency as you stand guard against negligence, recklessness, and fraud that threatens our system and the people who depend on it.”