U.S. Auditing Watchdog Tries to Remake Itself, But It Isn’t Easy

Chair Erica Williams has tried to set the troubled PCAOB on a new course. The ambitious shift has been marked by policy divisions and onerous work demands, but also a bounce in morale.

When Erica Williams took over the Public Company Accounting Oversight Board, she had her work cut out for her: mend a fractured culture, put some teeth into enforcement and bring outdated auditing rules into the present.

In January 2022, when she became chair of the PCAOB, the audit regulator had recently suffered a major blow. The Securities and Exchange Commission, overseer of the PCAOB, had dismissed former Chair William Duhnke the previous year and replaced most of the five-member board amid what was described as a culture of fear under Duhnke.

Appointed by SEC Chair Gary Gensler, Williams soon signaled a tougher enforcement approach to send a message to the audit profession, vowing to conduct more sweeps to root out wrongdoing by audit firms, strengthen and update standards and make inspections more efficient and transparent.

“This board is approaching enforcement with a renewed vigilance,” she said at a conference in September. “We intend to use every tool in our enforcement toolbox and impose significant sanctions, where appropriate, to ensure there are consequences for putting investors at risk and that bad actors are removed.”

Last year, the regulator fined accounting firms and individual auditors a total $10.5 million, a fivefold leap from an average of $1.9 million in each of the previous five years, according to Cornerstone Research, a financial consulting firm. The 2022 penalty total was the highest since 2003, when the PCAOB was created as part of the 2002 Sarbanes-Oxley Act after the Enron accounting scandal.

But that ambitious agenda is also straining staff and bringing to the surface previously rare board dissent.

Williams’ goals place significant expectations on employees to carry the new policies out, with requests, for example, to generate a big number of enforcement cases, people familiar with the matter said. Enforcement staff feel pressure to get significantly larger fines from accounting firms and auditors than in the past, the people said. Williams has said the PCAOB wants to increase the quality and types of cases it is pursuing, along with higher penalties. 

The PCAOB brought 42 enforcement cases in 2022, up from 22 on average from 2018 to 2020 under Duhnke, but down from a 51 average the prior three years, during which James Doty served as chair, the PCAOB said.

The increased regulatory activity generally has been in line with that of the SEC under Gensler, who spearheaded the PCAOB overhaul. And Gensler, who has been SEC chair since April 2021, has faced similar criticism of work demands. In a report last October, the SEC’s internal watchdog said the Gensler-led agency’s more aggressive agenda had stretched staff resources and increased risk of litigation. The SEC declined to comment for this article.  

Morale, however, is generally higher at the roughly 900-person watchdog under Williams, according to current and former employees.

“The PCAOB is mending,” said J. Robert Brown, who served as a board member from 2018 to 2021. “Under the prior board, I think there was a big morale problem, but I think that morale problem is easing.”

In a statement, Williams commented, “Protecting investors on U.S. markets drives everything we do at the PCAOB,” adding, “The Board and I will continue working together alongside the dedicated staff to improve audit quality for investors while making the PCAOB an even better place to work.” 

Policy divisions

The PCAOB, which regulates the accounting firms that audit U.S.-listed companies, sets audit standards, inspects audits and disciplines firms for violations. Currently, it has nine active proposals for new and updated standards, at least two of which it plans to adopt this year, and four additional rules it plans to propose by year-end, including a standard on auditors’ assessment of a company’s ability to continue operating.

And that ramped-up rule-making has laid bare some policy fissures. The board had a rare split vote on policy, when Duane DesParte and Christina Ho—the only two board members who are certified public accountants—in June opposed a PCAOB proposal requiring auditors to take a more proactive role in flagging possible fraud at their clients.

DesParte, the board’s sole holdover from the Duhnke era, at the time expressed dismay at the PCAOB’s broadening agenda.

“As we proceed one by one, I am increasingly concerned that we are establishing new auditor obligations and incrementally imposing new auditor responsibilities in ways that will significantly expand the scope and cost of audit and fundamentally alter the role of auditors,” he said.

The divided vote underscored a longstanding divergence between the PCAOB’s audit professionals and staff more focused on investors, typically over how much to require from auditors. The Center for Audit Quality, an industry group, also criticized the proposal, echoing some of DesParte’s concerns. The Council of Institutional Investors, however, said the proposal benefits investors, but also suggested it could go further in expanding auditors’ responsibilities. 

The PCAOB is in the process of updating nearly 40 audit rules related to 13 of its standard-setting projects, many of which refer to outdated technology. Since its inception, the group has used much of the rulebook of the American Institute of Certified Public Accountants on what was supposed to be an interim basis.

Many investors, however, say the PCAOB has never gone far enough to strengthen standards and enforcement, and it has yet to adopt any standards proposed under Williams.

“For two decades, the PCAOB failed miserably to update and revise all the standards it inherited, but they still have a long way to go,” said Lynn Turner, a member of the PCAOB’s investor advisory group and former SEC chief accountant.

In a statement, Williams said she is “proud of the accomplishments the Board is achieving” working together on behalf of investors.

Culture reset

Williams has also made some efforts to improve working conditions following a turbulent stretch at the watchdog. In 2017, the SEC replaced the board after a scandal involving the leak of confidential inspections data. In 2019, a whistleblower alleged that Duhnke, who became chair in 2018, was pushing out career personnel, in some cases in retaliation for disparaging the organization, and engaged in a politicized attempt to run down the PCAOB. A January 2021 report by former SEC Chairman Harvey Pitt said there was an “environment of fear and distrust” among the staff under Duhnke that led to the allegations.

Speaking of the 2017 aftermath, Duhnke said: “In the wake of the cheating scandal, the PCAOB needed a comprehensive reset … As one might expect, some were unhappy with the changes. Instead of rising to the challenge, they resorted to filing numerous false anonymous complaints.”

Under Williams, the PCAOB takes regular employee surveys, has extended paid parental leave to 16 weeks from four, and holds group discussions to improve the culture. 

In an internal survey, 84% of staff said they would recommend the PCAOB “as a great place to work,” well up from 55% a year earlier. The PCAOB declined to provide the full results of the survey, which was conducted between March and May. 

In recent weeks, the PCAOB has had a series of high-level departures, among them Ken Lench, general counsel; Eric Hagopian, information and data chief, and Raymond Hamm, the deputy director of enforcement and investigations.

Williams has elevated veteran staffers Karen Dietrich and Barbara Vanich to director of the office of international affairs and chief auditor, respectively, while also appointing outsiders to key roles including enforcement and investigations director and the organization’s first chief operating officer.

Still, observers see Williams’ ambitions as a tough climb.

“Chair Williams probably has some really good intentions to change the culture, but culture is very hard to change and will likely take years to achieve,” said Kim Westermann, an associate professor of accounting at California Polytechnic State University who has conducted research on PCAOB inspections.

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