Support Learning and Insight

It’s more important than ever to understand the challenges facing financial executives. Support the Financial Education & Research Foundation today.

The Return of the Activist PCAOB?


by Edith Orenstein

Two-and-a-half years ago, the Public Company Accounting Oversight Board was slammed for having an ‘activist’ agenda. With a mounting list of game-changing proposals, has the U.S. audit watchdog returned to its activist roots?

Back in 2012 pressure mounted on the Public Company Accounting Oversight Board (PCAOB) to relax a controversial proposal - then in the form of a pre-proposal called a Concept Release - that would have required public companies to rotate their audit firm after a specified number of years.

The ‘Activist’ PCAOB of 2012

Although the stated goal of the 2011 Concept Release was to enhance auditor independence and audit quality a flood of objections during the public comment period led to Congressional hearings, in which one Congressman specifically called out the PCAOB for having an ‘activist’ agenda , and the National Directors’ Institute convened a program entitled, “Audit Committee Roundtable – PCAOB Gone Wild.”

Objections voiced by the corporate financial reporting community (including testimony by Financial Executives International), audit profession and board/ governance community, were that mandatory audit firm rotation could cause decrease audit quality. Additionally, they argued that any such proposal threatened to interfere with or override board of directors’ responsibilities for overseeing the audit firm, a responsibility placed on boards by Congress in the Sarbanes-Oxley Act a decade earlier.

Movement on the audit rotation proposal slowed to a virtual halt, and in February of this year, citing remarks of PCAOB Chairman Jim Doty at a meeting with the U.S. Securities and Exchange Commission, the WSJ’s CFO Journal reported, PCAOB’s Auditor Rotation Project is Essentially Dead.

What’s in Store in 2015

Fast forward to today. Although the PCAOB dropped its proposal for audit firm rotation, the audit watchdog has maintained, if not accelerated, what some may view as an ‘activist’ agenda. Among the items targeted for action between now and the end of March, 2015, according to PCAOB’s current standard-setting agenda, are:

In my view, although the engagement partner disclosure proposal (FKA - or formerly known as - “engagement partner signature”) is arguably the best known of the above proposals in the corporate financial reporting world, CFOs, controllers and others responsible for corporate reporting and board oversight would be well-advised to pay very close attention to the first item listed above: the reproposal of the Auditor’s Reporting Model.

Among the key items contained in that proposal, was a requirement that auditors disclose and discuss “critical audit matters,” or CAMs, aimed to include areas where judgment calls may be particularly difficult, for example.

In a related rule-making action, one area of weakness in the auditor’s testing of complex judgment calls was addressed in the PCAOB’s Staff Consultation Paper (SCP) on Auditing Accounting Estimates, Including Fair Value Measurements and Related Disclosures. The comment deadline closed on last week on that proposal, and weaknesses found by PCAOB inspectors relating to auditor’s procedures for fair value measurements and estimates were presented at a recent meeting of the PCAOB’s Standing Advisory Group (SAG).

Another important point to note is that the PCAOB has begun seeking comment on a pre-proposal basis through “Staff Consultation Papers” vs. the traditional due process document used in the pre-proposal stage, the ‘Concept Release.’ I believe constituents should pay as much attention to a staff consultation paper as they would have paid to a Concept Release. And, if you are looking for staff consultation papers and related comment letters filed on them, you won’t find them in the PCAOB’s ‘rulemaking docket’ where other proposals, Concept Releases and comment letters are housed, but on a separate page for Staff Consultation Papers.

In other efforts to be nimble and release guidance sooner than later, the PCAOB earlier this year published two sets of staff guidance, on going concern, and revenue recognition, respectively, as previously reported in, PCAOB Leaves no Doubt on Going Concern, and  PCAOB Alert to Industry: Improve Audits of Revenue. The PCAOB Staff Audit Practice Alerts or SAPAs provide guidance and clarify the status of existing PCAOB rules for auditors in these two areas that were the subject of recent amendments by the Financial Accounting Standards Board (FASB).

 Focus on Fraud, Audit Committees

One of the major influences on PCAOB’s agenda and progress on that agenda is its Standing Advisory Group or SAG. At its next meeting, set to take place Nov. 20-21, the SAG is slated to spend several sessions on fraud – a subject that fuels much of the PCAOB’s standard-setting activity. The SAG will also discuss issues relating to Revenue Recognition, and comments received on its SCP on auditing estimates and fair value.

In related news, at last month’s Investors Advisory Group meeting,  SEC Chair Mary Jo White, as reported in Compliance Week, told the IAG that the SEC Plans Early 2015 Concept Release on Audit Committees.  As the SEC preps its Concept Release, the PCAOB has increasingly sought to actively engage with audit committee memberscorporate issuers and others who are indirectly if not directly impacted by the PCAOB’s rules addressed to auditors.

IAG Pushes PCAOB Past 'Incrementalism'

All-in-all, has the PCAOB returned to an ‘activist agenda’?  Some Investor Advisory Group (IAG) members would likely argue it has not.

Barbara Roper, the Consumer Federation of America's Director of Investor Protection, would likely say no, based on her remarks at the October IAG meeting, in which she advised PCAOB board and staff members, "If you are going to stop short of the really revolutionary reforms that would change the independence of the audit, then you can’t be timid about these other things… none of them is radical in the sense that it fundamentally changes the world."

Brandon Becker, EVP and Chief Legal Officer of TIAA-CREF, reflecting on various IAG members earlier remarks at the October meeting, observed, "The likelihood of structural reform is small to nil, I don’t think you are going to turn accounting boards into quasi-mutual fund boards… With respect to turning [auditors] into government employees, I would not hold up the experience of federal government examiners as an empirical example of those conflict-free examiners."

Recognizing this is an election year, Becker added, “I would suggest the board consider what it is going to do between now and Jan. 20, 2017,” adding, “I worry that chasing the perfect will be the enemy of the good.”

Seconding that view was Mike Head , a Resident Instructor at Creighton University and former Managing Director of Corporate Audit at TD Ameritrade Holding Corporation, who said, "I agree with Brandon, I am an incrementalist also; at the end of the day, if we can make progress and add value.. for shareholders, that’s what it’s all about."

However, another view on ‘incrementalism’ was voiced by Damon Silvers, Director of Policy and Special Counsel at the AFL-CIO, who also served as Deputy Chair of the Congressional Oversight Panel for The Troubled Asset Relief Program (TARP) formed in response to the financial crisis. Silvers opened his closing remarks at the IAG meeting by saying, "I’m here because I have a great deal of admiration and confidence in the chairman, the board and the staff, I think that [Chief Auditor] Marty [Baumann] has labored around the agenda, I want to make that the starting point of what I’m going to say…"

He then added, "That’s not going to be enough, you actually have to get that done. I have confidence you are actually trying…  It is unquestionably true that the way policy is made is usually incremental, but if you ask for little things, you get nothing."

“Sarbanes-Oxley failed in the sense it did not prevent the next financial crisis,” Silvers said, adding, “It’s only the fact that the failures were so large, and so comprehensive, that no one has asked where the auditors were during this period.”

Speaking directly of the role of the IAG, Silvers ventured, "The job of a body like this is to make serious demands upon the [PCAOB] board, knowing that the board must live in a world of complexity and politics and so forth."

Former SEC Chief Accountant Lynn Turner, a member of the IAG and previous member of PCAOB’s SAG, implored the PCAOB staff and board to do more, saying, "I’ve been coming back here now for a decade, to these meetings, each year about this time … we’ve been either on the SAG or this group been told about things you are working on or doing… I see positive things that you’ve done on inspections, … room for improvement, transparency, but on the rest of it, I just don’t see anything, and so often I’ve had an expectation given what I’ve heard, that great things are coming out of this board, but it’s gotten so that I just don’t expect anything anymore."

Turner then told the PCAOB and his fellow IAG members, "The [PCAOB] board hasn’t done anything big.. . interim standards become final standards  because they [new standards] don’t get done… I think it’s fair for the American public to expect more from the leadership than what they are getting.. It’s become just another bureaucratic board than any other board in DC," adding, "At this point in time, a bird in the hand is worth many, many in the bush."

Learn More

Whether you believe the PCAOB has returned to an 'activist' agenda or needs to listen to those calling for it to be more active, you'll want to hear what PCAOB Board Members Lew Ferguson and Jay Hanson have to say next week at FEI’s Current Financial Reporting Issues Conference (CFRI).

Ferguson and Jay Hanson plan to discuss recent PCAOB inspection findings, implications for 2014 audits and how those findings relate to the Board’s current standard-setting agenda.  Additionally, they will discuss certain of the Board’s initiatives to measure and further enhance audit quality, and Ferguson will discuss some of the activities and findings of the International Forum of Independent Audit Regulators (IFIAR), which he chairs.

The PCAOB update  at FEI CFRI will take place along with an SEC Update from the Commission's new Chief Accountant, Jim Schnurr, and SEC Division of Corporation Finance Chief Accountant Mark Kronforst, on Day 2 of the two-day conference, taking place in NYC Monday November 17-Tuesday, November 18. CFRI online registration is still available.