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Center for Audit Quality Asks PCAOB to Reduce Burdens on Small Accounting Firms

June 28, 2024 

A task force of the Center for Audit Quality (CAQ) urged the Public Company Accounting Oversight Board (PCAOB) to consider implementing several measures aimed at easing regulatory burdens for smaller audit firms, including a longer comment period for the board’s standard-setting proposals and increased outreach.

In 2024 alone, the PCAOB has published more than 4,200 pages of proposed and final releases, and the CAQ Smaller Firm Task Force (SFTF) said the board’s 60-day comment periods are insufficient, especially when it issues more than one proposal on the same day. This is particularly difficult when the proposals are released during small firm busy season.

The task force pointed out that other standard-setters such as the International Auditing and Assurance Standards Board (IAASB) and the Financial Accounting Standards Board (FASB) normally provide comment periods of 90 to 120 days.

“Smaller firms have limited resources dedicated to reading and responding to proposals (maybe two to three people as compared to teams of resources in the larger firms, and those individuals are often concurrently tasked with updating methodology for new PCAOB standards and other responsibilities to support the performance of quality audits),” the task force wrote to the PCAOB on June 20, 2024.

The PCAOB holds a series of smaller auditor forums every year, and the task force said the board should look for more opportunities to use those forums as a way to seek input in advance of standard and rule proposals as well as before finalizing the proposals.

Everything Everywhere All at Once

The recommendations come as the PCAOB under the leadership of Erica Williams has been pursuing the most ambitious standard-setting and rulemaking agendas in the board’s history. And the CAQ, an affiliate of the AICPA representing accounting firms that audit public companies, has been expressing concerns about what it sees as the board’s rush to update auditing standards without providing adequate rationale behind it.

Now the task force is echoing the same concerns about the cumulative effect of the PCAOB’s activities on smaller and medium-sized firms. To emphasize the gravity of the situation, the task force said that it had never separately commented on PCAOB standard-setting or other activities during its 15-year existence until now.

Since mid-December 2023, the PCAOB has reopened a comment period, issued four proposals, and adopted four final standards. Among those, a number were proposed or adopted on the same day.

To better make its case, the task force said that it is deeply concerned about the board’s pace and volume of its activities on not only on smaller firms but also ultimately on smaller public companies and the capital markets.

These companies are important not only to the communities they operate in but are “vital” to the US economy and workforce. Citing an SEC staff report, the SFTF said that small businesses represent 99.9% of all businesses, make up 43.5% of GDP, and create 63% of net new jobs.

After the implementation of Sarbanes-Oxley Act of 2002, which established the PCAOB, “public companies experienced significant increases in audit fees combined with the cost of their own implementation, which disproportionately impacted smaller companies,” the task force wrote. As a result, many small public companies decide to go private or sell.

“It is essential that the PCAOB carefully consider the potential additional costs associated with the implementation of these Proposals on capital formation, particularly since the potential benefits are doubtful,” the task force wrote.

Other Recommendations

The SFTF said the PCAOB should consider the following other recommendations:

Study costs to smaller firms in the PCAOB’s economic analysis: The task force is worried that new standards and rules will prompt smaller firms to exist the public company audit practice and disrupt capital formation with more companies staying private. The task force said that the board’s economic analysis does not consider the economic impact to audit market competition or capital formation.

Issue concept releases on PCAOB auditing standards and rules before issuing proposals: “While we understand that adds time to the overall standard-setting or rulemaking agenda, if the objective is to truly enhance audit quality and transparency for stakeholders, we believe such care and due process is warranted,” the SFTF wrote.

Consider forming a smaller firm office and/or advisory committee The task force pointed to the SEC which has both. “A dedicated group of stakeholders focused on smaller firms would allow smaller firms an opportunity to voice their recommendations and concerns beyond the limited discourse currently allowed the smaller firm representative on” the Standards and Emerging Issues Advisory Group, the task force said. “It would also demonstrate a genuine commitment to hearing the candid perspectives of smaller firms.”

Assess scalability of PCAOB standards and rules In particular, the SFTF said the board should do a holistic study of its standards and rules to promote consistency and reduce confusion and duplicative requirements.

The CAQ forwarded the letter to SEC Chief Accountant Paul Munter and Stacey Bowers, Director of the SEC Office of the Advocate for Small Business Capital Formation. The SEC oversees the PCAOB.

Congress passed Sarbanes-Oxley in response to accounting scandals that toppled companies like Enron and WorldCom and cost investors a significant amount of money.

Unlike the SEC, which has a tripartite mission of promoting capital formation, maintaining market efficiency, and protecting investors, the PCAOB only has a single mission: investor protection.

[Thomson Reuters]

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