Republicans Propose Abolishing PCAOB

Republicans in Congress unveiled legislation on Friday to abolish the Public Company Accounting Oversight Board and fold the PCAOB’s audit industry oversight duties into the Securities and Exchange Commission. 

The House Financial Services Committee released the proposed text Friday evening, presumably hoping that nobody would notice. The bill would take the PCAOB’s duties — approving new audit standards, inspecting audit firms, and taking enforcement action against audit firms and individual auditors — and re-assign them to the SEC. Employees of the PCAOB (roughly 900 people) would be eligible to take comparable jobs at the SEC, although as a practical matter that could mean a significant pay cut for a fair number of them. So in other words, lots of PCAOB folks might quit.

We should keep a few points in mind here. First, this bill is a long way from becoming law. It’s scheduled to be debated by the Financial Services Committee this coming Wednesday, and sooner or later that Republican-led committee probably will vote in favor of passage. After that, however, the bill would still need to be included in Congress’ massive tax and spending bill for the next fiscal year starting Oct. 1, which would require support from Republican leadership; then that tax-and-spend bill would need to pass both the House and the Senate. 

Right now it’s a crapshoot whether even Republicans themselves will support that final tax-and-spend bill, let alone the Democrats. So a lot of horse-trading is yet to come, and this particular provision could be sacrificed as part of those negotiations. 

All that said, abolishing the PCAOB has been a dream of Republicans pretty much since the day they voted to establish the agency back in 2002 as part of the Sarbanes-Oxley Act. Folding the agency into the SEC is a part of the Project 2025 plan, right there on Page 830. And who wrote the Project 2025 chapter for financial regulatory agencies? Why, Paul Atkins, who took over as chairman of the SEC last week.

Pondering a Post-PCAOB World

Let’s assume for a moment that the PCAOB does get folded into the SEC, as some sort of “Division of Public Accounting.” What would that mean for audit firms and public companies? 

Foremost, a lot less oversight on audit firms. The PCAOB had been dysfunctional for years, from a constitutional challenge to its existence in the late 2000s to some truly bananas mis-governance in the 2010s, until the Biden Administration sacked pretty much the whole board in 2021. Since then, current PCAOB chair Erica Young has revived the agency’s enforcement and inspections regime, and minced no words when she was dissatisfied with audit firm performance. Young has tempered her words more recently as audit inspection results improved. 

Clearly all that will go out the window if an Atkins-led SEC takes over the PCAOB’s duties. As a practical matter, the SEC is already a diminished agency thanks to staff buyouts that reportedly have led to a 16 percent reduction in manpower. Yes, PCAOB employees will be eligible to take comparable jobs in that Division of Public Accounting (or whatever we’d call it), but you’re deluded if you believe all that PCAOB manpower and institutional knowledge will immediately transfer over to the SEC and keep rolling right along. Lots of people won’t.

Moreover, presumably this means the SEC commissioners themselves will be the gatekeepers who review and approve new audit standards; and Atkins has already implemented a commissioner-level chokehold on launching formal investigations. So lots of audit industry oversight — development of new standards and enforcement action against errant auditors or audit firms — simply won’t happen. 

Another issue important for SOX compliance teams would be how audit firm inspections happen. SOX compliance leaders and corporate finance VPs have complained to me for years that the PCAOB has been overly zealous in its inspections of audit firms, which in turn makes the audit firms overly zealous in the demands they place upon you during audit season. 

So if some newfangled SEC Division of Corporate Accounting goes easy on audit firm inspections, will that lead to fewer demands for controls testing or documentation from your audit firm? In theory the answer would be yes, but in the real world audit firms need to keep racking up those billable hours somehow. (If you have thoughts on how all this might unfold, as always you can email me at [email protected] or find me on LinkedIn.) 

Consider the Bigger Picture Too

In fairness, lots of auditors and SOX compliance teams will say that less oversight is a good thing — that the PCAOB really has been too heavy handed, driving up costs beyond the benefit to investors and driving good people out of the industry. To their point, numerous mid-sized audit firms have exited the business of auditing public companies entirely, because they don’t want the headache of dealing with the PCAOB.

So those people who say the audit industry business model as it now exists is broken — they’re not wrong. I’m just skeptical that Atkins and his fellow ideologues running the SEC have any idea what a better approach might be. 

The answer isn’t less oversight, since that’s what got us into the corporate accounting crises of the early 2000s; it’s better oversight, fit for the risks, challenges, and technologies of the 2020s. 

Does Atkins have the vision and capacity to define that better regulatory system, when he last worked at the SEC nearly 20 years ago and has been a lobbyist for the crypto industry most of the last decade? Or is he just another standard-issue conservative looking to tick off all the boxes for Project 2025? 

I dunno. But if this legislation to abolish the PCAOB does come to pass, we’ll all find out.