The rulemaking process continues to roll along at the PCAOB, even as the organization awaits a near-100 percent turnover of its current board.
As the public company audit standard-setter, created under the Sarbanes-Oxley Act, the PCAOB’s rulemaking, strategic plan, budget and funding are overseen by the U.S. Securities and Exchange Commission, which also appoints the PCAOB board.
SEC Chairman Jay Clayton has opened the search to replace board members whose terms have expired, including PCAOB Chairman James Doty, who has agreed to stay on until his successor is named. Other board seats that could turn over this year on the five-member board include the seat vacated by Jay Hanson, as well as seats held by Jeanette Franzel – who has also continued to serve past the expiration of her term – and Steve Harris, whose term expires this year.
“Given the importance of the PCAOB to our capital markets, one of my priorities upon assuming the SEC’s Chairmanship was to initiate a process to bring the PCAOB to full strength,” Clayton said in an SEC statement. “My fellow Commissioners share in this objective. I am very pleased that Chairman Doty has agreed to continue to serve as the Chairman of the PCAOB as we commence the process for appointing his successor and new Board members. I believe this will ensure the continued execution of the PCAOB’s mission as the PCAOB transitions to new leadership.”
Comments continue to roll in
Meanwhile, auditors, issuers, academics, and others have been busy providing comment letters on a number of PCAOB rule-making matters, most significantly in response to the SEC’s posting of a Notice of a final PCAOB rule that would significantly change the auditor’s reporting model.
According to the rules established under the Sarbanes-Oxley Act, the SEC has the “final” final say in approving PCAOB auditing standards after they meet the approval of the PCAOB board. Under this procedure, the SEC posts PCAOB standards it has received from the PCAOB and is actively considering for final approval via a notice on the SEC website, providing one last opportunity for comments by the public before the SEC determines whether to give the PCAOB standard its seal of approval.
Audit firms, including BDO USA LLP, EY, Deloitte, and PwC, generally supported the proposal, including required disclosure of critical audit matters. They praised the phased-in approach and called for careful monitoring that the proposal meets its intent, particularly before it is rolled out to smaller public companies. However, the firms took issue with the PCAOB’s continued insistence on disclosure of auditor tenure as part of the new auditor’s report, reiterating their concerns about the usefulness of such information combined with complexities in determining the information.
Investor representatives such as the Council of Institutional Investors supported the rulemaking, “thank(ing) the SEC and the PCAOB for pursuing one of the most important recommendations contained in the U.S. Department of Treasury’s 2008 Final Report of the Advisory Committee on the Auditing Profession – ‘to consider improvements to the auditor’s standard reporting model.’”
The rule came under heavy criticism from the U.S. Chamber of Commerce, which stated, “An acknowledgement by the PCAOB that the Proposed Standard will lead to the disclosure of immaterial and confidential material should give the SEC pause.”
Other matters at earlier stages of rulemaking on which the PCAOB currently seeks comment include proposed standards released earlier this year on auditing accounting estimates, including fair value, and on the auditor’s use of the work of specialists.
Thus far, one comment letter has been filed on the specialists proposal, and three comments have been filed on the fair value / estimates proposal. However, the comment period — ending on Aug. 30 — is still young, and it is likely the PCAOB will see an uptick in volume of comments on these proposals, given the number of comments filed on earlier versions.