PCAOB Member Brown cast dissenting votes, doubling down on his criticism about the lack of investor input on recent actions of the PCAOB.
The PCAOB approved on a 4-to-1 vote the Board’s strategic plan and its budget for the 2021 fiscal year. The $287.3 million budget represents a modest increase of a little under 1 percent from the 2020 budget. The Board also approved by the same margin amendments to align the PCAOB’s independence requirements with recently-adopted SEC rules. Member Jay Brown, the lone dissenter, raised objections about the direction of the Board, reiterating comments he has made in recent speeches calling out the PCAOB for its lack of public input on the Board’s actions.
Budget for 2021. PCAOB Chief Financial Officer Holly Greaves presented the proposed budget to the Board. According to Greaves, the largest component of the 2021 budget will go to personnel costs, which makes up three-quarters of the total budget. This includes funding nine more positions over the 2020 budget. Non-personnel costs include rent, information technology, travel-related costs (mostly encompassing inspections), and administrative costs such as subscriptions and events. The budget, which is funded largely through accounting support fees, also includes a five-month reserve of operating resources lasting through early 2022, Greaves said.
PCAOB Chairman Bill Duhnke praised the work of the PCAOB’s staff, calling 2020 a year unlike any other because of the impact of COVID-19 on operations. Despite these challenges, the staff was able to transition to 100 percent remote working starting in March without major issues in its operations, he said. Describing 2020 as a productive year, Duhnke noted that the staff had completed a number of international inspections, implemented revisions to its inspection reports, and continued to advance its enforcement mission, including actions for substantive audit failures. Although the PCAOB faced obstacles in the face of the COVID crisis, it still managed to improve engagement and oversight, Duhnke said.
Board Member Jim Kaiser, who is leaving the PCAOB following the end of his term this year, also lauded the work of the staff, especially for being flexible and nimble in its inspection program. He also touted the Board’s actions on modernizing its standard-setting and research agendas to focus on near-term objectives. Rebekah Goshorn Jurata, the newest member of the Board, also praised the new approach to the PCAOB’s agendas, especially where it focuses on the need for guidance and new standards. The revised standard-setting agenda also signals to the public what the Board’s priorities are so it can monitor the PCAOB’s progress and hold it accountable for its stated goals, Jurata added.
Casting a dissenting vote on the budget, Member Jay Brown chastised the Board for approving the objectives of the PCAOB’s strategic plan as if the pandemic never occurred. He also expressed his dismay that the Board does not make the budget public; instead, the public must go through the SEC or the Freedom of Information Act (FOIA) for the budget details, causing unnecessary costs and delays for information that can easily be made available on the PCAOB’s website.
Brown has been vocal in recent speeches about the lack of investor input on recent Board actions, a sentiment he echoed in his dissenting statement. PCAOB advisory committees have not met in over a year, and the Board decided to revise its agendas without adequate feedback from investors, he said. Brown added that the notice and comment process on PCAOB standards is no longer assured because it can be eliminated by a majority vote of the Board. Brown also urged the Board to follow in the steps of the SEC to create an Office of Minority and Women Inclusion and an Office of the Investor Advocate. Because the current direction of the Board does not adequately address these ongoing challenges, Brown said he could not support the budget and strategic plan recommendation.
Independence requirements. The Board also voted 4-to-1 to adopt amendments to align its own independence requirements with recently approved SEC rules. The SEC rules, which were approved on a 3-to-2 vote, are intended to focus the auditor independence rules on relationships and services that are more likely to jeopardize the objectivity and impartiality of audits. PCAOB Chief Auditor Megan Zietsman, who will soon join the PCAOB as a Board member, advised that aligning PCAOB auditor independence rules under Regulation S-X Rule 2-01 with those of the SEC would help avoid duplicative requirements between the two regulatory regimes.
Chairman Duhnke said the amendments to the PCAOB’s auditor independence rules will help avoid confusion between the rules of the Board and the SEC. Board Member Duane DesParte agreed with the chairman, stating that the new rules would provide better clarity to investors, auditors, and other market participants.
Brown again voiced his displeasure with the Board’s action, decrying it as rolling back changes without conducting substantive analysis of the new rules’ impact. He asserted that the Board was acting in a rushed manner at considerable cost by denying the public the right to provide their input on the new rules. Brown also criticized the Board for not seeking the views of audit firms and audit committees before adopting the amendments.
The PCAOB has a unique and fundamental role in assessing auditor independence, Brown proclaimed. It arose in the wake of the Enron scandal when Congress created a strong independent regulator of audit reports that was given explicit authority to develop its own standards on auditor independence, Brown remarked. The decision to forgo public comment on the new rules will not make problematic issues go away, such as communication and documentation requirements, according to Brown. He added that the new rules leave largely untouched the interim standards adopted by the Board in 2003, which were written in the self-regulation era without investor input.
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