Dear Ms. Brown:
The U.S. Chamber of Commerce (“Chamber”) Center for Capital Markets Competitiveness (“CCMC”) appreciates the opportunity to comment on the Public Company Accounting Oversight Board (“PCAOB” or “Board”) proposed rules on Firm Reporting(the “Proposal”). The Chamber urges PCAOB to withdraw this proposal.
The Proposal is a mix of more than three dozen requirements for registered audit firms to report to the PCAOB on firm operations, structures, financial performance, and quality controls. The Proposal represents a significant expansion in PCAOB audit firm reporting requirements for all registeredaudit firms – both active and inactive – with a combination of one-time, annual, and episodic information to be provided to the PCAOB on either a publicly available or confidential basis.
The Proposal claims that the proposed reporting requirements would facilitate informed decision-making and risk assessment by investors, audit committees, and other stakeholders; inform the PCAOB’s inspection, enforcement, and standard-setting activities; increase the standardization and comparability of information provided by registered audit firms; and improve the timeliness of information provided to the PCAOB, investors, audit committees, and other stakeholders.[1]
However, these claims are not supported by persuasive evidence or analysis. The required disclosures are not needed by audit committees in their oversight of external audits or by investors for their voting and investment decisions. Further, the PCAOB already has access to necessary information and data to inform and facilitate its oversight activities, including through its registration and inspection processes and other requirements in its rules and standards.
Through this proposal, the Board is attempting to bootstrap authority it does not have. The Chamber agrees with dissenting Board Member Ho that mandating information the PCAOB has “no authority or ability to do anything about, could be reasonably construed as a gross overreach and an abuse of regulatory power.”[2]
We recommend that the PCAOB withdraw and reconsider the Proposal. Any new audit firm reporting requirements should be consistent with the PCAOB’s authority and remit, clearly necessary to carry out its mission, and confined to information incremental to what it now obtains through the registration and inspection processes.
Review of the Proposal
The Proposal includes an expansive set of new reporting requirements most of which apply to all registered audit firms, regardless of whether they provide audit services on issuer and/or broker-dealer engagements. The Proposal would:
· Revise annual reporting on Form 2 to require more information about a firm’s network arrangements, leadership and governance structure, fees collected, and client base;
· Implement a new Form 2 requirement for annual (albeit confidential) submission to the PCAOB of financial statements, prepared in accordance with generally accepted accounting principles (“GAAP”), by firms with more than 200 audit reports for issuer audit clients and more than 1,000 personnel during the relevant reporting period;[3]
· Revise Form 3 special reporting to reduce the timeframe for reporting to the PCAOB from 30 to 14 days (or more promptly as warranted) and expand the scope of special reporting to include (on a confidential basis) events that pose a material risk, or represent a material change, to the firm’s organization, operations, liquidity or financial resources, or provision of audit services;
o Material events and matters include, but would not be limitedto, those that have or are reasonably likely to materially impact the firm’s total revenue; determinations of substantial doubt about the firm’s ability to continue as a going concern; planned or anticipated acquisition of the firm, change in control, or restructuring and planned acquisition or disposition of assets or an interest in an associated entity; entering into or disposing of a material financial arrangement that would affect firm liquidity or financial resources; actual or anticipated non-compliance with loan covenants; material changes in insurance or loss reserves and material changes related to captive insurance or reinsurance policies; material changes in the amount of unfunded pension liabilities; plans that would cause a material change to the firm’s operations or provision of services (e.g., spinoffs or severing a portion of the business for private equity involvement); a new or change in licensure or certifications not identified on Forms 1 or 3; a change in principal executive officer; and any other planned or anticipated material amendments or changes to the firm’s organization, legal structure, or governance.[4]
· Implement new cybersecurity reporting requirements, including reporting to the PCAOB of significant cybersecurity incidents within five business days on a confidential basis and public reporting of a description of a firm’s policies and procedures, if any, to identify, assess, and manage cybersecurity risks; and
· Implement a new Form QCPP, “Update to the Statement of Applicant’s Quality Control Policies and Procedures,”[5] to update the firm’s quality control policies currently provided in a firm’s Form 1 application for registration.[6]
To read the full letter click here.
[1] See the Proposal, pages 16 and 17.
[2] See the Statement on the Firm Reporting Proposal – Are We Regulating the Audit Firms or Driving Out Competition? by Board Member Christina Ho (April 9, 2024).
[3] For years 1 and 2, the Proposal permits firms to provide financial statements that do not conform to GAAP provided they (1) identify the information that is not readily available but required by GAAP and (2) provide notes that would reconcile non-confirming financial statements to the applicable financial reporting framework. See the Proposal, pages 25 and 26. The Proposal does not address how to reconcile these apparently mutually exclusive provisions.
[4] See the Appendix of the Proposal, pages xiii and xiv.
[5] A rule to implement a new Form QCPP should have been proposed in conjunction with the PCAOB adopting the standard on Quality Control (“QC 1000”) on May 13, 2024. Nonetheless, it can be separately proposed by the Board.
[6] See the Proposal, pages 5 and 6.
