Burst of New Audit Rules Poised to Curb Inspection Flaws, Fraud

US auditors are dealing with a flurry of rule changes over the next two years that impose a higher bar for vetting the books of some of the largest companies in the world.

The new requirements stem from an unusual burst of standard-setting by the Public Company Accounting Oversight Board, which has churned out six final projects since 2022 as it looks to overhaul an outdated rule book and stem mounting audit flaws spotted in routine inspections.

But the rapid pace of change under the leadership of Chair Erica Williams has sparked tension with auditors and corporate advocates who question whether the reforms will deliver on the promise of more thorough checks on corporate accounting.

“These reforms are important so that audit firms do what they are supposed to do, which is ensure that investors don’t end up being misled by public companies,” said Benjamin Schiffrin, director of securities policy with the consumer advocacy group Better Markets.

Refreshed standards enshrine the core concept that accountants’ work is meant to protects investors and also set guardrails for how auditors assess digital records in an era of cloud computing and artificial intelligence.

Auditors have demanded more time to mold those reforms and unpack how the proposals interact with other requirements. By rushing the process, the board risked producing poorly designed rules, the US Chamber of Commerce has said.

“They’re moving so many dials, they don’t know which dial is going to impact what,” said Colleen Boland, an associate accounting professor at the University of Wisconsin-Milwaukee and a former PCAOB economic research fellow. “The PCAOB doesn’t know; the firms don’t know; the investors don’t know.”

Williams has resisted calls to slow down. She previously told Bloomberg Tax that the board relied on years of research and feedback as it drafted reforms.

Modernizing PCAOB requirements should lead to more “consistent and effective practices for auditors, leading to better audit quality,” the board said in a statement.

Five more projects are in the works, including a controversial proposal that would require auditors to dig deeper for crimes that could sink stock values.

Aging Standards

Until now, the bulk of the regulator’s work has focused on inspecting auditors’ work to ensure it meets basic standards, and levying sanctions when violations occur. Past standard-setting tackled some reforms such as risk assessments and expanding auditor communications.

The latest updates are intended to address recurring problems spotted in routine inspections, with requirements that support firm culture and governance and ultimately lead to more rigorous auditing, Schiffrin said.

Inspection violations have risen steadily in the years since the start of the 2020 coronavirus pandemic. Last year the board found flaws in nearly half of all audits it inspected.

Renewed focus on standard-setting comes two decades since the board’s formation in the wake of accounting scandals that toppled Enron and WorldCom. Congress tasked the PCAOB with setting guideposts for audits of listed companies that could counter the unique risks and complexities of the US securities market.

Much of the board’s rulebook, however, borrows from standards set by the audit industry, in some cases decades ago.

“This board came in as a reaction,” Boland said, adding that board members are making good on their promise to update PCAOB standards.

Advancing Quality

Among recently finished projects, Williams and other board members expect the new quality controls standard to raise the bar for corporate audits. The board overhauled foundational rules for how firms manage their practices—from ethics to training to staffing individual audits—to address risks they face in their routine practice.

Firms must put in place independent oversight of those internal safeguards under the new standard, which takes effect in December 2025.

Investors have been calling for independent oversight for over a decade, said Sandy Peters, senior head of global advocacy for the CFA Institute. She will be watching if the changes begin to move the needle on audit quality.

“Whether people like the decisions or not, it’s good prudent standard-setting to take a look at these standards,” Peters said. “Has the world changed? Has the world shifted?”

Even as the board resets the bar for audits, the PCAOB has imposed a lower threshold for holding individual partners accountable for their role in audit failures.

That shift in liability does not alter the nuts and bolts of auditing. Instead it reflects the board’s tougher stance on enforcement, said Thomas White, a lecturer at Columbia Law School who is retired from practicing corporate law at WilmerHale.

Under Williams the board has more aggressively enforced its rules hitting auditors with steep financial penalties and operational remedies.

“I’m somewhat skeptical that the way you improve audit quality is by making people more afraid that if they make a mistake they’re going to be sanctioned,” White said.