Trump Administration Would Shift Audit Watchdog Role to SEC

The U.S. audit regulator would turn over its duties to the Securities and Exchange Commission under the Trump administration’s budget proposal for fiscal 2021.

The White House would transfer the authority of the Public Company Accounting Oversight Board to the SEC by 2022 in order to eliminate duplication between the two regulators and “reduce regulatory ambiguity,” it said in the budget released Monday.

The administration estimates eliminating the board would save an estimated $580 million over nine years. Public companies and registered broker-dealers pay support fees that fund the board and its operations. In 2020, the board is working with an operating budget of $284.7 million.

Congress created the PCAOB as part of the landmark 2002 Sarbanes-Oxley Act, aiming to restore trust in financial reporting after accounting scandals led to the collapse of Enron Corp. and WorldCom Inc.

The SEC, in its own budget release, was silent about the fate of the PCAOB and included it among the other self-regulatory organizations it oversees. The SEC appoints the board, approves its budget, and signs off on any audit standard changes.

‘A Mistake’

But the board’s singular focus on audit quality would be lost amid the larger mission of the SEC, said Dan Goelzer, a former board member and former general counsel to the commission.

“I think it would be a mistake,” Goelzer said of the administration’s proposal. “I think it’s been a success in improving audit quality and getting the firms to focus more on quality controls in their audit practice.”

“Why tamper with something that’s working and has been successful,” he said.

Sandy Peters, head of financial reporting policy at the CFA Institute, questioned why the U.S. would backtrack on audit regulation while the U.K. is actively strengthening it regulator and tightening oversight of the audit industry following a string of accounting scandals that plagued public companies there.

Any cost-benefit analysis has to include the potential losses to investors—or actual losses, in the case of Enron and WorldCom investors and retirees, he said. “We’ve thought that it’s well worth the money, as the people who pay the bill,” Peters said of the PCAOB.

Whether the SEC would maintain the same level of inspections as the board is a question for policy makers. Rather than the fees, it’s the board’s inspections that companies and accounting firms don’t like, said Michael Shaub, accounting professor at Texas A&M University.

Shaub said he can see the arguments to eliminate the redundancies between the two agencies, and he would support the SEC taking on the board’s inspection work. The problem, he said, is the SEC never did that before Sarbanes-Oxley, and only stepped in after there was a problem.

The proposal comes as the board is still trying to rebuild—and repair its own credibility—after former staffers leaked confidential details to KPMG LLP staff about the board’s inspection plans. The SEC replaced all five board members in 2017, most senior staff members were replaced, and the new leadership began looking for ways to overhaul its standard-setting, inspections and enforcement operations.

—With assistance from Andrew Ramonas.