A new U.S. regulation aimed at audit organizations is facing collective opposition from the Big Four accounting firms, showcasing an intense legal power struggle between auditors and regulators as the U.S. government is determined to overhaul its capital markets.
On August 7, a proposal by the Public Company Accounting Oversight Board (PCAOB), issued in June and calling for more responsibility from audit firms, is nearing the end of its consultation period. The Big Four accounting firms have recently begun lobbying their clients to oppose the proposal, warning that if the proposal gets passed, audit fees will significantly rise.
According to Proposal No. 2023-003, the PCAOB seeks to broaden the scope of auditors' responsibilities, requiring them to inform the board of directors when they detect illegal activities by their clients.
The new objectives set by PCAOB in the proposal are:
- To protect investors from harm caused by non-compliance when such actions have a significant impact on the company's financial statements.
- To improve audit quality through the auditor's identification of non-compliance that may have a significant effect on the financial statements.
The current standards only require auditors to detect and report unlawful activities directly impacting the accuracy of financial statements, while the new rule will mean auditors must inspect activities that could potentially have indirect effects.
Under the existing system, the auditors' function is fairly single-dimensional. For any illegal activities that fall outside of the company's financial reporting and accounting scope, such as non-compliance with regulations related to the company's operations, audit organizations generally turn a blind eye.
In response to the new rule proposed by PCAOB, the Center for Audit Quality, led by Deloitte, PwC, EY, and KPMG, stated in an open letter that auditors are not lawyers, and this proposal would expand the auditor's role, requiring them to apply knowledge and expertise beyond their core competencies. They warned that the proposal would substantially increase audit costs without bringing equivalent benefits.
According to the Financial Times, there are also doubts about the proposal within the PCAOB. Out of five directors, only three support the new rule, while two who have worked at the Big Four have expressed explicit opposition.
Tony Thompson, a PCAOB director who voted in favor of the proposal, told the Financial Times he's open to feedback, especially from smaller auditing firms that may not have the resources of the Big Four.
In response to the current opposition surrounding the proposal, he stated they are not asking auditors to become lawyers or to spend substantial resources on hiring experts.
He further clarified that there could be legal issues encountered during audits where they'd be expected to comment. He urged auditors not to ignore signs that may be cause for concern.
