Building Trust and Inspiring Hope in the Accounting and Auditing Profession

Remarks as prepared for delivery

Thank you, Gregory. Good morning and thank you for having me here. Before I begin, let me get my standard PCAOB disclaimer out of the way. The views I express here are my own and do not necessarily represent the views of the PCAOB Board, other Board Members, or PCAOB staff.

I am grateful for Anthony's invitation to speak in front of this audience. I was an internal auditor in the financial services industry at one point in my career, and I know firsthand the key role internal audit plays in corporate governance. Good corporate governance promotes trust, transparency, and accountability, which effectuates long term growth and stability within an organization. In my current role as a PCAOB Board Member, my focus has been on external auditors. Although internal and external auditors have very distinct roles, they exist in the same capital markets ecosystem and are synergistic. Internal audit's scope is expansive, covering all operations and processes, while external audit's scope is focused on the required financial disclosures as well as the internal controls over financial reporting. They also differ in timing. One is continuous while the other is annual. In addition, internal audit is value-driven whereas external audit is compliance-driven, especially in our current regulatory environment. As a result, internal audit functions are inherently better positioned to identify and drive improvements within a company on a continual basis. An effective and value-driven internal audit function reflects strength in a company's corporate governance and therefore mitigates risks of errors or fraud. External auditors' independent certification provides a seal of trust on the financial disclosures that secures and facilitates continued capital formation. Both internal and external auditors play vital roles in fostering trust in public companies and ultimately the capital markets.

Trust is not only vital to the capital markets, but it is also the foundation of all human endeavors. Unfortunately, trust in our society has been deteriorating over the past decade. The Edelman Trust Barometer, a worldwide survey on trust conducted annually since 2001, reported a crisis in trust beginning in 2017, when the general population's trust in four key institutions - business, government, NGOs, and media - declined broadly. The average level of trust in all four institutions is below 50%.¹ Since then, public trust in these four key institutions has continued to deteriorate. The 2023 Edelman Trust Barometer, which surveyed 28 countries with over 32,000 respondents, found that "[p]eople now fear for their economic future without a trust safety net. Only 40% of respondents say they and their families will be better off in five years, a 10-point decline from 2022."²

A lack of trust in key institutions destabilizes our ability to solve problems, as people cannot even agree on the nature and extent of the various problems. For example, PCAOB has been painting a dire picture of the state of audit quality. It has been publicly reported that 46% of audits that PCAOB inspected in 2023 were deficient,³ reflecting an increase from 34% in 2021 and 29% in 2020.⁴ In addition, PCAOB has been boasting about its enforcement program accomplishments. PCAOB's 2023 annual report cites "To protect investors and drive deterrence, we imposed over $20 million in civil monetary penalties in 2023, the largest amount of penalties in one year that the PCAOB has ever imposed."⁵ Emphasis added. Investors could interpret these reports from the public company audit regulator as a dire warning that public company audits cannot be trusted, and that auditors are either crooks or simply incompetent. But there is another side of the story.

To elaborate, let me start with the PCAOB's enforcement program and the record setting civil money penalties. I believe there are multiple instances where the PCAOB has become overzealous in its enforcement program. For example, the PCAOB inspected a firm (by the name of Cherry Bekaert LLP) in 2022, where PCAOB inspectors identified that the firm had failed to make a required audit committee communication in violation of a PCAOB auditing standard. After this deficiency was identified by the PCAOB, the firm established and implemented changes to its policies and procedures for the purpose of providing reasonable assurance that it would not again violate the specific standard. In this case, the PCAOB inspections program was successful where we identified a violation, and the firm took steps to help make sure it would not happen again - so case closed, right? Wrong! As part of the PCAOB's strategic goal of strengthening enforcement, the PCAOB induced the firm to offer to pay a $35,000 civil money penalty, followed by a PCAOB chest-thumping news release stating that the "PCAOB will hold firms accountable for violating PCAOB rules and standards regarding required audit committee communications."⁶

I now want to address how the 46% audit deficiency rate is not a sole indicator of audit quality. To me, the best and most direct metric that measures reporting, and audit quality is the number of public company financial restatements, and this particular metric suggests a more positive and hopeful reality. Specifically, a study conducted by the Center for Audit Quality found that the number of financial restatements filed with the SEC fell by more than 50% over a recent 10-year period with 402 financial restatements in 2022, down from 858 in 2013.⁷ It is fair to say that Congress' intent to restore public trust in auditors of public companies has made a real difference since the enactment of SOX over 20 years ago.

In addition, there are currently nearly 700,000⁸ actively licensed CPAs worldwide, with over 670,000⁹ in the United States as of August 29, 2024. Even with the PCAOB's historic enforcement record in 2023, the number of respondents fined was 53¹⁰ which is less than 0.01% of the total number of active CPAs worldwide. So which perspective is more accurate - is it the perspective suggesting that public company audits cannot be trusted based on PCAOB enforcement actions and inspection results or is it the more positive and hopeful perspective of fewer restatements? I'll let you decide.

Yet, no one should feel complacent about the state of public company reporting and audit quality. One public company restatement is still too many. There are some auditors who are incompetent, unethical, and who conduct themselves in ways that are unworthy of this profession. Those individuals should be sanctioned. No one wants "bad" auditors to be barred from practicing more than the profession itself, as those people bring shame to this important and honorable profession.

However, repeatedly spreading an exaggerated narrative suggesting that public company audits and the auditing profession cannot be trusted is unfair, irresponsible, and not evidence based. This binary, chest-thumping approach of bashing the profession in the name of investor protection will only lead to more polarization and distrust. During my time at the U.S. Department of the Treasury, I witnessed firsthand how crucial it was for government officials and regulators to instill confidence and trust in our financial system. The cost of the loss of trust is enormous and far-reaching. Since all of you work in a highly regulated financial sector, imagine your regulators boasting about their enforcement actions. How will that affect your company, your industry, the financial markets, and even the economy?

Accountants have been innovators and problem-solvers since the beginning of civilization. The core function of the accounting profession has always been about discerning and reporting the truth, which leads to solutions. A good accountant can methodically decipher a complex problem such that it can be understood and solved. Discerning and telling the whole truth is the only way to building trust. It also requires expertise and objectivity. For example, the 46% deficiency rate represents the aggregate percentage of issuer audits inspected in 2023 (793) that had at least one Part I.A. deficiency. Part I.A. deficiencies are defined by PCAOB as, "[d]eficiencies that were of such significance that we believe the firm, at the time it issued its audit report(s), had not obtained sufficient appropriate audit evidence to support its opinion(s) on the issuer's financial statements and/or ICFR."¹¹ However, PCAOB qualifies the definition, "[i]nclusion of a deficiency in an inspection report-other than those deficiencies for audits with incorrect opinions on the financial statements and/or ICFR-does not necessarily mean that the issuer's financial statements are materially misstated or that undisclosed material weaknesses in ICFR exist."¹² Emphasis added. The implication here is that deficiencies for audits with incorrect opinions on the financial statements and/or ICFR are deficiencies that provide a definitive link to actual misstatements, which is a metric more akin to the actual restatement metric I mentioned earlier. If you review the 2023 inspection reports on our website, the deficiency rate for audits with incorrect opinions on the financial statements and/or ICFR is less than 5%.

Furthermore, PCAOB does not assign a "severity" rating for any of its identified audit deficiencies. Public companies and their external auditors are required to conclude whether any control deficiencies are material weaknesses, significant deficiencies, or deficiencies. As you all know, it is rare for companies not to have any control deficiencies just like it is rare for companies not to have immaterial errors since humans are not perfect, but material weaknesses and significant deficiencies need to be remediated. Without knowing the severity of these Part I.A. deficiencies, investors have no way of knowing whether they were related to something as simple as missing some documentation or to something more serious such as significant errors in audit judgment. By lumping all deficiencies together without any qualitative assessment of their severity, the PCAOB paints a distorted picture of audit quality when it states that "[w]e continue to be concerned about audit quality as reflected in the overall deficiency rates."¹³ To put it colloquially, receiving citations for jaywalking is qualitatively different than receiving citations for reckless driving. In addition, since PCAOB only inspects a nonstatistical-based sample of the issuer audits, the results of the inspection cannot be extrapolated to the entire universe of public company audits performed each year. As you can see, the 46% that gets mentioned in PCAOB public reports and news releases, which are then repeated in news articles, requires a critical understanding of our inspection methodology and reporting so that they are not misleading or misunderstood.

Unfortunately, public figures are not always interested in "the whole truth, and nothing but the truth." Too often, some public figures are interested only in reducing complex subjects and issues to the lowest common denominator to score points and to self-aggrandize with little consideration of the knock-on effects. It is more expedient to demonize a profession than to present a thoughtful and balanced picture that optimizes the common good of a complex network of stakeholders, within the capital markets ecosystem for the benefit of investors. These distorted and unfair narratives also make the accounting profession even less appealing, which will only exacerbate the talent shortage problem. I have personally heard from friends and former colleagues in public accounting who have exited or are considering exiting the profession because of the current unbalanced regulatory environment. All of you know firsthand how the accountant shortage is hurting companies.

The 2024 Edelman Trust Barometer found that "While people agree that scientists are essential to the acceptance of innovation, many are concerned that politics has too much influence on science. This perception is contributing to the decline of trust in the institutions responsible for steering us through change and towards a more prosperous future."¹⁴ This finding really resonates with me as I believe the same thing is happening to the accounting and auditing profession.

I am entering my fourth year at the PCAOB, and my role as a PCAOB Board Member has challenged my professional decision-making process; however, I am staying true to my values and principles. I have been given a number of labels since I was appointed, "data nerd regulator" by Bloomberg,¹⁵ "vocal critic" and "sole voice of dissent" by the WSJ¹⁶, and most recently "contrarian" by Capitol Account.¹⁷ I wholeheartedly embrace each label because they speak to my proclivity to decision making based on data and evidence, as is my commitment to speak the truth at all costs. As one of the two CPA Board Members, it is my job to use my expertise and my voice to speak the truth about the impact of our policies on investors and capital markets. I believe that although I am a lone voice on the Board, I speak for the auditors dutifully doing their jobs; issuers committed to transparent disclosures and delivering value for both their customers and their investors; and academics recruiting and educating talent for the future. And most importantly, I believe I speak for all reasonable investors who want to build wealth.

As I mentioned in the beginning, both internal and external auditors are crucial to fostering trust in public companies and the capital markets. The accounting and auditing profession is at a pivotal moment, given the precarious trust environment, rapid technology advancement, and talent shortages. We need to be bold and lead the way in solving complex problems by using the most important skill all accountants are trained to have - understanding the data to discern the truth.

I shared my thoughts about a future vision of the accounting profession in the Journal of Accountancy last month.¹⁸ Accounting in the modern era is a discipline that resides at the intersection of three domains - data, process, and finance, all of which are enabled by technology. To realize this vision, we need every accounting and auditing practitioner to drive change in this profession.

In your role as internal audit executives and practitioners, you can help realize this vision by driving corporate governance over] data, process and financial disciplines; promoting innovation to automate routine tasks and increase productivity; and as your Global Board Chair and my good friend Terry has emphasized, delivering strategic value to help companies manage risks and solve complex problems.

While I am disheartened by the unjust and misleading characterization of the auditing profession and some of the harmful PCAOB policies to investors as well as the capital markets, I am hopeful that if we are collectively committed to building trust and solving problems in our respective roles, we can inspire hope in the future of the accounting and auditing profession.

Thank you.