Audit Board Pressed to Redesign Oversight for AI, Fraud Risks

Auditors, lawmakers, financial regulators, and investors called on the US audit watchdog to roll up its sleeves and dig into a crush of systemic threats that they say could undermine audits as well as corporate financial reporting that drives the $73 trillion US capital market.

Artificial intelligence and private equity’s increasing foothold in the accounting industry should sit at the top of the list, according to dozens of recently submitted public comment letters seeking to shape the Public Company Accounting Oversight Board’s agenda. The regulator is gathering input as it resets its priorities since the Trump administration reconfigured the independent board with new leadership in February.

“The PCAOB must engage in standard-setting that addresses current risks, such as protecting auditor independence and ensuring audit quality in light of private equity ownership of accounting firms,” Sen. Elizabeth Warren said in a letter.

The Massachusetts Democrat, a critic of the board, also asked about the PCAOB’s role and response to the volatile private credit market and complex off-balance sheet arrangements driving billions in AI investments, according to her letter dated May 15. The board, in a statement, said it was reviewing Warren’s letter and would respond to her directly.

The board aims to sketch out its strategy as early as June and has said it would seek a separate round of feedback to update its rule-writing agenda. The PCAOB also is working to revise its overhauled quality control rules for auditors, ahead of a looming December effective date.

Congress created the independent audit board more than two decades ago to ensure investors could rely on corporate reporting following a series of accounting scandals. A political fight last year to dismantle the PCAOB prompted calls to overhaul the board’s approach to oversight of the industry, including its routine checks of auditors’ work.

Those inspections should focus on whether auditors “exercised sound judgment in critical areas” and not just “documentation formalities or minor technical departures,” RSM US LLP told the board in its May 15 comment letter.

Many firms back the board’s plans to restructure those routine inspections around safeguards auditors have put in place to ensure the quality of their work. Auditors also pushed the board to provide guidance as they increasingly incorporate rapidly evolving AI tools into their work.

“The PCAOB should take the opportunity to reflect on these developments, challenge the status quo, and prepare for the future,” PwC LLP said of the emerging technology.

Auditors want the regulator to provide a steady diet of guidance to ensure consistency across the industry and the board’s routine reviews. For example, a “rapid response” group could help the board share “critical, timely guidance” for front line auditors, the Texas Society of CPAs said in a letter to the PCAOB.

The board must dial in on audit missteps that can leave investors without a full picture of a company’s financial health, investors and officials from other federal agencies told the board.

The Federal Housing Finance Agency, the regulator that oversees Fannie Mae and Freddie Mac, urged the board to focus on fraud risks, complex valuations and management review of controls. These are “areas where there is persistent evidence of audit challenges,” the agency said in its letter to the PCAOB.

Ratings agency S&P Global asked for more information about how auditors performed in “areas of significant judgment”—which often include revenue and complex tax positions—in addition to how they determined the threshold for what information is reported in financial statement footnotes.

“Focus on matters that represent the highest risks,” the board’s investor advisory group said in a letter. Those risks should include auditors based in China and the expansion of private capital, the group said.