Audit Leader Behind US Rule Revamp Defies Calls to Slow Down

Erica Williams has set a blistering pace to overhaul rules governing audits of public companies that in some cases are decades out of date.

Williams, who has been chair of the Public Company Accounting Oversight Board since 2022, has led the Enron-era regulator as it has finalized five projects and moved six others through various stages of adoption. Last year alone was the board’s most active period to modernize its rule book in a decade.

Audit firms, largely unsuccessfully, have demanded more opportunities to shape pending reforms and more time to adopt to changes that guide how they audit corporate accounting for juggernauts like Apple to small R&D firms.

Yet, Williams makes no apologies and has no plans to slow down.

“Maintaining high standards is a tough job,” the former White House legal aide and advisor to past Securities and Exchange Commission chairs said in a recent sit-down interview with Bloomberg Tax. “The capital markets don’t stand still. And lots of different things have happened in the past 20 years and our standards need to keep up.”

Williams, who was appointed to a second term in June, oversees a regulator that historically leaned on inspections and the threat of typically small financial penalties to hold auditors accountable.

During her tenure, the board upped the cost of common infractions like backdating papers that document the audit along with more serious charges. The board in April levied a record $25 million fine against the Dutch arm of KPMG for cheating on training tests.

Some stakeholders have argued the board should focus less on fines and sanctions that can end careers and more on ensuring firms comply with basic standards through guidance and inspections. The US Chamber of Commerce, for instance, called a rule change “draconian” and unnecessary that would hold partners and senior staff accountable for negligence if their missteps contributed to audit failures.

One thing that could derail Williams’ agenda: the outcome of the upcoming presidential election. A new administration could chose to overhaul PCAOB leadership for what would be the third time since 2017.

Enron-era Rules

Congress created the board in 2002 to protect investors from accounting scandals like those that toppled Enron Corp. and WorldCom Inc. Among its duties, lawmakers tasked the regulator with writing new rules to ensure auditors deliver a reliable picture of corporate health to shareholders.

Despite that authority, the board’s rule book relies on standards largely written by the accounting industry, in some cases decades ago. Those measures were adopted as a stop-gap but despite Williams’ progress the majority remain unchanged even as international audit rules and requirements for private company audits continued to evolve.

The need for tougher audit standards that meet the risks of today’s capital markets hasn’t ebbed in the board’s two-decade history, Williams said.

As PCAOB modernizes its rules, the regulator relies on comment letters as well as other sources of feedback including years of accumulated input and research.

“We’ve seen concept releases, we’ve seen research projects, we’ve seen proposals and re-proposals,” Williams said. “Now’s really the time to bring those efforts to fruition and deliver updated standards and rules so that we can make sure that investors are best protected.”

Although firms support the board’s efforts to update its standards, they are concerned how those rule-changes might interact and whether they would meet the needs of a wide range of audits, said Dennis McGowan, vice president of professional practice at the Center for Audit Quality, which represents the interest of auditors.

“To guard against unintended consequences, sufficient time is necessary for all stakeholders to absorb, adapt, and consider the cumulative impact of modernized requirements,” McGowan said in a statement.

The Road to Quality

One of the marquee projects pushed by the board under Williams would overhaul foundational rules for how firms manage their audit practice, known as quality controls. The new standard, which is pending review before the Securities and Exchange Commission, would require firms to design safeguards for routine risks in their practice.

Firms that have invested in those internal guardrails—which cover ethics, staffing levels, and whether to take on a client—have decreased problems uncovered during inspections and boosted audit quality, Williams said.

Nearly half of company audits PCAOB inspected last year fell short of basic standards, according to results the board released earlier this month.

Mid-tier firms struggled compared to their Big Four competitors among firms that undergo annual assessments. Eight out of 10 of those mid-tier firms had deficiency rates of 40% or greater.

Issuing staff guidance more frequently and publishing inspection results faster are among the steps the board is taking to help firms adapt to new mandates for audit practice oversight.

The board published 2023 inspection results for auditors with the largest market share six months earlier than its previous findings. So far this year the board turned around results for most small firms within six months.

Next in Line

Still pending are projects that cover information firms must report to the board and public.

Another project would require auditors to dig deeper when looking for fraud or other crimes that tank stock values and investor confidence. Williams wouldn’t say what next steps PCAOB would take with the controversial project, known as non-compliance with laws and regulations.

“We’re not on a timeline and we want to make sure that we’re getting this right,” Williams said of the board’s rule-writing process.

Williams, however, serves at the whim of the political party in power. Yet she’s not moved by the election calendar.

“We’re laser focused on moving forward on the key goals in our strategic plan and I will continue to do that as long as I’m in this job,” Williams said.