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INSIGHT: Trump’s Proposed Budget Threatens Audit Watchdog’s Enforcement Functions

Feb. 26, 2020, 9:01 AM

The Trump administration’s proposed 2021 budget recommends eliminating the Public Company Accounting Oversight Board (PCAOB) and consolidating its functions into the Securities and Exchange Commission beginning in 2022.

If the proposed consolidation of the PCAOB into the SEC ultimately obtains Congressional approval, this would be a monumental change for public accounting firms and issuers. For now, the proposal leaves open several questions. However, it seems unlikely that the House of Representatives would approve the president’s proposed budget as submitted.

The PCAOB’s current annual budget of approximately $280 million is funded by collecting so-called accounting support fees from public companies and other entities required to obtain an audit opinion under PCAOB standards. Assuming the consolidation were to occur, it is unclear whether the SEC would replicate the scope, magnitude, and rigor of the PCAOB’s regulatory activities.

The administration stated it does not expect “reductions in auditor oversight” due to the proposed consolidation, but the proposed budget raises the possibility there would be a material reduction in the funding available for auditor supervision, including the PCAOB’s current audit-firm inspection and enforcement activities.

$64 Million Predicted in Annual Savings

The Trump administration’s proposed budget would eliminate PCAOB funding starting in 2022 and increase the SEC’s budget starting that same year. The budget predicts average annual savings from the consolidation of $64 million each year for the remainder of the decade. This raises the question: Could a consolidation of the SEC and PCAOB truly save $64 million per year without a reduction in oversight activities by eliminating redundant expenditures across the two agencies?

Although the size of projected savings may seem aggressive, over $85 million of the PCAOB’s current 2020 budget is allocated to its Office of Administration and Office of Information Technology, which are functions that would be candidates for consolidation with parallel offices within the SEC in a consolidation.

Inspections and Enforcement

If the proposed consolidation did turn out to require cutbacks, such cutbacks could be the most prevalent in personnel-intensive activities such as inspections and enforcement. Audit inspections and enforcement investigations have become an increasingly expensive reality for some audit firms over the past decade.

The proposed budget states that, because the SEC is subject to discretionary appropriations, moving the PCAOB’s role to the SEC will ensure “constraint over the fees assessed on market participants”—suggesting that public companies could see lower accounting support fees as a result of a shift.

Consolidating the PCAOB within the SEC may also impact standard-making for public company auditors. Currently, such auditors certify that their audits have been conducted pursuant to PCAOB standards. It is unclear whether the SEC would assume the PCAOB’s standard-setting function.

Recently, the PCAOB announced that it planned to adopt new quality control standards which could result in significant changes to the internal structure of accounting firms and potentially lead to increased overall audit costs. The timing of the implementation of such changes remains to be seen.

Shifting the responsibilities of the PCAOB to the SEC could also precipitate changes for enforcement proceedings against audit firms and their professionals. While charges filed by the PCAOB against audit firms or individuals usually remain confidential until the case is settled or until the matter reaches a certain stage in the appeals process, the same is not necessarily true for charges filed by the SEC. Under a consolidation, audit firms and auditors could lose the confidentiality protections which were explicitly required when Congress created the PCAOB.

Congressional approval of the president’s budget and the proposed consolidation are far from certain. However, the proposal threatens the very existence of the PCAOB and may portend further changes at the PCAOB even if the proposed consolidation into the SEC does not go forward.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Jessica Pulliam is a partner at Baker Botts and chairs the firm’s Trial Department in Dallas. She defends public companies and their officers and directors, private enterprises and professional firms in high stakes lawsuits. She has handled matters involving class actions, corporate crisis, business torts, securities fraud, fiduciary litigation, accounting and disclosure issues, SEC and PCAOB investigations, whistleblower claims, and post-deal disputes.

Josh Davidson is a partner at Baker Botts in Houston who handles a wide range of corporate and securities work. He is nationally recognized for his experience in transactions involving master limited partnerships, (MLPs), YieldCos, and royalty trusts. Davidson is chair of the firm’s Houston Corporate Department and head of the firm’s Capital Markets and MLP/YieldCo Practice.

Charles Strecker is special consel at Baker Botts in Dallas. He represents public corporations, private companies, and individuals in state and federal courts throughout the country. His representation includes clients in a variety of industries, such as private equity, professional services, technology and energy.

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