PCAOB chair addresses the board’s credibility problem

It’s no revelation that the PCAOB has been under fire in recent months. SEC Chair Paul Atkins replaced nearly the entire board, including Chair Erica Williams; cut the board’s budget; and slashed members’ salaries. Recently, the SEC has even posted job openings for a new SOX group, raising suspicions that it plans to assume some of the PCAOB’s functions.

PCAOB chair Demetrios “Jim” Logothetis addressed these concerns during an April 29 meeting of the PCAOB’s Investor Advisory Group. When Logothetis interviewed for the role of chair, he said, he was reassured that the SEC wanted to keep the board around. But he was also told that his mandate was “to do whatever we need to do to regain the credibility that perhaps is missing out there.”

And the board is suffering from a credibility gap, Logothetis suggested. During a recent meeting of the International Forum of Independent Audit Regulators in Paris, Logothetis asked representatives of Big Six auditing firms how audit committees worked with the PCAOB, he said. What he heard did not inspire confidence. One person “inadvertently used the term ‘manage the PCAOB,’” he said, while another reported that “the audit committees have tuned out the PCAOB.”

That could pose a problem, he said: It all “comes down to whether or not these firms that we are regulating take our comments and recommendations seriously. That’s where behavior changes.”

Reports need to be more relevant. Investor group members told the PCAOB that audit committees don’t always receive PCAOB inspection reports, and that when they do, they don’t necessarily find the information useful. The reports are “very noisy. And we just want to get to the bullet-pointed point of view,” Diana Glassman, director of engagement at investment manager Federated Hermes, said. Ken Goldman, former Yahoo CFO and former president of family office management company Hillspire, suggested that the reports “summarize your key findings so we have lessons learned” and differentiate better between genuine errors and “paperwork issues.”

Goldman also observed that he has to request inspection reports. He recommended that the PCAOB make it mandatory that firms give audit committees the reports on an annual basis, a suggestion Logothetis appreciated. “I love it, and we need to find a way to do it,” he said.

Updating inspections. Logothetis also discussed plans to modernize inspections, which he said would be the board’s top priority after implementing QC 1000. “We are in the process of forming a task force to reconsider the inspection process,” he noted.

Likening the PCAOB to the FAA, he said he believes the board’s primary role is to prevent “crashes,” or in its case, “significant audit failures.” To that end he aims to have inspections focus more tightly on key risks. An inspection of an audit of Coca-Cola, for instance—one of Logothetis’ own clients during his time as an auditor at EY—would concentrate on income tax provisions, as that is the worldwide company’s area of highest risk.

That wouldn’t mean that inspections would be any less rigorous, he hastened to add: “Ultimately we want to not reduce the number of accounts that we look at. It’s possible that we will look at more files,” he said.

Logothetis also said the PCAOB needs to upskill its staff, particularly in areas such as technology. “The accounting firms have poured millions, if not billions, of dollars into their systems,” he observed, and the board may not have caught up. As for AI in auditing, “it’s not next year, it’s not the year after,” he said. “It’s here.”