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Members of the US Senate finance committee are demanding tougher enforcement action against accounting firms after a sustained increase in the number of flaws found in their audit work.
Democratic senators Elizabeth Warren and Sheldon Whitehouse said deficiency rates that have exceeded 40 per cent for the past two years call into question whether the Public Company Accounting Oversight Board is properly holding the industry to account.
In a letter to the PCAOB seen by the Financial Times, the senators zeroed in on BDO, the sixth-largest accounting firm in the US, where almost all audits examined by inspectors last year were found to have flaws. They asked whether “repeat offenders” are deterred by potential fines that they said are typically “a drop in the bucket” compared with firm revenues.
“The PCAOB must do better,” Warren and Whitehouse wrote. Either the audit standards written by the board were inadequate, they wrote, “or the PCAOB is failing to establish accountability for firms that do not meet them”.
The letter highlights the increasing pressure on the PCAOB at a time when accounting firms’ executives are privately bemoaning the politicised nature of audit regulation and enforcement.
From the other side of the political spectrum, a conservative legal group called the New Civil Liberties Alliance has challenged the PCAOB’s regulatory powers, claiming in a lawsuit that they are unconstitutional.
The regulator has also been dealing with an unusual split in its own ranks. Board member Christina Ho, a former auditor, last month criticised enforcement activity as “overzealous” and said audit quality was better measured by public company financial restatements than by the PCAOB’s inspection findings.
The PCAOB was set up in the wake of the Enron scandal two decades ago to write and police audit standards, and to inspect audit firms that sign off on financial statements of US-listed companies. It inspected audits by more than 200 accounting firms last year, finding deficiencies in 46 per cent of audits, up from 40 per cent in 2022, but chair Erica Williams said there were “small signs of improvement”.
Warren and Whitehouse called that “the wrong conclusion to draw from an embarrassing and intolerable set of findings”. They said the inspections in fact indicated that “investors and the public essentially face a coin flip when it comes to whether they should believe and trust the results of public companies’ audits”.
The PCAOB said it would respond to the senators directly, but added: “We share the same commitment to quality audits, and we will continue to work with them on our shared goal of protecting investors.”
Williams has in the past promised to use “every tool in the toolbox” provided by Congress to hold audit firms to account, and under her tenure the PCAOB has levied record fines in each of the past three years.
BDO said it is investing in improving its audit-quality scores and has built up external oversight of its processes.