According to the bill, the CFPB’s budget would take a big hit as well as its penalty money obtained from enforcement actions. The funds received from these enforcement actions will be used for victim compensation with the leftovers being sent to the Treasury. Specifically, the legislation will require that “if the Bureau makes payments to all of the direct victims of activities for which that civil penalty was imposed, the Bureau shall transfer all amounts that remain in the Civil Penalty Fund with respect to that civil penalty to the general fund of the Treasury.”

Essentially, the CFPB’s budget would decrease around 60% and its funding from the Federal Reserve would be capped at 5% of the central bank’s operating expenses under the proposal — down from the current limit of 12% as laid out in the Dodd-Frank Act.

The Legislation Represents Larger Effort to Cut Government Spending

The CFPB has come under a significant amount of fire since the start of the Trump administration. There have been many efforts by President Trump to dismantle the agency such as attempted mass firings, an order to suspend agency operations, and so on.

This legislation represents a broader effort by Republicans to create at least $1.5 trillion in spending cuts in order to pass a $5 trillion tax cut as part of President Trump’s policy agenda. “For too long, government spending has been on a one-way ratchet,” House Financial Services Committee Chairman French Hill, R-Ark., said at the start of Wednesday’s markup. “We are here with one purpose, to do our part to put our nation back on a responsible fiscal trajectory.”

Republicans are in support of this funding as they see it as a means towards diminishing “reckless government spending.” Meanwhile Democrats perceive the bill as hypocritical in that such substantial spending cuts themselves are “reckless.” Accordingly, many Democrats believe that the CFPB runs a profitable business, putting more money in consumer pockets than the expenses it incurs to do so.

PCAOB to be Dissolved Into the SEC

Under the proposed legislation, the PCAOB, known to oversee the audits of public companies, will merge into the SEC. This results from Republican criticism of the agency that it lacks accountability and transparency. The SEC would essentially assume the duties and responsibilities of the PCAOB.

While many are in support of such a significant move, many believe that such a move is not practical. Congresswoman Janelle Bynum cautioned against merging the PCAOB into the SEC, describing the proposal as a significant and potentially risky shift that demands closer examination. She urged Republicans to “pump the brakes” and introduced an amendment that would delay the transfer of oversight authority until the SEC can confirm that the change would not heighten investor risk.

In contrast, many believe that that such a move is crucial towards President Trump’s government spending agenda. “I appreciate my colleague’s newfound passion for fiscal discipline,” Congresswoman Ann Wagner said. “However, the committee print before us today is a result of extensive member input to deliver on the promise to rein in out-of-control spending.  

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Over a nearly two-year period, personnel in PwC Singapore’s Independence Office developed and implemented various methods to understate the rates at which the PwC personnel failed to properly or timely disclose their financial interests and relationships. These methods involved misclassifying certain of those failures – known as PICT exceptions – as self-reported. As a result, on two separate occasions the firm provided understated PICT exception rates to the PCAOB in order to address prior PCAOB inspection findings.

“The PCAOB found that firm leadership’s focus on achieving a targeted PICT exception rate, combined with a lack of appropriate PICT-related policies and procedures and related controls, enabled the independence office’s misconduct,” the PCAOB said. “The PCAOB also found that the firm failed to give appropriate consideration to the assignment of quality control responsibilities when selecting the individual it appointed as its partner responsible for independence.”

The PCAOB found that PwC Singapore’s leadership’s focus on achieving a targeted PICT exception rate, combined with a lack of appropriate PICT-related policies and procedures and related controls, enabled the Independence Office’s misconduct. The PCAOB also found that the firm failed to give appropriate consideration to the assignment of quality control responsibilities when selecting the individual it appointed as its Partner Responsible for Independence.

“It is imperative that firms maintain an appropriate ethical culture in all aspects of their system of quality control,” said Robert E. Rice, Director of the PCAOB’s Division of Enforcement and Investigations (DEI). “Firms must properly monitor and report on compliance with their independence-related policies and procedures to ensure the Board and investors have accurate information.”

PwC Singapore’s Cooperation Credit

The PCAOB board noted that it took PwC Singapore’s “extraordinary cooperation in this matter.” Specifically, the firm shared with the PCAOB the results of its internal investigation which revealed the circumstances surrounding the Independence Office’s efforts to improperly reduce the Firm’s reported PICT exception rates.

Without admitting or denying the Board’s findings, PwC Singapore agreed to settle the PCAOB’s allegations, which ultimately imposed a $1.5 million penalty. PwC Singapore is also required to undertake certain remedial measures to establish, revise, or supplement, as necessary, policies and procedures, including monitoring procedures, related to the Firm’s independence processes.  

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The PCAOB proposal would amend Rule 3502, Responsibility Not to Knowingly or Recklessly Contribute to Violations, by updating the threshold for liability from recklessness to negligence—allowing the PCAOB to hold auditors accountable for failing to exercise the same standard of reasonable care and competence they are already required to exercise anytime they are executing their professional duties.

The rule, originally enacted in 2005, governs the liability of associated persons who contribute to registered public accounting firms’ violations of the laws, rules, and standards that the PCAOB enforces.

“This proposal is simply updating PCAOB rules to match what investors already expect: that auditors act with reasonable care whenever they are performing their duties—and when an auditor’s negligence results in firm violations that can put investors at risk, the PCAOB has tools to hold them accountable,” said PCAOB Chair Erica Y. Williams.

Rule 3502’s purpose is to enable the Board to hold accountable associated persons of PCAOB-registered firms who directly and substantially contribute to violations committed by registered firms.

The PCAOB proposal intends to better protect investors with two key updates:

1. It strengthens accountability for those who put investors at risk by updating the threshold for liability.

Auditors are already required to exercise reasonable care anytime they perform an audit – and failure to do so constitutes “negligence.”

The current Rule 3502, however, only allows auditors to be held liable for firms’ violations when they “recklessly” contribute to those violations – which represents a greater departure from the standard of care than negligence. This means even when a firm commits a violation negligently, an associated person who directly and substantially contributed to the firm’s violation can be sanctioned only if the PCAOB shows that the associated person acted recklessly.

The proposal, if adopted, would update Rule 3502’s liability standard from recklessness to negligence, aligning it with the same standard of reasonable care auditors are already required to exercise anytime they are executing their professional duties. Similarly, the U.S. Securities and Exchange Commission already has the ability to bring enforcement actions against associated persons when they negligently cause firm violations.

The proposal maintains the requirement under the current version of Rule 3502 that an associated person must have contributed to the firm’s violation both “directly and substantially” in order to be held liable.

2. It clarifies the relationship between the contributory actor and the primary violator.

To be held liable under the current Rule 3502, an associated person who contributes to a firm’s violation must be an associated person of that particular firm. Given the increasing complexity of arrangements among firms and the constantly evolving nature of technology, the proposal clarifies that associated persons of any firm can be held liable as long as their conduct at least negligently, and directly and substantially, contributes to any firm’s violation, not just violations by a firm with which they are associated.

“It is important to understand, auditors are already required to exercise reasonable care or competence anytime they perform an audit—meaning they are prohibited from being negligent today,” said Chair Williams in a recent speech on the proposal. “Similarly, the U.S. Securities and Exchange Commission already has the ability to seek penalties in enforcement actions against associated persons when they negligently cause firm violations. So, there is no reason this proposal should cost auditors significant time, resources, or money,” she said.

Throughout the proposal, the Board requests comments on specific aspects of the proposed amendments. The deadline for public comment on the proposal is November 3, 2023.  

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According to the PCAOB’s disciplinary order, CohnReznick failed to timely disclose four reportable events on the PCAOB’s Form 3 regarding two disciplinary proceedings brought by the SEC against the firm and three of its partners. The SEC case concerned improper professional conduct by CohnReznick on engagements for two clients in 2017, which resulted in a $2 million settlement with the SEC in June 2022.

Under PCAOB Rule 2203, Special Reports, this event was supposed to be reported to the PCAOB within 30 days of the event’s occurrence. CohnReznick violated this rule, because it did not make the required disclosures about the SEC’s disciplinary proceedings involving the firm and its personnel until roughly five months after the deadline, the PCAOB said.

Failure in Compliance

“CohnReznick’s internal compliance and reporting systems failed to identify the initiation and conclusion of the Commission proceedings against CohnReznick and the firm’s partners as being reportable to the PCAOB on Form 3 on a timely basis,” the PCAOB’s disciplinary order stated. “As a result, CohnReznick inappropriately notified the PCAOB of the initiation and conclusion of relevant disciplinary proceedings after the deadline for doing so.”

Other audit firms should take note of this enforcement action, as the PCAOB has increased its vigilance over firms’ failures to disclose required events on Form 3, and within the required timeframe. “Registered firms must report qualifying events on Form 3 on a timely basis so that such information is available to investors and can be used as part of the Board’s oversight of those firms,” said Robert Rice, PCAOB Director of Enforcement and Investigations.

In addition to the civil penalty, the order further requires CohnReznick to comply with its PCAOB reporting policies and procedures, “including those pertaining to providing reasonable assurance that reportable events are reported on the applicable PCAOB form in a timely and complete manner.”

CohnReznick did not admit or deny the findings in consenting to the PCAOB’s order. 

Jaclyn Jaeger is a contributing editor at Compliance Chief 360° and a freelance business writer based in Manchester, New Hampshire.

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In settlements announced Oct. 18, the PCAOB imposed civil money penalties of $150,000 each against audit partner, Jonathan Taylor, and New York-based accounting firm Spielman Koenigsberg & Parker (SKP), where Taylor was a partner.

Additionally, the PCAOB has censured and permanently barred Taylor from association with a registered public accounting firm and further revoked SKP’s PCAOB registration and censured the firm “for failing to establish and implement adequate quality control policies and procedures with respect to audits of issuers.”

The PCAOB said SKP can reapply for registration after five years if the firm “adopts policies and conducts training related to audits of issuers before filing any future registration application.”

Audit Misconduct
In anticipation of a PCAOB inspection in 2021, “Taylor coordinated a months-long effort involving other SKP professionals to alter and backdate audit work papers and then made those work papers available to the inspectors,” the PCAOB said in its order. Taylor then “made false statements to the inspectors about whether those work papers had been improperly altered, even after they pointed out modification dates appearing in the firm’s audit software that suggested the contrary.”

Specifically, Taylor and other SKP professionals backdated multiple work papers for 2019 audits. Approximately 80 of 145 work papers beared false signoffs, the PCAOB said. In a subsequent PCAOB investigation regarding the alleged conduct, Taylor repeatedly provided investigators with false and misleading information.

“Taylor misled investigators regarding whether engagement quality reviews (EQRs) were performed, when and what kinds of alterations were made to work papers, and whether SKP had certain documents in its possession,” the PCAOB said in its order. “Taylor also represented that his productions on SKP’s behalf in response to document demands from the investigators were complete—while withholding thousands of responsive documents, including documents that evidenced Taylor’s misconduct.”

Quality Control Failures
According to the PCAOB, the only issuer clients SKP has ever audited were a pair of contribution plans covering certain salaried and hourly employees of clothing company PVH. “Having decided to perform audits of issuers, however, SKP was obligated to design and implement policies and procedures, including monitoring procedures, to provide reasonable assurance of compliance with regulatory requirements applicable to issuer audits,” the PCAOB said in its order against the firm. “SKP failed to do so.”

SKP’s quality control policies and procedures from 2018 to 2021 “were not suitably designed and effectively applied to provide reasonable assurance that the work performed by its engagement personnel met PCAOB audit documentation requirements,” the PCAOB said in its order against SKP.

“For example, SKP’s quality control policies and procedures did not address whether or how its engagement personnel could add, modify, or delete audit documentation following the documentation completion date” or “the need to retain records relevant to the audit for a seven-year period after conclusion of an issuer audit.”

The PCAOB said SKP also failed to design or implement other policies and procedures to prevent or detect improper alterations of audit documentation after the documentation completion date. “These quality control failures increased the risk that work papers might be improperly altered after the documentation completion date,” the PCAOB said.

Compliance Message
The PCAOB’s action comes at a time when the Board has warned it is enhancing its enforcement approach, including by increasing average penalties, pursuing first-of-their-kind enforcement actions, and taking steps to proactively seek out wrongdoing by increasing the use of enforcement sweeps against firms where a violation of PCAOB standards or rules may have occurred.

“The Board will take action to protect investors from bad actors and impose consequences on those who put the integrity of our capital markets at risk,” said PCAOB Chair Erica Williams.

“The quality control systems at audit firms are fundamental to audit quality and regulatory compliance,” said Mark Adler, PCAOB Acting Director of the Division of Enforcement and Investigation. “Registered firms must take care to establish and implement policies and procedures directed to meaningful monitoring and robust compliance with regulatory requirements.” 

Jaclyn Jaeger is a contributing editor at Compliance Chief 360° and a freelance business writer based in Manchester, New Hampshire.

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Failure to file Form APs in a timely manner is a violation of PCAOB Rule 3211, “Auditor Reporting of Certain Audit Participants.”

In its sanctions, announced Oct. 4, the PCAOB said audit firm Yarel + Partners received a $35,000 civil money penalty and censure, and the following three audit firms received a $20,000 civil penalty and censure: Shanghai Perfect CPA Partnership; James Pai; and Liebman Goldberg & Hymowitz.

The firms — without admitting or denying the findings—consented to the PCAOB’s orders and disciplinary actions. Each firm also consented to undertake remedial measures to establish policies and procedures directed toward ensuring future compliance with PCAOB reporting requirements.

“All four firms have since filed the Form APs in question, but only after the PCAOB took action,” the PCAOB said.

The PCAOB said it discovered the firms’ violations during a sweep, in which it was collecting information about potential violations from several firms simultaneously. The sanctions follow an announcement that PCAOB Board Chair Erica Williams made in July that PCAOB would be conducting sweeps as part of its overall effort to strengthen enforcement.

“Investors and the public rely on Form AP disclosures to understand exactly who has a hand in the audits of public companies,” Williams said. “Timely disclosure is critical for transparency and accountability in our capital markets, and the PCAOB will be vigilant in enforcing disclosure rules.” 

Jaclyn Jaeger is a contributing editor at Compliance Chief 360° and a freelance business writer based in Manchester, New Hampshire.

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According to SEC data, more than 200 U.S.-listed Chinese companies face the risk of being delisted from U.S. securities exchanges under the Holding Foreign Companies Accountable Act (HFCAA). Under the HFCAA, Chinese companies that cannot be fully inspected or investigated by the Public Company Accounting Oversight Board (PCAOB), the top U.S. audit regulator, by 2024 would be prohibited from being listed on U.S. securities exchanges.

To avoid trading prohibitions, many China- and Hong Kong-based companies have begun to structure their audit engagements with registered public accounting firms located either in the United States or elsewhere. However, these new arrangements raise new concerns about whether the newly engaged audit firms meet their responsibilities as a lead auditor.

In a statement, Paul Munter, acting chief accountant at the SEC, said the newly retained accounting firm “should communicate with the predecessor accounting firm and evaluate the information obtained prior to accepting the engagement. Critically, the predecessor accounting firm should respond fully to any inquiries that the new accounting firm makes under applicable PCAOB standards, including any requests for access to the work papers of the predecessor accounting firm relating to audits of previous financial statement periods.”

Additionally, Munter said the newly engaged accounting firm should make inquiries of the predecessor accounting firm about the following matters:

• The integrity of the company’s management;
• Any disagreements with management that the predecessor firm may have had regarding accounting principles or other significant matters encountered during the previous audit(s);
• Communications of matters between the predecessor firm and the company’s audit committee;
• The predecessor firm’s understanding of the nature of the company’s relationships and transactions with related parties and any significant unusual transactions; and
• The predecessor auditor’s understanding as to the reasons for the change of auditors.

“If the issuer does not authorize appropriate communications, or places significant limitations on the responses of its predecessor accounting firm, the new accounting firm may not be able to accept the engagement and be in compliance with applicable PCAOB standards,” Munter stated. “The same is true if the predecessor auditor creates roadblocks and fails to engage in appropriate communications or to provide requested information, including prior work papers.”

In his closing remarks, Munter further warned, “The failure of the retained lead auditor to meet any of its legal or professional obligations with respect to PCAOB inspection and investigative demands, or the failure of the lead auditor to comply with all applicable audit standards can result in significant liability for not only the auditor and its personnel, but also for the issuer.” Thus, such compliance violations should be avoided.

Accessibility to financial statements and work papers has historically been the biggest issue concerning Chinese public companies listed on U.S. securities exchanges, because of the Chinese government’s tendency to block access to audit reports. In August, the PCAOB reached an agreement with Chinese regulators that would grant the PCAOB complete access to the audit work papers, audit personnel, and other information needed to inspect and investigate public accounting firms headquartered in mainland China and Hong Kong. 

Jaclyn Jaeger is a contributing editor at Compliance Chief 360° and a freelance business writer based in Manchester, New Hampshire.

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The Public Company Accounting Oversight Board inspects and investigates public accounting firms in more than 50 jurisdictions around the world, consistent with its mandate under the Sarbanes-Oxley Act. But for more than a decade, positions taken by authorities in the People’s Republic of China (PRC) have obstructed the PCAOB’s access to completely inspect and investigate registered public accounting firms in mainland China and Hong Kong.

The PCAOB received a leg up in 2020, when Congress passed the Holding Foreign Companies Accountable Act (HFCAA), which called on the Securities and Exchange Commission to ban trading of U.S.-listed securities of China-based companies if obstacles to PCAOB access persist. “The U.S. Congress sent a strong message with the passage of the [HFCAA] that access to the U.S. capital markets is a privilege, not a right,” stated PCAOB Chair Erica Williams. “The PCAOB has been working to execute our mandate under the law.”

As part of this ongoing effort, the PCAOB signed a “Statement of Protocol” with the China Securities Regulatory Commission and the Ministry of Finance of the People’s Republic of China this week. “On paper, the agreement…grants the PCAOB complete access to the audit work papers, audit personnel, and other information we need to inspect and investigate any firm we choose, with no loopholes and no exceptions—but the real test will be whether the words agreed to on paper translate into complete access in practice,” Williams said.

According to the PCAOB, the Statement of Protocol grants the PCAOB complete access in the following three important ways:

• The PCAOB has sole discretion to select the firms, audit engagements and potential violations it inspects and investigates—without consultation with, nor input from, Chinese authorities.
• Procedures are in place for PCAOB inspectors and investigators to view complete audit work papers with all information included and for the PCAOB to retain information as needed.
• The PCAOB has direct access to interview and take testimony from all personnel associated with the audits the PCAOB inspects or investigates.

Last year, the PCAOB said it determined the positions taken by PRC authorities prevented it from inspecting and investigating in mainland China and Hong Kong completely. The PCAOB must now reassess its determinations by the end of 2022. The PCAOB inspection team has been directed to finalize their preparations to be on the ground by mid-September to “put this agreement to the test,” Williams said.

“Our dedicated teams of professionals have been preparing for this moment for months, and they are ready to work swiftly, but thoroughly, to carry out our inspections and investigations,” Williams added. “Whether our teams are able to complete that work without obstruction will inform the PCAOB’s determinations at the end of this year.” 

Jaclyn Jaeger is a contributing editor at Compliance Chief 360° and a freelance business writer based in Manchester, New Hampshire.

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As companies increase their global presence, the use of additional audit firms has become more prevalent in the conduct of external audits. In 2021, 26 percent of all public company audit engagements used multiple auditors, and nearly 30 percent of these audits involved at least five audit firms, according to the PCAOB.

Using multiple auditors, however, can create coordination and communication challenges for lead auditors, noted PCAOB Chair Erica Williams. “When miscommunication occurs or when there are misunderstandings about the nature, timing, and extent of the other auditor’s procedures, audit quality will likely suffer,” Williams said in a prepared statement.

In fact, the PCAOB continues to observe “enforcement cases and inspection deficiencies that point to failures by certain lead auditors overseeing the work of other auditors,” signaling room for improvement, Williams added.

The move is the first by the rebuilt PCAOB after a period of turbulence and relatively little action.

Increased Oversight
The new amendments, which include changes to existing standards and adoption of a new standard (AS 1206, Dividing Responsibility for the Audit With Another Accounting Firm), improve PCAOB standards principally by:

• Specifying certain procedures for the lead auditor to perform when planning and supervising an audit that involves other auditors; and
• Applying a risk-based supervisory approach to the lead auditor’s oversight of other auditors for whose work the lead auditor assumes responsibility.

“Enhancing the lead auditor’s supervision of other auditors, including through better coordination and communication, should result in increased investor protection by improving the lead auditor’s ability to prevent or detect deficiencies in the work of other auditors before the audit report is issued,” Williams said.

The amendments “provide for the lead auditor to perform specific procedures regarding other auditors’ understanding of, and compliance with, independence and ethics requirements and regarding the knowledge, skill, and ability of other auditors participating in planning and supervision activities,” said Duane DesParte, a PCAOB board member.

Overall, the amendments “clarify and strengthen the roles and accountabilities of the lead auditor and other auditors, thereby improving audit quality,” DesParte said.

The amendments apply to all audits conducted under PCAOB standards. Subject to approval by the Securities and Exchange Commission, the amendments will take effect for audits of financial statements for fiscal years ending on or after Dec. 15, 2024.  

Jaclyn Jaeger is a contributing editor at Internal Audit 360° and a freelance business writer based in Manchester, New Hampshire.

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