August 3, 2023
Office of the Secretary
Public Company Accounting Oversight Board
1666 K Street, NW
Washington, DC 20006
Dear Office of the Secretary:
We are pleased to provide comments to the board and staff on the recently issued proposing release:
Amendments to PCAOB Auditing Standards related to a company’s noncompliance with laws and regulations and other related amendments (the “proposal”). Baker Tilly US, LLP (“Baker Tilly,” “we,” or “our”) is currently an annually inspected public accounting firm auditing only slightly over 100 issuers, approximately 30 of which are employee benefit plan audits filing on Form 11-K. Our issuer audit practice consists primarily of smaller reporting companies in various industries, including financial institutions. We also perform audits of broker-dealers.
Although we are a top-10 ranked firm, our organization is in the PCAOB’s category of a non-affiliated firm (“NAF”), which is substantially different from a Global Network Firm (“GNF”).
We generally welcome the board’s efforts to modernize PCAOB auditing and quality control standards and rules; however, we are concerned that the pace of change is too rapid, and the scope is too significant. Each individual project on the board’s standard setting agenda represents incremental effort for audit firms and, in turn, costs to issuers and investors. We share board member DesParte’s concern that the ambitious agenda – and this project in particular – may contribute to a widening expectations gap1. While each individual project includes an economic analysis, we believe it is imperative that the impact of this and other projects are considered in aggregate, not just individually. For NAF firms like Baker Tilly, mustering the resources to effect all of the changes represents a significant burden as well as a resource allocation constraint, as the same personnel that would be tasked with implementing new standards are also responsible for supporting engagement teams during audits, supporting the PCAOB’s inspection process, conducting internal inspections, and designing, implementing, and monitoring remediation plans, among other responsibilities. While firms can and have hired additional resources to assist with these initiatives, the needs continue to increase with each new standard issued. We are concerned that the pace of standard setting and related risks may cause middle market audit firms to exit the public company audit market or significantly reduce their portfolios, thereby reducing competition in the market and narrowing the choices available to issuers, potentially harming investors in the process. To that end, we also share the concerns of board member Ho, who noted the proposal:
… contain[s] a breathtaking expansion of the auditors’ responsibilities, which I believe will hurt investors. This expansion could cause considerable confusion on the appropriate role of auditors, undermine the time-tested accountability framework, and reduce the resilience of the already highly concentrated audit marketplace. 2
As a matter of public policy, we do not believe this is the intention of the board, but the potential for unintended consequences is high with respect to this proposal, particularly when added to the other standards on the board’s agenda, as well as the related impact of new SEC rules or FASB standard
We have concerns with many aspects of the proposal, which generally relate to costs relative to benefits, and the skillsets needed to comply with the proposal. We summarize these concerns as follows:
First, AT-C Section 315 requires that the laws or regulations subject to the attestation engagement be specified. In stark contrast, the proposal puts the onus on the auditor to identify and assess laws or regulations with which noncompliance could reasonably have a material effect on the entity’s financial statements. Second, AT-C Section 315 includes preconditions for an engagement that require management’s assumption of responsibility and other steps, depending on the level of service of the engagement. For example, in an examination-level engagement, AT-C 315.09(b) includes a precondition that, “management evaluates the entity's compliance with specified requirements,” and paragraph .10 goes on to require a written assertion from management regarding its compliance with the specified requirements.
We believe these points are consistent with board Member Ho’s observation that the proposal “introduces ambiguities regarding auditor obligations to investors, by transforming the auditor’s role from one of providing reasonable assurance to one of performing a management function.”4 We wholeheartedly agree that it will be difficult for an auditor to perform the analysis required by the proposal if management is not required to do so by current SEC regulations.
We recognize that SEC rulemaking would significantly delay the board’s desired timeline, but we believe this would be a much more appropriate and practical course of action. We are also concerned with potential learning curve challenges for auditors, as assessing compliance with laws and regulations unrelated related to financial reporting is not even a part of the Uniform CPA Examination.
Despite the obvious significant effort by the Office of the Chief Auditor (“OCA”) and staff, we believe there is a critical need for a reset to conduct more research on this issue, including outreach to issuers, audit committees, audit firms of all sizes, legal experts, the SEC, standard setters from the AICPA and IAASB, and the investor community. We note the June 29, 2023 meeting of the PCAOB Standards and Emerging Issues Advisory Group (“SEIAG”) contained only a brief overview and limited discussion of the proposal; we believe a much deeper exploration of this proposal by the talented and diverse members of the SEIAG would be helpful and informative to the board and OCA staff. Comment letters are certainly an important part of the standard setting process, but we believe all stakeholders will benefit from more intentional discussion of the practical implementation challenges and economic impacts of the proposal.
We thank you for the opportunity to present our views on the proposal and appreciate your consideration. We would be pleased to discuss these comments further with you.
BAKER TILLY US, LLP