By Chris Prentice
NEW YORK (Reuters) -The chair of the U.S. accounting watchdog on Thursday warned against drastic changes to oversight of public companies’ auditors, a day after Republican lawmakers advanced legislation to effectively eliminate the group.
Erica Williams, chair of the Public Company Accounting Oversight Board, said the organization is vital to the millions of Americans invested in U.S. capital markets. Congress created the nonprofit PCAOB in 2002 as part of a law in response to a series of accounting scandals and auditing failures that led to the bankruptcies of Enron and WorldCom.
U.S. lawmakers on Wednesday voted in favor of draft legislation that would fold the organization’s responsibilities into the Securities and Exchange Commission, which currently oversees it. That plan, part of a sweeping bid to cut taxes and government spending, will now be included as part of a larger bill for both houses of Congress to consider.
Williams said the stakes were higher than ever for U.S. capital markets.
"The integrity of our markets is not inevitable," she said at an event at Baruch College in New York. "It takes vigilance to guard against negligence, recklessness, and fraud that threaten our system and the people who depend on it."
The PCAOB has long faced criticism over its executives’ pay and the way it handles oversight of auditors, which some see as too aggressive.
"The PCAOB is a thoughtful experiment gone really bad,” said Jacob Frenkel, a former SEC lawyer who now represents audit firms and professionals in PCAOB investigations. He said its work creates issues for smaller auditors in particular.
Under Williams, the watchdog has levied record fines against auditors and investigated the audits of Hong Kong and China-based firms for the first time.
There were, on average, significant improvements in audit quality across audit firms last year, Williams said. That followed a rise in audit deficiencies in recent years, a worrying sign for the quality of public company financials.
PCAOB proponents said the group has been integral in improving audit quality and that folding the organization into the SEC could minimize oversight of auditors and their work verifying public companies’ financials.
That improvement has been key to rebuilding and boosting investor confidence, said Paul Munter, former chief accountant at the SEC.
"Developing and maintaining trust is an ongoing effort. If you don’t continue to focus on it, there’s great risk," Munter said.
A GAP IN OVERSIGHT, AND INVESTOR RISK
The PCAOB has agreements all over the world to conduct reviews of auditors who review financial statements of companies listed on U.S. exchanges. That includes China, which in 2022 allowed U.S. examiners to review its auditors for the first time.
The PCAOB’s agreements, which took years to put into place, cannot be "cut and pasted" and will need to be renegotiated, Williams said.
"There will be a gap," Williams said in an interview on the sidelines of Thursday’s conference. "And we all know what happens when no one is watching. When the economy is tight, companies cook the books and investors get the short end of the stick."