The reliability of financial reporting is a foundation for the functioning of capital markets. These markets are both transparent and stable. Financial statement audits are considered independently by investors, regulators, and other market participants as a means of confirming that the financial information presented by companies fairly depicts their economic reality.
Oversight of audits and regulatory framework
Absent credible oversight of these audits, the loss of investor confidence in capital markets may be accelerated, and therefore increases the potential for systemic risk.
Multiple levels have been created within the audit regulatory framework in the United States to support public accounting firm accountability. In addition to the mechanisms designed to ensure auditors adhere to professional standards and comply with the ethical obligations of their profession, mechanisms are also provided to ensure that auditors remain independent while examining a company’s financial report.
In addition to this framework, the responsibility to enforce actions against auditors whose behavior fails to meet the professional standards they are expected to follow and/or who behave unacceptably must be established. As financial markets grow more complex and as corporate structures become increasingly complicated, regulators have emphasized the need to continually improve the performance of institutions responsible for ensuring the quality of audits.
Improving governance, strengthening internal control mechanisms, and ensuring that publicly accountable institutions will continue to function in a manner that serves the best interests of the public is essential to maintaining and sustaining investor confidence in U.S. capital markets.
Intensifying regulatory oversight and debate regarding efficiency
These appointments were made in response to ongoing discussions regarding the level of regulatory oversight intensity. They were also made in response to the degree of efficiency of U.S. capital markets. Proponents of strong regulatory oversight contend that such oversight will reduce the risk of inaccurate audit reports (i.e., misstatements) by auditors.
This reduction should help to maintain investor confidence. It should also promote a stable financial environment. On the other hand, opponents of regulatory oversight contend that overly aggressive oversight will increase the costs associated with compliance for accounting firms and may hinder their ability to provide effective services.
It appears that the SEC’s expressed intention to improve the efficiency of the regulatory process reflects its attempt to find a balance between achieving the objectives of regulatory oversight. It also reflects the realities of the competitive marketplace.
PCAOB appointments and professional expertise
The Securities and Exchange Commission (SEC) announced today that it has appointed Demetrios “Jim” Logothetis as the Chairman of the Public Company Accounting Oversight Board (PCAOB). The SEC also appointed new members, Mark Calabria, Kyle Hauptman, and Steven Laughton. George Botic will remain the Acting Chairman of the PCAOB until Mr. Logothetis is sworn in.
SEC Chairman Paul S. Atkins described the appointments as the beginning of a new era for the PCAOB. He stated that the board would focus on performing its core statutory duties. It will also focus on building confidence in the audit oversight process.
Mr. Calabria, who is currently an Associate Director and Chief Statistician at the Office of Management and Budget, will bring experience in economics and regulatory policy to the PCAOB. Mr. Hauptman will add experience from his present position as Vice Chairman of the National Credit Union Administration. Mr. Laughton will provide legal and policy experience from the U.S. Department of the Treasury, where he worked on issues of cybersecurity and consumer financial protection.
Collectively, the three appointees represent a broad array of disciplines related to accounting, economics, regulation, and law. These disciplines may affect how the PCAOB performs inspections. Ultimately, the appointment of Mr. Logothetis and the other members of the PCAOB represents the SEC’s intention to recalibrate the governance structure of audit oversight. It also aims to enhance the accountability of institutions responsible for that oversight.
