Dear Secretary Countryman:
The U.S. Chamber of Commerce Center for Capital Markets Competitiveness (“Chamber”) respectfully submits the following comments on the Notice of Filing of the Public Company Accounting Oversight Board (“PCAOB” or “Board”) Proposed Rules on Firm and Engagement Metrics and Related Amendments (“Proposed Rules” or “adopting release”). The Securities and Exchange Commission’s (“SEC”) comment period for the Proposed Rules is insufficient to solicit a broad swath of comments, particularly because the comment period extends over several common year-end holidays.
The SEC should not approve the Proposed Rules for the following reasons:
- The adopting release inappropriately dismisses concerns that the Proposed Rules are not fit for purpose;
- The proposed disclosures fall woefully short of standard materiality application, which is the lodestar for regulatory disclosure requirements, and the adopting release fails to address concerns that the metrics are not material information;
- The adopting release fails to adequately address concerns that run counter to PCAOB beliefs on standardization and comparability that underpin the Proposed Rules;
- The PCAOB did not re-expose the Proposed Rules for public comment or at least re-expose portions, including the newly added training metrics, further contravening due process and the approach of prior Boards;
- The adopting release inappropriately dismisses concerns that the Proposed Rules allow no tolerance for unintentional errors – no matter how small or de minimis;
- The economic analysis fails to even-handedly assess comments, concerns, and evidence on need, benefits, costs, consequences, and alternatives and falls far short of demonstrating that the Proposed Rules are necessary or appropriate for the protection of investors and will promote efficiency, competition, and capital formation.
Discussion
The Proposed Rules do not update nor modernize the PCAOB’s interim auditing standards or otherwise revise auditor performance standards with an objective of improving audit quality. Rather, the Proposed Rules would impose a sweeping new audit firm disclosure regime for firm and engagement metrics in a rushed rulemaking.
The SEC also rushed due process by submitting the Proposed Rules to the Federal Register within two business days of Board adoption and allowing only a few weeks for comments (i.e., twenty-one days from publication in the Federal Register). The SEC’s approach ignores stakeholder requests that “the Commission consider the options it has to afford sufficient time for stakeholders to review the rules and participate in a robust comment process,” including extension of the period to act on the Proposed Rules by another forty-five days.[1] The rushed approach to finalize rulemaking is also counter to views expressed by members of the U.S. Congress.[2]
Other factors reinforce the need for an extended comment period. The adopting release is complicated and lengthy (335 pages) and the PCAOB adopted the Proposed Rules just before the Thanksgiving holiday. A short SEC comment period during December also coincides with a time-constrained period for stakeholders, given other year-end financial reporting and audit-related demands and the Christmas and New Year holidays. Further, the PCAOB adopted the Proposed Rules together with others on Firm Reporting and the SEC submitted both rulemakings to the Federal Register the same day,[3] which challenges stakeholders with overlapping comment periods on two significant PCAOB rulemakings.
Most commenters on the PCAOB’s April proposal did not support the proposed metrics disclosure and over seventy percent expressed concerns.[4] In response, the Proposed Rules reflect revisions to the requirements proposed for comment. However, substantive issues remain. Further, the adopting release rejects offers to pilot test proposed metrics and preferable alternatives advanced by stakeholders in the spirit of cooperating on a path forward for a reasonable audit metric disclosure framework.
The adopting release inappropriately dismisses concerns that the Proposed Rules are not fit for purpose.
The PCAOB’s investor protection mission under SOX is focused on “driving audit quality forward.”[5] However, the Proposed Rules are not focused on improving audit quality.
The Proposed Rules require disclosure of 65 different metrics (numbers) – 45 (in eight categories) at the firm level and 20 (in six categories) at the engagement level.[6] The firm metrics are required to be disclosed by every firm that audits at least one accelerated or large accelerated filer and the engagement metrics for every audit of such filers.[7] The Proposed Rules also prescribe, in great detail, the inputs to and computation of each number, including rounding.
Comments on the file to the PCAOB explain that the prescribed metrics are flawed proxies for assessing audit quality. The metrics are not aligned with how audit firms manage and monitor their audit practices or relevant to how audit firms view audit quality in their systems of quality control.
Nonetheless, the adopting release attempts ‘to have it both ways.’ On one hand, it maintains the metrics are needed by investors and audit committees as “decision-useful” information to assess the quality of an audit firm’s services overall and on each engagement. On the other hand, the adopting release acknowledges that the metrics are not audit quality indicators (either individually or collectively); that the specified metrics, inputs, and/or formulas are not consistent with those currently used by audit firms in their quality control processes; and that audit firms may not find the metrics useful in monitoring their quality controls and assessing audit quality. Given these considerations, the Proposed Rules (reasonably and appropriately) do not require audit firms to use the metrics internally or disclose them in audit firm audit quality and transparency reports.
However, the adopting release ignores the essential problem: A regulatory mandate for a one-size-fits-all set of granular metrics with detailed specifics on definitions, data inputs, and calculations for each metric (including rounding) - where the required metrics are not consistent with those used by firms for monitoring quality controls and assessing audit quality – cannot and does not result in “decision-useful” information for investors or audit committees. Further, mandated metrics are “cast in concrete” and cannot evolve over time with the evolution of audit practice, the use of technology by auditors and companies, and the regulatory and business environment.
The Proposed Rules create a metric disclosure regime grounded in a laborious compliance exercise and risk undermining audit quality by redirecting time and resources to such activities.
The adopting release ignores that the Proposed Rules are not fit for purpose.[8] In this regard, it is doubtful that the Proposed Rules can pass muster under the recent Fifth Circuit Appeals Court decision in Alliance for Fair Board Recruitment et al. v. SEC.[9]
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[1] See the letter to the SEC from the Center for Audit Quality (“CAQ”) on Firm and Engagement Metrics and Firm Reporting dated November 22, 2024.
[2] See letters from Representative French Hill and Senator Tim Scott. Available at: Scott Letter on Rulemaking and Nominations; e559a2dd-e8c4-4f98-85e3-29ebfbe0ad06.pdf.
[3] See the SEC Notice of Filing of PCAOB Proposed Rules on Firm Reporting (Release No. 34-101723; File No. PCAOB-2024-07) (November 25, 2024).
[4] See the Statement by Board Member Ho on the Firm & Engagement Metrics Adopting Release – Will This Unusually Rushed Auditing Standard Suffer the Same Fate of the Auditing Standard 2? dated November 21, 2024.
[5] For example, see the Message from the Chair in the PCAOB 2023 Annual Report (page 4).
[6] Firm-level metrics are reported to the PCAOB as of September 30th of each year on a new Form FM, Firm Metrics. Engagement-level metrics for audits of accelerated and large accelerated filers are reported on a revised Form AP, Audit Participants and Metrics, within 35 days after the date the audit report is first included in a document filed with the SEC.
[7] The PCAOB estimates that about 210 audit firms will be subject to the firm-level disclosure requirements and approximately 3,400 accelerated and large accelerated filer audits will be subject to the engagement-level disclosure. Based on registration information on the PCAOB website (at November 26, 2024), 210 firms encompass almost half of the 438 audit firms that currently provide audit reports for at least one issuer.
[8] In voting against adopting the Proposed Rules, Board Member Ho questioned whether the Proposed Rules are fit for purpose and emphasized that the rules and the rulemaking process fail to align with the principles of the Paperwork Reduction Act. See the Statement by Board Member Ho on the Firm & Engagement Metrics Adopting Release – Will This Unusually Rushed Auditing Standard Suffer the Same Fate of the Auditing Standard 2? dated November 21, 2024.
[9] See Alliance for Fair Board Recruitment; National Center for Public Policy Research v. Securities and Exchange Commission, U.S. Court of Appeals Fifth Circuit (Case No. 21-60626), filed December 11, 2024.