SEC, Watchdog Must Rethink Their Approach to US Audit Standards

The auditing profession has come under immense scrutiny in recent years, as the Public Company Accounting Oversight Board has dramatically increased enforcement fines, set an aggressive standard-setting agenda, and created a opaque audit inspection framework.

This trajectory has created an environment where auditors focus more on satisfying regulatory checklists than exercising professional judgment. Worse yet, firms continue to leave the auditing sector—a look at annual market share analysis of audit engagements of SEC registrants shows that 19 firms left between 2023 and 2024.

Through my conversations with regulators and audit professionals, a few key areas have emerged as priorities to ensure the audit profession thrives in 2025 and beyond. The PCAOB and the Securities and Exchange Commission can turn the page and recalibrate their oversight, prioritizing reforms that enhance audit quality without imposing unnecessary burdens.

Overhauling the Process

Audit inspections should provide meaningful insights into audit quality, yet today’s system misrepresents the true realities.

Take, for example, the 46% deficiency rate reported in PCAOB’s 2023 inspections. At face value, this number is alarming, but deeper analysis tells a different story. Only 5% of inspected audits in 2023 resulted in incorrect audit reports.

Restatements due to PCAOB inspections have remained below 1% since 2009 and dropped to 0.5% from 2017 to 2021. Material restatements decreased from 28% to 18% between 2013 and 2022.

Despite these positive trends, the PCAOB’s vague and inconsistent terminology, coupled with its pass-fail approach, creates unnecessary alarm rather than fostering continuous improvement. This issue even garnered the attention of Sen. Elizabeth Warren (D-Mass.) and Sen. Sheldon Whitehouse (D-R.I.), who penned a letter to the PCAOB in the fall, adding fuel to the fire.

To improve transparency, the PCAOB should consider revising the inspection reporting model to distinguish between minor issues and critical failures. Clarifying language in inspection reports would properly categorize deficiencies based on impact and magnitude, rather than simply checking enough “boxes” to ensure a passing grade.

Greater transparency in reporting also would help regulators, investors, and auditors develop an accurate understanding of audit performance.

Without these changes, policymakers and the public will continue to misinterpret inspection findings, leading to unwarranted skepticism of the profession and a continued exodus of qualified auditors.

Realigning Enforcement

The PCAOB’s enforcement actions skyrocketed to $35.5 million in 2024, a sharp rise from the $2.6 million average between 2014 and 2021. This increase is not due to a rise in financial statement restatements or audit failures, but rather an expansion of regulatory penalties for administrative issues.

Enforcement is critical to maintaining high standards, but a well-functioning enforcement program should prioritize remediation over punishment. Firms should focus on addressing substantive audit concerns rather than navigating procedural compliance.

Like inspection reports, enforcement measures should distinguish between material and non-material deficiencies, avoiding punitive measures for administrative issues that don’t affect audit reliability.

Greater oversight of the PCAOB’s enforcement authority would maintain a fair and accountable process. Excessive regulatory risks and fines discourage firms from entering or remaining in the profession.

Enforcement measures must be redesigned to support audit quality and greater accuracy, rather than deterring firms from the profession altogether.

Standard-Setting Reforms

Future standard-setting must align with the evolving financial reporting environment, prioritizing guidance in emerging areas like artificial intelligence and areas of uncertainty.

The focus should shift from regulatory volume to regulatory quality. Innovative approaches, such as pilot testing, could be used more often to determine the viability of proposals and test novel concepts such as continuous monitoring.

Audit standard-setting should be driven by research, data, and industry needs rather than political shifts or reactionary rulemaking.

Tight response windows for PCAOB proposals have frustrated stakeholders. For example, on April 9, the board released two significant proposals, one on firm and engagement metrics and another on firm reporting, with responses due by June 6, 2024. Meanwhile, the PCAOB finalized and adopted two other significant projects on May 13 that contained overlapping provisions in the April 9 proposals.

The board denied requests by the Center for Audit Quality and the PICPA for more time to provide meaningful input, and adopted the April 9 proposals in late November. A subsequent 21-day comment period set off a marathon race to respond. The SEC eventually extended the comment period, but in the end, the PCAOB withdrew the proposals on Feb. 18.

To improve the standard-setting process, the SEC and PCAOB should prioritize board members with deep expertise in auditing, financial reporting, and technology. More importantly, the board should remain independent of political pressure to develop standards that truly enhance audit quality.

Substantive economic analysis must be conducted to assess the cost-benefit impact of new proposals, considering their cumulative effect on firms of all sizes. Additionally, public response periods should be extended to at least 90 days to allow for thoughtful industry feedback, and longer when multiple major proposals are outstanding.

Long-Term Accountability

Beyond immediate rulemaking, structural reforms are needed to ensure regulatory oversight remains balanced and effective. The PCAOB’s relationship with the SEC may be due for reassessment.

Objectivity at the highest levels is crucial for thoughtful and unbiased proposals to move forward under reasonable timelines with a clear process, while avoiding conflicts of interest. These reforms could restore trust and communication between regulators and auditors.

The SEC and PCAOB face a defining moment. By prioritizing balanced, research-driven reforms, they can establish a regulatory framework that enhances transparency in audit inspections, emphasizes remediation over punitive enforcement, and develops high-quality audit standards aligned with the evolving financial reporting landscape.

These reforms should incorporate rigorous economic analysis and meaningful stakeholder input, ultimately strengthening investor confidence without overburdening firms.

The current regulatory approach has created unnecessary burdens and inefficiencies that are already having a lasting impact on the profession. It’s time to build a regulatory environment that supports audit integrity rather than stifles it.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Allison Henry is vice president of professional and technical standards at the Pennsylvania Institute of Certified Public Accountants.

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