The Public Company Accounting Oversight Board (PCAOB) oversees the audits of public corporations.

At the top of its website, the PCAOB declares that it is “driving continuous improvement in audit quality.”

But in a letter this week to the Securities and Exchange Commission (SEC),  a number of public interest leaders and public officials say that a recent PCAOB proposal to revise auditor independence rules “would weaken auditor independence standards, further undermining investors’ faith in the reliability of financial disclosures and putting the integrity of our capital markets at risk.” 

The letter is signed by, among others, Barbara Roper of Consumer Federation of America, Lynn Turner of the Alliance for Concerned Investors, Michael Garland of the New York City Comptroller’s Office, Beth Pearce, the Vermont State Treasurer, Lev Bragramian of Better Markets, and Barlett Naylor of Public Citizen.

Turner, the former SEC chief accountant, called the SEC and PCAOB rule changes “a last minute gift to the auditing profession.”  

“Chairman Jay Clayton is moving to deliver that gift before he leaves the SEC at the end of the year,” Turner said.

“In a gross abuse of process, these changes were adopted by the PCAOB without any opportunity for public comment and without any apparent consideration of how they will affect communications between auditors and audit committees,” the group wrote. “They are now being hurried through the approval process at the SEC under an artificially short timeframe. For these and other reasons discussed below, the rule changes should be withdrawn.”

The group said that both the SEC’s recent amendments, adopted with two dissents, and the PCAOB rule changes to align with the SEC rules would weaken, rather than strengthen, auditor independence. 

“Instead of acting to address that problem, the leadership of the SEC and PCAOB, between them, have been engaged in a systematic weakening of those critically important auditor independence standards,” they wrote. 

That has included an SEC action, in its 2019 rule changes, to narrow the definition of audit client for a fund under audit to exclude funds that would otherwise be considered “affiliates of the audit client” and to replace a bright-line 10 percent shareholder ownership test for debtor-creditor relationships with a weaker, harder to enforce 20 percent “significant influence” test.

The group also cited an SEC action, in its 2020 rule changes, to add a “materiality qualifier” to the definition of audit client, relying on audit firms and audit clients to decide whether something is likely to compromise auditor independence and removing the oversight regarding those determinations previously provided by Commission staff.

“This is akin to parking the Fox in the Hen House,” they wrote. “It ignores both the PCAOB’s own evidence of rampant non-compliance with auditor independence rules and the obvious conflict of interest auditors and audit clients face in making those determinations.” 

The PCAOB has “failed to acknowledge, let alone address, the objections raised by these groups and individuals is consistent with its recent history of limiting investor input,” they wrote.

“Earlier this year, for example, in a meeting between investor groups and members of the PCAOB Board, Chairman William Duhnke expressed surprise at the vehemence of the groups’ opposition to the Board’s recently adopted guidance on auditors’ communications with audit committees,” they wrote. “We noted at the time that the Board might not have been taken by surprise had it conducted a notice and comment process before adopting the revisions to its guidance, and had it not chosen to dissolve other mechanisms for investor engagement, such as the Investor Advisory Committee.” 

“Since then, despite the Chairman’s speechmaking on the importance of transparency and engagement, nothing has been done to address those concerns, and the Chair and members of the Board are once again adopting policy changes with a direct impact on investors without any opportunity for investor input. The only reasonable conclusion is that the Board Chair and members are deliberately ignoring views of the very members of the public whose interests the Board is supposed to serve.”

SEC Commissioners Allison Herren Lee and Caroline Crenshaw recently weighed in, saying in their public statement on the latest SEC rule changes, that “the dial for auditor independence is turning in only one direction, and that is towards loosening standards and reducing transparency.”

“Worse, this loosening of the standards is occurring at the same time the quality of audits and compliance with professional standards have fallen to dangerously low levels, as noted in PCAOB inspection reports,” the public interest leaders said.