SEC Chair Urges PCAOB to Update Financial Accounting Standards

SEC Chair Gary Gensler urged the Public Company Accounting Oversight Board ("PCAOB") to update its auditor independence standards and stated that the SEC "may need to take a fresh look at the SEC's auditor independence rules as well."

In remarks before the Center for Audit Quality, Chair Gensler described how financial accounting and audit oversight evolved since the passing of the Sarbanes-Oxley Act of 2002. He highlighted the establishment of the PCAOB, which, he said, has played a large role in improving audit quality. Notwithstanding, he "candidly" challenged the current "relationships between issuers and auditors, between standard-setters and auditing firms, [as] too clubby." He asserted that "it matters who sets the standards. It matters who 'audits the auditors.'"

Mr. Gensler charged that the PCAOB has been slow to update its auditing standards, many of which have never been updated and still remain from its predecessor, the American Institute of Certified Public Accountants. He highlighted continuing issues with auditor independence and quality, stating that many auditing firms had lucrative consulting engagements with the companies they were auditing - an inherent conflict of interest. He said that allowing the PCAOB to bring forth enforcement actions against audit firms to combat conflicts of interest and promote auditor integrity has contributed to the increase in auditing quality and supported continuing close oversight of auditors, especially as audits become more complex.

Chair Gensler also encouraged firms to review and enhance their independence protocols with respect to their auditing and consulting practices.