PCAOB Adopts Amendments to Independence Rules, Announces 2020-2024 Strategic Plan

On November 19th, the Public Company Accounting Oversight Board (PCAOB) adopted amendments to its independence requirement to align with the Securities and Exchange Commission (SEC) rules.

“The Board’s targeted amendments are intended to avoid confusion, differences, and duplication between PCAOB and SEC independence requirements,” said PCAOB Chairman William D. Duhnke III.

As mentioned in a previous post, in June 2019, the SEC adopted amendments – which took effect on October 3, 2019 – to its auditor independence rules relating to the analysis that must be conducted to determine whether an auditor is independent when the auditor has a lending relationship with certain shareholders of an audit client.

However, the PCAOB has their own independence standards and definitions, specifically PCAOB Rule 3501. Without amendments, the proposed changes to the SEC’s independence rules could cause confusion if certain terms are used in both the SEC’s and PCAOB’s rules but defined differently. In fact, commenters on the SEC’s proposed amendments urged the Commission and the Board to collaborate to keep the independence rules aligned.

“To avoid differences and duplicative requirements, and to provide greater regulatory certainty, the Board is making targeted amendments to its interim independence standards applicable to lending arrangements between auditors and audit clients. In addition, the Board is making targeted amendments to align certain terms defined in Rule 3501 with the Commission’s recent amendments to its definitions of those terms in Rule 2-01(f).”

The amendments, pending approval by the SEC, would take effect 180 days after the publication date of the SEC’s October 16, 2020 amendments to Rule 2-01.

Also on November 19th, the PCAOB approved its 2020-2024 Strategic Plan, as well as its fiscal 2021 budget of $287.3 million.

The five goals for 2020-2024, which have remained unchanged since last year’s strategic plan, are as follows:

Several key factors inform the PCAOB’s strategic outlook, including the need for further improvement in the quality of audit services, disruptive technological changes, and stakeholder engagement and communications. These are the same factors identified in last year’s strategic plan, as the PCAOB believes that, based on the ongoing internal review and external feedback, these are the correct factors to direct their efforts.

Additionally affecting the PCAOB’s oversight efforts are the emerging audit-related risks arising from COVID-19. The PCAOB’s target team, which was established as part of the board’s multiyear effort to transform their inspection program, has been deployed to consider those significant risks associated with the pandemic.

According to this year’s plan, there are more than 1,700 public accounting firms currently registered with the PCAOB. Approximately 560 of these registered firms audit more than 12,400 issuers that file with the SEC. Those issuers, which include 7,396 public companies, represent roughly $46.74 trillion in global market cap.

As of September 30, 2020, there were approximately 800 PCAOB staff members. The newly approved budget of $287.3 million, a 0.9% increase from last year’s budget, would allow for funding of roughly 859 positions. For reference, fiscal 2019’s budget of $284.7 was projected to fund up to 850 positions.

“The PCAOB has made significant progress in executing our strategic plan and advancing our vision for the organization,” said Duhnke. “I look forward to working with my fellow Board members and our dedicated staff as we continue to strive for forward-looking, responsive, and innovative oversight.”

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