The Public Company Accounting Oversight Board (PCAOB) has spent the past five years increasing its regulatory intensity over the global public accounting firms. Regulations, rules, and standards remain mostly unchanged since the Sarbanes-Oxley Act of 2002 was passed, and the establishment of the PCAOB. Still, the refinement, interpretation, and enforcement of these rules have increased considerably since early 2018. The PCAOB has expanded its regulatory reach internationally, and this is challenging for the most integral public accounting firms. The world relies on public accounting firms to ensure that companies are accurately tracking revenue and expense, their financial information is reliable for important business decisions, and the companies are compliant with law and regulations. In order to maintain the public trust, these accounting firms must be compliant in fact as well as in appearance. What used to be considered compliant may no longer be deemed acceptable. It is no longer enough for firms and their partners to maintain independence compliance; they must further invest in ensuring all global members and partners' independence compliance. Failing to do so will result in punitive and reputational damages.
The PCAOB's influence becomes evident when looking at enforcement data related to PCAOB Rule 3520. Auditor Independence. Table 1 compares five years of PCAOB enforcement, related explicitly to auditor and firm independence compliance, levied against member firms located within the U.S. and internationally (non-U.S.)
Table 1: Independence compliance-related PCAOB enforcements leveraged against international versus U.S. member firms
The PCAOB's international enforcements continue to grow more prominent and primarily target the world's largest accounting firms. Fines levied against an international member of a Big 4 accounting firm comprised 60% of all global enforcements. Additionally, fines levied against Big 4 firms are, on average, 11 times larger than the fines levied against non-Big 4 accounting firms. These fines - regardless of the amount - tend to be picked up by global news publications. This can lead to reputational damages to both the worldwide firm and partners. A 2019 study from AON noted that damage to reputation/brand was the number one risk for investment, finance, and professional services firms. Reputational damage in the public accounting space can occur by failing to maintain independence, impacting relationships and revenue for multinational firms, and being detrimental to the career and livelihood of partners and practitioners. The study also states that "this exposure is underestimated, and organizations need to proactively explore ways to sufficiently quantify and assess existing and potential reputational risks."
We believe companies must strive to be globally consistent with maintaining compliance. And while it may feel impossible to mitigate all independence risks completely, Kingland's public accounting clients have found that continuous investment into independence processes and systems are critical, strategic differentiators.
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