Comment Letter Warns of Harmful Impact of Requirements on U.S. Capital Markets and the Investing Public
NEW YORK (Dec. 20, 2024) – The American Institute of CPAs (AICPA) has submitted a comment letter urging the U.S. Securities and Exchange Commission (SEC) to reject the Public Company Accounting Oversight Board’s recently adopted rules on certain audit firm and audit engagement performance metrics and the resulting disclosure of that data.
The AICPA has grave concerns about the added burdens these rules would place on audit firms, particularly small and midsized ones, and believes they would unintentionally hurt U.S. capital markets and the investing public. “Alternative approaches that better balance transparency, cost, and the needs of audit committees, while continuing to support the quality of audit services and choice of audit providers available to perform public company audits and serve the public interest should be pursued, rather than introducing potentially detrimental unproven regulations,” the comment letter states.
The PCAOB rules would mandate the disclosure of performance metrics for audits of accelerated and large accelerated filers and expand operational and financial reporting by registered public accounting firms. Accelerated filers are companies that have a public float of between $75 million and $700 million, annual revenues of $100 million or more, and have filed periodic reports and an annual report within the past year. Larger accelerated filers have a public float of $700 million or more. The PCAOB rules would require an affirmative vote by the SEC to go into effect.
The AICPA’s comment letter states: “We believe these rules will have unintended negative consequences, including driving small and medium-sized firms out of the public company auditing practice. This would result in fewer firms performing audits which are critically important for smaller and medium size companies seeking to access the U.S. capital markets. Consequently, companies will face greater challenges and higher costs in meeting necessary audit requirements to access to the U.S. capital markets. The PCAOB acknowledges that mid-sized and smaller accounting firms serving small to mid-sized public companies will incur substantial, if not prohibitive, costs in complying with the proposed amendments. The final rules reaffirm the PCAOB’s belief that the rules will disproportionately affect smaller firms.”
The AICPA challenged the PCAOB’s assessment of several factors that could potentially mitigate the impact of the rules, holding that:
It is overly simplistic to think the impact of the rules would mostly fall within the market for large accelerated filers. The comment letter noted, “Smaller audit firms often serve clients of varying sizes, and their departure from the broader public company audit market could result in a substantial loss of audit firm options, particularly for smaller, less complex accelerated filers. The loss of competition and the reduction in available audit firms could lead to higher costs and less favorable engagement terms for these smaller issuers. A landscape in which smaller issuers have fewer options contradicts the PCAOB’s goal of promoting fair competition.”
The contention that competition may increase in the non-accelerated filer audit market as firms exit the accelerated filer and large accelerated filer markets is flawed. “This fails to account for the fact that non-accelerated filers often rely on firms with specific expertise and resources,” the comment letter said. “Further, the firms exiting the accelerated filer space may not be able to effectively redeploy their capacity to the non-accelerated filer market. In fact, their exit could lead to a loss of specialized services and a further concentration of resources in the larger end of audit firms, making it harder for non-accelerated filers to secure high-quality, affordable audits.”
The prediction that profitable firms in the larger audit markets could expand their market share overlooks the difficulties in scaling operations quickly. “The resources required to absorb and integrate such capacity are substantial, and many firms may not have the operational flexibility to do so without significant strain on their existing clients and resources,” the comment letter said. “This further risks driving up audit costs for smaller and mid-sized issuers, which are often less agile and unable to absorb such change without significant disruption.”
A final area of concern is the use of the performance metrics within the PCAOB’s inspection and enforcement program, increasing the risk of enforcement for minor, unintentional reporting errors. The PCAOB rejected calls for a threshold based on the severity of reporting errors, the comment letter said.