The AICPA on Dec. 19 sent a comment letter to the Securities and Exchange Commission (SEC) against the Public Company Accounting Oversight Board’s (PCAOB) final rules on firm and engagement metrics and firm reporting.
"In short, we believe it would be harmful to the U.S. capital markets and the U.S. investing public if the SEC approves these final rules. " the AICPA's comment letter said.
As background, on Nov. 21. the PCAOB adopted a set of new requirements on public reporting of standardized firm and engagement metrics as well as a separate but complementary set of amendments regarding the PCAOB framework for collecting information from audit firms.
The AICPA said, "As we expressed to the PCAOB in our comment letter dated June 18, 2024, the recently adopted rules
mandate the disclosure of performance metrics for audits of accelerated and large accelerated filers, and
expanded operational and financial condition reporting by registered accounting firms. These rules will
disproportionately affect smaller and medium-sized audit firms. 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 such audits which are critically
important for smaller and medium size companies seeking to access the U.S. capital markets."
As a consequence, the AICPA said that companies will experience greater challenges and higher costs in meeting necessary audit
requirements to access 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 these rules
will disproportionately affect smaller firms."
The AICPA added that even though the PCAOB, in the final rules, has recommended several mitigating factors that can alleviate the
possible negative impacts on firm exits from performing public company audits, these points
overlook critical realities regarding the impact of the final rules.
The first of this critical realities is that many mid-sized and smaller audit firms are integral to providing audit services for mid-sized and smaller accelerated filers, and the departure of such audit firms would considerably reduce the number of audit service providers. "The PCAOB’s suggestion that these firms would primarily exit the market for large accelerated filers is overly simplistic," the AICPA said.
Second, the AICPA said that although the PCAOB suggests that competition may increase in the non-accelerated filer audit market as firms exit the accelerated filer and large accelerated filer markets, this view does not consider the
fact that non-accelerated filers usually depend on firms with specific expertise and resources. Additionally, the firms
exiting the accelerated filer space might be unable to effectively redeploy their capacity to the nonaccelerated 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 AICPA said.
Finally, the PCAOB’s assertion that firms who stay profitable in the larger audit markets can expand their market share by acquiring capacity from exiting firms does not account for the difficulties in scaling operations expeditiously. "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. 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," according to the AICPA.
The AICPA pointed out that the PCAOB could pursue alternative methods to get to its intended goals without imposing the new rules' burdensome reporting requirements. For instance, the AICPA said that instead of requiring broad,
mandatory disclosures of performance metrics, the PCAOB could take a more targeted approach by
offering more meaningful and actionable information to audit committees and investors. "The
haste in which these rules were adopted and submitted to the SEC suggests that the PCAOB has not
properly addressed many stakeholder concerns," the AICPA said.
The AICPA asked the SEC to refrain from approving the PCAOB rules. "Instead, 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 AICPA stated.