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PCAOB Proposal Would Bar False or Misleading Statements by Auditors

S.J. Steinhardt
Published Date:
Feb 28, 2024

iStock-519089329 Audit

The Public Company Accounting Oversight Board (PCAOB) voted unanimously for a proposal to establish new restrictions on statements auditors can make concerning a firm’s PCAOB registration status, including the extent of PCAOB oversight of the firm’s work, The Wall Street Journal reported.   

By prohibiting auditors from making false or misleading statements about PCAOB registration and oversight, the proposal would bar audit firms from misrepresenting the status or significance of their registration with the PCAOB, especially in reports they have increasingly issued that verify cryptocurrency companies’ reserves.

There are no existing rules clearly prohibiting this practice, the Journal reported. The proposal aims to rectify that by establishing a general prohibition on false or misleading statements concerning registration; providing specificity about the application of the general prohibition; and codifying the PCAOB’s practice of considering false or misleading statements during the registration process.

“PCAOB registration is not an advertising gimmick for firms,” said PCAOB Chair Erica Y. Williams, in the proposal announcement. “In order to protect investors from misinformation, there must be consequences when firms misrepresent their registration status or what it means.” She explained that some firms issue false or misleading statements that imply that the PCAOB sponsors, recommends or endorses the firm or its services, or tie the registration to services outside of PCAOB’s oversight, and some present PCAOB registration as a form of endorsement or approval by the PCAOB on their websites, the Journal reported.

“Unfortunately, we have seen too many instances of firms promoting their PCAOB registration in a way that could mislead clients, investors, and others,” she said.

One such example is that of Irvine, Calif.-based firm JC&Company Group. “The PCAOB label is a seal of approval and a mark of excellence that we are proud to wear, and the distinction of being a registrant allows us to offer the highest level of service and expertise to our clients,” the firm's website stated in November, the Journal reported. The firm did not immediately respond to a request from the Journal for comment.

Any firm that performs at least 20 percent of the audit work based on hours or fees is required to register with the PCAOB, the Journal reported. Registered firms must adhere to audit standards and are subject to inspections and possible enforcement.

“Currently, nearly half of the firms registered with the PCAOB do not engage in any audit-related work for issuers or broker-dealers that is subject to PCAOB oversight,” the PCAOB said in its announcement. “Some of these firms promote their PCAOB registration in a manner that could lead investors and other market participants to mistakenly think that their work is subject to PCAOB oversight.”

In recent years, crypto exchanges have increasingly hired auditors to provide proof-of-reserve reports, which are not as thorough as an audited financial statement and do not qualify as a full audit, the Journal reported. Last year, the PCAOB’s investor advocate office warned investors to “exercise extreme caution” when using these reports.

The majority of crypto businesses fall outside the PCAOB’s jurisdiction, as most of these exchanges are privately held. The PCAOB has said it can oversee audits only of public companies and Securities and Exchange Commission (SEC)-registered broker-dealers. 

The new proposal also includes a procedural mechanism that would enable the PCAOB, under specified conditions, to treat a PCAOB-registered firm’s failures both to file annual reports to the PCAOB and to pay annual fees to the PCAOB for at least two consecutive reporting years as a constructive request for leave to withdraw from PCAOB registration, and to deem the firm’s registration withdrawn.

The deadline for public comment on the proposal is April 12, 2024. Comments can be submitted on the PCAOB's Open for Public Comment page.

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