Statement On PCAOB 2024 Budget, SEC Chair Gary Gensler, Dec. 13, 2023

Today, the Commission is voting to approve the 2024 budget of the Public Company Accounting Oversight Board (PCAOB). I support this $385 million budget—supporting a modest two percent increase in headcount—because of the important role the PCAOB plays in protecting investors and facilitating capital formation.

A critical feature of our capital markets is that investors rely on public company disclosures, including their financial results. Essential to investors’ trust in the reliability of such financial information is an independent audit of issuers’ financial statements.

Congress understood this when they passed the Sarbanes-Oxley Act of 2002 in response to some of the largest accounting frauds and bankruptcies in the history of our country.

In 2001, Enron, then the seventh-largest company in the United States, collapsed. Enron’s management had cooked the books, concealed problems in the business, defrauded investors, and more. WorldCom and others followed.

The crisis revealed a key issue regarding the quality of auditing standards and auditing oversight. Among other problems, the relationships between issuers and auditors, between standard-setters and auditing firms, were too clubby. Auditors were setting their own standards for conducting profitable public company audits, and auditors were subject to insufficient oversight and accountability. It was regulation by the profession, essentially self-policing.

A central goal of the Sarbanes-Oxley Act was to restore trust in our financial system by providing external regulation of auditors. As part of the law, Congress established the PCAOB, an independently funded board under the regulatory oversight of the SEC.

Auditing firms must register with the PCAOB if they audit one of the more than 7,400 actively reporting public companies or one of the about 3,500 SEC-registered broker-dealers.[1] Under the Sarbanes-Oxley Act the PCAOB must conduct inspections of such firms at least once every three years. Last year, it conducted more than 200 audit firm inspections of more than 800 firm engagements in 30 jurisdictions.[2]

The Sarbanes-Oxley Act also required the PCAOB to adopt audit standards. Now, over twenty years after its creation, the PCAOB has embarked on updating and replacing the prior standards that the profession adopted for itself (what are called the “interim standards”) with modernized PCAOB standards. For example, earlier this month, the Commission approved the PCAOB’s new Confirmations standard, replacing a 1992-era, paper-and-pencil audit standard with a standard relevant to the modern reality of our electronic communications era.[3]

The PCAOB also plays an important role investigating auditing firms for compliance with auditing standards under the federal securities laws and, when justified and appropriate, brings enforcement actions.

These PCAOB functions, which are critical for investor trust in our markets and capital formation, require adequate resources.

The PCAOB budget request is $385 million, up from the 2023 budget of $350 million. This supports 20 new positions, increasing the headcount to 946. Half of the new positions are for the Division of Registrations and Inspections, which would increase from 510 to 520, restoring the inspections division back to its 2017 headcount after which resources for audit inspections were reduced.

Thanks to PCAOB inspections, the quality of auditor oversight all over the world has improved, over time. More than 50 jurisdictions have complied with the requirements that the PCAOB inspect audit firms that audit or participate in the audit of U.S.-listed companies based in their borders. Until 2022, however, this was not the case for China and Hong Kong.

This changed with the enactment of the Holding Foreign Companies Accountable Act and subsequent negotiations which led to the August 2022 Statement of Protocol, signed by the PCAOB, the China Securities Regulatory Commission, and China’s Ministry of Finance.

Since then, the PCAOB has been able to fulfill its oversight responsibilities in both 2022 and 2023 relating to audit firms in China and Hong Kong.

In conclusion, I’m pleased to support the 2024 budget for the PCAOB. A core lesson of events leading to the Sarbanes-Oxley Act was the importance of robust and independent organizations setting audit standards, inspecting audit firms, and enforcing the rules.

I’d like to thank my colleagues at the SEC and the PCAOB for their work on this matter, including:

• Paul Munter, Natasha Guinan, Anita Doutt, Shaz Niazi, Mark Jacoby, and Taylor Pross from the Office of the Chief Accountant;
• Caryn Kauffman, Allen Blume, Nikki Puccio, and Kristin Aveille from the Office of Financial Management;
• Bryant Morris, Peggy Kim, and Eduardo Aleman from the Office of the General Counsel; and
• David Bottom, Greg Schulze, and Bobby Sharma from the Office of Information.
• Chair Erica Williams, Board member Kara Stein, Board member Anthony Thompson, Board member Christina Ho, and Board member George Botic.