Accounting
Enforcement vs. progress: Audit reform amid heavy regulation
High-profile enforcement activity is beginning to undermine the trust that the audit profession has earned over more than a century of diligent work. However, the historically large fines are not indicators of a degradation in audit quality. Instead, key audit quality indicators point to significant improvements in audit quality.
Recent enforcement actions by the Public Company Accounting Oversight Board appear to prioritize administrative burdens and punitive measures over substantive improvements in audit quality. As these multimillion-dollar fines make their way into headlines of mainstream news, the public perception of auditors and audit quality erodes.
Our profession supports the need to root out bad actors and poor quality, while ensuring the integrity of audits. However, the PCAOB’s current enforcement-first, overly prescriptive guidance leads to excessive administrative costs and enforcement measures that do little to enhance audit quality. Instead, this approach contributes to an atmosphere of hostility that forces staff and prospective auditors to think twice about their engagements and leadership roles in audit firms. This shift harms our profession — which is already struggling to attract and retain talent, even at the partner level — and also the broader capital markets.
Audit quality indicators already showed significant improvement before the PCAOB’s recent push for greater enforcement. For example, the Big Four audit firms have maintained relatively low deficiency rates, and the number of financial restatements has decreased dramatically in recent years. The percentage of material restatements, “Big R” restatements, fell from 28% to 18% from 2013 to 2022, reflecting better adaptation to new reporting standards and internal controls by public companies and their auditors, according to the
Despite these gains, the PCAOB’s aggressive enforcement agenda overshadows the profession’s achievements. In the first half of 2024 alone, the PCAOB levied nearly $35 million in penalties — more than the combined total of penalties imposed in the previous four years. Just 10 years ago, the PCAOB levied fines totaling $85,000. In the span of a decade, that makes for an astonishing increase of over 40,000%. Prior to current PCAOB Chair Erica Williams, the average yearly fines from the board were approximately $2.6 million. From 2022 to the first half of 2024, the average annual total of fines sits at roughly $22 million.
This spike in fines reflects an ‘enforcement-first’ mentality that focuses on punishment rather than collaboration and guidance to improve quality.
Growing enforcement activity and eroded trust, despite improving audit quality
If we look more closely, many of these fines are imposed for technicalities, such as lapses in documentation, communication, or not filing a Form AP 60 in a timely fashion. Accounting firms should avoid these errors, yes, but the current regime punishes them with disproportionate severity.
Rather than providing firms an opportunity to remediate without financial penalties, the PCAOB’s aggressive actions discourage professionals from continuing in the auditing field, undermining the goal of promoting high audit quality. The effectiveness of the board’s regulatory oversight should be measured by improvements in audit quality, not the dollar figure it tallies in fines.
High-profile enforcement actions often overshadow the diligent, day-to-day work that most auditors perform, and these incidents do not reflect the overall health of the profession. Yet still, enforcement activity remains elevated.
Doing more with less: Guidance, technology and people
Since COVID, audit professionals are being asked to do more with less. More work, greater scrutiny, and harsher penalties exacerbate the profession’s talent pipeline challenges. Recent PCAOB proposals suggest a drastic expansion of audit scope — including the proposal on noncompliance with laws and regulations, for example, that would require auditors to provide greater assurance across areas typically outside the scope of a financial statement audit, which would result in significant increases in time and effort, and significantly increased audit fees.
While these regulations aim to increase trust and accountability, they can often create challenges for firms trying to comply. This is particularly true for smaller firms, which may struggle to meet new demands due to limited resources. Larger firms, while more equipped to adapt, must still weigh the balance of compliance against delivery of high-quality audits, and even some of the largest auditors have backed out due to the risk of over-zealous PCAOB enforcement.
Many firms see emerging technologies like artificial intelligence and automated analytics tools as a way to streamline processes and alleviate some aspects of increasing scrutiny and workloads. These innovations have the potential to revolutionize audits by automating data-heavy tasks and allowing auditors to focus on deeper, more complex analysis.
While the technology exists, many firms face challenges in integrating it at the speed and scale needed, in part due to a regulatory environment that pushes for enforcement instead of innovation. I believe that with a proper refocusing on progressive policy and support in regards to audit technology, we can create a framework that leads to fast adoption of technology to not only support auditors, but substantially improve audit quality.
A balanced approach to reform
Voices within the profession already call for a more sensible approach to reform. Christina Ho, a PCAOB board member, advocates for practical standards that enhance audit quality without imposing undue burdens on firms. These perspectives, echoed by the Pennsylvania Institute of CPAs, stress the importance of balancing improved processes with realistic operational expectations.
Moving forward, the audit profession must navigate the fine line between regulation, enforcement and innovation. If current regulatory pressures continue unchecked, they could drive professional talent away, threatening the diversity and competitiveness of the field. By supporting policies that prioritize both innovation and practicality, the audit profession can continue to thrive in a rapidly changing environment.
The International Auditing and Assurance Standards Board is proposing to tailor some of its standards to align with recent additions to the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants when it comes to using the work of an external expert.
The
- ISA 620, Using the Work of an Auditor’s Expert;
- ISRE 2400 (Revised), Engagements to Review Historical Financial Statements;
- ISAE 3000 (Revised), Assurance Engagements Other than Audits or Reviews of Historical Financial Information;
- ISRS 4400 (Revised), Agreed-upon Procedures Engagements.
The IAASB is asking for comments via a digital response template that can be found on the
In December 2023, the IESBA approved an exposure draft for proposed revisions to the IESBA’s Code of Ethics related to using the work of an external expert. The proposals included three new sections to the Code of Ethics, including provisions for professional accountants in public practice; professional accountants in business and sustainability assurance practitioners. The IESBA approved the provisions on using the work of an external expert at its December 2024 meeting, establishing an ethical framework to guide accountants and sustainability assurance practitioners in evaluating whether an external expert has the necessary competence, capabilities and objectivity to use their work, as well as provisions on applying the Ethics Code’s conceptual framework when using the work of an outside expert.
President Donald Trump’s tariffs would effectively cause a tax increase for low-income families that is more than three times higher than what wealthier Americans would pay, according to an
The report from the progressive think tank outlined the outcomes for Americans of all backgrounds if the tariffs currently in effect remain in place next year. Those making $28,600 or less would have to spend 6.2% more of their income due to higher prices, while the richest Americans with income of at least $914,900 are expected to spend 1.7% more. Middle-income families making between $55,100 and $94,100 would pay 5% more of their earnings.
Trump has
Economists have warned that costs from tariff increases would ultimately be passed on to U.S. consumers. And while prices will rise for everyone, lower-income families are expected to lose a larger portion of their budgets because they tend to spend more of their earnings on goods, including food and other necessities, compared to wealthier individuals.
Food prices could rise by 2.6% in the short run due to tariffs, according to an
The Yale Budget Lab projected that the tariffs would result in a loss of $4,700 a year on average for American households.
Artificial intelligence is just getting started in the accounting world, but it is already helping firms like technology specialist
Schellman CEO Avani Desai said there have definitely been some shifts in headcount at the Top 100 Firm, though she stressed it was nothing dramatic, as it mostly reflects natural attrition combined with being more selective with hiring. She said the firm has already made an internal decision to not reduce headcount in force, as that just indicates they didn’t hire properly the first time.
“It hasn’t been about reducing roles but evolving how we do work, so there wasn’t one specific date where we ‘started’ the reduction. It’s been more case by case. We’ve held back on refilling certain roles when we saw opportunities to streamline, especially with the use of new technologies like AI,” she said.
One area where the firm has found such opportunities has been in the testing of certain cybersecurity controls, particularly within the SOC framework. The firm examined all the controls it tests on the service side and asked which ones require human judgment or deep expertise. The answer was a lot of them. But for the ones that don’t, AI algorithms have been able to significantly lighten the load.
“[If] we don’t refill a role, it’s because the need actually has changed, or the process has improved so significantly [that] the workload is lighter or shared across the smarter system. So that’s what’s happening,” said Desai.
Outside of client services like SOC control testing and reporting, the firm has found efficiencies in administrative functions as well as certain internal operational processes. On the latter point, Desai noted that Schellman’s engineers, including the chief information officer, have been using AI to help develop code, which means they’re not relying as much on outside expertise on the internal service delivery side of things. There are still people in the development process, but their roles are changing: They’re writing less code, and doing more reviewing of code before it gets pushed into production, saving time and creating efficiencies.
“The best way for me to say this is, to us, this has been intentional. We paused hiring in a few areas where we saw overlaps, where technology was really working,” said Desai.
However, even in an age awash with AI, Schellman acknowledges there are certain jobs that need a human, at least for now. For example, the firm does assessments for the FedRAMP program, which is needed for cloud service providers to contract with certain government agencies. These assessments, even in the most stable of times, can be long and complex engagements, to say nothing of the less predictable nature of the current government. As such, it does not make as much sense to reduce human staff in this area.
“The way it is right now for us to do FedRAMP engagements, it’s a very manual process. There’s a lot of back and forth between us and a third party, the government, and we don’t see a lot of overall application or technology help… We’re in the federal space and you can imagine, [with] what’s going on right now, there’s a big changing market condition for clients and their pricing pressure,” said Desai.
As Schellman reduces staff levels in some places, it is increasing them in others. Desai said the firm is actively hiring in certain areas. In particular, it’s adding staff in technical cybersecurity (e.g., penetration testers), the aforementioned FedRAMP engagements, AI assessment (in line with recently becoming an ISO 42001 certification body) and in some client-facing roles like marketing and sales.
“So, to me, this isn’t about doing more with less … It’s about doing more of the right things with the right people,” said Desai.
While these moves have resulted in savings, she said that was never really the point, so whatever the firm has saved from staffing efficiencies it has reinvested in its tech stack to build its service line further. When asked for an example, she said the firm would like to focus more on penetration testing by building a SaaS tool for it. While Schellman has a proof of concept developed, she noted it would take a lot of money and time to deploy a full solution — both of which the firm now has more of because of its efficiency moves.
“What is the ‘why’ behind these decisions? The ‘why’ for us isn’t what I think you traditionally see, which is ‘We need to get profitability high. We need to have less people do more things.’ That’s not what it is like,” said Desai. “I want to be able to focus on quality. And the only way I think I can focus on quality is if my people are not focusing on things that don’t matter … I feel like I’m in a much better place because the smart people that I’ve hired are working on the riskiest and most complicated things.”
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