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PCAOB ramps up enforcement as it faces possible shutdown

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The Public Company Accounting Oversight Board increased its enforcement activity in 2024 to its highest level since 2017, according to a new report, even as the PCAOB faces the prospect of perhaps being absorbed in the Securities and Exchange Commission.

The report, released Wednesday by Cornerstone Research, found that monetary penalties levied by the PCAOB reached their highest for the third consecutive year. The report also compares PCAOB enforcement activity under President Biden to President Trump’s first term.

The report found the PCAOB publicly disclosed 51 total enforcement actions, including 40 actions involving the performance of an audit. Most of these actions came in the first half of the year, with only 10 auditing actions finalized after the Supreme Court ruled against the use of administrative law judges in SEC v. Jarkesy. At $35.7 million, the number of total monetary penalties in 2024 marked a 78% increase over 2023 and represented nearly 40% of all monetary penalties imposed since the PCAOB’s inception.

“The PCAOB continued aggressive enforcement in 2024, finalizing 30 auditing actions in the first half of 2024, more than triple the number of actions finalized in the first half of 2023,” said Jean-Philippe Poissant, one of the report’s co-authors and co-head of Cornerstone Research’s accounting practice, in a statement. “In one in five auditing actions, the PCAOB alleged violations of not only auditing standards, but quality control standards and ethics and independence, as well.”

The report compares PCAOB enforcement under the Biden administration, and found that under the Biden administration, the PCAOB finalized 160 total actions, including 124 auditing actions, compared to 126 and 101, respectively, under the Trump administration. The total value of the monetary penalties imposed were nearly seven times higher during the Biden administration, reaching approximately $68 million, compared to just over $10 million during the first Trump administration.

“The type of respondents in enforcement actions shifted from a majority of individual respondents during the Trump administration to a near even split between individual and firm respondents during the Biden administration,” said Russell Molter, a principal at Cornerstone Research and report coauthor, in a statement. “Additionally, the percentage of respondents fined in Auditing Actions climbed from a little over half (59%) to nearly all respondents (94%).”

With 2024 marking the 20th year since the PCAOB finalized its first enforcement action, the report also analyzed the agency’s enforcement results in the past two decades. In these 20 years, the PCAOB finalized 487 total actions involving 675 respondents, the majority of which (344) were individuals. The PCAOB has imposed $94 million in monetary penalties since its inception.

Changes at the PCAOB and SEC

The report’s release coincides with new concerns over the future of the PCAOB under the Trump administration, which has been laying off thousands of federal employees as part of a cost-cutting initiative, while moving to all but close down agencies such as the Consumer Financial Protection Bureau and the U.S. Agency for International Development. The aggressive work of the PCAOB has occurred under PCAOB chair Erica Williams who was brought in by former SEC chair Gary Gensler with a mandate to get tougher on auditing firms and ramp up inspections, enforcement and standard-setting. The Heritage Foundation’s Project 2025 planning document that was circulated prior to Trump’s election called for the PCAOB to be abolished, along with the Financial Industry Regulatory Authority, and said their regulatory functions should be absorbed into the SEC.

Trump has nominated Paul Atkins, a former SEC commissioner who was previously critical of the PCAOB, as the next chair of the SEC. That could prompt another wave of turnovers at the board, as occurred during the previous Trump administration and the Biden administration.

“As it relates to the PCAOB and the SEC, I think there’s been a lot of projection, a lot of hypotheses or predictions that the PCAOB would be folded into the SEC based upon prior views of the administration or Chairman Atkins,” said Andrew Gragnani, president of CBIZ CPAs P.C. “That leads to a lot of questions regarding the nature and timing of inspections, the nature and timing of funding, etc. It does not change the need to continue to perform high-quality audits. We’re not planning that there will be wholesale changes to the inspection process. I don’t think that’s a healthy way to look at how this will all play out, but there are changes that people have projected that would impact firms. I think the primary one that people are focused on with the administration is the view that there’ll be less enforcement activity, so that obviously would be one that would be most significant to the firms, given that the PCAOB, under Chairman Williams, has been very active in their enforcement against firms for inspections. That might be the most meaningful change if there was to be this folding of the PCAOB into the SEC. That’s the one major expectation from the administration that has been anticipated.”

Dan Goelzer, one of the original members of the PCAOB and later an acting chair, recently told Accounting Today that a change in the composition of the board is likely.

“I suppose it’s probably pretty likely that there will be maybe a complete change in the membership of the board,” said Dan Goelzer, one of the original members of the PCAOB and later an acting chair. “That happened both of the last times around when there was a change in administration. I don’t really say that with any pleasure. I’d rather see a less political PCAOB. But as a practical matter, I certainly think the new SEC would look to change the chair of the PCAOB — I suppose that’s quite likely at least — and some of the other board members as well.”

There may be a restructuring of the PCAOB as well, along with its possible absorption into the SEC. “The other big picture issue is whether broad efforts to restructure or streamline the government are going to include the idea of folding the PCAOB into the SEC,” said Goelzer. “That came up during the prior Trump administration and was actually proposed in one of Trump’s budgets, and it’s in the Heritage Foundation report. I suspect that will come up as a discussion item, at least. Whether it would actually make it through Congress is far from clear.”

The SEC has overhauled the membership of the PCAOB under Gensler, and during the Trump administration under former SEC chair Jay Clayton, but there were some differences. 

“I do think there’s a distinguishing factor with Jay Clayton in that most, if not all, of the PCAOB board members at that time were serving on expired terms, which was different from four years later, when Gary Gensler was the chair,” said Center for Audit Quality CEO Julie Bell Lindsay. 

She believes effective oversight of the audit profession requires impartiality without political considerations. “The pendulum swinging back and forth every four years is not good,” said Bell Lindsay. “It’s not conducive for long-term audit quality. It’s not conducive to market efficiency and to stability of the capital markets. We would like to avoid the pendulum swinging every four years.”

She pointed out that both the SEC and the PCAOB have enforcement authority over auditors.

“With respect to enforcement over the public company audit profession, there are two cops on the beat,” said Bell Lindsay. “Both the PCAOB and the SEC have enforcement authority when it comes to public company auditors. Where there are bad actors, bad actors need to be held to account. The pendulum has swung pretty far in one direction, and there have been some concerns about the impact of the current enforcement thinking when it comes to retention of talent in the audit profession. This is not a profession that is necessarily bursting at the seams with new talent coming in, so the impact on talent and on public company audit firms wanting to stay in the business of auditing public companies. I think it’s really important to remember that at least 75% of the mid to small cap companies in the U.S. are serviced by mid to small size public company audit firms. A huge swath of the marketplace is serviced by small to mid sized public company auditors, and the impact that standard-setting, enforcement, etc can have on those firms can have unintended consequences.”

Goelzer is seeing similar concerns expressed at small auditing firms. “I’ve certainly heard people say that smaller firms are reconsidering whether they want to be engaged in public company auditing,” he said. “If you only have a handful of public company clients, you look at these penalties and the cost of complying with new auditing standards and regulations, firms may well conclude that they’ll simply leave this space and concentrate on private company auditing or other kinds of services for clients that has a spillover effect than on smaller public companies, which have less auditor choice, and probably increased audit fees as a result.”

The PCAOB board composition is likely to change at the very least. “If you think back to the previous administration, there was a complete overhaul of the board last time around, and we expect that there will be a similar reaction to the regime change,” said Jackson Johnson, president of Johnson Global Advisory, a Washington, D.C.-based firm that helps auditing firms navigate the PCAOB inspection process. “I do expect that the majority of the board will be replaced.”

He expects to see the SEC and the PCAOB taking a less aggressive stance and levying fewer penalties. “The current board’s priorities were to use enforcement as a regulatory tool, more standards and more enforcement,” said Johnson. “The next board will be quite different. The next board will be a more collaborative mindset with firms, more information gathering with stakeholders, more economic analysis to inform standard setting, more robust economic analysis to inform standard setting.”

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Senate unveils plan to fast-track tax cuts, debt limit hike

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Senate Republicans unveiled a budget blueprint designed to fast-track a renewal of President Donald Trump’s tax cuts and an increase to the nation’s borrowing limit, ahead of a planned vote on the resolution later this week. 

The Senate plan will allow for a $4 trillion extension of Trump’s tax cuts and an additional $1.5 trillion in further levy reductions. The House plan called for $4.5 trillion in total cuts.

Republicans say they are assuming that the cost of extending the expiring 2017 Trump tax cuts will cost zero dollars.

The draft is a sign that divisions within the Senate GOP over the size and scope of spending cuts to offset tax reductions are closer to being resolved. 

Lawmakers, however, have yet to face some of the most difficult decisions, including which spending to cut and which tax reductions to prioritize. That will be negotiated in the coming weeks after both chambers approve identical budget resolutions unlocking the process.

The Senate budget plan would also increase the debt ceiling by up to $5 trillion, compared with the $4 trillion hike in the House plan. Senate Republicans say they want to ensure that Congress does not need to vote on the debt ceiling again before the 2026 midterm elections. 

“This budget resolution unlocks the process to permanently extend proven, pro-growth tax policy,” Senate Finance Chairman Mike Crapo, an Idaho Republican, said. 

The blueprint is the latest in a multi-step legislative process for Republicans to pass a renewal of Trump’s tax cuts through Congress. The bill will renew the president’s 2017 reductions set to expire at the end of this year, which include lower rates for households and deductions for privately held businesses. 

Republicans are also hoping to include additional tax measures to the bill, including raising the state and local tax deduction cap and some of Trump’s campaign pledges to eliminate taxes on certain categories of income, including tips and overtime pay.

The plan would allow for the debt ceiling hike to be vote on separately from the rest of the tax and spending package. That gives lawmakers flexibility to move more quickly on the debt ceiling piece if a federal default looms before lawmakers can agree on the tax package.

Political realities

Senate Majority Leader John Thune told reporters on Wednesday, after meeting with Trump at the White House to discuss the tax blueprint, that he’s not sure yet if he has the votes to pass the measure.

Thune in a statement said the budget has been blessed by the top Senate ruleskeeper but Democrats said that it is still vulnerable to being challenged later.

The biggest differences in the Senate budget from the competing House plan are in the directives for spending cuts, a reflection of divisions among lawmakers over reductions to benefit programs, including Medicaid and food stamps. 

The Senate plan pares back a House measure that calls for at least $2 trillion in spending reductions over a decade, a massive reduction that would likely mean curbing popular entitlement programs.

The Senate GOP budget grants significantly more flexibility. It instructs key committees that oversee entitlement programs to come up with at least $4 billion in cuts. Republicans say they expect the final tax package to contain much larger curbs on spending.

The Senate budget would also allow $150 billion in new spending for the military and $175 billion for border and immigration enforcement.

If the minimum spending cuts are achieved along with the maximum tax cuts, the plan would add $5.8 trillion in new deficits over 10 years, according to the Committee for a Responsible Federal Budget.

The Senate is planning a vote on the plan in the coming days. Then it goes to the House for a vote as soon as next week. There, it could face opposition from spending hawks like South Carolina’s Ralph Norman, who are signaling they want more aggressive cuts. 

House Speaker Mike Johnson can likely afford just two or three defections on the budget vote given his slim majority and unified Democratic opposition.

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How asset location decides bond ladder taxes

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Financial advisors and clients worried about stock volatility and inflation can climb bond ladders to safety — but they won’t find any, if those steps lead to a place with higher taxes.

The choice of asset location for bond ladders in a client portfolio can prove so important that some wealthy customers holding them in a taxable brokerage account may wind up losing money in an inflationary period due to the payments to Uncle Sam, according to a new academic study. And those taxes, due to what the author described as the “dead loss” from the so-called original issue discount compared to the value, come with an extra sting if advisors and clients thought the bond ladder had prepared for the rise in inflation.

Bond ladders — whether they are based on Treasury inflation-protected securities like the strategy described in the study or another fixed-income security — provide small but steady returns tied to the regular cadence of maturities in the debt-based products. However, advisors and their clients need to consider where any interest payments, coupon income or principal accretion from the bond ladders could wind up as ordinary income, said Cal Spranger, a fixed income and wealth manager with Seattle-based Badgley + Phelps Wealth Managers.

“Thats going to be the No. 1 concern about, where is the optimal place to hold them,” Spranger said in an interview. “One of our primary objectives for a bond portfolio is to smooth out that volatility. … We’re trying to reduce risk with the bond portfolio, not increase risks.”

READ MORE: Why laddered bond portfolios cover all the bases

The ‘peculiarly bad location’ for a bond ladder

Risk-averse planners, then, could likely predict the conclusion of the working academic paper, which was posted in late February by Edward McQuarrie, a professor emeritus in the Leavey School of Business at Santa Clara University: Tax-deferred retirement accounts such as a 401(k) or a traditional individual retirement account are usually the best location for a Treasury inflation-protected securities ladder. The appreciation attributes available through an after-tax Roth IRA work better for equities than a bond ladder designed for decumulation, and the potential payments to Uncle Sam in brokerage accounts make them an even worse asset location.

“Few planners will be surprised to learn that locating a TIPS ladder in a taxable account leads to phantom income and excess payment of tax, with a consequent reduction in after-tax real spending power,” McQuarrie writes. “Some may be surprised to learn just how baleful that mistake in account location can be, up to and including negative payouts in the early years for high tax brackets and very high rates of inflation. In the worst cases, more is due in tax than the ladder payout provides. And many will be surprised to learn how rapidly the penalty for choosing the wrong asset location increases at higher rates of inflation — precisely the motivation for setting up a TIPS ladder in the first place. Perhaps the most surprising result of all was the discovery that excess tax payments in the early years are never made up. [Original issue discount] causes a dead loss.”

The Roth account may look like a healthy alternative, since the clients wouldn’t owe any further taxes on distributions from them in retirement. But the bond ladder would defeat the whole purpose of that vehicle, McQuarrie writes.

“Planners should recognize that a Roth account is a peculiarly bad location for a bond ladder, whether real or nominal,” he writes. “Ladders are decumulation tools designed to provide a stream of distributions, which the Roth account does not otherwise require. Locating a bond ladder in the Roth thus forfeits what some consider to be one of the most valuable features of the Roth account. If the bond ladder is the only asset in the Roth, then the Roth itself will have been liquidated as the ladder reaches its end.”

READ MORE: How to hedge risk with annuity ladders

RMD advantages

That means that the Treasury inflation-protected securities ladder will add the most value to portfolios in a tax-deferred account (TDA), which McQuarrie acknowledges is not a shocking recommendation to anyone familiar with them. On the other hand, some planners with clients who need to begin required minimum distributions from their traditional IRA may reap further benefits than expected from that location.

“More interesting is the demonstration that the after-tax real income received from a TIPS ladder located in a TDA does not vary with the rate of inflation, in contrast to what happens in a taxable account,” McQuarrie writes. “Also of note was the ability of most TIPS ladders to handle the RMDs due, and, at higher rates of inflation, to shelter other assets from the need to take RMDs.”

The present time of high yields from Treasury inflation-protected securities could represent an ample opportunity to tap into that scenario.

“If TIPS yields are attractive when the ladder is set up, distributions from the ladder will typically satisfy RMDs on the ladder balance throughout the 30 years,” McQuarrie writes. “The higher the inflation experienced, the greater the surplus coverage, allowing other assets in the account to be sheltered in part from RMDs by means of the TIPS ladder payout. However, if TIPS yields are borderline unattractive at ladder set up, and if the ladder proved unnecessary because inflation fell to historically low levels, then there may be a shortfall in RMD coverage in the middle years, requiring either that TIPS bonds be sold prematurely, or that other assets in the TDA be tapped to cover the RMD.”

READ MORE: A primer on the IRA ‘bridge’ to bigger Social Security benefits

The key takeaways on bond ladders

Other caveats to the strategies revolve around any possible state taxes on withdrawals or any number of client circumstances ruling out a universal recommendation. The main message of McQuarrie’s study serves as a warning against putting the ladder in a taxable brokerage account.

“Unsurprisingly, the higher the client’s tax rate, the worse the outcomes from locating a TIPS ladder in taxable when inflation rages,” he writes. “High-bracket taxpayers who accurately foresee a surge in future inflation, and take steps to defend against it, but who make the mistake of locating their TIPS ladder in taxable, can end up paying more in tax to the government than is received from the TIPS ladder during the first year or two.”

For municipal or other types of tax-exempt bonds, though, a taxable account is “the optimal place,” Spranger said. Convertible Treasury or corporate bonds show more similarity with the Treasury inflation-protected securities in that their ideal location is in a tax-deferred account, he noted.

Regardless, bonds act as a crucial core to a client’s portfolio, tamping down on the risk of volatility and sensitivity to interest rates. And the right ladder strategies yield more reliable future rates of returns for clients than a bond ETF or mutual fund, Spranger said.

“We’re strong proponents of using individual bonds, No. 1 so that we can create bond ladders, but, most importantly, for the certainty that individual bonds provide,” he said.

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Why IRS cuts may spare a unit that facilitates mortgages

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Loan applicants and mortgage companies often rely on an Internal Revenue Service that’s dramatically downsizing to help facilitate the lending process, but they may be in luck.

That’s because the division responsible for the main form used to allow consumers to authorize the release of income-tax information to lenders is tied to essential IRS operations.

The Income Verification Express Service could be insulated from what NMN affiliate Accounting Today has described of a series of fluctuating IRS cuts because it’s part of the submission processing unit within wage and investment, a division central to the tax bureau’s purpose.

“It’s unlikely that IVES will be impacted due to association within submission processing,” said Curtis Knuth, president and CEO of NCS, a consumer reporting agency. “Processing tax returns and collecting revenue is the core function and purpose of the IRS.”

Knuth is a member of the IVES participant working group, which is comprised of representatives from companies that facilitate processing of 4506-C forms used to request tax transcripts for mortgages. Those involved represent a range of company sizes and business models.

The IRS has planned to slash thousands of jobs and make billions of dollars of cuts that are still in process, some of which have been successfully challenged in court.

While the current cuts might not be a concern for processing the main form of tax transcript requests this time around, there have been past issues with it in other situations like 2019’s lengthy government shutdown.

President Trump recently signed a continuing funding resolution to avert a shutdown. But it will run out later this year, so the issue could re-emerge if there’s an impasse in Congress at that time. Republicans largely dominate Congress but their lead is thinner in the Senate.

The mortgage industry will likely have an additional option it didn’t have in 2019 if another extended deadlock on the budget emerges and impedes processing of the central tax transcript form.

“It absolutely affected closings, because you couldn’t get the transcripts. You couldn’t get anybody on the phone,” said Phil Crescenzo Jr., vice president of National One Mortgage Corp.’s Southeast division.

There is an automated, free way for consumers to release their transcripts that may still operate when there are issues with the 4506-C process, which has a $4 surcharge. However, the alternative to the 4506-C form is less straightforward and objective as it’s done outside of the mortgage process, requiring a separate logon and actions.

Some of the most recent IRS cuts have targeted technology jobs and could have an impact on systems, so it’s also worth noting that another option lenders have sometimes elected to use is to allow loans temporarily move forward when transcript access is interrupted and verified later. 

There is a risk to waiting for verification or not getting it directly from the IRS, however, as government-related agencies hold mortgage lenders responsible for the accuracy of borrower income information. That risk could increase if loan performance issues become more prevalent.

Currently, tax transcripts primarily come into play for government-related loans made to contract workers, said Crescenzo.

“That’s the only receipt that you have for a self-employed client’s income to know it’s valid,” he said.

The home affordability crunch and rise of gig work like Uber driving has increased interest in these types of mortgages, he said. 

Contract workers can alternatively seek financing from the private non-qualified mortgage market where bank statements could be used to verify self-employment income, but Crescenzo said that has disadvantages related to government-related loans.

“Non QM requires higher downpayments and interest rates than traditional financing,” he said.

In the next couple years, regional demand for loans based on self-employment income could rise given the federal job cuts planned broadly at public agencies, depending on the extent to which court challenges to them go through.

Those potential borrowers will find it difficult to get new mortgages until they can establish more of a track record with their new sources of income, in most cases two years from a tax filing perspective. 

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