It’s good to be a powerful regulator that sets its own budget without much congressional oversight or a need to beg elected representatives for annual appropriations.
Most Americans are feeling the squeeze of runaway inflation and stagnant wage growth, but not the bureaucrats who regulate auditors of public companies and securities brokers.
The Public Company Accounting Oversight Board, a private corporation created by the Sarbanes-Oxley Act of 2002, posted a summary in November of its otherwise nonpublic $385 million budget for 2024, representing a 10% funding increase over the current year. That’s on top of a 12% increase last year and 11% the year before.
In just over 20 years of existence, the PCAOB has achieved an astonishing cumulative funding increase of nearly 400%—far outpacing inflation, wage growth, and even recklessly irresponsible overall federal spending.
No wonder the board can pay each of its five leaders appointed by the Securities and Exchange Commission annual salaries exceeding half a million dollars—more than the $480,000 Anthony Fauci reportedly received in 2002 as the highest paid federal government official. The PCAOB essentially has an evergreen money tree.
You might wonder where all that money comes from. Under Sarbanes-Oxley, the board assesses annual taxes on publicly traded corporations—read: shareholders—to fund the vast majority of its operations. Euphemistically called accounting support fees, these taxes require no annual approval or oversight by Congress.
The SEC is the only practical check on the PCAOB’s taxing and spending. Its commissioners approve the tax rates and budget each year, usually around mid-December. But the SEC is composed of mostly unelected regulators who select board members. And PCAOB funding doesn’t affect the SEC’s own budget, so there’s little incentive or inclination to play Scrooge.
SEC staffers presumably encourage the PCAOB behind the scenes not to get too greedy, but the SEC has approved a publicly announced budget every year except 2005. Last year, one SEC commissioner publicly dissented from the agency’s approval but was outvoted by her four colleagues in favor of business as usual. In some recent years, the SEC hasn’t even held a public hearing when considering the board’s budget, simply rubber-stamping it behind closed doors and issuing a press release.
It would be one thing if the PCAOB was firing on all cylinders—but exactly the opposite is happening.
When the PCAOB was created in 2002, it aimed to bolster investor protection through improved audit quality. In recent months, however, it has admitted that after two decades on the job, audit quality has gotten worse.
Only a few years ago, during a brief period of relatively flat growth in its annual budgets, leaders said audit quality was improving, although perhaps “plateauing.”
In July, staff released a report admitting a “concerning” and “unsettling” trend: Approximately 40% of the audits the PCAOB inspected in 2022 had significant deficiencies, up from 34% in 2021 and 29% in 2020.
In an accompanying press release, Chair Erica Williams called this trend “absolutely unacceptable,” but offered no hint that regulatory failure and overreach might deserve at least some share of the blame.
Instead, she scolded audit firms for failing to “live up to their responsibilities to investors” and demanded they “make changes to turn things around.” She has repeated the same message in several speeches since then.
This inverse correlation between profligate PCAOB spending and audit quality isn’t the only irony lost. Deteriorating audit quality has also coincided with a zealous ramp-up in enforcement activity and fines against accountants accused of audit missteps.
Whereas only a few years ago, fines against individual auditors rarely exceeded $25,000, the PCAOB now routinely demands at least $100,000—citing no empirical evidence of any positive correlation between those escalating fines and enhanced investor protection or audit quality.
Accountants who refuse these demands (or can’t pay) face years of expensive investigation and disciplinary proceedings, typically with little hope of keeping their current jobs or finding new work in the audit profession. Nearly all eventually capitulate before any hearing.
But at least all those fines help pay down our $34 trillion national debt, right? Nope. Unlike fines collected by the SEC and other government agencies—which typically go either to the federal treasury, victims of misconduct, or whistleblowers—Sarbanes-Oxley requires PCAOB fines to be doled out as scholarships to college and graduate students pursuing accounting degrees.
The SEC has scheduled a hearing on Dec. 13 to consider the budget. Here’s hoping the commissioners aren’t too swept up in the holiday spirit.