In a largely symbolic gesture meant to emphasize its importance, an investor panel voted to recommend to the Public Company Accounting Oversight Board that it should collect audited financial statements from registered audit firms.

The PCAOB’s Investor Advisory Group is not a rule-making body, having no authority to require the PCAOB or any other agency to do anything. Yet it unanimously consented to a member’s motion advising the PCAOB to take whatever measures might be necessary to compel audit firms to submit audited financial statements for regulatory review. 

“The governance of the audit firms being of such critical importance to the economy, it’s vital that the regulator have access to financial information necessary to perform its role,” said Anne Simpson, investment director at the California Public Employees’ Retirement System, at the IAG’s recent meeting. She moved that the PCAOB begin requiring and reviewing such information, and the panel accepted her recommendation unanimously. PCAOB member Steve Harris, an investor advocate who chairs the IAG, even invited the group to state its support for the idea by voting on it. 

Audit firms are not publicly traded entities, making their financial statements not subject to any of the public scrutiny that public companies face in preparing and filing audited financial statements so they can access the capital markets. The PCAOB and its investor panel have fretted openly that the multidisciplinary nature of the major audit networks, which includes a wide array of business and technology services beyond accounting or auditing, puts the regulated audit work at risk of having less importance to the firm business models. Audit firms have countered that having broad expertise under roof enhances the expertise that can be leveraged in the audit.

The investor panel also urged the PCAOB to get busy on some long-dormant initiatives that require attention — especially the development of audit quality indicators that would give all audit stakeholders some common measures of audit quality to manage and the update of standards on how auditors are expected to respond when they encounter illegal activities.

Norman Harrison, managing director at Duff & Phelps, reminded the PCAOB it’s been nearly a decade since the Advisory Committee on the Auditing Profession recommended the PCAOB collect financial information on audit firms, require firms to provide public annual reports, and develop indicators of audit quality that would form the basis for measuring and managing audit quality.

That was in 2008. The board began a formal effort in 2012, culminating with a concept release to open a public dialogue on some possible audit quality indicators to consider, but the board has taken no further formal action since late 2015. “We’re still not at the finish line,” said Harrison. “Our fundamental point, our core message, is to strongly urge the board to move with dispatch to complete its work in this area. It’s time.”

And after the discovery that Wells Fargo’s auditor was aware of the creation of false customer accounts long before the general public heard, the investor panel says the board needs to update it nearly 30-year-old rules on the auditor’s duty when learning of noncompliance with laws and regulations.

The current standard dates back to 1989, well before Sarbanes-Oxley or Dodd-Frank, when auditing standards were written by the profession itself. The PCAOB adopted the standard when the board was formed in 2003 and hasn’t touched it since.

“It doesn’t reflect the world as we know it today,” said Mary Bersot, CEO and chief investment officer at Bersot Capital Management. “Investor expectations need to be realistic, but at the same time the standards need to be written so it’s clear to the auditor what their role is. We would expect an auditor when they discover material information to report it in a timely fashion.”