PCAOB Looks to Ban Audit Firms From Misrepresenting Their Registration Status
Feb. 27, 2024
Firms touting their registration with the Public Company Accounting Oversight Board in crypto reports would be deemed to be making misleading statements under the proposal
The Public Company Accounting Oversight Board wants to prohibit audit firms from misrepresenting the status or significance of their registration with the regulator, especially in reports they have increasingly issued that verify cryptocurrency companies’ reserves.
The board on Tuesday voted unanimously, 5-0, to propose barring registered firms and their staff from making false or misleading statements about the registration status or what the registration signifies. There are no existing rules clearly prohibiting this.
Audit firms have to register with the PCAOB before they can prepare an audit for a U.S. public company or broker-dealer. Any firm that performs at least 20% of the audit work based on hours or fees is required to register with the regulator. Registered firms have to adhere to audit standards and are subject to inspections and possible enforcement.
In some cases, the firm misrepresents the extent to which the PCAOB oversees the firm’s services. Almost half of the registered firms don’t perform any audit-related work that is subject to the PCAOB’s oversight, the watchdog said.
For example, firms that tout their PCAOB registration in a so-called proof-of-reserve report would be deemed to be providing misleading statements under the proposal. The only exception would be if the firm states that its work on the proof-of-reserve report doesn’t fall within the PCAOB’s jurisdiction. Firms that violate PCAOB rules could be fined or face other penalties.
Crypto exchanges in recent years have increasingly hired auditors to provide proof-of-reserve reports, which can show the business is solvent and has enough assets to cover its liabilities. The reports are intended to give investors certainty that their tokens are covered by reserves and that their funds are safe.
But the reports aren’t as thorough as an audited financial statement and don’t qualify as a full audit. The PCAOB’s investor advocate office last March warned investors to “exercise extreme caution” when using these reports.
In the wake of the collapse of crypto exchange FTX in late 2022, the PCAOB faced calls to be the regulator that brings supervision to bear on auditors of crypto companies. The majority of crypto businesses fall outside its jurisdiction as most crypto exchanges are privately held. The regulator has said it can only oversee audits of public companies and Securities and Exchange Commission-registered broker-dealers.
Other examples of false or misleading statements include firms implying that the PCAOB sponsors, recommends or endorses the firm or its services, or tying the registration to services outside of PCAOB’s oversight, according to Tuesday’s proposal. Some firms have extolled PCAOB registration as a form of endorsement or stamp of approval by the PCAOB on their websites, Chair Erica Williams said.
“Unfortunately, we have seen too many instances of firms promoting their PCAOB registration in a way that could mislead clients, investors, and others,” Williams said.
Irvine, Calif.-based firm JC&Company Group, as of last November, made similar statements on its website. “The PCAOB label is a seal of approval and a mark of excellence that we are proud to wear, and the distinction of being a registrant allows us to offer the highest level of service and expertise to our clients,” the website said at the time. The firm didn’t immediately respond to a request for comment.
Registered firms already have certain obligations. They pay up to $100,000 in annual fees to the PCAOB, depending on the number of audit clients and staff they have. The firms also are required to file an annual report to the PCAOB, which includes a list of the U.S. public companies they audit.
The proposal would tighten the requirements for a firm to remain registered with the watchdog. If a firm doesn’t file annual reports with the PCAOB or pay annual fees for at least two consecutive years, the board would be able to consider the firm as having withdrawn its registration.
The public has until April 12 to submit feedback on the proposal.
[The Wall Street Journal]
