The Public Company Accounting Oversight Board has released staff guidance on how the PCAOB should perform an economic analysis as part of its standard-setting process.
The document, Staff Guidance on Economic Analysis in PCAOB Standard Setting, was prepared by PCAOB staff economists and the Office of the General Counsel. PCAOB chairman James Doty has directed the staff to follow the guidance in the document.
"The guidance builds on the PCAOB's existing rulemaking process by establishing an analytical framework for staff to evaluate the economic implications of standard-setting projects that are presented for board consideration," said Doty said in a statement. “The guidance should give those who are interested in the PCAOB's standard setting a better understanding of the analysis that staff plan to conduct to ensure effective and efficient rulemaking. The guidance helps us pursue investor protection with appropriate consideration of regulatory burden."
The guidance describes four main elements of economic analysis for setting auditing and related professional practice standards: describing the need for a rule, developing a baseline for measuring the effects of a rule, considering reasonable alternatives to the rule, and analyzing the economic impacts of the rule (and alternatives to the rule), including the benefits and costs.
SEC commissioner Michael Piwowar praised the document: “I applaud the release of the PCAOB’s staff guidance on economic analysis for standard setting activities,” he said in a statement. High-quality economic analysis helps ensure that regulatory decisions are informed by the best available information about likely economic consequences and allows meaningful comparison of the proposed action with reasonable alternatives, including taking no action. I appreciate the close cooperation between the staffs of the commission and the board in order to finalize the guidance.”
The guidance builds on work that the PCAOB began undertaking last year. The PCAOB established a Center for Economic Analysis in 2013, headed by economist Luigi Zingales, the Robert C. McCormack Professor of Entrepreneurship and Finance and the David G. Booth Faculty Fellow at the University of Chicago Booth School of Business, to promote economic research relating to the role of the audit in capital formation and investor protection.
"The guidance on economic analysis reflects the PCAOB's commitment to the use of economic analysis in its rulemaking," said PCAOB chief auditor Martin F. Baumann. "The Offices of the Chief Auditor and Research and Analysis have fortified our resources with economists to conduct more rigorous economic analysis. In addition, I look forward to insights from new research on the role of auditing in our financial markets, developed by the PCAOB Center for Economic Analysis."
Congressional lawmakers and industry lobbyists have been urging regulators to conduct cost/benefit analyses before finalizing regulations. Despite the advantages of performing such analyses, critics complain that in many cases, they have slowed down and weakened the rulemaking process for provisions of laws such as the Dodd-Frank Act, including the Volcker Rule and derivatives trading reforms.
Congress has also intervened with the PCAOB's proposed standards, citing the costs of some of its contemplated reforms. Last year, the House voted overwhelmingly to pass legislation prohibiting the PCAOB from imposing mandatory audit firm rotation.
Rep. Darrell Issa, R-Calif., the chairman of the House Oversight and Government Reform Committee, applauded the PCAOB staff guidance, noting that he and Rep. Patrick McHenry, R-N.C., the deputy Republican whip, have been pushing for such changes.
“Nearly two years ago, Rep. McHenry and I began requesting that regulatory organizations strengthen their rulemaking processes and we encouraged these agencies to ensure that proper cost benefits analysis was conducted before the process was concluded, as the law requires,” Issa said in a statement. “In response to the committee’s oversight of the PCAOB’s economic analysis, today the PCAOB released mandatory staff guidance on the use of economic analysis. I applaud the PCAOB’s actions. Robust economic analysis is key to ensuring that rules and regulations are rational, well-tailored, and appropriate. Faithful adherence to this guidance will greatly assist the PCAOB in its rulemaking and standard-setting.”