AICPA weighs PE and tech impact on audit independence

Christina Ho, a former member of the Public Company Accounting Oversight Board who is now chief assurance officer at the auditing and technology firm Oath Verified, believes the PCAOB and the American Institute of CPAs should be hearing more from tech companies as their standards evolve.

She has found that out of  the 81 comment letters filed on the AICPA's proposed independence rules for CPA firms with outside investors and vendors, dozens came from state boards of accountancy, but none originated from technology companies.

In her second comment letter on the proposed changes to the AICPA's Code of Professional Conduct, Ho noted that even in a revised draft, ambiguity remains about when licensing AI audit tools crosses into a regulatory conflict. That's a gap software companies have missed because the rule reads, on its surface, as being about private equity roll-ups rather than technology. Ho argued this could favor large incumbent firms that build AI in-house over smaller firms and startups that need to license AI technology.

With comments due by the end of this month and no further opportunity to shape the rule before the AICPA Professional Ethics Executive Committee's October interim meeting, she believes there's much at stake for the accounting profession as AI reshapes how audits are done. 

The AICPA originally proposed revisions to its Code of Professional Conduct regarding the kinds of alternative practice structures set up by firms that have accepted private equity investment last December.

Ho submitted her first comment letter on the proposal in April in her personal capacity. Later, after the AICPA PEEC group held another meeting earlier this month to present some of the updates it had made based on the comment letters received from the original exposure draft, and invited more comments, she submitted another comment. 

"I was concerned when the committee presented the statistics about the commenters that there was no representation from tech companies," she told Accounting Today. "As someone who was a former regulator and standard-setter, I know how important the opportunity to comment is. The whole purpose of commenting is to make sure that the standard-setter has all the perspectives to consider, so they don't write standards that cause unintended consequences that might be harmful."

She believes the proposed changes will have a far-reaching impact on the profession.

"This profession is changing a lot, not just structurally, but with the availability of technology," said Ho. "A lot of firms are using third-party tools, and there are now many accounting and audit tech startups. This is not just impacting Oath, but many other companies are impacted, especially the tech companies."

She noted that technology businesses that are considered by the AICPA to be "closely aligned" with audit firms could potentially become part of the scope of the changes to the alternative practice structure.

Her own firm uses an alternative practice structure since it has received funding from venture capital firms. The Chicago-based firm, led by CEO Liucas Ward, raised $6.6 million in a seed funding round last December led by Rackhouse Capital with participation from Chicago Ventures and M25, according to the Wall Street Journal. It now has raised about $10 million in funding.

"We currently are already using an alternative platform because our platform is a venture-backed company," said Ho. "In order to create an attest entity, we had to create an alternative practice structure. That's what all the state regulators require."

Ho has long had a special interest in technology and spearheaded an effort at the PCAOB to examine advances in audit technology when it formed the Technology Innovation Alliance Working Group in 2022. 

"When I was on the board, I frequently spoke about how technology could help reimagine the audit space and promote higher audit quality," said Ho. "After my term was up at the board, I got the opportunity to meet Lucas, who's the CEO of Oath, and I realized that I was very good at describing what needed to happen. It's always easy to talk about something, but at Oath here I get the opportunity to actually be part of the solution, and I actually get to really build the methodology for an AI-native audit from the ground up. I saw that as a great opportunity for me to have a front-row seat of this transformation."

The increasing role of private equity and venture capital investment in the accounting profession has transformed the sector and posed challenges not only to the structure of firms, but the role of auditors, especially as technologies like AI grow in use.

"That's why I'm here," said Ho. "I see that the accounting and auditing industry is going through a lot of changes. From a structural perspective, all the firms are changing ownership and taking capital from PE, and at the same time because of the technology with AI, there's also a major shift that I think is really needed."

She noted that auditing historically has involved a human person checking another person's work, but now it's becoming more about a machine checking another machine's work. 

"Our vision is that we want to build an independent verification platform, which is a much bigger category than audit, for a machine-checking machine. I think that is a big shift and opportunity that will make this profession more relevant and modern and will increase trust because I think that with a lot of information being generated by machine AI, it's difficult to know what you can trust and what you cannot. I see this as a great opportunity for this profession to really have an impact."

Oath has been hiring what the company calls "accountant engineers" to help with this transformation.

Dissenting views

Before her resignation last December, Ho was often known at the PCAOB for her dissenting views and votes against the proposed NOCLAR standard for noncompliance with laws and regulations and the proposed standards on firm and engagement metrics and firm reporting, all of which have since been shelved by either the PCAOB itself or the Securities and Exchange Commission. The mostly new set of board members at the PCAOB has been making changes, including the formation of a new Inspections Modernization Council, as well as plans to close the Office of the Inspector Advocate and assign the duties to PCAOB chair Demetrios Logothetis, who is also interested in leveraging technology advances.

"From some of the public statements I have heard, this board and specifically the chair is interested in advancing technology, which I think is good," said Ho. "I understand they were trying to actually staff a tech leadership role in the chair's office. There was a job posted a while ago. From that perspective, it's signaling the investment that this board is making. I don't know how effective they'll be because it takes more than one person to try to drive changes in advanced technology adoption in a large organization. But I'm glad that they are at least making those investments because I don't believe that the prior board was investing in that. From that perspective, I support them, and I hope they can make more advancements in this space than we did in the last board."

Last week, the PCAOB's Inspections Modernization Council posted its discussion materials from its meetings this summer, and they indicate the PCAOB plans to leverage technology such as AI in its inspection process. Ho sees parallels in the work now being at Oath to automate such processes.

"I think they can totally apply the same technology to automate and drive higher quality of the inspections," she said.

She believes it's possible to leverage AI, but still keep confidential client data separate from the public-facing AI models. 

"There is a technical solution for that because we have client data and we use AI, and in our environment we architect, each client has its own environment that is completely secure," said Ho. "It does not train the model."

Maintaining independence

She believes it's important for auditing firms with alternative practice structures to maintain their independence. "I think it is important to make sure that we are independent because that is the foundation of audit and verification," said Ho. "But in the current environment where firms need capital, that's why they get PE capital because they need to be able to invest in the infrastructure, especially technology, to be able to compete in this day and age. PE has all these funds. We call it an alternative practice structure, but it has become mainstream now."

She believes it's important for the AICPA to tackle these changes in its alternative practice structure guidance to make sure there are guardrails and audit firms don't compromise their independence, but she admits the issue is complex. 

"In my comment letter, I do talk about how it's not just necessarily that you are in a fund," said Ho. "That's just a container, but do you have significant influence and control? I think that's really key."

She noted the AICPA PEEC taskforce has updated the exposure draft to recommend an approach looking at whether the investors have significant influence or control as a critical factor in determining whether an attest entity is independent or not. During the August meeting, the committee indicated it plans to re-expose the latest version of the guidance in October or November to give everyone another opportunity to comment before the revisions are adopted next May. 

Ho would like to see more stakeholders weigh in with their feedback, especially technology companies. "I did that when I was at the PCAOB too," she said. "I always encouraged stakeholders to comment and make their voices heard, because it's important for standard-setters to get it right."