The Public Company Accounting Oversight Board approved a 2014 fiscal-year budget of approximately $258.4 million, a 5 percent increase over this past year, and a 2013-2017 strategic plan that includes a greater focus on accounting firms' burgeoning consulting practices.
"We have observed a growing rate of increase in consulting revenue and acquisition activity by firms in the past several years," PCAOB board member Steven Harris said in a statement. "Consulting revenue for the Big Four global network firms has increased over the past five years by 33 percent, versus only 6 percent in audit revenue. Based on acquisitions and other activities at the firms, it is likely that consulting revenue will continue its rise."
In the past 18 months, the Big Four global firms and their affiliates have announced over 36 acquisitions of consulting businesses, with the Big Four U.S. firms accounting for 19 of those acquisitions, he noted. Recently, KPMG announced that it was starting an investment fund with the goal of investing in, partnering with, and acquiring organizations that specialize in data and analytics tools and assets, he noted. "These developments point to a future in which the relationship between the largest audit firms and their clients will become ever more complex," said Harris.
Several of the largest auditing firms sold off their consulting practices over a decade ago in the wake of accounting scandals like Enron and WorldCom and the passage of the Sarbanes-Oxley Act of 2002, which restricted auditing firms from conflicts of interest with their non-audit practices. But firms have been gradually rebuilding their more profitable consulting and advisory businesses in recent years with the help of M&A activity. PricewaterhouseCoopers announced plans in October to merge with Booz & Co., and Deloitte acquired the Monitor Group in January 2013.
At a meeting in late November, the PCAOB approved both the strategic plan and budget. The PCAOB's fiscal 2014 budget is $12.8 million, or 5 percent, above the board's 2013 budget of $245.6 million. The board also approved its strategic plan for 2013-2017 to serve as the foundation for the 2014 budget, and to guide the PCAOB's programs and operations.
"We are happy to say that we made substantial progress on the six near-term priorities we outlined this time last year," said PCAOB Chairman James Doty in a statement. "For the 2013-2017 plan approved today, we added new objectives and strategies relating to these priorities. The $258 million budget supports the strategic plan, and properly reflects the board's funding needs to maintain quality programs, effective oversight, and dedicated people as we seek to fulfill the board's investor protection mission."
The total accounting support fee for 2014 is $252 million, with approximately $225 million allocated to public companies and $27 million to broker-dealers.
IDENTIFYING MORE RISKS
Other elements of the strategic plan include investor protection and improving audit quality through the development of audit quality indicators at both the firm level and the engagement level.
The board also plans to focus on monitoring emerging trends that may lead to increased audit risk, including cybersecurity risk. "Such risks pose significant issues for companies, such as increased security costs; loss of material intellectual property; claims by customers; and litigation," said Harris.
The PCAOB's international agenda includes China, where it has made some progress this past year in sharing information with Chinese regulators, although the PCAOB still does not have the ability to inspect firms in China. However, China is not the only problem country, with the strategic plan noting, "PCAOB inspections continue to find high rates of deficiencies at the global networks."
PCAOB board member Lewis Ferguson now chairs the International Forum of Independent Audit Regulators, a group of 46 audit regulators from around the world, which recently published research showing that audit regulators across the globe are encountering similar issues with audit quality, he pointed out.
The PCAOB also plans to issue guidance on how firms can conduct "root-cause analysis" of systemic risks. The board also intends to provide more detailed information about registered auditing firms on its Web site. Harris said that he would like to see a tool on its Web site that enables investors and other interested stakeholders to easily identify the auditor of an issuer by simply inputting a company's ticker symbol. That would allow investors to identify a company's auditing firm and do their own due diligence on the auditor. The PCAOB's Office of Information Technology has developed a prototype for accomplishing this and Harris said that he hopes it will be finalized and made operational in 2014.
In addition, the PCAOB is developing internal guidance for integrating economic analysis into its program activities to aid in the evaluation of economic considerations, including costs and benefits, in its standards and rules.
The PCAOB is increasing its staff to deal with all these new initiatives. The budget assumes that the PCAOB will reach a 2014 year-end projected total of 864 staff. The Division of Registration and Inspections accounts for 533 of these positions, while the Division of Enforcement and Investigations accounts for 66 positions.
As of Nov. 13, 2013, there were 2,234 public accounting firms registered with the PCAOB, including 913 based outside the United States. The 2014 budget is subject to approval by the Securities and Exchange Commission.
