The Coming SEC-PCAOB Merger? Arguments Against Abolishing the PCAOB

The House Financial Services Committee voted to include a provision in the 2025 budget reconciliation bill that would abolish the PCAOB. The proposal would reassign PCAOB functions to the SEC.

Unfortunately, if this PCAOB provision stays in the budget reconciliation bill, it’s likely to be the end of the PCAOB. The fate of the PCAOB would be a minor detail in the context of the reconciliation and would not in itself be likely to influence any votes. The only thing that might stop it is if the Senate parliamentarian rules that it isn’t germane to the budget.

I can see a lot of downsides to an SEC-PCAOB merger and hardly any advantages. The PCAOB is funded mainly by assessments paid by the largest public companies – and since it doesn’t receive any taxpayer funding, there is no fiscal justification for a merger.

Here are some bullets I pulled from this excellent blog by Dan Goelzer, a former SEC general counsel and someone who served for many years on the PCAOB board, right from its founding:

1. Importance of the PCAOB
   • The PCAOB was created by the Sarbanes-Oxley Act following financial reporting crises (Enron, WorldCom).
   • Sarbanes-Oxley passed with strong bipartisan support (unanimously in the Senate and with only three negative votes in the House).
   • The PCAOB has successfully fulfilled its intended purpose.
2. PCAOB’s positive impact
   • The PCAOB has catalyzed major improvements in audit quality through its inspection program.
   • During its 20+ years of operation:
     • Financial restatements have declined.
     • Accounting firms have become more focused on audit quality.
     • There have been few significant breakdowns in audited financial reporting.
3. Problems with transferring functions to the SEC
   • Audit oversight deserves an organization with exclusive focus on these issues.
   • The SEC already has broad responsibilities and limited resources.
   • The current structure allows the SEC to oversee PCAOB without investing its own resources in day-to-day audit oversight.
   • A merger would dilute both audit oversight and the SEC’s ability to perform other investor protection responsibilities.
4. Implementation challenges
   • Recreating comparable inspection and standard-setting functions would take several years.
   • There would be considerable disruption and a lack of continuity.
   • Staffing would be a significant challenge:
     • PCAOB personnel are unlikely to transfer to the SEC at lower government pay rates.
     • PCAOB inspectors are experienced auditors in high demand due to talent shortages.
5. International inspection complications
   • The foreign inspection program would need to be rebuilt at considerable cost.
   • The 2022 agreement with China specifically permits PCAOB (not US government) employees to conduct inspections.
   • China is unlikely to allow the SEC to continue these inspections.
   • Other countries also may want to renegotiate their inspection agreements.
   • It could take years to restore the foreign inspection program to its current status.
6. Fiscal impact
   • The merger would increase rather than decrease the deficit.
   • PCAOB funding comes from:
     • Assessments paid by the largest public companies
     • Fees paid by accounting firms
     • No taxpayer funding
   • The SEC receives annual appropriations from Congress (taxpayer funded).
   • A merger would shift audit oversight costs from companies and accounting firms to taxpayers.
7. Budget reconciliation logic flaws
   • The proposal aims for the PCAOB to turn over unused funds to the Treasury when abolished.
   • This represents only a one-time payment.
   • It would require future appropriations in perpetuity to support the SEC’s expanded responsibilities.
   • The proposal makes little fiscal sense for the long term.

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