After the Enron episode in 2001, US lawmakers established the Public Company Accounting Oversight Board (PCAOB) to look into the audit quality of accounting firms and mandate companies to review their internal control over financial reporting annually.

As part of the strategy to improve the efficiency of US regulators, it is proposed to merge the PCAOB with the Securities and Exchange Commission (SEC). This proposal, outlined by the leadership of the House Committee on Financial Services, is under consideration for inclusion in the tax and spending bill currently before Congress.

Proponents of audit quality and good governance would be hoping that Trump chickens out on this proposal. The draft legislation would eliminate a levy on listed companies and broker-dealers that currently funds the PCAOB, transferring the organisation’s responsibilities to the SEC.

Over the last 24 years, the PCAOB has conducted more than 4,100 inspections of the work done by audit firms. Many firms have been penalised, some have been advised to improve the documentation of their audit quality while a few firms have been barred from auditing listed companies.

PCAOB has also issued auditing standards and has developed content on accounting standards as per US GAAP. However, of late, the agency has faced criticism from accounting firms, for imposing stringent standards and record fines.

The move to abolish the PCAOB is expected to face opposition from Democrats and may not gain full support from audit firms. Some organisations have advocated for the agency to be more responsive to the accounting profession.

It is natural for a regulatory body that has been in existence for over two decades to draw criticism for showing signs of “regulatory ennui”. Yet, merging them with other regulatory bodies is not an ideal solution in an era of regulatory specialisation. Oversight models may evolve, but what should not change is the accounting profession’s accountability to all stakeholders.

India’s NFRA

The National Financial Reporting Authority (NFRA) in India has been modelled on the PCAOB. If PCAOB was the US reaction to Enron, NFRA was the Indian reaction to Punjab National Bank and other accounting accidents. Though NFRA took some time to be up and running (conceptualised in 2013 but opened offices only in 2017) they have issued disciplinary orders against some accounting firms, finalised audit quality review reports, issued financial quality review reports and put out a few Circulars on accounting matters.

More recently, NFRA has issued a series of documents that list out matters that members of the audit committee need to ask their statutory auditors. Over the last two years, some audit firms have filed petitions against the NFRA stating that it cannot empower itself with the dual responsibility of inspecting audit firms and also penalising them. The Supreme Court has agreed with this but has also confirmed that the powers of NFRA are in no manner restricted due to this.

One question that is being asked is whether NFRA could also be a victim of regulatory ennui. NFRA has done enough and more to sensitise the Indian accounting profession and auditees on the need to maintain a certain minimum level of audit quality. Proof of this can be seen from the fact that audit reports over the last few years have been calling out matters that previously could have been parked in the disclosures to the financial statements. Some have stated that the Serious Frauds Investigation Office (SFIO) is also another regulator.

However, the mandate of NFRA and SFIO are completely different. Unlike the PCAOB, the NFRA is not dependent on the fines it imposes for its running. The government should think of audit quality as a journey and not a destination and empower the NFRA to become neutral, fair, rigorous and assertive. Empowerment should be both budgetary and non-bureaucratic.

The writer is a chartered accountant

Published on June 12, 2025