Of Counsel Andrew Feller recently spoke with Big4News about the future of U.S. audit oversight, potential enforcement gaps as regulatory responsibilities evolve, and the challenges facing auditor whistleblowers.

As the SEC builds specialized enforcement capabilities through its new Financial Reporting and Accounting Unit, the Public Company Accounting Oversight Board (PCAOB) is reconsidering its approach to inspections and enforcement.  Drawing on his 15 years at the SEC, including as a founding member of its Complex Financial Instruments Unit, Andrew discussed what these developments could mean for auditor accountability and investor protection.

Andrew explained that specialized units strengthen the SEC’s ability to pursue technically demanding investigations by concentrating expertise and resources.  These units, he noted, are “willing to take on harder cases because they have the expertise needed.”  He also addressed how investigators distinguish difficult professional judgments from misconduct, including by examining whether auditors ignored or rationalized warning signs.

While welcoming greater specialization at the SEC, Andrew cautioned that a reduced PCAOB enforcement role could leave certain forms of auditor misconduct receiving less scrutiny.  The SEC has historically led investigations into large-scale audit failures and fraud, but he questioned whether it has the resources to pursue the individual auditor negligence cases that constitute a significant portion of the PCAOB’s docket.  He emphasized the need to balance the agencies’ roles “so that there isn’t a hole in the enforcement coverage of the industry.”

Andrew also highlighted the critical role whistleblowers play in exposing audit misconduct.  Audit professionals can provide valuable information, yet they face substantial professional risks and stricter eligibility requirements under the SEC’s whistleblower program.  As he explained, “the rules unfortunately make it hard for an auditor to blow the whistle on ongoing, rather than completed, misconduct.”

If the PCAOB reduces its enforcement and audit-specific inspection activity, Andrew suggested that the SEC may need to reconsider whether those rules enable whistleblowers to provide timely, actionable information that can help prevent investor harm.  Given the complexity of the requirements, he encouraged auditors considering reporting misconduct “to reach out to a specialized whistleblower lawyer to ensure that their interests are protected throughout the process.”