US may merge PCAOB audit regulator with SEC

The Trump administration has indicated it plans to abolish the Public Company Accounting Oversight Board (PCAOB), the US audit regulator, and roll its functions into the Securities and Exchange Commission (SEC) in its budget blueprint, although immediate action is unlikely

The outline US budget for 2021 includes a passage proposing to consolidate the authorities and responsibilities of PCAOB into SEC beginning in 2022.

The Sarbanes-Oxley Act of 2002 established PCAOB to oversee the audits and auditors of both public companies that are subject to federal securities law and broker-dealers registered with SEC.

According to the budget documentation, the SEC is already charged with investigating federal securities law violations and has the authority to impose disciplinary action, including for public accounting firms that are also overseen by PCAOB.

It states that consolidating these functions within SEC will reduce regulatory ambiguity and duplicative statutory authorities. SEC is also subject to discretionary appropriations, which ensures oversight and constraint over the fees assessed on market participants.

There has been criticism that the PCAOB has not taken enough action to curb audit failures and has rarely issued substantive fines in cases of audit misconduct. There are calls for it to use its powers more effectively to clamp down on major audit firms which breach audit governance standards.

Budget estimates suggests that combing the PCAOB and SEC would produce savings of between $58m and $70m annually, resulting in a $580m gain to the Treasury over the period 2021 to 2030.

In addition, the budget proposes to eliminate the SEC reserve fund in order to restore accountability to the American taxpayer.

The Dodd-Frank Wall Street Reform and Consumer Protection Act created the SEC's mandatory reserve fund, which gives the Commission broad authority to spend up to $100m per year as it deems necessary to carry out its functions.

The Budget documentation suggests that while the fund is outside of the congressional appropriations process, it has come to represent an extension of the SEC's regular appropriation rather than the emergency reserve it was intended to be. This proposal would restore the SEC's accountability by diverting reserve fund resources to the US Treasury for deficit reduction and requiring the SEC to request any additional appropriations from the Congress beginning in 2022.

While the proposal to merge the two regulators is included in the budget, by tradition the outline budget is rejected by Congress so the plans will not get very far this year, especially with Democrats in control of the House. However, commentators are suggesting it is an indication of what could happen in future, especially after the November elections, when control of the White House and/or Congress could change.

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