Earmark Podcast | Earn Free Accounting CPE

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Christina Ho: [00:00:00] I was very upset about being accused of lying. I think that if you say that, you know, I had a different views and I thought it was very hypocritical of the senators, especially Senator Warren, to essentially bully me because I had a different view.

Blake Oliver: [00:00:23] If you'd like to earn CPE credit for listening to this episode, visit earmarks. Download the app, take a short quiz, and get your CPE certificate. Continuing education has never been so easy. And now on to the episode. Hello everyone, and welcome back to earmark. I'm Blake Oliver. I'm talking today with Christina Ho, a board member at the PCAOB, the public company accounting Oversight Board. Christina, welcome to the program.

Christina Ho: [00:00:55] Thank you. Thank you for having me.

Blake Oliver: [00:00:58] Let's say that you and I met at a cocktail party in DC, and I'm not an auditor. I'm not an accountant. I don't know anything about the accounting profession. And I ask what you do, and you tell me. I'm a board member at the PCAOB. And I say, well, what's that? How would you describe the PCAOB to someone who is not familiar with it?

Christina Ho: [00:01:21] Well, great question, but before I answer, I want to give my standard disclaimer first. The views expressed here are my own. They do not necessarily represent the views of the PCAOB board, other board member or staff. So I would say to you that the PCAOB is responsible for making sure auditors who check the publicly traded companies financial disclosures are doing their job well.

Blake Oliver: [00:01:52] How does the PCAOB measure that? How do you know if the auditors are doing their job?

Christina Ho: [00:02:00] Yes. Pcob has a investor protection mission and which is carried out through, um, certain program by registering the audit firms who can do public company audits. And then we do an inspection. By doing inspection, we I mean that we check periodically depending on the size of the firms, uh, how they did with their audits. And then we also have an enforcement program if, um, we find that, uh, audit firms has done, uh, committed fraud or violated our standard or rules, we can, um, sanction them. And the way that we find out whether they are doing their job. Well, um, primarily through inspection, the inspection program actually has the majority of the staff in that program, and we inspect firms audits on a some on an annual basis, some on every three year basis. And based on the result of that, we determine whether they are doing their job well or not.

Blake Oliver: [00:03:18] Okay. Got it. So the Pcob inspects the audits of firms that are registered with the PCAOB. Yes. And if you were auditing public companies, companies listed on stock exchanges in the United States, then you have to be registered with the PCAOB, right?

Christina Ho: [00:03:36] Yes.

Blake Oliver: [00:03:37] Okay. And how does that work, exactly? How does the PCAOB decide what audits to inspect? What audits to audit? Because I understand it's not every audit that gets inspected, right?

Christina Ho: [00:03:52] Yes. So, um, we take, uh, the way that we take a sample. So auditors always pick sample because we can't inspect every single audit. Uh, we take a sample, and then we, um, inspect based on certain areas. We also don't inspect for every audit. We don't inspect every single area we inspect. We take a risk based approach, uh, certain audits we select based on a random basis. But, um, a majority of them we select on a risk base, uh, basis.

Blake Oliver: [00:04:30] Okay, great. So I as an audit firm, I do, let's say 100 audits and then the PCAOB decides out of those 100, we're going to inspect X number of audits. About what percentage is it that get inspected.

Christina Ho: [00:04:47] Yes. So it's different for Between. So there are three sort of category. The one category is what we call the global network firms. They are the big six. So the big four plus Grant Thornton and BDO, they're the largest um firms. We select them in terms of the number for the big four. It's like about 50 plus or minus. You know, each year. Um, and then BDO and Grant Thornton are less than that because they have less clients. Because if you think about it, the majority, you know, all of the S&P 500 and you know, the the large accelerated, um, issuers are all audited by mostly audited by Big Four. And then then the next category is what we call the annual firms. They are firms that have more than 100 Hundred ensure they get inspected annually as well, and that percentage is about 10%. Um, I personally think that our inspection program is disproportionately burdensome on these firms and they are smaller. But if you think about it, they their audit partners actually get inspected a lot more frequently given the percentage we focus on. That's why I have heard feedback from many of those firms that they are trying to especially view on the on the, you know, like a little bit more than 100. They actually are trying to like get rid of their audit clients to get under 100. Um, so the third category, is anybody any firms farms with less than 100 issuers, and they get inspected every three years.

Blake Oliver: [00:06:52] Ah, so that's a big difference going from annual inspections to tri annual or triennial. I think that's the word. Yes. Um, a lot less work.

Christina Ho: [00:07:01] Yes.

Blake Oliver: [00:07:02] So the the firms that get inspected annually that are smaller than the big six, the big four plus BDO and Grant Thornton, you said it's about 10%. And I believe you said that for the largest firms those top six, it's about 50 audits each that get inspected. Yes. What is that. What does that work out to as a percentage of the audits that they do? Is that around 10% or is it more or is it less?

Christina Ho: [00:07:29] No, it's less because, you know, if they have let's, you know, assume that that they have you know, we have there's like 4000, um, well, maybe 5000 public companies now. And let's say, you know, about 2000 of them are large. And so if you think about among the big four, um, you know, there are like threshold is probably less than 10%. I don't know the exact number. But, you know, in my head, um, and it depends on which firms I think they, they get um, probably from a percentage wise, they have they get audited, inspected less. Plus you think about how many, you know, how much resources they have, uh, in terms of national office and all that kind of stuff, that that's why I think it's disproportionately burdensome on the, um, you know, annually inspected firms.

Blake Oliver: [00:08:31] Yeah, that seems unfair that the largest firms would have fewer inspections as a percentage of their audits than firms that are smaller than them.

Christina Ho: [00:08:40] Yes. I think that, um, I mean, these are all the things I've been hearing, you know, as part of my engagement with, uh, especially smaller firms. Uh, I'm learning more about, um, the impact to them and also, more importantly, the impact to the capital market ecosystem as a whole. I personally, I just don't think it's good to, for a very important part of an ecosystem to try to not grow. That doesn't sound like a good thing to me, especially if we are trying to, you know, really like facilitate capital formation. We want our capital markets to grow. Um, we need to make sure we have resilience in the audit marketplace, uh, to make sure that we have enough supply to support, especially the smaller issue because they they are not the the big four is not going to audit those clients.

Blake Oliver: [00:09:47] Right. So your view is that the burden on the small audit firms is too high.

Christina Ho: [00:09:55] Yeah, I think it's disproportionately too high, uh, on those smaller firms.

Blake Oliver: [00:10:01] And that burden is causing them to either stop doing audits or to shrink the number of audits they do in order to be inspected less often.

Christina Ho: [00:10:10] Yes, exactly. And I also think because of the challenge of the human capital, because the smaller firms from a competition, uh, competitiveness wise, you know, for human capital and also investment in technology, they just don't have the same resources. So they are already, um, sort of on a disadvantage. And if they are actually have more burden from a regulator perspective, it's just going to make them even. You know, they have more work and and harder to attract talent.

Blake Oliver: [00:10:51] One argument in favor of keeping that burden, or keeping the current system in place, is that it improves audit quality. And I'd love to talk to you about your views on the state of audit quality today. How are we doing as a profession? What is the state of audit quality? Are we doing good audits? Are we doing bad audits? If it's a mix, how many are good and how many are bad? How do you look at it?

Christina Ho: [00:11:21] Yes. It depends on what data you look at. So if you look at the data on number of restatement and you look at the last ten, 20 years and, and we are from a number of restatement perspective. One would say, you know, the the state of audit quality is good because we are under restatement has been on decline in the past ten years. If you look at the AICPA, CAQ study that they released last year, um, and also I talked to um, audit committees and uh, on a regular basis, if I talk to them, they feel that the audit quality has been, uh, improving and has and so is the quality of the financial reporting. If you ask, um, if you look at our deficiency rate as a metrics on audit quality, you would think that the sky is falling and that the audit quality is really bad. So in my opinion, I believe that the audit quality is very nuanced. And I think that restatement metric is a a much better metrics that measure audit quality, because that really measure the true impact to investors. The reason I don't believe that our deficiency rate is the best measurement. It's one measurement, but it's not the best measurement of audit quality is because one, our deficiencies in and I have been saying this publicly. We do not have any severity rate on our deficiency rate. Our deficiency. We put everything in the same bucket. And in reality, not everything is the same in terms of impact and materiality. So what matters to investors is really restatement. That matters to them the most. And this is from you know, I also talk to the investors, including institutional investors, traders, analysts. And um they focus on restatement. So I think the answer is that more nuanced than like just, you know, one thing. Um.

Blake Oliver: [00:14:03] Can we sorry, can we, uh, dig into those numbers a bit? I'd love to. I'd love to understand how you square those. Yes, because I have been watching the Pcob press releases. The deficiency rate in particular got a lot of attention last year, and it is very high. It looks high. 46% of audits, almost half of audits reviewed in the 2023 inspection cycle Contained at least one significant deficiency, and that's up from 40% in 2022. And that rose from 34% in 2021 and 29% in 2020. So we went from 29% deficiencies. A 29% deficiency rate in 2020 to a 46% deficiency rate in 2023. And according to the Pcaob's own definition, the deficiencies in these audits are so severe that, quote, the audit firm had not obtained sufficient appropriate audit evidence to support its opinion, unquote. So when I read that, that to me sounds like the auditor should not have issued the opinion. And it sounds like the auditor should not have issued the opinion in close to half of the audits that were inspected. Help me understand this.

Christina Ho: [00:15:29] Yes. So I have spoken on that. In fact, I have been accused for downplaying our, um, deficiency, uh, the state of audit quality, um, by by saying this, uh, in fact, I think it's important I the definition you read that was right. But it's also equally important when you read our disclaimer, which says if we include a part one A or part one B deficiency in this report, other than those deficiencies for audits with incorrect opinion on the financial statements, it does not necessarily mean that the issuer's financial statements are materially misstated or that undisclosed material weaknesses in Icfr exist, and the percentage of those that that are in the category of deficiency for audits with incorrect opening is like less than 5%. So I think that you can look at the definition which also said at the time, and then our disclaimer. So in reality, it's very difficult for investors to discern what the impact and materiality of these deficiencies are. And that's what I meant by severity. For, you know, the issuers internal control over financial reporting, they have to look at evaluate their internal control. And the auditor has to attest to their internal control, but they have to identify whether they are material weakness, significant deficiency or deficiency. Our inspection report does not provide these severity.

Blake Oliver: [00:17:14] The 5% number you mentioned, that is the percentage of financial statements that are restated as a result of errors.

Christina Ho: [00:17:23] That is actually. Those are the actual audit deficiency that had a incorrect opinion on the financial statements.

Blake Oliver: [00:17:37] So there's a difference between the Pcob deficiency rate, which is 46%, that says there's something wrong with this audit. And then the 5% number, which is the audit opinion was wrong. And that's what I don't understand is like, if the if the Pcob is saying that the auditors should not have issued the opinion, how can the opinion be right?

Christina Ho: [00:18:03] Well, I think that here's the thing. When, when when we do these inspection, we provide these comments to the firm. And, and I think we put that in our inspection report which have a bunch of disclaimers, including the one I just read. Ed. Um. They could. It's possible that the firms might have gone back to double check that the audit deficiency did not actually result in any incorrect opinion. So that's not transparent in our report. So it really is confusing to the investors and the public.

Blake Oliver: [00:18:49] So the the firm gets the deficiency. The firm gets a deficiency in their audit. And then the audit firm has to decide are we going to help the client restate their financials. And it's 5% of the time when they do that. And is that is that 5% of all the PCAOB inspections.

Christina Ho: [00:19:13] So if you look at the 2020 the 46% for the year for 20. So it's 2024. We have 46%. But if you could look through all the inspection report, uh, if that there is a section, it would say deficiency for audits with incorrect opinion. If you look under that heading and count and then divide it by the total of audits that we inspected it, you know, my calculation was less than 5%, which means it's very, very few that were our deficiency that we identify for the audits, that they actually resulted in incorrect opinion. So that's how I kind of like look at these two number. That's why I feel like there needs to be more context so that people understand. Because like you said, if you hear 46%, you think like half of the audits cannot be trusted. And that is not true because the nature of these this deficiency. It needs to be, you know, looked at carefully and, uh, and also how we came up with the 46%, because when I talked about the earlier about the fact that we took a sample. Right. And if you take a risk based sample and because they're not statistical sample, we really can't extrapolate the deficiency rate to the entire population of all the audit because we did not take a statistical sample. So this may be may mean that if you actually inspected the entire population, the deficiency rate might be lower, because if you you know, when you do a risk based approach, meaning you're more likely to identify By a deficiency in those samples.

Blake Oliver: [00:21:20] Right. You're looking for audits that are likely to have deficiencies? Yes. So that number is kind of useless, isn't it? The 46% number. It doesn't mean. What does it even mean? Is it? It doesn't mean that to me.

Christina Ho: [00:21:36] To me, I actually think the way to look at deficiency rate is not by each year. Um, the best way to look at that data needs to be looking at a trend. And then you look at what caused these changes in the trend. Uh, when I first started, uh, on the board, I actually, you know, looked at deficiency rate since inception, and I looked at the trend and I actually did a speech on it last year about, you know, how there were like, you know, you can kind of look at them every ten years and they tend to go up and then come down and then go up and come down. Um, there are different events that cause these things to happen. So like, for example, the first like ten years, um, the deficiency rate got very high, like in 2010, uh, from, you know, 2004, um, because we that's the first year that we started doing inspection on Icfr because of the as five standard. So when, when Pcob first started, we issued this auditing standard, two on, you know, auditing internal control over financial reporting, which created a big mess because of all the detail and prescriptive things that auditors ask the issuer to do. So several years later, um, we had to amend that standard to make it more principle based. And then 2010 was when we first like really started inspecting Icfr audit. And so you kind of, you know, I saw a trend of going up. And um, because we're inspecting in a new area. And then if I look at the last, you know, four years and the trend of going up, there were multiple things that happened with the Covid, with the remote work, with multiple things, with changing the board, because that leads to potentially different, different expectations. Right. So so I think that the best way to, to assess, to use that information, because I'm a data person, I don't look at these data just without context. I think it's really important to look at these data in context.

Blake Oliver: [00:24:08] I agree. And it seems like we're missing a lot of that context in what is released by the PCAOB. It seems like if we are going to try to measure audit quality profession wide, then we should have a metric that reliably measures it in a way that is unbiased. So the fact that all these audits are selected on a risk based approach and not randomly is a problem, because we're not getting a clear picture as to what percentage of audits as a whole in the whole population have a deficiency. It would be like if we were auditors and we were going in and picking a population, and we were hand picking to try to find the transactions with errors, issues, problems. Right. And we weren't randomly selecting. Right. So, um, why doesn't the pcob have an objective measurement of audit quality or is there one that is not being published?

Christina Ho: [00:25:09] I believe that if our goal is to improve audit quality by helping the firm improve, which I believe was the intent of Congress, because it was supposed to be a supervision model where you do inspection and then you help the firm improve large and small. And then, um, and taking a risk based approach makes sense because you want to identify the area that had the most risk of deficiency so that you can help the firm improve. What I am critical about is what we have been doing is not to help the firm improve, but by painting a picture of the auditing profession being Incompetent, dishonest. That is very unfair. And if you were going to do that, then I agree with you that by using these percent, these deficiency rate as a mean to, you know, pretty much make the audit quality sound at the state of audit quality seem really bad without providing transparent information and context, then yes, I completely agree with you. That is not right and that is what I have been critical about.

Blake Oliver: [00:26:47] So don't you agree though that it would be it would be helpful to have an objective measure of like audit quality by firm, where a random percentage of a firm's audits are selected for inspection and then they are rated for quality. And that way investors Management can look at a firm and say, well, your ranking is 80% and this other firm is 60%, and this other firm is 50%. Right now we kind of have that a little bit, but it's not objective. It's not fair because the audits are not randomly selected. We have some firms that have 100% deficiency rates. Right. Every audit that is inspected is deficient. There's actually quite a few on the PCAOB website, and that looks terrible, but I guess it doesn't seem to matter to anyone. Investors don't seem to care. Like, shouldn't we have some sort of shouldn't we have some sort of way of ranking the quality of the audits done by audit firms?

Christina Ho: [00:27:48] Yes, I think the pat in the historically actually the board has tried to I mean, I think the the project audit quality indicator has been around for, you know, 15 years or something like that. And I think this board also, you know, as a result of that, try to propose some firm and engagement metrics, which, um, I dissented on. And, and uh, I think the measurement of audit quality has been something that people have been trying to do, but I think it's difficult because, um, audit quality is not a quantitative, uh, easily quantitatively measurable. So I think that is that has been the struggle and the going back to your comment about the investor, you know, doesn't don't seem to care. I do think investors care, but I also think there are different investors, different kind of investors. Um, for the most sophisticated investor, they they focus on making investment decisions decision based on the company's disclosure and the performance, and then they make sure that the audit is a clean opinion. So which is that's like the most important part to them. And they um, for the most part, they trust the process.

Christina Ho: [00:29:19] I think we also have some investor advocates who would say that, yes, you need to have the engagement, performance metrics and all that kind of stuff. They believe that that will provide an investor, um, informative information. But I also think information if you have so much out there, I would say the fact that we've been like, you know, really flooding the, the, um, ecosystem or the market with all the information about our inspection results and enforcement, it's hard for investors to decipher what which piece of information truly mattered. And I think that's the part we're not doing a good job at. We give them so much information, but often not, you know, with real context. And it just seemed like everything is so bad. Then when you listen to that, it's hard for them to say, okay, you know, I will listen to this part of the information. So I think that we should be more transparent about the context. And I agree that having more information on that really link audit quality is really would be very helpful.

Blake Oliver: [00:30:45] Yeah, that's the way I, I've always viewed the pcob as, as the auditor of the auditors. The we we need a way to. Measure their performance and we don't have that. It the deficiency rates do not accomplish that according to what I'm hearing from you right now. Yes. It's not an accurate measure when when we see like BDO has like an 80% or more deficiency rate, that doesn't mean that 80% of their audits are are bad. It just means that of the ones that the Pcob inspectors inspected, there was something wrong with it, but that whatever was wrong with it didn't necessarily mean that BDO didn't issue the correct opinion. So that to me is like a useless metric.

Christina Ho: [00:31:32] I can't say I disagree with you.

Blake Oliver: [00:31:36] Um, so, you know, let's, let's, let's talk about what's going on in politics recently, Department of Government Efficiency has been going around and digging into different federal agencies, organizations, nonprofits, It's saying justify your purpose, justify why taxpayers should continue to fund you and cutting those that can't. Um, has the Pcob had any contact with Doge? Well.

Christina Ho: [00:32:12] One of the, um, thing you will hear from people today is that we are not a federal agency because we're technically a nonprofit, even though we were established by Congress. But the Sarbanes Oxley law specifically say we're not a federal agency. So you, you, you know, there are a number of executive order that's related to Department of Government Efficiency, that or issue to ask agency heads to look at, um, efficiency or, uh, regulatory burden, uh, in coordination with the Department of Government Efficiency. Now that seems sensible to me. But can we say we are a federal agency? We are not a federal agency. However, I also don't think we can say because of that, we're not impacted because our regulator, which is S.E.C., is a federal agency. And I expect that they would be already looking even without the Department of Government efficiency, would be looking to for us to look at efficiency and optimize our workforce. Because I have said publicly, our budget has grown 40% under this board and that is not sustainable. And so I fully expect that the SEC, the new SEC leadership, even without the Department of Government Efficiency, would want us to look for efficiency with the Department of Government Efficiency lens. I think they will probably want us to do even more of that.

Blake Oliver: [00:34:03] Some have suggested disbanding the Pcob and rolling its responsibilities back in to the SEC. What would you say to that?

Christina Ho: [00:34:15] Well, I would say to do that requires Congress to make legislation. You really can't do that without amending Sarbanes-Oxley and amending that. You know, you know, going through the legislative process that that could take a long time. And it depends on so many factors. Um, if you ask me on just the merit of that, I, I can see the, the merit for doing that. Um, mainly because. Pcdob is a regulator that's not a federal agency, which means that we're subject to congressional oversight, which means that we are subject to a lot of the federal statutory constraints on regulators. And, uh, and and that's important because regulator has a lot of power. And I believe that unchecked power is dangerous. And to have a, um, you know, nonfederal entity to have that much power can be dangerous, because under our bylaws, uh, all the power to run the day to day operation, including directing the staff, you know, allocating resources are vested on the chair. So the chair is like the CEO of the entity. Um, but the chair also runs the board. And based on our bylaws. So it's kind of like it's not like in the corporate world where you have a board overseeing management. This one is like the chair has essentially unchecked power that can. Do you know anything? It's subject to the SEC's oversight. And but the SEC oversight currently is only limited to our budget and our, uh, rulemaking activities. And of course, appointing the board. So I believe that there are merits because PCAOB, given our regulatory power, need more accountability. But for that to happen requires Congress to act.

Blake Oliver: [00:36:51] So that's interesting. I didn't know that. So the chair, Erica Williams, she controls the board, does not, uh, like you said, in a corporate environment, the board appoints the CEO. It doesn't work that way with the PCAOB. Interesting. So the Pcob was established after the collapse of Enron with Sarbanes-Oxley. The goal to create oversight for the audit profession. Because the argument was. Feel free to correct me if I'm wrong on my history here. The argument was that the audit profession had failed to regulate itself in that regard. Um, is there any evidence that the Pcob has improved audit quality in the time since it was established?

Christina Ho: [00:37:44] I believe if you look at the restatement metrics, I think that you can, um, really, uh, the implication is that, of course, it's not all related to Pcob. I think the, the pcob is a factor in, in, um, providing that. And I think if if you talk to audit committee chairs, you talk to the controllers of S&P 500, I think all of them would say that the state of financial disclosures in terms of quality has improved, and also the state of they feel comfortable with the state of, you know, their auditors because they obviously only deal with their auditors. So I think if you look at those different pieces of information. I think it's reasonable to say that PCAOB has helped improve water quality.

Blake Oliver: [00:38:53] But that's anecdotal. We don't have a way to measure it.

Christina Ho: [00:38:57] Yes. It's anecdotal. Um, but, you know, you can say restatement. Um, that is a quantitative metric. Um, of course, the restatement is not entirely attributed to just auditor. There are many, many factors. You know, there are many players in in the financial reporting ecosystem. So everybody I think can take credit for that. Uh, and PCAOB is one of them.

Blake Oliver: [00:39:28] So the percentage of financial restatements has decreased.

Christina Ho: [00:39:32] Yes.

Blake Oliver: [00:39:34] And what how how much?

Christina Ho: [00:39:38] I don't remember the exact numbers. But if you look at the CAQ study that was released last year, you can see the, you know, they did a ten year look back and study and looking at restatement um, numbers.

Blake Oliver: [00:40:00] Got it. Okay. So we can say or you would agree with the statement that the Pcob has improved audit quality. We just don't know how much.

Christina Ho: [00:40:13] Yes.

Blake Oliver: [00:40:14] Okay.

Christina Ho: [00:40:14] I mean, you can say it's kind of like you can say there's a correlation, but whether there's a causation, we don't.

Blake Oliver: [00:40:21] Right. Right. So. This is almost a moot point. Well, it is a moot point. The, uh, proposed quality control standards from November, because I believe that the Pcob has backed off from that. Is that right?

Christina Ho: [00:40:40] That was not the quality control standard. That was the two standard, one on firm reporting and one on firm and engagement metrics.

Blake Oliver: [00:40:48] That's what I meant. The firm and the firm engagement metrics was the one that I'm interested in. Is that one still proposed? Is that one still happening?

Christina Ho: [00:40:56] No. Both of them were adopted by the board in November and then they got it was subsequently withdrawn in February this year.

Speaker3: [00:41:08] Got it.

Blake Oliver: [00:41:09] So the firm and engagement level metrics would have required firms to report on hours worked by senior professionals, compared to junior staff. They would have had to report average weekly hours worked by seniors on a quarterly basis at a firm level. How many training hours per year audit personnel are getting the experience of audit personnel their industry History, experience and some more metrics as well, like the history of restatements, the retention levels, that sort of thing. Um, you opposed that?

Christina Ho: [00:41:46] Yes.

Blake Oliver: [00:41:47] That seems like it would be interesting to know on a firm by firm basis, how many hours these auditors are being worked, how experienced they are, what the churn rate is at those firms. Why did you oppose that?

Christina Ho: [00:42:04] Yes. Um, I opposed that for a few reasons. And if you look at all of the metrics, I agree some of them would be helpful, but not all of them. But I, I oppose for primarily two reasons. One, our economic benefit, the cost benefit was not compelling that that the these metrics as a in terms of benefit will outweigh the cost because, um, I don't know if you work in the public accounting environment or not, but, um, if everybody has to be checking, keeping track of their hours on, you know, the individual hours they've done. And I remember when I was an auditor, like, we would have a spreadsheet to like for budget purpose that will keep track of, you know, by work stream or something like that. And this would mean in order to provide that metrics at the firm level, you will have to a firm would have to implement a system to capture them consistently. And and it would be tremendously burdensome. And to me, especially if you're already in your busy season, you should focus on doing audit, not tracking all these hours. So to me, our economic analysis was not clear that the benefit outweighs the cost. Secondly is we claim that we were doing that for investors and audit committees. But the feedback we got from investors and audit committees through public comments where they did not need this to make their decision. So it wasn't clear that we were doing this truly to meet a need that we said we were trying to meet. So those were the two main reasons. Uh, and this is kind of how I make my decision when I look at our standard, the standard whether it will truly improve audit quality or not. Because to me, that's the most important thing.

Blake Oliver: [00:44:25] Well, and it seems like you can't even make that A determination as to whether or not any of these reporting requirements will improve audit quality, because there is no true measure of audit quality at the PCAOB.

Christina Ho: [00:44:40] Yes. So I think it was an attempt to provide more information so that people can deduce the audit quality, because I think we point pointed to some of the research on the number of hours you, you know, work in some area. But and when you think about it, uh, when you do these metrics at the, you know, every single issuer level, there are so many kinds, so many contexts that will, you know, that needs that people need to understand to consume that information in a way that is not misleading. And and I don't believe our proposal provided that kind of Ability. Well, the last thing we want to do is to confuse more people.

Blake Oliver: [00:45:34] Well, and if you look at how quickly artificial intelligence is coming into audit and accounting, the metric of hours worked is going to become less and less and less relevant to the output of audit quality. Because if artificial intelligence increases the productivity of one person by ten x or more, as is being claimed and as is being experienced by many people, then it won't matter how many hours are being reported. Like, that's not the most important thing.

Christina Ho: [00:46:11] Yes. And I also I and I said this because some commenters suggested that we do this on a pilot basis, which I would have supported because I think in today's Environment where technology is moving. We really need a more agile approach so that to look at something on a pipe, to do something in a pilot basis and then learn from that and adjust, that would have been a more sensible approach so that we could learn more from the pilot. That but that was not the proposal.

Blake Oliver: [00:46:51] So the idea behind it was to give more information to investors. One really important piece of information that is not currently given to investors is the name of the company that was audited in these inspection reports. So when an audit is deficient, we don't the Pcob does not reveal the company that was audited. Do you think that should be revealed shared with investors?

Christina Ho: [00:47:22] I, I don't know if there's a reason not to. Um, I do know that it requires more public comment. And I don't know if issuers have any concern or the committee have any concern. I actually am someone who really support more data so that it can help people make decisions. So I, I, I don't see what the risk would be, but I also don't claim to know all of it. So I would like to hear more from, you know, different commenters, whether that is something that would be a problem or not. Lawyers might, might tell me that that is not good, I don't know.

Blake Oliver: [00:48:06] Yeah, I know, I, I imagine that the audit firms would not be happy to have their clients named. If it turns out that they did a deficient audit, that wouldn't be good for their business and probably not good for them from a legal standpoint either, but I do wonder if it would incentivize audit firms to do higher quality audits because of the fear of the blowback. When a client finds that there's a news report now about how their most recent audit had a part one a deficiency, and the auditor should not have issued their opinion. I do I do feel like that would make a huge difference.

Christina Ho: [00:48:47] Yeah. Well, that I think is a logical, um, approach. But I think, you know, to do that we probably need to go through some kind of rulemaking in order to do that. I don't know what the history was in terms of where we are now with, with the fact that we're not disclosing issuers.

Blake Oliver: [00:49:08] So we've already talked about this from a theoretical standpoint. Um, this idea of this, you know, deficiency rate versus the restatement rate. And that was at the center of your public dispute with Senators Warren and Whitehouse last year. So we don't have to dig into the the, you know, your arguments because we've heard those and we you know, I think to summarize what Senator Warren and Whitehouse said, it was basically that like they. Well, I'd love to hear from you. Like what was that like? How did it feel having two senators criticize you for a speech you made? And then you know what? What inspired you to go public with your, um, with your response?

Speaker3: [00:50:01] I was shocked.

Christina Ho: [00:50:02] Because, um, I gave the speech to a to a group of internal auditors, and I had no idea somebody's out there reading my speech because I'm thinking, who is out there? Um, reading my speech for no reason. So. So I that, you know, that was my initial reaction. And I was really shocked because the, the senators accused me of lying essentially in my speech. And so, you know, when I think about my own background, um, and, you know, obviously, I was the first board member to dissent, uh, in the history of PCAOB. Um, on our first, you know, for the no clerk proposal. Um, but so I have been, you know, really, you know, name as the dissenting member, vocal critic. People have called me contrarian, which I embrace all those titles. Um, so so it's fine. But I was very upset about being accused of lying. I think that if you say that? You know, I had a different views and I thought it was very hypocritical of the senators, especially Senator Warren, to essentially bully me, um, because I had a different view from her.

Speaker3: [00:51:34] Yeah. And she basically.

Blake Oliver: [00:51:35] Characterized you as, uh, the quote is you appear to be focused on downplaying and misdirecting attention from these atrocious findings, referring to the latest report on the deficiency rate.

Christina Ho: [00:51:51] Yeah. So I felt that if you just, you know, if you want to say my views were not correct, they're not, you know, consistent with what you believe that that's all fine. And I also believe that senators do have the authority to, you know, hold us accountable. And if she had reached out to me and say, you know, I have a problem with your speech and these remarks you made. You know what made you and want to have a conversation that would be completely appropriate, but to then put in a letter that she sent to our chair, which means I didn't even have a proper avenue to respond and, um, call my character into question. I could not be silent about it. And I thought about what I would do. And one of the things as a board member of PCAOB and like I said earlier, because the board members all the power really to run the organization is vested in the chair. The board members really only have our voice and our vote. So the only if I if my voice is being taken away, Way, then I should not be in my job anymore. So I decided that I was going to speak up, which was what I did.

Blake Oliver: [00:53:22] And you did in a LinkedIn post, and it received probably far more coverage than the original letter that the senators sent. It was quite remarkable in the accounting profession.

Christina Ho: [00:53:37] Yes, I, I was very thankful for the support I received. Um, that was one of the things that I realized, um, just from my especially the past two years. I think people were very appreciative that I would speak up. And even though I am a minority on our board, uh, in terms of, you know, my views, but I do represent the majority of the Stakeholder views. The reasonable investors, the people in the profession. Um, so I that had I have received a lot of support and, and I feel like it's important for me to use my voice to speak up for those who don't have a voice.

Blake Oliver: [00:54:32] Well, thank you for lending your voice to this program, and thank you for answering some questions that have been bugging me for years. I really appreciate.

Speaker3: [00:54:43] It.

Christina Ho: [00:54:43] Welcome. You're welcome. I appreciate having the opportunity to, you know, speak here and and talk to you. I enjoy I have listened to some of your podcasts myself. So um, so thank you for inviting me.

Blake Oliver: [00:54:58] Happy to have you.