Dive Brief:

• Republicans on the House Financial Services Committee have proposed legislation that would eliminate the watchdog for accounting firms that audit publicly traded companies, folding its duties into the Securities and Exchange Commission.
• Under the draft legislation, a levy on companies and broker dealers used to fund the Public Company Accounting Oversight Board would end. Rules and processes currently overseen by the board would carry over into the SEC.
• The Financial Services Committee is scheduled on Wednesday to consider winding down the PCAOB as part of a sweeping bill to fund the federal government. The effort to eliminate the board — established in 2002 after the Enron accounting scandal — is one of many Trump administration initiatives to reduce regulation and is likely to spark opposition from committee Democrats.

Dive Insight:

While centralizing authority, folding the PCAOB into the SEC would risk politicizing regulation and diluting specialized audit oversight, according to Jennifer Wood, partner and assurance service line leader at the Bonadio Group, an accounting and consulting firm.

“The most significant downside would be the erosion of the PCAOB’s singular focus on audit quality,” Wood said, noting that “the SEC may be less aggressive in proposing or enforcing rules that impose operational burdens on audit firms.”

For example, the SEC may blunt oversight of recent PCAOB initiatives expanding auditor responsibilities, including mandates for sharper fraud detection and noncompliance with laws and regulations (NOCLAR) standards, Wood said.

In the name of streamlining regulation, the SEC may also soften indicators on audit quality and operational rules for inspections, she said in an email response to questions.

Moreover, the SEC mandate to facilitate capital formation and market efficiency may at times rub up against the need to ensure audit quality, she said.

“A loss of specialized audit inspections and reduced independence of oversight could harm public confidence in financial reporting, especially in times of market stress or corporate failures,” she said.

Investor advocates, some SEC and PCAOB officials, accounting academics and some industry stakeholders will likely oppose scuttling the PCAOB, Wood said.

When pressed by Sen. Chris Van Hollen, D-Md., at a Senate Banking Committee hearing last month, Paul Atkins — then the nominee to lead the SEC — declined to say whether he would favor folding the PCAOB into the commission.

“The function needs to be done,” Atkins said. “Whether it's PCAOB or whether it's folded back into the SEC, the function is vital.”

Atkins received Senate confirmation as SEC chair on April 9 without the support of Democrats.

The PCAOB has come under fire in recent years for tightening regulation.

For example, the PCAOB proposed a standard in 2023 that would require accounting firms to step up efforts at detecting fraud. Rather than merely identify compliance laws and note instances of potential deviation, accounting firms would need to create procedures to ferret out non-compliance and actively evaluate a potential breach.

The board eventually shelved the proposal in the face of industry backlash.

The PCAOB for years has been in the cross-hairs of conservative think tanks and Republican lawmakers.

The board has “proved to be ineffective, costly, opaque and largely impervious to reform,” according to “Mandate for Leadership,” a key document written by Project 2025, a conservative initiative led by the Heritage Foundation aimed at influencing the Trump administration.

“To reduce costs and improve transparency, due process, congressional oversight and responsiveness,” the PCAOB should be abolished, with its regulatory role merged into the SEC, Project 2025 said.

Authors of the report cited Atkins among contributors who deserve “special mention.”

The American Institute of CPAs released a statement Monday that neither supported nor opposed the Republican effort to “defund” the PCAOB and wrap it into the SEC.

“We stand ready to assist policymakers as they consider potential changes to the regulatory infrastructure overseeing public company auditing,” AICPA CEO Mark Koziel said.

Editor’s note: The story has been updated with comment and background.