US SEC in ‘Censorship’ Row for Audit Regulation Study

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The US Securities and Exchange Commission has been accused of censorship after forcing an academic to delay publication for nine months of a paper examining the impact of regulations on small audit firms.

The politically sensitive work, based on three years of interviews with audit firm staff, was completed by Ally Zimmerman and three other researchers while Zimmerman was on a one-year fellowship at the SEC last year. Zimmerman, an associate professor at Florida State University, completed the fellowship in July.

The paper highlights criticism of the Public Company Accounting Oversight Board, the US audit regulator that is overseen by the SEC. Small firms complain of delays in receiving feedback from the agency, the paper said, indicating that the regulator’s inspection regime favors larger firms such as the Big Four. Smaller auditors don’t have the same infrastructure to respond when inspectors find audit flaws, the researchers said.

The PCAOB has faced industry claims that its tougher stance under the Biden administration is pushing some smaller firms out of the market, with the risk that listed companies too small for the big four will struggle to find an auditor. The paper concludes that some small firms are reluctant to take on more clients for fear of triggering additional inspections.

The paper was only made public after her fellowship ended, Zimmerman told the Financial Times, and the authors plan to submit it for peer review.

“The SEC didn’t like that the newspaper was there,” she said, adding that an SEC employee told her during the exchange that there was a problem with the “optics.”

“As a fellow, you are required to submit all papers for review, and I submitted several papers to them,” Zimmerman said. “That was the only one they banned or censored.”

The SEC declined to comment. A source familiar with his decision said the paper was deemed to include confidential information, which SEC staff members are not allowed to disclose, because it included interviews with people who worked for the PCAOB before moving to audit firms.

Christina Ho, a PCAOB board member who has opposed some of the agency’s additional regulations, said she was told about the paper privately last year and was excited that it is now public.

“As regulators, we should be open to having this kind of dialogue,” Ho said. “We are changing the structure of the market, unintentionally, making the environment more difficult for small firms.”

The PCAOB criticized the paper for mischaracterizing the process firms must go through to fix flaws found by its inspectors and for basing its conclusions on interviews with a small portion of audit firms. It has specific resources aimed at small firms to help them prevent or remedy deficiencies, he said.

“PCAOB staff follow the same standardized communication process for all remedial firms, regardless of size, resulting in thousands of hours spent providing feedback to firms each year,” a spokesperson said.

John Keyser, assistant professor of accounting at Case Western Reserve University and co-author of the paper, said: “There are differences between how large firms and small firms experience the remediation process. We don’t blame the PCAOB for this, other than to say that they might allocate more resources to smaller firms in response to what we’re finding out.”