Last month, we circulated Shadow SEC Statement No. 4, which urged caution in legislating major changes in the Public Company Accounting Oversight Board (“PCAOB”) or its funding. The Senate nonetheless took up a bill that would have transferred the PCAOB’s functions to the SEC and forbidden the SEC from spending money to carry out those functions. We appeared to be on the cusp of passing major legislation by means of a process with no hearings, no opportunity for thorough debate, no input from affected parties, and no consideration of how to conduct standard setting, annual inspection of public auditors, and disciplinary actions against auditors. This would have left audit firms for public companies without any oversight at all and brought to an end a well-calibrated regulation of auditors in sustaining the trustworthiness of our capital markets. As one member of this group (Professor John Coates, a former general counsel of the SEC) testified before the Subcommittee on Capital Markets of the House Committee on Financial Services on June 25, 2025, prior to the creation of the PCAOB, “the audit profession’s only overseers were largely toothless, self-regulatory bodies, backed sporadically by the underfunded and over-tasked SEC.” We could have been easily back to this unacceptable starting point.

Fortunately, a legal disaster was averted when the Senate Parliamentarian ruled that certain portions of the Administration’s bill (including the portions relating to the PCAOB) were outside the permissible scope of budget reconciliation legislation under the Senate’s rules. Still, the fate of the PCAOB remains uncertain. Its members can be removed by the SEC, seemingly without cause, as the result of a recent Supreme Court decision expressly dealing with the PCAOB. Also, legislation curtailing it can be adopted in new legislation. However, any such new legislation will be subject to a possible filibuster (which it would take 60 votes to overcome).

Given the importance of the PCAOB to our capital markets, we believe a more thoughtful process is necessary and should include a thorough assessment of the PCAOB’s impact to date. In our judgment, that impact has been highly beneficial and includes:

(1) a significant decline in the number of major audit deficiencies among the major auditing firms, as determined through annual PCAOB inspections (because the PCAOB conducted some 230 audits of firms covering 900 engagements in 2024, this improvement has occurred on a very large scale and is likely not a short-term aberration);

(2) a significant revision in the auditor’s short-form opinion letter (which empirical studies have found to have a favorable impact on price-discovery); and

(3) surveys showing that even corporate executives believe that internal controls have been strengthened as the result of the PCAOB’s recent efforts.

We believe the regulation of auditing entails multiple, deeply intertwined issues. Nonetheless, we submit that given the PCAOB’s multiple successes and limited costs, Congress should desist in rushing legislation through that would eliminate one of the most important institutions that ensures investors’ confidence in U.S. capital markets. While regulation always has costs, there is no free lunch, and the elimination of the PCAOB would likely reduce investor confidence.

This post comes to us from the Shadow SEC, whose members are professors John Coates at Harvard Law School, John C. Coffee, Jr. at Columbia Law School, James D. Cox at Duke University School of Law, Merritt B. Fox at Columbia Law School, and Joel Seligman at Washington University School of Law.