While the U.S. auditor watchdog was handed a legislative lifeline last week, some accounting experts say the battle over its future is nowhere near over. 

The win for the Public Company Accounting Oversight Board came on Thursday when the Senate Parliamentarian found that the controversial provision that would eliminate the PCAOB and fold its authority into the Securities and Exchange Commission violated the so-called Byrd rule, which requires reconciliation bills to be focused on certain fiscal issues.  

PCAOB Chair Erica Williams hailed the move in sweeping terms. “This is good news for millions of Americans whose retirement savings and investments would be put at risk by eliminating the PCAOB,” Williams said in a statement emailed to CFO Dive. But Nicole Wright, an associate professor of accounting at James Madison University called it “a temporary reprieve regarding the attempt to fold the PCAOB into the SEC. I think the focus is not over in trying to remove the PCAOB.” 

Dubbed the “Byrd bath” after the senator who gave it its name, the process of reviewing the Republicans’ massive tax and spending bill is comprised of multiple steps. Sen. Jeff Merkley (D-OR), ranking member of the Senate Committee on the Budget, said the ruling ultimately means provisions on the PCAOB will need to be stripped from the bill to make it compliant with the rules. Alternatively, the provision could also be modified to make it compliant, according to Marc Gerson, a partner who specializes in tax policy at the law firm of Miller & Chevalier. 

For practical purposes, it’s likely that the PCAOB has been decoupled from the big tax bill, Jack Castonguay, an associate professor of accounting at Hofstra University, said Monday.

“The Senate parliamentarian’s ruling means the proposed PCAOB reorganization under the SEC is likely dead on arrival,” he wrote in an email, noting that if the House leaves its version of the PCAOB proposal in, they would need 60 votes in the Senate to pass the overall bill. “The House isn’t going to risk the fate of the whole bill on the PCAOB provision. I think its quasi-independent structure is safe for the time being.” 

Rising opposition

The legislative action comes on the heels of a rising chorus of academics, former regulators, as well as some voices in the business community opposing the abolishment of the PCAOB. The independently-funded board was created in 2002 by Congress following multi-billion-dollar accounting scandals at Enron and WorldCom.

Sherron Watkins and Cynthia Cooper, whistleblowers who, respectively, exposed accounting fraud at Enron and WorldCom and were named Time magazine’s Persons of the Year in 2002, took to The New York Times editorial page last month to champion the Sarbanes-Oxley Act and the PCAOB. They warned that “systemic risks metastasize in regulatory gaps” and said that the board has ushered in “rigorous inspections” and made audits more consistent and credible. They also called for any needed changes to be addressed within the current framework. 

Meanwhile, former regulators and professors sent a June 4 letter to the Senate banking and budget committees objecting to its inclusion in the budget based on the Byrd rule, and noting that it does not receive any direct funding from Congress, Thomson Reuters reported. In addition, the Council of Institutional Investors also penned a June 5 letter urging senators to oppose the provision and safeguard the PCAOB.    

More fights brewing

Supporters of keeping the PCAOB should look at what occurred in a positive light, Wright said in an email Monday. 

“This attempt was buried in a large bill, where it could have been lost in the shuffle. But a conversation has started in mainstream media around the importance of audit regulation and the benefits of the PCAOB,” Wright said. “If the goal is improved audit quality, these discussions need to happen. The good, the bad and the ugly on all sides of the issue.” 

Still, close watchers of the PCAOB have long said there are ways to “defang” and sideline the board that don’t entail its full elimination by Congress. In December, Robert Pawlewicz, assistant professor of accounting at the Robins School of Business for the University of Richmond in Richmond, Virginia, told CFO Dive that the incoming presidential administration doesn’t need to destroy the PCAOB to make it ineffective.  

Even before the Byrd action last week, Pawlewicz was skeptical the measure would pass the Senate. Given that the SEC holds the PCAOB purse strings, he said he would be watching the next budget cycle for clues to where the future of the PCAOB is headed.   

“The PCAOB’s budget for 2025 was approved in December 2024” by then-SEC Chair Gary Gensler, but when we get to the next budget cycle for 2026, “we’ll really get to see, if there is a new board, what is their approach” for 2026, he said.

Castonguay also noted that the SEC could still “handcuff” the board in other ways even if it retains its current structure.

“The SEC still has to approve the PCAOB’s budget and support fee. If they wanted to weaken the PCAOB they could reject the support fee or force it to pare its budget considerably,” he said. “They can’t eliminate it now. But they could certainly reduce its capacity to inspect auditors or render enforcement actions.”