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The US Securities and Exchange Commission has been accused of censorship after forcing an academic for nine months to delay publication of a paper examining the impact of regulation on small audit firms.
The politically sensitive paper, based on three years of interviews with audit firm staff, was completed by Ally Zimmerman and three other researchers while Zimmerman was in a one-year fellowship at the SEC last year. Zimmerman, an associate professor at Florida State University, finished the fellowship in July.
The paper highlights criticism of the Public Company Accounting Oversight Board, the US audit regulator which is overseen by the SEC. Small firms complain of delays in getting feedback from the agency, the paper found, indicating the regulator’s inspection regime favours larger firms such as the Big Four. Smaller auditors do not have the same infrastructure to respond when inspectors find audit flaws, the researchers said.
The PCAOB has faced claims from the industry 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 could struggle to find an auditor. The paper concludes that some small firms are hesitant to take on more clients for fear of triggering additional inspections.
The work has only now been made public after the end of her fellowship, Zimmerman told the Financial Times, and the authors plan to submit it for peer review.
“The SEC didn’t like the paper being out there,” she said, adding that one SEC staffer told her during her fellowship that there was a problem with “optics”.
“As a fellow you are required to send all your papers for review and I sent them several papers,” Zimmerman said. “This was the only one that they banned or censored.”
The SEC declined to comment. A source familiar with its 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 used to work for the PCAOB before they moved to audit firms.
Christina Ho, a PCAOB board member who has opposed some of the additional regulations being pursued by the agency, said she was briefed on the paper privately last year and was pleased it is now public.
“As regulators, we should be open to having this kind of dialogue,” Ho said. “We are changing market structure, unintentionally, by making the environment harder for small firms.”
The PCAOB criticised the paper for mischaracterising the process firms must go through to fix flaws found by its inspectors, and for basing conclusions on interviews with a small fraction of audit firms. It has specific resources targeted at small firms to help them prevent or remediate deficiencies, it said.
“PCAOB staff follow the same standardised outreach process for all firms in remediation no matter their size, which results in thousands of hours spent providing firms with feedback every year,” a spokesperson said.
John Keyser, assistant professor of accounting at Case Western Reserve University and a co-author of the paper, said: “There are differences between how big firms and small firms experience the remediation process. We are not blaming the PCAOB for this, other than to say that it could allocate more resources to the smaller firms in response to what we are finding.”