The PCAOB Is Missing In Action on Climate Risk

Thomas L. Riesenberg is a Senior Regulatory Advisor at Ceres. This post is based on his Ceres piece.

Scores of U.S. and non-U.S. financial regulators have in recent years been addressing climate change through rulemakings, risk assessments, and other activities. But one actor has been absent – the Public Company Accounting Oversight Board.

The PCAOB (technically a nonprofit corporation, not a U.S. government agency) was created by the Sarbanes-Oxley Act to oversee the performance of public company audits and the auditing profession. Its five board members are appointed by the Securities and Exchange Commission. Last year, the SEC replaced all five Trump-era members, with SEC Chair Gary Gensler stating his hope that this would set the PCAOB “on a path to better protect investors by ensuring that public company audits are informative, accurate, and independent.”[1]

The PCAOB laid out that path in its PCAOB’s Draft Strategic Plan, issued in August of this year. [2] The draft plan sets forth the organization’s goals for 2022 through 2026, including the need to address many “emerging trends,” such as “new approaches to raising capital (including through special purpose acquisition companies), digital assets, the war for talent, and increased remote work at public companies, broker-dealers, and audit firms.” These trends, the Draft Plan stated, are “transforming auditing and financial statement preparation,” requiring the PCAOB to “anticipate and respond to developments in the audit profession” and moderniz[e] our standards to drive changes in auditing practices and enhance investor protection.”

No mention is made in the draft plan of any actions the PCAOB might take with respect to climate change. This is puzzling for several reasons, as Ceres, a sustainability nonprofit, explained in a comment letter submitted to the PCAOB. [3] Most significantly, a few months before the PCAOB issued its draft plan, the SEC published in March 2022 its proposed climate disclosure rule, and that rule would directly implicate the PCAOB’s work by requiring that independent third-parties, such as accounting firms registered with the PCAOB, provide assurance of certain SEC registrants’ reports of their greenhouse gas emissions. Given that potential requirement, the SEC’s proposing release includes references to the PCAOB more than a dozen times. For example, the SEC asked for comment on the question “[w]hat, if any, additional guidance or revisions” of the PCAOB standards might be needed if the proposed rule were adopted? Further, because the rule proposal would allow firms that are not PCAOBregistered accounting firms to perform this work, the SEC asked whether it should “direct the PCAOB to develop a separate registration process for service providers that are not otherwise registered?”[4]

Commenters, responding to these and other issues raised by the SEC’s proposal, directly addressed the need for PCAOB involvement. For example, the U.S. Chamber of Commerce wrote to the SEC that the proposed rule would have “meaningful implications for audit standard setters like the PCAOB” because “the PCAOB may need to consider updating its standards.”[5] The Allstate Corporation said “the PCAOB will need to review its current attestation standards to determine if the standards provide a sufficient framework for the attestation engagement covering climate disclosures.”[6] Many others made similar comments.

Calls for PCAOB involvement in this area actually predates both the SEC rulemaking and the draft strategic plan. Among other things, a report issued in 2021 by CarbonTracker, Flying blind: the glaring absence of climate risks in financial reporting, found that public companies generally fail to disclose climate-related risks in their audited financial statements and audit reports generally provide no indication of consideration of material climate-related matters. [7] CarbonTracker urged the PCAOB to adopt “rigorous standards” so that auditors would more thoroughly examine this issue.

Outside of the U.S., the need for standards governing assurance of climate information has been an active concern for many years. The PCAOB’s non-U.S. counterpart, the International Auditing and Assurance Standards Board, issued an assurance standard in 2013 that is used today by accounting firms in climate engagements. [8] More recently, in April this year, the IAASB issued non-authoritative guidance on issues relating to sustainability assurance engagements.

And last month the IAASB approved a major project to develop “an overarching standard for assurance on sustainability reporting.”[9] That is a significant development, prompting a statement from the International Organization of Securities Commissions, of which the SEC is an active member, “welcom[ing]” the IAASB’s activity. IOSCO called it “an important response to the accompanying market demand for robust standards applicable to all providers of sustainability assurance that can be used to foster independent, high-quality engagements and consistent practices.”[10]

Given all of these developments, the omission of any mention of climate change in the draft plan is striking. Also surprising is that after issuance of the draft plan, the PCAOB had another opportunity to acknowledge the potential financial significance of climate change. A few weeks ago, on September 26, the PCAOB issued a “request for information and comment”[11] on the use of its attestation standards. These are considered “interim” standards because they (and other professional standards) were adopted whole hog nearly 20 years ago from the American Institute of Certified Public Accountants’ existing set of standards shortly after the PCAOB was established. The attestation standards (which are different from the auditing standards that accountants use for financial statement audits) are the standards that are relevant here because they would be used by accounting firms in providing assurance on climate change information, just like the IAASB’s standards described above.

It is not clear why the PCAOB decided to issue its Request for Information and Comment now – it may indicate that the PCAOB is, in fact, finally acknowledging the possibility that its attestation standards need to be reevaluated in light of demands that third-party assurance be given to climate change disclosures. But if this is for so, why not say it? There is not a word in the PCAOB’s request for information about climate.

Thus, many developments, internationally and in the U.S., have laid climate change at the PCAOB’s doorstep. The PCAOB has a talented and experienced staff whose energies would be well spent by addressing this issue, one of the most financially significant problems existing today. But, so far, mum’s the word.


1SEC Announces Removal of William D. Duhnke III from the Public Company Accounting Oversight Board; Duane
M. DesParte to Serve as Acting Chair (June 4, 2021) back)

2Public Company Accounting Oversight Board, PCAOB Strategic Plan, 2022-2026 Draft for Comment [Release No.
2022-003] (August 16, 2022) back)

3Steven Rothstein, Ceres comment letter Re: PCAOB Strategic Plan, 2022-2026 Draft for Comment (September 15, 2022).(go back)

4Mindy Lubber, Ceres response Re: The Enhancement and Standardization of Climate-Related Disclosures forInvestors [File Number. S7-10-22] (June 17, 2022). (go back)

5US Chamber of Commerce, Comment Letter re: The Enhancement and Standardization of Climate-Related
Disclosures for Investors [File No. S7-10-22] (June 16, 2022). (go back)

6The Allstate Corporation, Comment Letter re: The Enhancement and Standardization of Climate-Related Disclosures for Investors [File No. S7-10-22] [File Number S7-10-22] (June 17, 2022). (go back)

7CarbonTracker, Flying blind: The glaring absence of climate risks in financial reporting, CarbonTracker Initiative (September 16, 2021). (go back)

8The Center for Audit Quality recently issued a report on attestation work performed by accounting and nonaccounting firms. S&P 500 ESG Reporting, back)

9International Auditing and Assurance Standards Board, Assurance on Sustainability Reporting, (September 2022) (go back)

10The Board of the International Organization of Securities Commissions, IOSCO encourages standard-setters’
work on assurance of sustainability-related corporate reporting (September 15, 2022). (go back)

11Public Company Accounting Oversight Board, Request for Information and Comment: The Application and Use of
the PCAOB’s Interim Attestation Standards (September 26, 2022). (go back)

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