Understanding the PCAOB

Summary

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Corporate Director Podcast: "Understanding the PCAOB"

Episode Date: July 3, 2025
Host: Dottie Schindlinger and Megan Day
Guests: Mike Levy (Cherry Hill Advisory), Sharon Watkins (Enron whistleblower), Cynthia Cooper (WorldCom whistleblower)

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Overview: The Future of the PCAOB and What It Means for Corporate Governance

This episode dives into the recent political efforts to eliminate the Public Company Accounting Oversight Board (PCAOB), the body created in the wake of Enron and WorldCom scandals to oversee external audit quality. With proposals to abolish the PCAOB and fold its responsibilities into the SEC, host Dottie Schindlinger and co-host Megan Day sit down with prominent guests—Mike Levy, and world-renowned whistleblowers Sharon Watkins and Cynthia Cooper—to explore the origins, functions, and critical importance of the PCAOB, and what its potential elimination could mean for board directors, audit committees, and the integrity of U.S. capital markets.

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Key Discussion Points and Insights

1. Why the PCAOB Matters: History, Purpose, and Current Threats

• Background: PCAOB was created post-Enron and WorldCom to restore trust in public audits after major corporate frauds.
• Recent Legislation: A budget bill proposed folding the PCAOB’s responsibilities into the SEC, which raised alarm among governance experts. The Senate parliamentarian recently struck this down, but the issue may resurface.
  • “This was in the wake of the Enron and WorldCom scandals that the PCAOB was created and it was really designed to help restore confidence in corporate audits.” – Dottie Schindlinger (00:53)
• Impact: The discussion unpacks why the PCAOB serves as a vital “audit of the auditors” and why its loss would increase risk for board directors and investors.

2. Mike Levy: The Practitioner Perspective

(02:23—08:47)

• Audit Safeguards: Removing the PCAOB doesn't abolish Sarbanes-Oxley (SOX), but would weaken external audit oversight.
  • “We have felt the PCAOB's impact... Sometimes you don't agree with the outcomes, but it does drive audit quality… [It’s] removing one of the safeguards that we have put in place to ensure quality financial statements are issued to shareholders.” – Mike Levy (02:32, 05:28)
• Board and Audit Committees: The PCAOB’s inspection results are critical in choosing external auditors and ensuring quality.
• Internal Audit’s Role: Should the PCAOB go, boards may need to lean more heavily on internal audit for independent assurance.
  • “…it could create more of an opportunity for boards and audit committees to lean on internal audit, because in the absence of that safeguarding guardrail… internal auditors still play a very active role…” – Mike Levy (06:09)
• Final Advice: Regardless of politics, independent validation is essential. The value of audit (inside and external) is undeniable.

3. Sharon Watkins & Cynthia Cooper: Whistleblower Wisdom & PCAOB Defense

(08:56—36:52)

• Personal Histories:

  • Sharon recounts unearthing Enron’s fraud as an insider, ultimately testifying before Congress to expose systemic failures.
  • Cynthia details leading WorldCom’s internal audit team that discovered and reported the largest fraud of its era.
  • “I stumbled across accounting fraud…my warnings were really too little, too late. Obviously, Enron collapsed in an accounting scandal.” – Sharon Watkins (10:02)
  • “My team and I unraveled what became over $7 billion fraud, $11 billion restatement… I reported directly to the chair of the audit committee and dotted line to the CFO.” – Cynthia Cooper (12:02)

• The Sarbanes-Oxley Effect: SOX mandated stronger board expertise, auditor independence, whistleblower protection, and created the PCAOB.

• PCAOB’s Unique Mission:

  • Sets and enforces audit quality standards; inspects audit firms annually (big firms) or every three years (smaller firms), maintains independence from both industry and government.
  • “The PCAOB is the only independent organization that oversees the quality of audits and audit firms that audit public companies must be registered with the PCAOB.” – Cynthia Cooper (16:07)

• Risks of Erasing the PCAOB:

  • Shifting its duties to the SEC would dilute oversight—SEC is underfunded, overstretched, and not audit-focused.
  • “Our belief is that it would dilute the effectiveness of the PCAOB… this would really move the burden to the taxpayer.” – Cynthia Cooper (18:05)

• Guardrails Metaphor: Removing the PCAOB is “like removing guardrails or speed limits… it is protecting you from what could be a fatal accident.” – Sharon Watkins (19:00)

• Recent Scandals Without Audit Oversight: Theranos and FTX, cited as evidence the lack of audited financials enables fraud.

4. Implications and Actionable Takeaways for Board Directors

• Increased Risk:
  • “It’s a huge increase in risk if the PCAOB goes away for board members and corporations and the capital markets.” – Cynthia Cooper (21:46)
• Call to Action:
  • Board members are encouraged to speak out, engage legislators, and educate on the necessity of balanced, smart guardrails.
  • “What board members can do is speak up, use their voice, reach out to senators, speak at events, write articles, let their voices be heard…” – Cynthia Cooper (22:08)
• Beyond PCAOB: Boardroom Evolution Needs
  • Board self-assessment is inadequate; many directors recognize dysfunctional boards and inertia.
  • Boards are lagging on DEI, AI risk, and emerging threats.
  • “The last line of defense is the corporate board… It’s the most dynamic board environment that has existed in the last 20 years.” – Sharon Watkins (23:20)

5. Looking to the Future: Recommendations & Reflections

• Don’t Default to Deregulation:
  • “History continues to repeat itself. So we see these crises, then Congress comes in and passes acts, then time passes, memory fades and we start to deregulate.” – Cynthia Cooper (25:27)
  • Use PCAOB inspection reports to judge audit firm quality.
• Evolving Boardroom Skills:
  • Boards need to rebalance agendas; focus on culture, whistleblower oversight, and strategic risk, not just compliance.
  • Bring in chief audit executives (CAEs) for board service—they’re “systems thinkers” who connect complex dots.
• Anticipate New Disclosure Requirements:
  • Disclosures on culture and whistleblower programs may augment or substitute regulatory oversight.

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Notable Quotes & Memorable Moments

• “It’s about auditing the auditors.” – Dottie Schindlinger (05:28)
• “Removing one of the safeguards and guardrails… to ensure quality financial statements are issued to shareholders.” – Mike Levy (05:28)
• “It is protecting you from what could be a fatal accident… We do so at our peril.” – Sharon Watkins (19:00, 21:31)
• “Scammers are gonna scam. And why are we weakening one of the last lines of defense against financial fraud?” – Megan Day (37:04)
• “The more regulation you eliminate, the more personal liability falls on the head of the director. Because who else is there mining the store?” – Dottie Schindlinger (40:06)

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Timestamps to Key Segments

• 00:53 – Overview of PCAOB’s creation and existential threat
• 02:23—08:47 – Mike Levy’s practitioner perspective
• 08:56 – Introduction of Sharon Watkins and Cynthia Cooper
• 10:02—13:42 – Personal stories of exposing Enron and WorldCom
• 14:16—18:47 – PCAOB’s creation, purpose, and critical role
• 19:00—21:31 – Dangers of eliminating PCAOB: analogies and real-world impacts
• 22:08—25:27 – What board directors can do, evolving risks, and additional guardrails
• 27:09—31:39 – How boardrooms will/should change in the next decade
• 32:58—36:39 – Sharon and Cynthia’s current passion projects: ethics, belonging, and governance culture
• 37:04—40:06 – Host reflection: why protections like PCAOB matter for everyone, not just directors

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Final Thoughts

The episode concludes with an emphatic reminder that eliminating the PCAOB would reduce crucial oversight, increase personal risk for board directors, and make corporate fraud and financial catastrophe more likely. The guests advocate for balanced, not burdensome, regulation—evolution, not repeal—and urge directors to use their influence to protect the public interest, promote strong cultures, and uphold vigilance in governance.

Essential listening for board members, audit professionals, and anyone invested in the future of trustworthy markets.

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Transcript

[Host Intro]

Foreign.

[Podcast Narrator]

Welcome to the Corporate Director Podcast where we discuss the experiences and ideas behind what's working in corporate board governance in our digital tech fueled world. Here you'll discover new insights from corporate leaders and governance researchers with compelling stories about corporate governance, strategy, board culture, risk management, digital transformation and more.

[Dottie Schindlinger]

Hi everybody and welcome back to the Corporate Director Podcast, the voice of modern governance. My name is Dottie Schindlinger, Executive Director of the Diligent Institute and I'm joined once again by my co host Megan Day, strategy leader here at Diligent. Megan, how are you doing today?

[Megan Day]

I am great, Dottie. We have a really exciting show lined up.

[Dottie Schindlinger]

Yeah, I'm really excited about today's show. So we're diving into a pretty interesting topic, or I should say interesting for those of us who are governance. And that's the future of the Public Company Accounting Oversight Board, the pcaob. This is a body that was created for those of us history buffs or who lived through it, those of us who are old enough to vividly remember it. This was in the wake of the Enron and WorldCom scandals that the PCAOB was created and it was really designed to help restore confidence in corporate audits. But it's been two decades plus since the Sarbanes Oxley legislation went into effect and there was a bill tied to the budget bill and in Congress that proposed to eliminate the PCAOB and fold its responsibilities into the sec. Now that recently got struck down by the Senate parliamentarian, but it does beg the question that the Republicans may still try to do something to get rid of the pcaob. And so we thought we would have a show today to talk a little bit about what this is anyway and why should corporate directors care about it and kind of what's happening out there. And, and I'm really excited because we are joined by a special guest for our opener here today. We're joined by Mike Levy, who's the CEO of Cherry Hill Advisory and he's the former chair of the North American Board of the Institute of Internal Auditors. So yay for auditors. And Mike brings really deep experience in audit risk and governance and we wanted to ask him to come join us for our opening rant today to help us unpack some of the implications of that change. So Mike, welcome to the show.

[Sharon Watkins]

Thank you.

[Mike Levy]

Thanks for having me, Dottie.

[Dottie Schindlinger]

So tell us your initial thoughts and reactions about the move to get rid of the pcaob. Good idea, bad idea.

[Mike Levy]

So as someone that has worked in this industry and has really deep Financial audit expertise, internal controls and then internal audit. I'm not in favor of that move. I think one distinction that's really important is that the removal of the PCOB does not remove Sarbanes Oxley as a requirement. So internal controls are still there. The PCAOB was developed as, as you mentioned early on as a process to ensure that external audits have the right level of audit quality. And everybody that's been involved in an external audit feels the PCAOB's impact. Because when PCAOB's do it, PCAOB does inspections, it impacts an external audit, which has downstream impacts to companies and internal auditors. So as someone that has lived and breathed that my whole career, I would tell you we have felt the PCAOB's impact. You feel, feel the quality. Sometimes you don't agree with the, the outcomes of it. But that being said, it does drive audit quality and it does drive better controls and better processes within companies. So it is, it was a concerning thing when we saw that part of the budget package.

[Megan Day]

Mike, thinking about our audience of board members and governance professionals, from a board governance perspective, what would this change mean for audit committees and also for the internal audit function?

[Mike Levy]

So I think, I think taking those two things separately, I think when we think about board directors and their role, board directors aren't directly interacting with the pcaob, but they are directly impact interacting with internal auditors and external auditors. So when you sit through a board meeting, but more more specifically an audit committee meeting, where you're talking about results of external audits, the auditors, the external auditors specifically are very commonly referencing what they are doing as it relates to audit quality based on the results of their inspection. The other piece of that is when you are selecting an external auditor, very commonly one of the things you're looking at in the selection process is how that audit firm has fared as it related to audit quality. And the key indicator of that is PCOB inspection results. Those results, not to go too far into detail, but sometimes get very granular in public. There's like a type 1 and a type 2 inspection report. But as a board member, without that input and that level of data and frankly the knowledge that you know that's happening in the background as it relates to the firm that you've hired, I think it does go to question what else can be done to ensure that you're getting a quality external audit. Because some board members treat external audits different ways. Some treat it as a checkbox compliance requirement, others treat it the way that they should, which is an audit is an independent evaluation of your financial processes as it relates to external audits. And that's critically important to ensure that as a fiduciary of a company, you're presenting the proper financial results. So that's part of why I get concerned as a. As an auditor thinking about this. I mean, it's removing one of the safeguards and guardrails that we have put in place in this process to ensure quality financial statements are issued to shareholders.

[Dottie Schindlinger]

So really, it's about auditing the auditors.

[Mike Levy]

That's exactly what it is.

[Dottie Schindlinger]

And so, Mike, I think, you know, obviously you make a very compelling case. And we thankfully had the opportunity to speak to kind of the two main protagonists of this story today. We spoke with Sharon Watkins and Cynthia Cooper, who I'll introduce here in just a moment. You know, in talking with them, we were sort of talking about, okay, if this gets eliminated, if these powers go back to the sec, what is that gonna look like? I'd like to ask you a little bit of a different question, because you've been an internal auditor, you've been on audit committees, and, you know, let's say that this move goes forward. I know the immediate threat is gone, but if the move goes forward down the road, what would need to change about the way audit committees and internal audit teams function to ensure audit integrity?

[Mike Levy]

I actually think in some ways, this is the unique value proposition of internal audit within companies, because as an internal auditor, we are not directly impacted by the pcaob. We have a separate set of standards that's issued by the Institute of Internal Auditors, and we just came out with a new update to those standards this year. That being said, I actually think it could create more of an opportunity for boards and audit committees to lean on internal audit, because in the absence of that safeguarding guardrail within the external audit function, internal auditors still play a very active role in most cases as it relates to financial risk, financial compliance, financial controls, as it relates to SOCs. And many times they are directly interacting with the external auditor. So there might need to be another risk that gets created around audit and maybe considered as part of the internal audit plan, so that a board and an audit committee can lean more closely on internal audit and say, hey, how do we get comfortable with these things that we're concerned about? And it just, frankly, changes and enhances and evolves the scope of internal audit even further. And we've seen that happen quite dramatically over the last few years with the advent of AI with cyber you know, cyber risk and all of these other emerging risk topics. This just becomes another risk that internal audit really needs to be equipped in helping companies manage and navigate to make sure we protect stakeholder investor confidence and shareholder confidence. At the end of the day, I.

[Dottie Schindlinger]

Think that's all really sage advice. So thank you for that. Mike, any sort of best and final that you want to leave our audience of corporate directors with before we listen to our interview?

[Mike Levy]

I think at the end of the day, when we think about all of the changes and impacts that we are seeing in the current administration and depending on what side of the aisle you're on, some will view that as good, some will view that as bad. I think it's really important to think about and impact why we have certain safeguards in place and how audit impacts that, whether it's an external auditor or an internal auditor. And as someone that has been on both sides of that, as both an external and internal auditor, I see value in that on both sides of this. Right? Whether it's a Democrat led executive branch or a Republican led, I think the value of internal audit is really significant. And as we talk about some of these changes, whether you're in the camp of someone that agrees with them or disagrees, I don't think you can contest the fact that having a set of independent validation of the work that is being done within a company is really important for investor and shareholder confidence and as such is really important to those fiduciaries like a board that's looking to continue to enhance and move forward in that area.

[Dottie Schindlinger]

Well, Mike, thank you so much for joining us for this conversation. I think it was really helpful to kind of get the internal audit take on this hot topic. So thank you for joining us.

[Mike Levy]

Thanks a lot for having me.

[Megan Day]

Great to have Mike on the show and I think it's a perfect segue to tee up this conversation you had Dottie with Cynthia and Sharon.

[Dottie Schindlinger]

That's great. I can't wait to share the interview with the audience. Let's give it a listen. Joining us on the Corporate Director podcast today is Sharon Watkins and Cynthia Cooper. Sharon and Cynthia are both former vice presidents of Enron and WorldCom respect. They exposed accounting fraud at those companies for which they were both named Time Magazine's Persons of the year in 2002. Cynthia has also previously served on the PCAOB's Standing Advisory Group. Sharon, Cynthia, welcome to the podcast.

[Sharon Watkins]

Thank you for having us.

[Cynthia Cooper]

Thank you. We're excited to be here with you today.

[Dottie Schindlinger]

So I've just started out with the most precursory introduction of you. I wondered if you could start by giving us a little bit more because there's so much to your background and so much to the history that you both have lived through. And I'd love to have you each share a little bit more about your career backgrounds and a little bit more about the roles that you played in exposing fraud at the companies that you were working at. So maybe, Sharon, if you don't mind, I'll start with you.

[Sharon Watkins]

I started life as an auditor at Arthur Andersen at the time that there were eight big eight accounting firms. And I worked at Anderson for eight years before working for a German company, Mattel Gesellschaft MG Trade Finance in New York, and then joined Enron in 1993. And I worked for eight years at Enron before the company's collapse and before the fraud. I am a cpa. I had been an auditor, but throughout my career I'd morphed into finance and mergers and acquisitions. I stumbled across accounting fraud. So in a way that makes it easier to report on it because my hands weren't dirty, so to speak. But in a way my warnings were really too little, too late. Obviously, Enron collapsed in an accounting scandal. But I was called to testify in front of the House and Senate investigating why a company with the size and stature of Enron could collapse without really any warning. You know, so they were investigating. And I guess my testimony helped mark the prosecutional trail. There are over two dozen felons associated with Enron executives from Enron that half of them did prison time, half of them got probation. So in a way, it's the aftermath. It's the fact that there was a whistleblower but the company didn't listen. What laws could be enacted? What can we put in place, dissect these failures to see what's what? And I think that's the reason I considered it a whistleblower, even though I was internal. But the external testimony in front of Congress is what brought bad acts actions to light.

[Dottie Schindlinger]

And I know, I'm sure me and many of our listeners vividly remember those hearings. I mean, that we were all watching those very avidly while that was happening. And so, Cynthia, I want to bring you into this conversation too, because you also were someone that was showing up before Congress. So answer that same question. Tell us a little bit more about your background and tell us a little bit more about your role at exposing the fraud in WorldCom.

[Cynthia Cooper]

Well, Sharon and I have very similar backgrounds in terms of our early careers. I started working in Atlanta for two of the big, at that time, the big eight accounting firms. So Deloitte and Pricewaterhouse, from there went to work for a public company in corporate accounting and then moved into internal audit. And in 2002, I was the vice president of internal audit at WorldCom. For those who may not remember WorldCom and Enron, because it's been some time now, just as a refresher, These were really two Wall street darlings, highly respected executives. WorldCom was constantly breaking one record after another. For example, at Floated two of the largest debt offerings in corporate history and the largest acquisition in corporate history. And The CFO of WorldCom and Enron both received the CFO of the Year award. At WorldCom, Scott Sullivan received this award for his work in mergers and acquisitions. So these were highly regarded companies. And I had an internal audit department at that time in 2002 of about 40 internal auditors. And we received some schedules that didn't really make sense. And based on a lot of extreme pushback that I was getting in the company, I asked one of my techie auditors to go into the accounting system and see if he saw anything labeled prepaid capacity. And ultimately we worked at night behind closed doors and we unraveled what became over $7 billion fraud, $11 billion restatement. And I actually interviewed over 10 executives. So I reported directly to the chair of the audit committee and dotted line to the chief financial Officer.

[Dottie Schindlinger]

I wanted to have you both on the show for a very specific reason, because I know that I ran across a fantastic op ed article that the two of you co authored in the New York Times in defense of the Public Company Accounting Oversight Board, the pcaob. And I wondered if you could start by just kind of walking us through a little bit of the history there. So how did these two scandals at Enron and WorldCom lead to Sarbanes Oxley? And then how did that kind of lead to the creation of the pcaob? And I don't know which of you wants to kind of give us that history lesson, but that would be really helpful just to level set and make sure everybody understands what we're talking about.

[Sharon Watkins]

I'll start with sox. And Cynthia, especially since she's been on the advisory committee, can talk about the work of the PCAOB. But because there was Enron, WorldCom and then Adelphia HealthSouth, there were all these corporate collapses in early 2002. And the legislative effort that came out of that was called the Sorbanes Oxley act or sox. And it had a number of provisions. It wanted the right expertise on corporate boards. It wanted independence. But part of the problem that was identified was that for instance, with Enron, Arthur Anderson was making around 25 million a year auditing the company and 27 million a year with add on consulting services. So at what point does that extra consulting work become a conflict of interest where it's so important to your bottom line that you perhaps go soft on the audit? And Anderson was also WorldCom's auditor. So it was apparent that something needed to be addressed within the accounting profession. They had been policing themselves, but was that accurate? And Sorbanes Oxley act required CEOs to certify financial statements. You could no longer use the Ken Lay defense. Enron CEO who claimed, hey, I'm not an accountant, you know, that's what we have Arthur Andersen for. Now. Upper management had to certify that these financial statements fairly represent the condition of the company. Internal controls had to be adequate. There was an anti retaliation provision to protect whistleblowers that was put in. But they created the pcaob, an independent organization that would in effect police the auditing firms.

[Dottie Schindlinger]

So Cynthia, that's a good segue to you. What does the PCAOB actually do?

[Cynthia Cooper]

Yeah, so the PCAOB is the only independent organization that oversees the quality of audits and audit firms that audit public companies must be registered with the pcaob. And each year they do many inspections across these firms for the big firms they inspect every year, for the smaller firms they inspect every three years. And in addition to that, they set standards for audit firms and they can actually enforce. They've been doing a lot of enforcement lately when there are problems with the audit quality.

[Dottie Schindlinger]

So I'd love to now transition a little bit to today. So thank you for that history lesson. It's helpful to just kind of ground everybody in reminding us what actually happened and what this is. But now there are some moves in Congress to change things. So Cynthia, maybe I'll start with you if you could share a little bit about what's being talked about, what's being contemplated, sort of where are we today and what would that mean?

[Cynthia Cooper]

Sure. So there is a provision in the current budget reconciliation bill that's now before the Senate to abolish the PCAOB and move any PCAOB functions into the sec. And this is what really caused us to write this op ed piece because the PCAOB is a critical guardrail for the public interest, for corporations, for board members in terms of mitigating risk. And it's the Last line of defense. Public accounting firms are the last line of defense when it comes to financial reporting. So we wanted to make sure that people didn't forget the history that this provision did not remain in the bill without people understanding that there are going to be perhaps an unintended consequences.

[Dottie Schindlinger]

And I'd love to expand on that a little bit. If the PCAOB were to be abolished and the responsibilities that they have go to the sec, what would the net effect of that be? What would sort of that mean in terms of audit quality and oversight?

[Cynthia Cooper]

Well, the SEC has a very broad mandate and the PCAOB has a very narrow mandate, simply looking at audit quality across audit firms. The SEC also has had about a 16% reduction in staffing recently based on doge cuts and buyouts. Our belief is that it would dilute the effectiveness of the pcaob. Also, in terms of how the budget is funded for the pcaob, it's not funded through taxpayer dollars. It's funded through assessed fees from public companies. And so this would really move the burden to the taxpayer.

[Dottie Schindlinger]

So, Sharon, I want to bring you into this conversation, too and just maybe have you share with us a reflection on and I know you did this very well in the op ed, but what would this mean for companies? Like, how is this, you know, what would this play out for companies and for their shareholders?

[Sharon Watkins]

The reality of this, it's really getting rid of the PCAOB and asking that those duties be done within the sec. So realistically, it's gone. So I want to point out, though, that this is like a guardrail. It's like speed limits. You could remove all those things. And that doesn't mean every car is going to go sliding off the cliff or everyone's going to speed and have tons of wrecks. But the fact that there are speed limits and occasionally police officers monitoring those speed limits, that there are guardrails, it is protecting you from what could be a fatal accident. Will companies hopefully prepare and produce and publish correct financial statements? I hope so. But remember, we're having them audited for a reason because, you know, there have been incentives that would make people maybe manipulate their financial statements a bit. Hence, we have auditing firms. So it's just another layer of protection that helps our capitalist system be the envy of the world. And without it. We mentioned that the PCAOB now has an ability to review Chinese auditing firms. But prior to that review, a company went public in the US and it was a fraud. You want to prevent Enrons? Now, some people would Say if you're speeding and you have a wreck, you caused your own demise. But perhaps an innocent life was lost. You can't imagine the kind of demise a company like Enron collapsing and WorldCom collapsing did. It made small businesses, certain customers, go under. It wasn't just all the employees that lost their jobs and their pensions. It has such a ripple effect on the Houston economy, for instance, and I'm sure the Jackson economy. You really want to avoid these things. We could all drive around without seat belts and perhaps have nothing happen, but we all wear seat belts on the off chance that something bad would happen. And I want to point out that the big scandals that we've seen lately, Theranos, the blood testing, which was a ripoff of venture capital, folks. No audited financial statements. Ftx, the crypto scandal. No audited financial statements. So you can see that the audited financial statements does help bring security and trust to the system. This is just removing an additional guardrail, but we do so at our peril.

[Dottie Schindlinger]

It seems to me like there's a lot at stake for corporate directors in this.

[Sharon Watkins]

Right.

[Dottie Schindlinger]

Because I think that, you know, the job of a corporate director is not getting any easier anytime soon. And the job's already hard enough not to have this extra protective measure. Seems like a missed opportunity if it goes away.

[Cynthia Cooper]

I'll add that it's a huge increase in risk if the PCAOB goes away for board members and corporations and the capital markets.

[Dottie Schindlinger]

I think that's very true. So what can we do? It's been approved by the House. It's in the Senate. We're recording this on June 16th. This will go to air in a few days here. Anything that we should encourage our audience to think about doing.

[Cynthia Cooper]

Well, I think we want to make sure that we have smart, balanced controls. Nobody wants over regulation that weighs down the economy and doesn't allow the United States to be competitive. But we need these basic smart guardrails, and the PCAOB is one of those basic guardrails. And so I think what board members can do is speak up, use their voice, reach out to senators, speak at events, write articles, let their voices be heard. Because it really is the last hour at this point. To encourage the Senate to strike this provision from the budget bill.

[Dottie Schindlinger]

One of the things I'd love to ask the two of you, because I know the two of you have been sort of in this fight for a long time. You have been very much on the vanguard of speaking for ethics and transparency and accountability across corporate life. And so I would Imagine the pcaob, important guardrail, but probably kind of a minimum guardrail. Are there other things that we should be arguing for to provide better protection so that we don't have, for example, another big financial collapse like we saw in 2008? You know, are there other things in your minds that could be really helpful to ensure a more transparent corporate environment?

[Sharon Watkins]

The last line of defense is the corporate board. I mean, they are the fiduciary duty. They are the ones supervising management. And I taught at UNC for four years. It was a corporate governance, leadership and ethics course for MBA students. And I always use those annual corporate director surveys. Price Waterhouse puts one out. Spencer Stewart puts one out. And it's always alarmed me that a large percentage of boards think that at least one board member should be replaced. So what's going on there? Why aren't they having assessments? Why isn't it working? You know, that they feel like they've got some dead weight on the board? Additionally, some of the newer surveys say that, like, up to 57% of boards have not discussed the company's position on social issues. And that's been very important this last year. I mean, Target got stuck with the DEI problem and boycotts. Budweiser had a problem a few years ago. But on the flip side, Chase and Costco and I think Apple spoke up about supporting their DEI policies and even put it to a shareholder vote. You know, so they were being proactive in these social areas. But for something close to 57, 60% of board members saying they haven't even discussed it, that's alarming. And a large percentage, something like 70%, say they think management is perfectly skilled to address AI. And AI is too much of a moving target to say, yeah, we're happy. Our management, they know what's going on with AI. AI hallucinates. Air Canada got themselves in trouble because their bot told a customer a policy that wasn't true. They got taken to court over it. You know, this is a changing environment, and it still alarms me. On the flip side, you've got activists like Elliott Investments that is really changing the board makeup and the company policies of Southwest Airlines. I think it's the most dynamic board environment that has existed in the last 20 years. I really do.

[Dottie Schindlinger]

Cynthia, anything that you would want to add in terms of other provisions we should be considering?

[Cynthia Cooper]

Well, I think one thing that is important is to. Instead of deregulating and just throwing everything out that, you know, we've worked so hard to build for so many years to really speak up for evolving instead of throwing the whole piece of legislation out the window. History continues to repeat itself. So we see these crisis, then Congress comes in and passes acts, then time passes, memory fades and we start to deregulate. We did the same thing with Glass Steagall, and we can see that that had some very bad consequences. That if you read the stories of Enron and WorldCom, you'll see how that helped to set the stage for both of these scandals. And so it's important for board members to make sure that they understand history, to make sure that they are putting the right things on their agendas. Regulation, for example, keeping up with this changing environment. And what does that mean for our internal risk landscape? How do we need to change internally what we're doing if we continue down this path of deregulation? And there are a couple of other things I would recommend. One is really understanding the role of the PCAOB and using the PCAOB's inspection reports as a tool to help understand how your audit firm is performing against other audit firms and what deficiencies the PCAOB has identified.

[Dottie Schindlinger]

That is great advice. Well, listen, before we let you go, there are three questions we like to ask every guest that joins us on the show. So if you'll indulge me the first question, and maybe I'll throw this first to you. Cynthia, what do you think will be the biggest difference between boardrooms today and 10 years from now?

[Cynthia Cooper]

Great question.

[Host Intro]

I think that we will continue to see the composition of the board change. I think the capabilities of the board will need to change over the next decade, as we have, I think, increased velocity of risk. And so the board will also need to keep up with that speed of risk that we see. I think AI will definitely transform how boards are consuming information, how they're assessing performance and detecting risk. And we'll also continue to see deregulatory pressures as the executive branch moves to spur innovation and capital formation and ease the regulatory burden on organizations. And so I think that will shift a lot of the responsibility and risk internally to boards and organizations. I think we'll also need to move boards so that they are rebalancing their board agendas. There are a lot of really critical risks that aren't always included on board agendas, like the health of the culture, the whistleblower program, its oversight, the tone at the top, understanding pressure. And I think that, you know, boards really need to take a hard look at their agendas because failures in culture, we know, often precede fraud failures and also elevating Strategic foresight. So that boards are really moving beyond just regulatory compliance and providing oversight of past performance. And they're really looking to the future that they're looking at strategy and the risk to strategy, looking at assumptions underlying the strategy and utilizing internal audit. I think internal audit is an organization or a group that's often underutilized. And I think boards need to really pull internal auditors in, especially if we're deregulating. And a lot of the risk is going to be moving internally and make sure that the internal audit function is more focused on strategic oversight instead of auditing and assessing very detailed transactional controls. Make sure they're looking at the strategy execution and the embedded risk and that they are, you know, looking at whether we're over expanding or over leveraging. They're looking at third party risk, they're looking at the effectiveness of the hotline. And internal audits can really help boards by providing independent assessments of organizational culture and the hotline as well. So I think looking at how you're utilizing internal audit is important. And I think when we're looking at board expansion, we should also look at including more CAEs. So most boards of public companies include at least one big four partner, but very few include chief audit executives. And I think as boards move to having more members that are probably heard of the T shape and that includes.

[Cynthia Cooper]

A board member who has very deep.

[Host Intro]

Expertise in at least one area and then broad expertise and is able to connect dots. And chief audit executives are probably as close as you're going to come to someone who would be a polymath. They're systems thinkers. They often have deep expertise across many different areas of an organization and they're.

[Cynthia Cooper]

Able to really connect dots.

[Host Intro]

And so that's, you know, I think groups like Diligent and other organizations that had databases of potential board members, I would love to see that expanded to include more chief audit executives. And then the last thing is just really, you know, for boards to keep an eye on what's going on with regulation deregulation and then what's going on with the sec. Because if we are deregulating, the SEC may well move to balance that by having organizations have more robust disclosure, for example, disclosing whether or not they've assessed the organizational culture, disclosing whistleblower program usage and performance, and disclosing whether they've actually even analyzed the inherent risks to the strategic plan and whether their internal audit groups are covering emerging hot topic areas like, you know, emerging risks. Data privacy would be one. Looking at pressure points across the organization. So I would look to potentially see more disclosure requirements as a counterbalance to deregulation.

[Dottie Schindlinger]

Sharon, I'm eager to ask you this next question, and that is what's the last thing that you read or watched or listened to that made you think about governance in a new light?

[Sharon Watkins]

I read it a few years ago, but I'm rereading it from my book club. And that's the book Sandworm. And it is about, you know, cyber attacks, really Russia to Ukraine, but it spread out. It impacted a lot of Western companies. But rereading it, and the fact that almost the link to Internet to actually mess with hardware, with electric grids, with power plants, with any kind of manufacturing facility, there's always supposedly a little bit of a back door so that certain key people can get in and operate remotely. And those those things offer an avenue in. So Sandworm, I would highly recommend people read that book. I should have the author's name at my fingertips, but I don't. It probably came out in 2019. It's an excellent read on cybersecurity risks that almost everyone faces. And then I think AI is such an unknown. And the fact that this big budget bill also precludes states from regulating AI for the next 10 years. Oh, that ought to be setting off alarm bells everywhere.

[Dottie Schindlinger]

Totally agree. And I'm going to ask this last question of both of you. So, Cynthia, I'll start with you. What is your current passion project?

[Cynthia Cooper]

My current passion project I have several. One is speaking to students. So I speak to a lot of universities on ethics and leadership, helping to prepare the next generation for ethical dilemmas they might face in the workplace and how to stop, step back, think them through, and make the right choices. And I've written a book, Extraordinary Circumstances, where I go through my experiences and lessons learned at WorldCom. And I wrote it in present tense because I wanted everyone to be able to put themselves in the shoes of other people, whether it's the people who became complicit with the fraud, board members, members of the external audit team, perhaps. Imagine that they were following my team and me as we identified and reported the fraud and think about what decisions they might have made along the way and how those choices would have impacted not only them, but other people. So that's one of the things that I am very passionate about. And I also am passionate about helping organizations and boards to understand how they can strengthen governance, to really understand this invisible layer of pressure and fear and misguided loyalty that sometimes goes unnoticed and helping to bring that to the surface helping organizations to build high performance, speak up cultures, making sure that they have a very strong, effective anonymous reporting mechanism, that people feel safety in speaking up, that organizations send out engagement surveys every year because none of these frauds happen in a vacuum. People know all these big scandals involve collusion, usually people working at the very highest levels of the organization. And so one of the best ways to find out if things are going on in your organization is simply to ask. Ask the people, send regular surveys and that will uncover a lot. And I think that people often over rely on internal controls. I think that's actually one of the reasons that some of these frauds went undetected for long periods of time. Because if you have collusion at the top of an organization, you can bypass most of those basic internal controls. So it really is critically important to make sure you have a strong ethical culture and a strong anonymous reporting mechanism and that these issues don't stay buried within the organization, but making sure that they rise to the level of the board.

[Dottie Schindlinger]

Sharon, I want to ask you the same question. What is your current passion project?

[Sharon Watkins]

It's a little bit more of a 50,000 foot level. I'm interested in the fact that belonging is so important to all of us. We have various churches, we belong to clubs, groups, athletic sporting teams. And it's in line with some of the things Cynthia was saying about loyalty. We don't want to rock the boat, we want to stay belonging to that tribe that we picked. And from my perspective, I move around a lot in some of the evangelical Christian circles. There are so many people that feel like to belong they have to vote a certain way. And we now have ugly Christian nationalism in our country. And we have speakers just reading the words of Jesus from Matthew 25, that when you saw someone hungry, naked, thirsty, you did something. And they're calling that socialist garbage. So they want to belong to a tribe so much, but they're also claiming to be Christian. So my passion project is more around those arenas because I've seen very good people make some horrible choices that I think go against what their soul really believes.

[Dottie Schindlinger]

I just wanna say thank you both to Cynthia Cooper and Sharon Watkins. Thank you for joining us on the podcast today and sharing your perspective. I think this was incredibly valuable. So thank you for joining me on.

[Sharon Watkins]

The show once again. Thanks for having us too.

[Cynthia Cooper]

Thank you, Dottie.

[Dottie Schindlinger]

We've been joined today by Cynthia Cooper and Sharon Watkins. Both are stalwart fighters against fraud and whistleblowers of fame from Enron and WorldCom. Thank you so much for joining us on the show.

[Megan Day]

Foreign first of all, Dottie, I want to be in a book club that is reading Sandworm. I'm gonna have to get that information from Sharon. What Cynthia said about history repeating itself and this is the opportunity to evolve and not tear it all down is so important to me. Scammers are gonna scam. We know this. And why are we weakening one of the last lines of defense against financial fraud?

[Dottie Schindlinger]

I mean, that's the thing, right? Like, so when I read their op ed in the New York Times, I really just couldn't sit on my hands. I had to reach right out to them to say this was really well, well written, very interesting, and would you come on the show and talk about it? Because, you know, regardless of the fact that now Congress has decided not to eliminate the PCAOB as part of the budget bill, which looks like it wasn't allowed, you know, who knows what's gonna happen? And there's such a move for de. And I think sometimes you can kind of fall into the trap, especially if you're a corporate director, of sort of just lulling yourself into thinking, well, deregulation always equals something good, right? We want to have more freedom. We don't want to have our hands tied. We want to be able to do the things that we need to do to grow our businesses. But this is a really good example of where without protections in place, things can go off the rails really quickly and you can find yourself on the board of a toxic asset. I mean, I'm fairly certain that the board of Enron and The board of WorldCom didn't really fully understand what was happening at those companies. I mean, keep in mind, these were two companies that were regularly getting applauded by the likes of McKinsey and others as like, the most ethical companies and the greatest places to work and yada yada. And so from the outside looking in, it just looked like these were such stable, fabulous companies, you know, very well run. And of course, when you look under the hood and if you talk to anyone in the internal audit team, including either Sharon or Cynthia at their respective companies, you find out that things are absolutely not going well, that there are some very real problems happening and some things are going to need to come to light. And when they do come to light, you know, those board members, I'm fairly certain, had a very difficult time finding other board seats. I'm sure it was destructive to their careers. And let's face facts, it destroyed 800,000 lives. So many people were impacted by the implosion of those companies, and that had ripple effects for, like, the next decade. That's not minor. You know, that's not a minor thing. And we all need those protections. I don't care whether you're a board member, whether you're a consumer, whether you're an executive at a company. We all need someone minding our backs, you know, watching our backs and just making sure everything is okay so that we can do our jobs well and feel good about the jobs we're doing.

[Megan Day]

Yep. And if you think about the job of a corporate director these days, eliminating something like this could mean more risk, more responsibility, potentially less clarity on audit oversight. And honestly, that's probably the last thing a director needs right now.

[Dottie Schindlinger]

Well, that's exactly right. The truth is, like, you know, if you think about it in this regard, the more regulation you eliminate, the more personal liability falls on the head of the director. Right. Because who else is there mining the store? Right. If there's no other, you know, if there's no oversight body, if there's no government assistance here, it's all on your head, and the chips will fall where they may. And you, as a director are not necessarily in the trenches enough to really know what's going on all the time. And that just feels very, very, very risky to me. So I, you know, as a director myself, I, you know, look, I'm not necessarily in favor of every regulation. I do think there's a lot of dumb ones out there. But I think something like the PCAOB just makes so much sense, you know, having some level of standard, some level of quality, looking at audits, looking at audit firms and making sure that they're all on the up and up and that they're all according to standard and being done right. That just makes total sense to me off the soapbox. We just had to share that with you. I mean, again, disagree with us if you do and give us a shout if you do. I mean, it would be interesting to hear a dissenting view, quite frankly. I mean, I feel pretty compelled talking to Sharon and Cynthia and certainly to Mike Levy as well, but would be totally open to hear a dissenting view. Always, you know, interested to hear multiple sides of an issue. So feel free to give us a [e-mail] well, Megan, that wraps up another episode of the corporate director podcast, the Voice of Modern Governance. I'd like to say a few special thank yous, first and foremost to our, our audit and whistleblower champions, Sharon Watkins and Cynthia Cooper and Mike Levy for joining us for the opening conversation podcast producers Kira Ciccarelli, Steve Clayton, and Laura Klein, our sponsors of the show, including PwC, KPMG, Wilson Sonsini, and Meridian Compensation Partners. And most especially, thank you to Diligent for sponsoring our show. If you like the show, please give us a rating on your podcast player of choice and drop us a [e-mail] you can also listen to more episodes and see more from the Diligent Institute by going to diligent.com resources. Thank you so much for listening.

[Podcast Narrator]

You've been listening to the Corporate Director Podcast. To ensure that you never miss an episode, subscribe to the show in your favorite podcast player. If you'd like to learn more about corporate governance and tools to help directors do their job better, visit dubai www.digent.com thank you so much for listening. Until next.

[Sharon Watkins]

Time.