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)

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.

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.

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)

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

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.