Last week, the U.S. audit regulator, the Public Company Accounting Oversight Board (PCAOB), gained key legislative support, but some accounting experts say the battle over its future is far from over.

The PCAOB's victory came on Thursday (June 12), when the Senate Parliamentarian ruled that the controversial provision to abolish the PCAOB and merge its functions into the U.S. Securities and Exchange Commission (SEC) violated the so-called "Byrd rule." That rule requires reconciliation bills to focus on specific fiscal issues.

PCAOB Chair Erica Williams welcomed the ruling in strong terms. "This is good news for millions of Americans whose retirement savings and investments could have been at risk if the PCAOB were abolished," Williams said in an emailed statement to CFO Dive. But Nicole Wright, an associate professor of accounting at James Madison University, called it "a temporary reprieve regarding the attempt to merge the PCAOB into the SEC. I don't think the effort to remove the PCAOB is over."

This review process, known as the "Byrd bath," named after former Senator Robert Byrd who proposed the rule, is part of a multi-step review of the Republican massive tax and spending bill. Senate Budget Committee ranking member, Oregon Democratic Senator Jeff Merkley, said the ruling ultimately means the PCAOB-related provision in the bill needs to be removed to comply with the rules. According to Marc Gerson, a tax policy-focused partner at Miller & Chevalier, the provision could also be modified to make it compliant.

Jack Castonguay, an associate professor of accounting at Hofstra University, said Monday that from a practical standpoint, the PCAOB has likely been stripped from the large tax bill.

"The Senate Parliamentarian's ruling means the proposed plan to merge the PCAOB into the SEC is likely dead on arrival," he wrote in an email, noting that if the House keeps the PCAOB-related proposal in its version, then the Senate would need 60 votes to pass the entire bill. "The House won't risk the fate of the entire bill over the PCAOB provision. I think its quasi-independent structure is safe for now."

Opposition grows

This legislative action followed growing opposition from academics, former regulators, and some in the business community to abolishing the PCAOB. The independently funded body was established by Congress in 2002 after the multibillion-dollar accounting scandals at Enron and WorldCom.

Sherron Watkins and Cynthia Cooper, whistleblowers who exposed accounting fraud at Enron and WorldCom respectively and were named Time magazine's Persons of the Year in 2002, wrote in the New York Times opinion section last month defending the Sarbanes-Oxley Act and the PCAOB. They warned that "systemic risk spreads in regulatory gaps" and said the PCAOB brought "rigorous inspections" that made audits more consistent and credible. They also called for any necessary reforms to be addressed within the existing framework.

Meanwhile, according to Thomson Reuters, former regulators and professors sent a letter on June 4 to the Senate Banking and Budget Committees opposing the inclusion of the provision in the budget bill based on the Byrd rule, noting that the PCAOB does not receive funding directly from Congress. Additionally, the Council of Institutional Investors also sent a letter to senators on June 5 urging them to oppose the provision and protect the PCAOB.

More battles brewing

Wright said in an email Monday that supporters of keeping the PCAOB should view what happened in a positive light.

"This attempt was buried in a massive bill and could have been lost in the chaos. But mainstream media has started discussing the importance of audit regulation and the benefits of the PCAOB," Wright said. "If the goal is to improve audit quality, these discussions are necessary. The good, the bad, and the ugly of all perspectives should be presented."

Nevertheless, long-time PCAOB watchers have long pointed out that there are multiple ways to "defang" or marginalize the agency without fully abolishing it through Congress. Last December, Robert Pawlewicz, an assistant professor of accounting at the Robins School of Business at the University of Richmond in Virginia, told CFO Dive that a new presidential administration doesn't need to "destroy the PCAOB to render it ineffective."

Even before the Byrd rule ruling, Pawlewicz was skeptical the measure would pass the Senate. Given that the SEC holds approval power over the PCAOB's budget, he said he would look to the next budget cycle for clues about the PCAOB's future direction.

"The PCAOB's 2025 budget was approved in December 2024 by then-SEC Chair Gary Gensler," Pawlewicz said. But as we move into the next budget cycle for 2026, "we'll really see, if there's a new board, what approach they take for 2026."

Castonguay also noted that even if the PCAOB retains its current structure, the SEC could still "hamstring" the agency in other ways.

"The SEC still needs to approve the PCAOB's budget and support fees. If they want to weaken the PCAOB, they could refuse the support fees or force it to significantly cut its budget," he said. "They can't abolish it now, but they can certainly reduce its ability to inspect auditors or take enforcement actions."