Opening Remarks

I want to echo Steve Harris's thanks to the Securities Exchange Commission, and in particular Chairman Schapiro, Chief Accountant Jim Kroeker, and Deputy Chief Accountant Mike Starr, for their support for the PCAOB and our Investor Advisory Group, and for their presence here today. I also want to thank you, Steve, for your leadership as chair of the Investor Advisory Group. And I want to thank the members of the advisory group for their participation and advice today.

The advisory committee's work, and our discussion today, are not about abstract issues. Each of the three topics we will take up today in one way or another appear at the forefront of our programs. The Board's subsequent proposals and other actions are not next year's business, but will follow in the near term. We will take them up with the public at large. We will solicit many views. But we will have proposals that address investor needs and lead to better audits and stronger protection of investors.

One of our topics today is what the lessons learned from the financial crisis teach us about the role of auditors in our financial system. We won't take this up first, but I suspect it will permeate both our other topics. It is critical that we examine how well auditors protected investors' interest in reliable financial reporting during the crisis. I have a sense that each of the various gatekeepers in our financial system was relying on other gatekeepers as checks and balances in the system. Auditors were a part of those checks and balances. That is, bank regulators, investors, lenders, and others perceived that the audit sign-off could give them comfort. That may or may not have been the case with respect to some parties. But the fact is that the auditor's presence played a role in other peoples' decisions.

I am eager to hear investor concerns about auditors' role in the financial crisis. I also have my own concerns, based on, among other things, the inspection results that the PCAOB has issued in inspection reports.

The PCAOB inspected the audits of many of the issuers that later failed or received federal bail-out funds. In several cases — including audits involving substantial financial institutions — PCAOB inspection teams identified what they determined to be audit failures of such significance that, in the inspectors' view, the firm had failed to support its opinion.

Some of these audits are now also the subject of pending PCAOB investigations and may lead to disciplinary actions against firms or individuals. Under the Sarbanes-Oxley Act, our disciplinary actions must remain non-public, unless the respondent consents, until both our proceeding and any SEC appeal are finished. This will take a long time.

A second topic for discussion today — the auditor's reporting model — is already on the PCAOB's agenda, and we'll be holding a public meeting to discuss it ourselves next week. Especially given the lessons of the financial crisis, I think this is a good time to take up this important issue.

Investors clearly want more from the audit report. We'll discuss today what that "more" might look like. There is of course a risk that "more" might become just more boilerplate. Standard-form language in some cases serves to protect investors. We certainly don't want to go back to the days of the McKesson & Robbins scandal, when non-standard audit reports could be used to weaken assurances provided to investors.

But clearly embedded in the call for more information from the auditor, is a call for auditors to better serve investors. I dare say most auditors don't see investors as their direct or even ultimate masters, unless they are dealing with a private investor, such as to conduct due diligence for a potential acquisition.

Our last topic — global networks and audit firm governance — is also critically important. The "global networks" are groups of firms that hold themselves out as providing a consistent audit methodology and seamless coordination among auditors worldwide. Audit reports by such networks do not generally describe the firms that participated in the audit or the coordination that was required. The firm that signs the report stands by the work of the firms that are not named, which is important. But the public is left with no information about which firms around the world actually performed the audit work and the significance of their respective roles.

Nearly if not all audits of large companies have some international component today. In the case of many of the largest companies, half or more of the audit may be performed abroad. And in all these cases that means coordination among the various audit firms that make up a network is key.

This topic touches on several particularly challenging areas for the PCAOB. As has been widely reported, the PCAOB is unable to inspect audits of firms that have registered with the PCAOB in order to be able to conduct or participate in audits of U.S. public companies but that are located in certain jurisdictions that have resisted inspections. This means enormous components of the audits of multi-national companies escape review, even when the firm that signed the audit report is a large U.S. accounting firm.

We are working, hard to reach accords that will allow our inspectors into those jurisdictions — it is one of our highest priorities. In January, the PCAOB concluded an agreement with U.K. authorities. This is good deal for U.S. investors. It's not a mutual recognition arrangement, but an arrangement for joint inspections that result in PCAOB audit reports based on PCAOB inspector findings. I hope it will pave the way for more agreements in the European Union and Switzerland. We also hope to make progress on a joint inspection arrangement with Chinese authorities, but there the progress is slower. Unfortunately, the risks to investors are every bit as great.

Even when we can inspect multiple firms' work on an audit, we need to look closely at how effective their coordination is. This is an important focus of both inspections and our enforcement activities. For example, the Board has instituted a proceeding against partners of firms in a large network related to their coordination on an audit for a foreign private issuer. Like all our litigation, this proceeding will remain non-public until all appeals are exhausted.

I look forward to discussion today. Let me now turn to Chairman Schapiro and invite her comment.