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 Statement on Public Meeting On Auditor Independence and Audit Firm Rotation

DATE: March 21, 2012
SPEAKER: Jeanette M. Franzel, Board Member
EVENT: PCAOB Public Meeting
LOCATION: Washington, DC

Thank you, Chairman Doty, for calling this public meeting to discuss ways to improve auditor independence, objectivity, and professional skepticism.

I am pleased that the Board will be receiving input over the next two days from so many distinguished panelists representing a wide range of stakeholders. I believe it is fair to say that the stakeholders represented over these next two days have a keen interest in independent, high quality audits of issuers that protect investors and further the public interest. The challenge before us is to find the appropriate path forward to achieve needed improvements in audit independence and audit quality.

The discussions over these next two days and the input that we will receive will be critical in adding to the public record and contributing to the Board's deliberations about ways to improve audits of issuers.

I am personally committed to exploring the broad range of issues that impact upon auditor independence, objectivity, and professional skepticism and advancing the Board's efforts to forge a path for improved audits that help ensure investor protection and audit quality.

Over these next two days, we will engage in a constructive, honest, and fact-based discussion about the complexity of auditor independence and the various pressures in the current business model of public company auditing that can compromise auditor independence.

I want to thank all of the panelists, their staff, and their constituencies, for taking the time and effort to assist us in exploring these very important issues.

Auditor Independence is Fundamental

An independent, high quality, and reliable audit function is fundamental to investor protection and the public interest. Auditor independence is the cornerstone of informative, accurate, and independent audit reports. Without auditor independence, an engagement is not an audit but, rather, a consulting engagement conducted on behalf of management. Without independence, auditors cannot properly discharge their full range of professional responsibilities for exercising due professional care, including professional skepticism—which is an attitude that includes a questioning mind and a critical assessment of audit evidence. These fundamental principles are necessary for auditors to objectively conclude about whether sufficient reliable evidence exists to provide an opinion about whether the financial statements are free of material misstatement, whether caused by error or fraud.

The personal and business dimensions of auditor independence make this a difficult and sometimes charged topic. The concept of auditor independence challenges personal behavior and ethics as well as engrained business models and business interests. Associated with the current business model is the assumption that the auditor will deliver a clean opinion within a certain budget and timeframe.

In addition, independence involves an "appearance" aspect, which means that investors, the public, and other stakeholders must be able weigh the circumstances and conclude that the auditor is independent such that they can have confidence in the auditor's results.

Results from PCAOB Inspections Are Troubling

It is troubling that PCAOB inspections continue to find serious audit deficiencies where auditors do not conduct basic auditing procedures required by the standards; or where they simply use management's explanations as their own conclusions, without adequate audit scrutiny, about material issues that have importance for investors.

The PCAOB staff and Board continue to conduct "root cause analyses" for these types of audit failures. The potential causes are complex and vary in nature across cases. It is important to note that audit failures and deficiencies can occur for a variety of reasons other than the lack of independence, objectivity or professional skepticism. We need to continue to analyze the causes of why auditors issue clean audit opinions when the audit work is incomplete or not properly conducted; or when financial statement information is contradicted by other available evidence or based on management's views without independent audit verification for important material issues. Unfortunately, the Board has seen too many examples where auditors go ahead and issue clean opinions without fully or properly auditing material estimates and account balances in accordance with PCAOB standards.

Moving Forward — Solutions Won't Be Simple

The methods for improving auditor independence and audit quality won't be easy or simple. There will not be one, single "silver bullet" and, as such, the Board has set a broad agenda looking at a variety of issues that could help improve auditor independence and audit quality. The Board is currently working on several major areas of audit practice, including the auditor's reporting model, auditors' communications with audit committees, auditor independence including audit firm rotation, related parties, a firm's use of specialists and other auditors, supervisory and quality control responsibilities in a firm, and disclosure of the engagement partner and other participants in audits.

The Board's August 16, 2011 Concept Release on Auditor Independence and Audit Firm Rotation contained broad discussions of auditor independence and audit quality, with a focused view on audit firm rotation. It is my hope that the ongoing discussion on these issues will lend insights into the multiple, interrelated factors that influence the behavior of auditors and audit firms in conducting independent and high quality audits.

The bottom line here is that we must come up with a package of solutions that will be solid and effective in protecting investors and the public interest. This will involve looking beyond the status quo and the current business cycle. We also need to carefully consider and analyze the potential costs and benefits of various actions, as well as the risks associated with unintended consequences, so that we are effective in protecting the interests of investors and furthering the public interest in the preparation of informative, accurate, and independent audit reports.

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I would like to thank the PCAOB staff who have worked on this important project and related issues, including the staff and leaders in the Office of the Chief Auditor, the Office of the General Counsel, and the Division of Registration and Inspections.

I look forward to working with my fellow Board members, the staff of the PCAOB and the SEC, and our stakeholders on these important issues. I welcome the input of the panelists over the next two days on these, and any other issues that can help to improve auditor independence, audit quality and investor protection now and for the long term.