Welcome to the third meeting of the Investor Advisory Group (IAG) of the Public Company Accounting Oversight Board.
I want to thank all the members for participating and contributing your time and expertise.
It was 10 years ago that Congress enacted the Sarbanes-Oxley Act of 2002, which is defined in its very first words as: "An Act to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws …." Title I of that Act created the PCAOB and gave it a clear mandate "to protect the interest of investors … in the preparation of informative, accurate and independent audit reports …." (Emphasis added).
It seems appropriate on the tenth anniversary of the Sarbanes-Oxley Act that investors — the group that the law was designed to protect — take time to discuss what the PCAOB has accomplished since the Act was passed, and to look ahead at what the Board still may need to do to fulfill its mission. We plan to have that discussion today through presentations by four working groups on the following topics:
Since the Investor Advisory Group meeting in March of last year, the Board has taken up a number of your recommendations.
This clearly demonstrates that the recommendations of this Investor Advisory Group have made a difference in the Board's work and helped the Board to establish its priorities.
At that meeting, a group of IAG members, led by Professor Carcello, presented the results of a survey of more than 300 leaders of investment banks, mutual funds, pension funds, hedge funds, and private equity funds, who manage more than $7 trillion of assets. Two points stood out in the survey results. First, investors want the auditor's report to discuss the auditor's assessment of the estimates and judgments used by management to prepare the financial statements. And, second, investors want auditors to discuss how they addressed the areas that presented the most significant risks that the financial statements might be materially misstated.
In response to this and other input, last year the Board published a concept release and held a roundtable to solicit comments on changes to the current auditor reporting model. A proposed standard is planned for release by the end of the third quarter.
Another excellent presentation at the last meeting focused on issues related to auditor independence. With these issues in mind, last year the Board issued a concept release seeking public comment on possible approaches to improve auditor independence, objectivity, and professional skepticism. And, last week we held a roundtable on the subject.
When we last met, the Group also discussed fraudulent financial reporting. This has been a long-term project for the Board and last month we issued a proposal that would increase auditor scrutiny of related party transactions, significant unusual transactions, and executive compensation practices that may create incentives or opportunities for misstatements in financial statements.
Members also discussed lessons to be learned from the financial crisis. This has been a priority issue for the Board and since then the Board has issued two Staff Audit Practice Alerts. One Alert addresses the audit risks in certain emerging markets. Another is designed to assist auditors in identifying events and relationships related to the company's operating environment that might affect the risk of material misstatement in its financial statements.
The Board also has proposed a new standard that would require improved communications between auditors and a public company's audit committee, particularly with respect to significant unusual transactions and the auditor's views on the issuer's ability to continue as a going concern.
The one thing that most people agree on, in considering all of these measures, is that "the status quo is not an option."
I expect that the Board will carefully consider what we hear today in the months ahead. Once again, thank you for all the hard work you have put into preparing for this meeting.