Thank you, Jeff, for this opportunity to address the Informal Accounting and Auditing Group of the Council of Institutional Investors.
As the Staff Director and Chief Counsel of the Senate Banking Committee during the passage of the Sarbanes-Oxley Act of 2002, working for then Chairman Paul Sarbanes, I am often asked:
Let me attempt to address each of these questions today. Throughout my remarks, please note that these are my views and not necessarily those of the other members of the Board or its staff.
With respect to the mission and the need for the PCAOB — the answer is simple. I believe that, without an effective PCAOB, a critical element in the checks and balances of this country's financial reporting system would disappear. This would result in a loss of investor confidence, not only in the audit process and in the integrity of the information that fuels our securities markets, but also in the overall fairness of those markets.
Such a loss of investor confidence would reduce the efficiency of the markets and add unnecessary costs to the capital formation process used by thousands of American companies to raise the funds they need to build their businesses and create jobs.
Not only the professional investor but every employee contributing to a pension or 401(k) plan, a 529 fund for college education, and every American citizen who sends a check to a mutual fund or opens an account with a broker, needs more than anything else to know that he or she will be treated fairly.
Being treated fairly includes being confident that the financial statements and other financial information that investors or their advisers use to make investment decisions present a fair picture of the underlying economics of public companies and investment funds, and are not tilted in a direction favored by management.
Investors need accurate financial reporting to make sure they can identify the better positioned companies from those that may need to address fundamental financial or operational weaknesses. Knowing the true value of companies allows investors to direct capital to those companies that can create jobs, provide desired products and services, generate revenues, pay taxes, and provide market liquidity — all the attributes of a good and healthy investment.
As Congress recognized as far back as 1934 — when debating passage of the Securities Exchange Act — "There cannot be honest markets without honest publicity." That is where the auditing profession comes in.
To provide investors with confidence that the financial information being provided by public companies is fair and complete, Congress mandated more than 75 years ago that financial statements filed with the Securities and Exchange Commission (SEC) be audited by independent public accountants.
Congress gave this function specifically to the accounting profession. Under the securities laws, to raise money from the public or to have securities listed on an exchange or registered with the SEC, a company does not have to hire a lawyer or even an underwriter, but it must hire an independent public accountant to audit its financial statements and, for larger companies, its internal control over financial reporting.
The U.S. Supreme Court, in the Arthur Young case, stressed the importance of the audit process to the integrity of our markets and the confidence of investors. It described the audit as a "public watchdog" function that "demands that the accountant maintain total independence from the client at all times and requires complete fidelity to the public trust."
For the major accounting firms in this country, this statutory franchise has provided a multi-billion dollar business. Not only do the firms charge fees for audit and audit-related services, but prior to the enactment of the Sarbanes-Oxley Act, there was substantial evidence that the firms had used their audit relationships with clients to generate even greater amounts in non-audit and consulting fees.
Much of the information about how the firms were benefiting from this statutory franchise first came to light in the 1970s following the Penn Central bankruptcy, the revelations of massive financial statement fraud (such as Equity Funding and Continental Vending) and the discovery of hundreds of prominent companies with "slush-funds" for bribes and for other illegal purposes.
In the 1980s, government agencies alleged that accounting firms issued clean opinions on the financial statements of savings and loans despite knowing of financial and accounting problems within those institutions. Three major accounting firms settled those cases by paying hundreds of millions of dollars to the government.
The 1980s also saw other front-page auditing scandals, such as the collapse of E.S.M., where an auditor allegedly took a bribe not to disclose that the company had cooked its books. Or the case of ZZZZ Best, whose independent accountants failed to identify imaginary profits in its financial statements. As a result, a company that once had $220 million in market capitalization had its assets sold in a bankruptcy-related auction for only $62,000.
The 1990s and the first few years of this century saw earnings management cases resulting in SEC enforcement actions against companies such as Cendant and Sunbeam. There also were restatements by such well-known companies as Xerox, Waste Management, Rite Aid, and MicroStrategy.
To put this in perspective — a study by Financial Executives International found that restatements at this time resulted in losses to investors of approximately $73 billion.
Additionally, in the early 2000s, a number of big blow-ups occurred, including Tyco, Adelphia, Peregrine Systems, Global Crossing, Enron, WorldCom- all without any real warning from auditors.
Literally billions in earnings and assets were restated due to accounting errors and irregularities. In addition, the fall of Enron cost almost 20,000 jobs and over $2.1 billion in retirement assets to its employees, as well as about $67 billion to its shareholders. WorldCom shareholders lost $180 billion.
With this track record, it is safe to say that the experiment of auditor self-regulation had failed. Auditing standards continued to be written by and for auditors, with little consideration of the investors' perspective.
According to a study by the U.S. General Accountability Office, from 1997 to 2002, more than 800 companies — about one in 10 — had to restate their financial results due to accounting irregularities. This resulted in an estimated loss of $100 billion in market capitalization for those companies. 
In short, under self-regulation, the same types of accounting problems and audit deficiencies that were present in the 1970s continued to arise in the 1980s, 1990s, and into the new century.
To some, the failure of self-regulation correlated with auditors becoming too cozy with their clients in order to win profitable consulting and advisory contracts. The SEC found that the major accounting firms' aggregate fees from auditing services had shrunk from 70 percent of their total revenues in 1977, to only 30 percent in 2000. 
Clearly, prior to the Sarbanes-Oxley Act, non-audit services had taken over as the major source of revenues at the firms. One of the purposes of that Act was to remind auditors that their primary duty under the law is to serve, first and foremost, the interests of investors.
By the time Enron and WorldCom imploded, Congress was able to draw on the inquiries and testimony from hearings in both the House and Senate over the previous 25 years to swiftly assemble legislation that would effectively address these deficiencies in financial reporting.
Hearings, on what later became the Sarbanes-Oxley Act, were first held in the House on Dec. 12, 2001. Between the House and Senate, there were more than 35 days of hearings, and more than 150 witnesses. On July 25, 2002, the Act passed the House by a vote of 423 to 3, and the Senate by 99 to 0.
The Act has 59 sections. As a whole, they strengthen auditors' independence from their audit clients, clarify the reporting responsibilities of public companies and their management and audit committees, enhance the quality of financial disclosures, limit analysts' conflicts of interest, and stiffen penalties for corporate fraud and white-collar crimes.
The centerpiece of the Act, though, is the end of self-regulation of the auditing profession and the establishment of the PCAOB. This was in keeping with the recommendation of the Public Oversight Board - the predecessor to the PCAOB — that a new private-sector regulatory structure for the accounting profession be established by Congressional legislation.
In answer to the question, What has the Board accomplished? I would point first to the successful establishment and operation of the new regulatory functions of the PCAOB.
To assure that the PCAOB would be independent from the auditing profession, the Act states that only two of the five members of the Board may be accountants, and it provides for an independent source of funding, with the vast majority of those funds coming from public companies.
The Act instructed the Board to replace the profession's self-regulation with meaningful programs focused on the public interest and the protection of investors. The Act put an end to the setting of auditing, attestation, ethics, independence, and quality-control standards by and for the profession, and it directed the PCAOB to ensure that standards used by the accounting profession be set with investors and the public in mind.
Firm-on-firm peer reviews were replaced by independent PCAOB inspections. And the Board was authorized to bring enforcement proceedings against PCAOB-registered firms and persons associated with those firms.
As a standard-setter, one of the first acts of the PCAOB was to revise the existing professional standards so that auditors could not ignore or bypass important procedures simply because they were inconvenient or harmful to the auditor-client relationship. The PCAOB adopted a rule to make clear that whenever an auditing standard states that an auditor "should" perform a procedure, it means that the procedure is presumptively mandatory.
This and similar changes gave teeth to auditing standards, and made them more readily enforceable in PCAOB inspection and disciplinary actions.
The Board then adopted standards that, among other things, addressed audits of internal control over financial reporting for the first time; significantly strengthened the documentation requirements for audit procedures and findings; and expanded the applicability of, and improved the requirements for, engagement quality reviews (previously called concurring partner reviews).
The Board has also issued a number of Staff Audit Practice Alerts to address new, emerging or otherwise noteworthy developments that may affect how auditors conduct their audits. These Alerts address auditing in the current economic environment, fair-value measurements, disclosures, other than temporary impairments, and significant unusual transactions.
The Board is also working on other standard proposals, including the use of confirmation procedures in the audit, auditing fair value measurements, and auditing related-party transactions.
As inspectors, the PCAOB has assembled an expert staff with decades of prior experience. From its inception in 2002, the PCAOB has built a staff of over 300 inspectors and conducted more than 1,205 inspections.
Inspections focus on areas of high risk to the audit, which are usually similar to the high risks facing all businesses or individual sectors. For example, our inspectors presently give special attention to areas such as: the valuation of investment securities and loans, the classification of financial instruments, impairment considerations related to goodwill and deferred tax assets, and the valuation of pension plan assets.
Aware that our inspectors will be looking at their work on a regular basis - either annually or triennially - auditors know they need to be focused on the high risk areas within companies that are important to investors, and auditors know that, if they fail, they will be held accountable.
In addition to the inspection process, auditors of public companies are subject to PCAOB enforcement powers. The Board has a solid enforcement program. Though restrictions in the Act prevent the PCAOB from discussing pending investigations and litigated cases, settled cases are made public. Settled cases have ranged from a major accounting-firm partner allegedly adjusting materiality determinations so the client could avoid possible correction of an overstatement,  to a firm with only one CPA attempting to audit 300 issuers and allegedly failing to perform critical parts of those audits.
To date, the PCAOB has settled 30 cases, with sanctions ranging from censure, to a revocation of registration, to a civil monetary penalty of $1 million. Also, the Board currently has under investigation several audits of issuers affected by the global financial crisis, and is coordinating its work with the SEC Division of Enforcement.
Another PCAOB accomplishment has been the promotion of more effective auditor regulation around the globe. Our system of independent auditor oversight has been emulated by many countries. For instance, in 2003, following on the heels of the passage of the Sarbanes-Oxley Act, Canada established an oversight board, the Canadian Public Accountability Board, to oversee firms that audit public companies in Canada.
Since then, an additional 30 jurisdictions have established regulatory oversight bodies that are in various stages of development. Although not all of these oversight bodies have the same degree of independence from the profession as the PCAOB, or the same programs, they have the same focus on improved audit quality and enhanced investor confidence.
Back home, observers generally agree that the quality and effectiveness of auditing has improved due to the work of the PCAOB.
We have heard this from members of audit committees, who say that audit quality has improved due to PCAOB oversight. Their views are significant because many audit committees received greater responsibility under the Sarbanes-Oxley Act for the oversight of the quality of the audits of their companies' financial statements and internal controls.
More than three-quarters of the audit committee members surveyed by the Center for Audit Quality (CAQ) in the spring of 2008 rated the overall quality of audits of their companies as "very good" or "excellent." Eighty-two percent of those surveyed said that audit quality had improved in recent years. Sixty percent agreed that the risk of financial inaccuracies in reported statements due to fraud had declined after the passage of the Sarbanes-Oxley Act because, in part, of the increased auditor scrutiny by the PCAOB and the tightened internal control requirements. 
In addition, accounting firm leaders have asserted that the PCAOB has been instrumental in bringing about improved audit quality. For example, Edward Nusbaum, CEO of Grant Thornton, said in a 2009 interview, "(M)y belief personally, and I think our firm's belief, is that the PCAOB is critical…. [The] PCAOB has been hugely successful with changing the profession. We don't always like those inspections. The fact of the matter is they do change behavior."
He said that inspections "impact people's compensation, they impact people's careers and they impact our firm policies. We have changed firm policies because of PCAOB inspections. So they have made a huge difference …. The PCAOB does a good job of protecting investors." 
Samuel DiPiazza, former CEO of PricewaterhouseCoopers International, also commented: "I think the regulation of the PCAOB over the profession has been good for us. It has made us a better profession." 
A 2009 survey of investors by the CAQ found that despite two years of financial turmoil at the time — approximately 70 percent of investors surveyed still expressed confidence in audited financial statements. About three-quarters said they were confident in U.S. capital markets and U.S. public companies, generally.
More than six in 10 (63 percent) of the investors surveyed believed that the benefits from the Sarbanes-Oxley Act were worth the costs. A majority (about 74 percent) said they believed that all investors benefit from its implementation.
Also, empirical data demonstrates that there has been a decrease in financial restatements by public companies that coincides with the passage and implementation of the Sarbanes-Oxley Act. Data from a new Audit Analytics study show that restatements fell for the third year in a row - down from 923 in 2008, to 674 in 2009 — a 27 percent drop, and lower by 62 percent from a peak of 1,795 restatements in 2006. Additionally, the study found a reduction in the restatement's negative impact on net income, the number of days restated and the average number of issues per restatement.
These positive findings compelled one media observer to write, "Yet again, the chorus of Sarbanes-Oxley critics out there has been shouted down by one bald fact: SOX compliance prevents financial restatements."
Despite this evidence underscoring the effectiveness of the PCAOB and the Sarbanes-Oxley Act, some have criticized them for not stopping the economic crisis that erupted in 2008 and led to losses of jobs, family savings and homes. It is important to recognize, however, that the Act and the PCAOB were designed to address financial reporting and auditing failures.
The Act and the PCAOB were not designed to address financial institution risk management, systemic risk to the safety and soundness of our nation's financial system, nor debt-to-equity ratios as high as 30 to 1.
No one designed the Sarbanes-Oxley Act to prevent, and it could not have prevented, abusive loan practices, Wall Street's poorly designed compensation practices, and the failure to effectively monitor systemic risk that generally are recognized to have contributed to the current economic crisis. 
In addition, due to its focus on public company investors, the Act did not subject the audits of nonpublic investment advisers or broker-dealers to the Board's auditing standards, inspection process, or enforcement powers. As such, the Act was not designed to prevent abuses like the Ponzi schemes allegedly run by Bernie Madoff and others.
Among the many things the Act did do, however, was to enhance auditor oversight so that — during times of economic difficulties like the present — the PCAOB is in a position to monitor and enforce adherence to fundamental audit procedures and to keep auditors focused on their overriding duty to protect the interest of investors.
Another criticism often heard of the Sarbanes-Oxley Act and the PCAOB is that they may have placed the U.S. markets at a competitive disadvantage and may have driven Initial Public Offerings (IPOs) away from U.S. markets. This argument has been discredited repeatedly, but it continues to resurface.
The facts tell us otherwise, as is evidenced in any number of well-regarded research reports that have studied thoroughly whether the Act and the PCAOB have affected listings on the U.S. securities markets.
For example, the authors of a prominent, widely respected academic research report in 2007 concluded, "(W)e find that there is a listing premium for firms that list on U.S. exchanges but that there is no listing premium for firms that list in London. The listing premium is robust …. We find no evidence that the listing premium falls after 2001, even for listed firms from countries with good investor protection…. All of our evidence is consistent with the theory that there is a distinct governance benefit for firms that list on the U.S. exchanges." 
In other words, companies' stock prices benefit from the governance and discipline that come with being subject to the U.S. securities laws, and the Sarbanes-Oxley Act.
Further support comes from a 2009 staff report from the Federal Reserve Bank of New York, which noted that, while worldwide competition for IPOs has increased, the United States has maintained its leadership in IPO listings. The report, which looked at the years between 1990 and 2006, stated: "U.S. exchanges have maintained an undisputable lead in global equity activity" before and after the passage of the Sarbanes-Oxley Act. What had changed were the rising importance of competing markets and the expanding role of emerging-market stock exchanges.
According to the report, "[T]his rising pattern reflects improved competitive conditions in a growing global market rather than a sudden decline in the activity of U.S. exchanges."
Some purport that the Sarbanes-Oxley Act and the PCAOB encouraged U.S. companies to list on London's Alternative Investment Market, or AIM. What they do not mention, however, is that the dramatic growth in the AIM a few years ago was due primarily to new listings by small firms that would have been unlikely to list in the United States anyway. 
Other critics had suggested more broadly that enforcing the reporting and compliance requirements of Sarbanes-Oxley and the PCAOB had changed the cost equation for businesses as they make decisions about where to list their securities. The reality, however - as academic studies have indicated - is that there is no evidence that companies are making listing decisions today any differently than they were before the Sarbanes-Oxley Act became law.
The facts are that the U.S. markets remain the gold standard for corporate governance and investor protection; they remain the deepest and most liquid markets in the world; and, listing in the United States still creates a lower cost of capital for public companies.
In conclusion, the Sarbanes-Oxley Act reminds all participants in the financial reporting process that the original goal for the securities laws, as expressed by Congress in 1934, was to provide investors with "all information needed … to determine the true value of their investments." 
This requires persistent attention to the needs of investors and the protection of the public interest by auditors ensuring that companies "fully and fairly" report reliable information, whether the news is good or bad.
The Sarbanes-Oxley Act clarifies the reporting responsibilities of public companies and their management and audit committees, enhances the quality of financial disclosures, and stiffens penalties for corporate fraud and white-collar crimes - all in an effort to drive home to corporate officers and directors the importance of fulfilling their responsibilities to report honestly to investors.
As for auditors, Congress gave the auditing profession over 25 years to demonstrate a commitment to serving investors through effective self-regulation. The profession's programs failed to produce a credible result and, consequently, our markets suffered from a lack of investor confidence.
As a result, Congress created the PCAOB with a mission to assure that auditors of public companies prepare informative, fair and independent audit reports that can be trusted by investors. Based on my experience, the PCAOB is actively and successfully pursuing that very important mission and is in a strong position to do so for many years to come.
 United States v. Arthur Young, 465 U.S. 805, 817-18 (1984).
 Livingston, Phillip B. "Quantitative Measures of the Quality of Financial Reporting. Financial Executive. July/August 2001. $73 billion represents total market value losses due to restatements for three years, 1998, 1999, and 2000 ($17.7, $24.2 and $31.2 billion, respectively).
 Blau, Justine. "WorldCom Malfeasance Revealed. Reports Detail Intimidation by Top Executives." CBS News. June 7, 2003, http://www.cbsnews.com/stories/2003/07/07/national/main562014.shtml.
 United States General Accountability Office. Financial Statement Restatements. Trends, Market Impacts, Regulatory Responses, and Remaining Challenges. Washington: 2002.
 United States Securities and Exchange Commission. "SEC Chairman Levitt Proposes Rulemaking, Other Measures to Maintain Quality of Financial Reporting." Press Release. May 10, 2000, http://www.sec.gov/news/headlines/audind.htm.
 The Public Oversight Board white paper, released at a hearing before the Senate Banking Committee on March 19, 2002.
 See, e.g., PCAOB Rule 3101, which defines certain terms used in auditing and professional practice standards. For example, a statement in a standard that an auditor "should" perform a procedure indicates that the procedure is presumptively mandatory.
 On Dec. 17, 2009, the PCAOB reproposed seven new auditing standards, collectively referred to as the risk assessment standards. On March 29, 2010, the PCAOB proposed a new standard on Communications with the Audit Committees. See PCAOB Standard-Setting Agenda.
 Several research papers have shown that PCAOB inspection reports are a powerful signal of audit quality for small firms in particular. See, Abbott Gunny and Zhang, 2008; Daugherty, Dickens and Tervo, 2008; and Gramling, Krishnan and Zhang, 2008.
 PCAOB Release No. 105-2009-004, In the Matter of Thomas J. Linden, CPA (Aug. 11, 2009).
 PCAOB Release No. 105-2009-006, In the Matter of Moore and Associates, Chartered, and Michael J. Moore, CPA (Aug. 27, 2009).
 Excerpts from CAQ Press Release, Post-SOX Audit Quality Has Improved, Say Nation's Audit Committee Members (March. 18, 2008).
 "Grant Thornton CEOs Discuss Supreme Court's PCAOB Case." WebCPA video. Online video clip. Oct. 15, 2009, http://www.webcpa.com/news/Video-Grant-Thornton-CEOs-Discuss-Supreme-Court-PCAOB-Case-52048-1.html.
 Cohn, "Samuel A. DiPiazza, Jr.," WebCPA (June 18, 2009), http://www.webcpa.com/news/Samuel-DiPiazza-50798-1.html.
 CAQ's 3rd Annual Individual Investor Survey, conducted Aug. 27 to Sept. 3, 2009, of 1,000 investors nationwide. See http://www.thecaq.org/newsroom/release_09302009.htm.
 Audit Analytics. 2009 Financial Restatements — A Nine Year Comparison. February 2010.
 Kelly, Matt. "Restatements Continue to Drop; All Hail SOX". Compliance Week. March 1, 2010. www.complianceweek.com/blog.
 Many reports have discussed the causes of the economic crisis. See, e.g., Department of Treasury, "Financial Regulatory Reform — A New Foundation: Rebuilding Financial Supervision and Regulation" and Senior Supervisors Group, "Risk Management Lessons Learned from the Global Banking Crisis of 2008" (Oct. 21, 2009).
 Doidge, Karolyi and Stulz, "Has New York become less competitive in global markets? Evaluating foreign listing choices over time," at 44 (July 2007).
 Federal Reserve Bank of New York Staff Reports,"Prestigious Stock Exchanges: A Network Analysis of International Financial Centers," Staff Report No. 384 (August 2009). See also Goldman Sachs, Global Economics Weekly, "Is Wall Street Doomed?" Issue No. 07/06 (February 14, 2007), which states: "The regulatory climate does matter…. Nonetheless, we do not think this is the main problem-nor indeed that Wall Street is 'losing out'…. Instead, we see the growth of capital markets outside the US as a natural consequence of economic growth and market maturation elsewhere. The US has in fact been losing market share for several decades…. 'Natural' advantages, such as time zone, geographic adjacency and language, suggest that other markets will enjoy strong growth ahead."
 In a 2007 working paper, the Fisher College of Business noted that its academic research showed that most firms on the AIM are small firms that would have been unlikely candidates to cross-list on the U.S. Exchanges. (Doidge, Karolyi and Stulz, "Has New York become less competitive in global markets? Evaluating foreign listing choices over time," at 44 (July 2007), available at http://ssrn.com/abstract=982193). Research by Ernst & Young in the first half of 2006 noted that 31 of the 77 companies that conducted IPOs abroad went to the AIM and were unlikely to have a discernable impact on U.S. markets (Pinelli and Muscat, "Global Capital Market Trends," Ernst & Young. January 2007).
 As a working paper from the Fisher College of Business declared, "There is little evidence that firms have been making listing decisions differently in recent years from how they made them from 1999 to 2001." (Doidge, Karolyi and Stulz, "Has New York become less competitive in global markets? Evaluating foreign listing choices over time," at 44 (July 2007), available at http://ssrn.com/abstract=982193). An Ernst & Young analysis showed that the percentage of identifiable competitive IPO opportunities for U.S. exchanges that chose to cross list both here and abroad remained in the range of pre-Sarbanes Oxley IPOs. (Pinelli and Muscat, "Global Capital Market Trends," Ernst & Young. January 2007).
 H.R. Rep. No. 1383, 73rd Cong., 2d Sess., 12 (1934).