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PCAOB Updates

 Recent Activities of the Investor Working Group and the Investor Advisory Group 

DATE April 25, 2013 
SPEAKER(S): Steven B. Harris, Board Member 
EVENT: 2013 PCAOB Academic Conference 
LOCATION: Washington, D.C. 

I am pleased to welcome all of you to the 2013 PCAOB Academic Conference. The Board benefits significantly from your participation, and we are delighted that you are able to join us today. At the outset, I must inform you that the views I express here today are my own and do not reflect the views of the Board or the staff of the PCAOB.

Today I want to briefly lay out certain audit-related topics that are of importance to investors both here and abroad.

IFIAR Investor Working Group

Like Lew Ferguson, the newly appointed Chairman of the International Forum of International Regulators ("IFIAR"), I have recently returned from Noordwijk, the Netherlands. At IFIAR, I chair their Investor Working Group, which is composed of the PCAOB and audit regulators from six other countries — Brazil, France, Japan, the Netherlands, South Korea and the United Kingdom. This group is focused on gathering, for the benefit of IFIAR's members, investor input on global regulatory trends affecting the audit and also about various audit-related initiatives underway around the world of importance to investors.

The Investor Working Group has hosted investor sessions at IFIAR plenary meetings since 2009 -- in Singapore, Madrid, Berlin, Busan, and London. Each of these sessions featured highly distinguished professional investor representatives from a wide variety of jurisdictions including for example: Canada, Germany, India, Japan, the Netherlands, Norway, Singapore, the United Kingdom and the United States.

In Noordwijk we heard a series of presentations and a panel discussion featuring prominent investor representatives from the United Kingdom, the Netherlands, and Japan.

Structure and Topics of Investor Sessions

In preparation for the investor session in Noordwijk, the IFIAR Investor Working Group drafted a background paper that will be posted in full on IFIAR's website (www.ifiar.org) in the near future. A few of the topics covered by the paper that came up in the investor working group session included:

  • Auditor independence,
  • Professional skepticism,
  • The auditor's report, and
  • The auditor's responsibilities in relation to going concern.

Other topics included in the paper that you may find of interest are:

  • Integrated reporting, a topic that has begun to gain some traction in the international community. Integrated reports would include not only financial information about the company but also analysis about a range of non-financial issues affecting the performance and long-term prospects of the company.
  • Audit quality, a topic that the PCAOB and various other regulatory bodies are emphasizing and which Greg Jonas, PCAOB Director of Research and Analysis, will discuss tomorrow when he addresses the Board's ongoing Audit Quality Indicators project.

The Investor Sessions

At Noordwijk, we heard presentations from four investor representatives, all of whom were chosen by the regulators who make up the Investor Working Group.

Out of deference to the Dutch Authority for the Financial Markets, the host regulator for the plenary meeting, we asked Jan Maarten Slaughter, who serves as Managing Director of the Dutch Investors' Association, to speak first. He discussed recent actions the Dutch parliament has taken to address auditor independence. Specifically, firms in the Netherlands are banned from providing non-audit services, and public interest entities must rotate auditors every eight years starting in 2016. Jan Maarten also provided his thoughts on going concern. Among other things, he told us that the Dutch Investors' Association believes that an auditor should be required to explicitly state if he or she has identified any evidence of events or conditions that may cast doubt on an entity's ability to continue as a going concern.

Paul Lee, of Hermes Equity Ownership Services, commented on the topic of professional skepticism. He believes that, symbolically speaking, an auditor isn't a guard dog or a bloodhound but rather a sniffer dog, because, as he put it, auditors must investigate problems with skepticism until they are resolved. He suggested that regulators, when examining how auditors reached their conclusions, should not only look at documentation but also question how the auditor followed the trails. Finally, Paul reminded the plenary that the most effective audit firms feature a group of empowered and skilled people who support the audit partners and supervise those who carry out the audit methodology.

Elizabeth Fernando, who serves as Head of Equities at the Universities Superannuation Scheme ("USS"), the £ 37 billion pension fund for 400 U.K. universities and other educational institutions, continued the conversation on auditor independence by conveying USS' support for mandatory auditor rotation. She also stated that audit committees should ultimately determine the length of an audit engagement. Finally, Elizabeth noted that auditor independence from management is only half the story, and that the auditor's accountability to shareholders must be clear as well. She felt that "too often auditors perceive management as their client and are unwilling to robustly challenge them."

Oki Matsumoto, founder and CEO of the Monex Group Inc, an online brokerage firm, discussed the auditor's report, a timely topic because of the various initiatives on improving the audit report that have emerged in recent years from the PCAOB and other standard-setting bodies. He asserted that audit reports should be written in plain, non-technical language so that all investors, professional and retail alike, understand them. He also shared the results of the Monex Global Survey, a periodic survey by the Monex Group of its investor customers in the United States, Hong Kong and Japan. According to the survey, many investors have never read the auditor's report, and, not surprisingly, those who have believe that the auditor's report needs to be written in simple, plain language.

Interestingly, Sir David Tweedie, the former Chairman of the International Accounting Standards Board, and a person generally recognized as one of the world's most influential accountants, echoed this sentiment recently when he said that "the audit report at present is hopeless. It's full of who is responsible for what, and it's difficult to find the auditor's opinion."

PCAOB Investor Advisory Group

On the domestic side, this year marks the fourth year of the PCAOB Investor Advisory Group ("IAG"). I have had the privilege of serving as the Chairman of the IAG since its inception in 2009.

The purpose of this group, as stated in its charter, is to "provide its views and advice to the Board on broad policy issues, and other matters that affect investors and are related to the work of the Board." These meetings are open to the public and webcast on our website.

IAG meetings are structured so that members select the topics, make the presentations and lead the discussions at the meeting.

We are looking forward to holding the 2013 Investor Advisory Group meeting sometime in the fall. Some of the subjects that group members have suggested thus far as possible topics for our upcoming meeting include, in no particular order:

  1. The auditor's report — This topic remains a focal point for many investor representatives, both domestically and internationally. The discussion may also include an examination of what regulators outside of the United States are doing concerning the auditor's report.
  2. Independence, objectivity and professional skepticism — Not surprisingly, this topic remains of concern for investors, particularly as accounting fraud has become increasingly sophisticated and financial transactions ever more complex. As some of you may know, the PCAOB issued a Staff Audit Practice Alert in December 2012 on maintaining and applying professional skepticism in audits. Some investor representatives have expressed an interest in exploring other means to increase the focus on the auditor's ability to maintain and apply professional skepticism in an audit.
  3. Audit quality indicators — Nearly everyone we have spoken with on our Investor Advisory Group has expressed an interest in exploring what factors go into determining audit quality and how they should be measured. This discussion was prompted by the project on audit quality indicators that our Office of Research and Analysis is currently conducting.
  4. Firm governance and culture — This topic is not new. The focus as suggested by some IAG members would include examining how firms incentivize their employees, how they retain and attract talent, and whether placing independent directors on a firm's board would make a difference.
  5. Economic analysis in rulemaking — Our rulemaking has always taken into account economic considerations. However, in light of the passage of the JOBS Act, such analysis has assumed a more critical role in our standard-setting initiatives and this issue has been raised as a possible topic for discussion by our Investor Advisory Group as well.

On the topic of standard setting, I have always taken the position that my role as a regulator of the auditing profession is to oversee a targeted, effective, cost-efficient, regulatory process. By having straightforward and streamlined standards and regulations, and by avoiding complexity to the extent possible, I believe we can end up with more effective regulations, more effective audits, and more investor confidence in the audit and financial reporting process.

Conclusion

As you can see, when it comes to audit matters, investors in the United States and around the world have similar concerns and are grappling with many of the same issues.

I look forward to hearing your views on the topics I have touched on, and on actions the PCAOB can take to further its mission, as stated in the Sarbanes-Oxley Act, of protecting the interests of investors by ensuring that auditors prepare informative, accurate and independent audit reports.