Welcome to the 2014 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 are my own and do not reflect the views of the Board or the staff of the PCAOB.
I want to briefly discuss a few items that are of importance to investors based on what I hear in my role as the Chair of both the PCAOB's Investor Advisory Group (IAG) and the Investor and Other Stakeholders Working Group of the International Forum of Independent Audit Regulators (IFIAR). I will also touch upon a few other issues.
I hope that you will consider examining some of them in your future research.
I have served as the Chair of the PCAOB's IAG since 2009. Members of this group select the topics to discuss at our annual meeting, and during last year's meeting members discussed, among other topics:
Among the topics this group has expressed an interest in discussing this year are:
On the international front, the IFIAR Investor and Other Stakeholders Working Group consists of the PCAOB and audit regulators from seven other countries — Canada, France, Japan, the Netherlands, Singapore, South Korea and the United Kingdom.
At this year's April meeting, this group held a joint session with the Global Public Policy Committee Working Group—which is comprised of the leaders of the major audit firms—to discuss how the audit can better serve investors and audit committee members. Panelists representing investors, audit committees and the profession participated in that discussion.
One key takeaway from this session was that monitoring the independence of the auditor is an especially important, ongoing responsibility of the audit committee.
Paul Beswick, the Securities and Exchange Commission's Chief Accountant, emphasized this point as well earlier this year in February during his presentation at SEC Speaks.
Following the plenary meeting, IFIAR issued its 2013 Inspections Findings Survey. The survey, which reflects responses from 38 regulators around the world, noted that the highest number of inspection findings were in the areas of fair value measurement, internal control testing, and adequacy of financial statements and disclosures.
These results are consistent with the findings of our own PCAOB inspectors. Our inspection staff has observed high rates of audit deficiencies over the last three years in audits of internal control, fair value measurements and disclosures, and management estimates.
The PCAOB, as with audit regulators from around the world, remains concerned about the continued high number of audit deficiencies.
To effectively advance audit quality, the PCAOB continues to pay close attention to how firms promote independence, objectivity, and professional skepticism.
In my opinion, under an issuer pay model, there is a constant risk that auditors may be, or may be perceived to be, biased towards management who pays their fees.
Directly related to the issue of independence, and hence audit quality, is the evolving nature of the largest firms' business models.
As many of you are aware, the Big Four firms are expanding their consulting businesses, either internally or through acquisitions. Some are expanding into other services as well. For example, a Big Four firm's foreign affiliate announced in March its ambitions to become a global top-20 legal services player within the next five years.
As the consulting arm of the firms grows and, at times, overtakes the audit function within the firm, the identity and focus on audit quality and independence may change. We have seen this situation play out before and, unfortunately, without a happy ending.
Firms have asserted that the acquisitions and investments they are making in their consulting and advisory practices improve their auditing capabilities. While this may be true, I believe it is the Board's responsibility to ensure that the firms continue to maintain their focus on investor protection through superior audit quality.
I also believe the major firms have become vital, or systemically important, to the economy as a result of their market share in the provision of audit services.
Individually, each of the Big Four U.S. firms would be included in the Fortune 500 based on revenue, and two would be included in the Fortune 250 list. Yet the public knows next to nothing about the financial conditions of these firms.
Currently, certain jurisdictions around the world require the major accounting firms to provide audited financial statements. For example, certain large accounting firms in the UK, the Netherlands and Austria include audited financial statements in their annual transparency reports, which are posted on their respective websites.
In the United States, the co-chairs of the 2008 Bush Administration's bipartisan Treasury Department Advisory Committee on the Auditing Profession Study asserted that they believed the "[i]ssuance of audited financial statements provides greater transparency and increases discipline and helps sharpen focus, accountability and trust." This was the basis for the recommendation by that Committee that the larger auditing firms submit audited financial statements to the PCAOB.
I agree for several reasons. In addition to providing transparency, I believe, it would help the Board better understand:
And, it would enable the Board to better understand the firms we regulate.
As with the other issues I have mentioned, I would be most interested in any views or academic research you would care to undertake or share with the PCAOB on this topic.
Finally, a word about diversity and the accounting profession, an issue that Board Member Jeanette Franzel has been involved with heavily. I would note that all the major accounting firms, and for that matter many of the Fortune 500 companies, are increasingly focusing on strengthening their talent pool through a commitment to diversity. Yet, we hear that accounting is not a particularly attractive field for minority students.
I think it is important that the academic community understands its role in improving the auditing and accounting profession's ability to attract high-potential, diverse talent. I would note that, according to the 2012 U.S. Census Bureau Report, by 2043 there will be no single ethnic or racial majority group in the United States as the share of non-Hispanic whites falls below 50 percent.
Therefore, I encourage you to work at increasing the participation of underrepresented groups in the profession. The academic community, for example, could work to enhance perceptions of the study of accounting and better explain to students how the profession contributes vitally to the functioning of the capital markets. Such efforts, I believe, could go a long way in attracting a diverse pool of talent to the study of accounting and to the profession as a whole.
In conclusion, I welcome your views, backed by analysis, on actions you believe the PCAOB should undertake 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.
 The Financial Reporting Council, for example, brought into force legal requirements on the auditors of certain public interest entities to publish annual Transparency Reports in 2008, in accordance with the Statutory Audit Directive. The requirement came into force for financial years ending on or after March 31, 2010. See https://www.frc.org.uk/Our-Work/Conduct/Professional-oversight/Oversight-of-Audit/Statutory-Auditors-Transparency-Reporting.aspx
 See II:9, Final Report of the Advisory Committee on the Auditing Profession to the U.S. Department of the Treasury (Oct. 6, 2008).