Many thanks Dr. Epps for providing me this opportunity to talk to the graduate students of accounting of Kennesaw State this morning. I know you have a full program and I have been asked to start off with a brief overview and background of the Public Company Accounting Oversight Board.
Before I continue, our Board policy requires that I tell you that the views I express today are my own, and do not necessarily reflect the views of the other Board Members or the staff of the Board.
I also will leave time and am happy to take questions at the end.
As I think you know, the PCAOB oversees the auditors and audits of public companies trading in the United States, as well as those of broker-dealers. Our job is investor protection — and that is the auditor's job as well.
The accounting and auditing professions serve a vital role in our capital markets and our economy, and I congratulate you for choosing this line of study. The federal securities laws grant auditors a unique franchise in that every public company that raises money through our capital markets or has a security listed on an exchange must hire an independent public accountant to audit its financial statements.
This role places auditors at the very heart of our financial regulatory system — a concept that was upheld by the U.S. Supreme Court in 1984.
In United States v. Arthur Young, the Court 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."
Without accurate and reliable corporate disclosures and financial statements — and competent auditors to audit them -- our competitive free market system cannot function properly. That is why, as I stated earlier, your chosen area of study is vital to our system of capitalism.
In the United States, over half of all households invest in publicly traded companies, whether through direct investments in companies' securities or through other investment vehicles. These investments in many instances provide for college funding and retirement.
Investors rely on the assurances provided by independent auditors that financial statements fairly present the financial positions of public companies. A loss of investor confidence in the integrity of the financial statement or the auditor would reduce the efficiency of our markets and add unnecessary costs to the capital formation process used by thousands of American companies to raise the funds needed to build their businesses and create more jobs.
The loss of that investor confidence is what Congress faced in 2002 after the financial crisis that culminated in the failures of WorldCom and Enron. While there had been other significant financial reporting frauds before, none had reached the magnitude of what we were facing in the early 2000s.
Literally billions in earnings and assets were restated due to accounting errors and irregularities at Enron and WorldCom. The fall of Enron alone cost almost 20,000 jobs and more than $2.1 billion in retirement assets to its employees, as well as about $67 billion to its shareholders. WorldCom cost its shareholders about $180 billion.
As a result of those and other financial reporting frauds and the associated audit failures, the Sarbanes-Oxley Act, which created the PCAOB, was passed with overwhelming support from both parties in July 2002. The stated purpose of the Act is "to protect investors by improving the accuracy and reliability of corporate disclosures."
The PCAOB was established because the accounting profession's framework of self-regulation had failed. The PCAOB's stated purpose is "to protect the interest of investors ... in the preparation of informative, accurate and independent audit reports."
This year, the PCAOB is celebrating its 10th anniversary and I believe it has achieved an impressive record of accomplishments in response to that directive from Congress.
The Sarbanes-Oxley Act directs us to:
Essentially, the PCAOB audits the auditors.
Presently, there are about 2,300 auditing firms registered with the PCAOB, including more than 900 international firms in about 84 countries. Last year, the Board conducted inspections of about 300 audit firms, including nearly 80 international firms in close to 30 countries.
Nine of the larger firms are currently subject to annual inspections, including Deloitte & Touche, Ernst & Young, KPMG, and PricewaterhouseCoopers, which are often referred to as the "Big Four." These four firms collectively audit U.S. public companies representing 98% of the total U.S. market capitalization. The rest of the audit firms with public company clients are inspected on a triennial cycle. To date, we have conducted over 1,700 inspections, and have issued over 1,500 inspection reports.
Since its founding in early 2003, the PCAOB has issued 16 auditing standards, covering internal control over financial reporting, and a set of eight foundational risk-assessment standards. Last August the Board approved our latest standard, Communications with Audit Committees, to improve the relevance, timeliness, and quality of communications between auditors and audit committees of public companies.
The staff of the Chief Auditor's office also has issued several audit practice alerts to provide guidance on current auditing issues, such as audit risks in emerging markets and audit considerations during the economic crisis. The latest, issued in December, calls attention to the fundamental importance of professional skepticism. It outlines steps that auditors can take to ensure that they remain skeptical throughout the audit.
In the enforcement area, the Board settled eight enforcement cases in 2012. Though the Sarbanes-Oxley Act prevents us from publicizing our ongoing enforcement proceedings, I can tell you that our proceedings so far have addressed a broad range of audit issues, including a firm's failure to assure that audits are staffed appropriately, an auditor's failure to act when confronted with evidence of illegal acts by a client, and an auditor's failure to be independent from his audit client.
Countries around the world have taken notice of the PCAOB and its work. More than 40 countries have established similar independent audit oversight regimes since the PCAOB was created. Most of those countries are now members of the International Forum of Independent Audit Regulators, or IFIAR, a coalition of 46 jurisdictions of independent audit oversight bodies from around the world.
So, that is a very brief overview of the PCAOB. Now, I want to touch on some of the things that the Board is working on currently. These include (1) requiring greater disclosure in the auditor's report, (2) enhancing auditor independence, and (3) fostering greater accountability in the profession.
The auditor's report, as I think most of you know, has not been updated significantly since the 1980s. While the current pass/fail model is helpful, we are hearing from a variety of investor representatives that the report needs to convey more information, especially in light of the recent financial crisis where so many issuers received clean opinions prior to filing for bankruptcy or receiving government assistance.
The auditor's report provides an opportunity for auditors to demonstrate their relevance to investors and the public generally. Jim Turley, Chairman and CEO of Ernst & Young, has said that, "The most important issue facing our profession is the relevancy of our audit service/product and making sure that we communicate with stakeholders in ways that are of importance to them." 
The Board is currently looking at various possible changes to the auditor's report. We issued a concept release in 2011 asking for comments on how improvements could be made, such as by adding more information about significant risks identified by the auditor.
A major reason auditors are so vital to our markets is because they provide an independent check on a company's financial statements. The independence of the auditor from its client is critical.
Before passage of the Sarbanes-Oxley Act in 2002, firms were providing both consulting and audit services to the same client. The audit failures leading up to the passage of Sarbanes-Oxley, however, revealed that in an issuer-pay model, when a firm derives a substantial amount of consulting revenue from an audit client, its independence and objectivity may be compromised.
Sarbanes-Oxley addressed this concern by prohibiting firms from providing certain "non-audit" services to audit clients in the U.S.
The Board has undertaken various initiatives to address its ongoing concerns that some auditors may not be approaching certain aspects of their audit work with the independence, objectivity and professional skepticism envisioned by the Sarbanes-Oxley Act and PCAOB standards, and we are concerned about some of the marketing and business development activities of some of the firms we inspect.
The two items that I have just mentioned are related to one of the basic underlying principles of the Sarbanes-Oxley Act—increasing the "accountability" of all market participants to investors. For example, the Act required that the principal executive officer and the principal financial officer personally certify, in part, that the disclosure and financial statements are fairly represented in all material respects. A number of us believe that nothing focuses the mind quite like putting one's name or signature on a document.
The Board is looking at various means to address accountability in the profession. Some of the things we are considering include whether to require the engagement partner, the person who is responsible for supervising the audit, to sign the audit report or have the engagement partner specifically named in the report.
Board consideration to address these and other pending issues must, however, be balanced against the unintended result of creating too many requirements, and overly complex standards. In my opinion, such a result would not be in the best interest of investors. My goal as a regulator of the auditing profession is to oversee a targeted, effective, cost-efficient, regulatory process with each proposed standard justified in advance by the Board's clearly stating what the problem is that needs to be addressed. By having straightforward and streamlined standards and reports written in plain English, and by avoiding complexity to the extent possible, I believe we can end up with more effective standards and reports, more effective audits, and more investor confidence in the audit and financial reporting process.
In conclusion, I believe that the passage of the Sarbanes-Oxley Act, which created the PCAOB, instituted fundamental changes in the oversight of the auditing profession and helped restore investor confidence in the auditors' work and opinion.
Let me repeat, I commend you for choosing such an intellectually rigorous and robust field of study. Your future chosen profession is vital to the integrity of our capital markets and to the infrastructure of our entire financial system which so effectively promotes competition and which I believe remains the envy of the world.
I am happy to answer any questions you may have.
 United States v. Arthur Young, 465 U.S. 805, 818 (1984).
 Top 100 Extra: The Biggest Issues Facing the Profession. Accounting Today, September 1, 2012. http://www.accountingtoday.com/ato_issues/26_9/Top-100-Extra-The-Biggest-Issues-Facing-the-Profession-63908-1.html