Today's meeting brings to a close the current chapter in the most far-reaching standard setting project the PCAOB has undertaken in the four and a half years it has been in operation. In conjunction with management assessments, internal control audits under Auditing Standard No. 2 have had a profound effect on both public company financial reporting and on the way that audits are conducted. Companies have identified and corrected thousands of previously-undetected deficiencies, and controls are undoubtedly stronger and better understood today than before Section 404 reporting took effect.
At the same time, this process has proven highly controversial. Last December, the Board proposed to replace Auditing Standard No. 2, with a more risk-focused and principles-based approach to internal control auditing. The proposal the Board published for comment sought to focus the auditor on the matters most important to control effectiveness; to eliminate unnecessary requirements and procedures; and to make the standard more workable for smaller companies.
I think it is fair to say that the predominant view of the 175 comments the Board received was that we were on the right track. Of course, the comments contained numerous – and often contradictory – recommendations for additional changes. Some people thought we had gone too far in affording greater flexibility to tailor the audit to the issuer; others argued that we had not gone far enough. But, the general concepts on which the new standard rests enjoyed wide support.
Based on the comments, we have made some important further changes that were not originally incorporated in the proposal. The staff has already discussed many of these. I would like to briefly highlight five that are, in my view, particularly noteworthy.
I believe these are positive changes and that, taken as a whole, the package the Board is considering today will preserve the benefits of internal control auditing, while at the same time focus auditor energy and resources on the mountains, rather than the molehills, of internal control. I am also optimistic that we have created a framework that can be applied to smaller, less complex companies in a way that matches costs and benefits.
However, as I emphasized in my comments last December, there are limits to what we can accomplish through a new auditing standard. How a standard is implemented matters as much as how it is written. The Board has said that it will use its inspection program to make sure this standard is implemented in a way that is consistent with the Board's objectives. We have also undertaken to develop guidance for internal control audits of smaller companies. Our success in making good on those promises will be critical, especially as the SEC brings smaller companies – the non-accelerated filers – into the internal control reporting and auditing regime.
I want to conclude by joining my colleagues in thanking the staff of the Chief Auditor's Office, particularly Tom Ray, Laura Phillips, and Sharon Virag, for their hard work and dedication. I don't think any of them joined the Board's staff to devote their careers to internal control auditing, but the commitment, enthusiasm, and sound judgment that they have brought to this project have been of immense value – not just to the Board – but to the investing public. Special thanks go to Laura Phillips, who has been part of our Chief Auditor's staff since almost the beginning and who has recently announced that she is going to be leaving the Board for the corporate world. It's been a privilege and a pleasure to work with you, Laura, and we will miss you.