Thank you for joining us today for our 21st Forum since we began this program in 2005. We have learned so much during the past two years in which we have been “on the road,” talking to folks such as you. We hope that this is a helpful use of your time; we know that is useful for us. To make the next few hours together as productive as possible, I have a few requests.
Before we begin, let’s take a rough survey of the audience. How many of you have been to prior PCAOB Forums? How many of you currently have 50 or more SEC “issuer” clients? How many of you have over 20, but less than 50 such clients? How many of you have 20 or fewer issuer clients? How many of you are in the process of, or have completed, a PCAOB-inspection? Of those of you with your hands up, how many have been through, or are currently in, a 12-month remediation cycle?
As I hope that you can appreciate from this rough survey, you are a diverse audience. You represent a wide spectrum of the auditing profession. We have tailored today’s program to meet the needs of most of you. Some of you may find some of our points too rudimentary; others may find them more challenging. I ask that you all have patience with us, and understand that this is, indeed, a varied audience.
Two more survey questions. How many of you have read something about the PCAOB in a newspaper, professional journal, or comparable internet site, during the past month? How many of these articles have been about something other than internal control over financial reporting? Contrary to the impression that this type of coverage may create – and admitting that we at the PCAOB have spent a lot of time during the past few months worrying about and working on the new internal control auditing standard that we’ll talk about this afternoon – the PCAOB is not all about Section 404. I’d like to spend the next few minutes talking with you about PCAOB activities that you are unlikely to hear or read much about, but which have a significant impact on how we go about doing our jobs – and by extension, how you and we relate to one another. To guide this discussion, I’ll be referring to the Board’s recently adopted 5-year Strategic Plan (a copy of which is in the back of your materials).
As do most organizations, the PCAOB has a mission statement. In our case, it was drafted by Congress, and directs us to oversee auditors of public companies, for the purpose of protecting the interests of investors and the public in the preparation of informative, fair and independent audit reports. Our “vision” is to do this by being a “model regulatory organization,” and “using innovative and cost-effective tools…to improve audit quality, reduce the risks of auditing failures…and promote public trust in both the financial reporting process and [the] accounting profession.” This is not only quite a mouthful, it is quite a handful.
To help us get our arms around these lofty aspirations, we’ve identified four overarching goals, and linked them to a total of 17 objectives. Each objective is supported by 2-6 “action plans” that are designed to provide a substantive and measurable means of tracking progress.
You’ll be glad to know that this concludes my “Strategic Planning-101/speak.” Now, let me get to the meat.
Our first overarching goal is to
“Promote investor confidence in audited financial statements…through the effective use of a supervisory model of oversight of registered public accounting firms.”
We use that term – supervisory model – quite a bit. There is no precise definition. Some use it interchangeably with “remedial model,” which is usually used in contrast to “enforcement” or “disciplinary” models. Given the fact that both of the two permanent chairmen that we have had during our short tenure come from the Federal Reserve System – which uses a “supervisory model” to oversee this country’s banks – it should come as no surprise that the term is imbedded in our culture. In my mind, embracing a “supervisory model” really means two distinct but related things. First, we will use many tools – not just enforcement – to move the auditing profession in a way that promotes investor confidence. Second, while enforcement may be the heaviest tool in our tool box, we will use it quite selectively. I think that you will see the supervisory model in practice today, as you hear from our staff.
We’ve identified several objectives designed to support this first overarching goal (that is, to promote investor confidence in audited financial statements … through the effective use of a supervisory model). These objectives call for the integration throughout our organization of risk-based approaches to our work – to our inspections, to the guidance we give and standards we develop, and to the disciplinary actions that we bring. The “risk” that is our focus is the risk of an audit failure, which could occur in both the situation in which existing standards have been complied with, and the situation in which they have not.
Let me give you a concrete example of the work that we’re doing related to this goal. We have within our organization an Office of Research & Analysis. This Office acquires data from a variety of sources, analyzes that data, and communicates the results to the Board and other PCAOB offices (and, sometimes, the public). Analyses from ORA are key components of our inspection work – from the selection of audit engagements, to issues within audits for review. Working together, our analysts and inspectors develop programs designed to look for non-compliance with professional standards, weighted toward those instances in which non-compliance raises the risk of audit failure. But this data-flow cannot only be one-way (from the analyst to inspector). Inspector observations must also flow back to the rest of our organization, to both ensure continual improvement in our risk-assessment methodology, as well as to identify areas in which full compliance with an existing standard may not appropriately minimize the risk of an audit failure. In this latter case, the goal of “promoting investor confidence” may best be met by changing the auditing standard.
The PCAOB’s second overarching goal is to:
“Inform, educate and obtain feedback from a broad cross-section of the audit profession, market participants and other[s] … about the PCAOB’s … activities and best practices in the audit profession.”
These Small Business Forums are one concrete way that we’re trying to attain this goal. Another way relates to the work that I’ve just mentioned concerning our first goal, and risk assessment. As we learn more about the audit risks that exist, we will communicate this to the audit profession (and others) so that – working together – we can continually and incrementally improve the quality of financial reporting.
To further support this second goal, the PCAOB has also partnered with the Auditing Association of the American Accounting Association (AAA) to analyze existing academic research on the various issues related to audit quality. AAA has formed 10 independent research synthesis teams to study the following subjects:
While the PCAOB had input into the subject areas under research, each synthesis team is free to reach its own conclusions and to publish its results without further PCAOB involvement. The status of these various research projects can be tracked via the Auditing Section’s Web site (http://aaahq.org/audit/index.htm.)
The PCAOB’s third strategic goal is to:
“… [S]trengthen the effectiveness and coordination of auditor oversight efforts in the U.S. and abroad.”
To support this goal, we maintain working relationships with not only US standards-setters and regulators such as FASB, the AICPA, the Government Accountability Office (GAO), state boards of accountancy and various prosecutors’ offices across the country, but also with our non-US counterparts. One of the most interesting phenomena since the most recent spate of accounting scandals crossed the globe has been the way in which other countries have approached the question of whether – and if so how – the potential for accounting fraud should be legislated. Most countries have concluded that some changes to their existing auditor oversight mechanisms are warranted. As other countries debate what changes best match their needs, resources and cultures, the PCAOB has provided the benefit of our experiences (both as to what has worked well and what has not). Last month, for example, the PCAOB sponsored a 2-day conference (the “International Auditor Regulatory Institute”) which was attended by over 75 participants representing approximately 42 countries.
Our fourth and final strategic goal is to:
“Operate the PCAOB in a manner that recognizes its public mission and responsibility to exercise careful stewardship over its resources.”
While activities supporting this goal are generally internal in perspective (that is, they relate to our human resource, communication and information technology policies and targets), the way in which the goal is phrased represents a key component of our culture and core values. Even though the PCAOB is part of the private sector and not the government, the PCAOB exists in order to fulfill a public mission; because of this, we must be held accountable for the way in which we use our resources.
I hope that you will see some of our organizational values today. We will do our best to answer your questions, even if it means that we have to make some calls into our headquarters office in Washington, DC. If you asked for information that we are bound to keep confidential, we’ll candidly tell you that. The bottom line is that we are here to give you information that we think is important, as well as to hear from you what is, in fact, important to you. Together, I think we’ll have a productive day.
 The term "issuer" means an issuer (as defined in Section 3 of the Securities Exchange Act of 1934), the securities of which are registered under Section 12 of that Act, or that is required to file reports under Section 15(d) of that Act, or that files or has filed a registration statement that has not yet become effective under the Securities Act of 1933, and that it has not withdrawn. See Rules of the PCAOB, Rule 1001(i)(iii).
 The PCAOB Strategic Plan is also available at the Board's web site.