Thank you, Mr. Chairman. I support adoption of the rule amendment before us today.
Last December, with some reluctance, I voted along with my fellow Board members to propose an amendment to Rule 4003 to give the Board the ability to postpone certain inspections of foreign registered public accounting firms for up to three years. I stated then, as I do now, that it is a difficult call to make when considering whether extending the deadlines for certain international inspections is consistent with the Sarbanes-Oxley Act’s imperative to protect investors.
The choice the Board faced was clearly stated in the release, namely to: (1) postpone certain inspections of foreign registered public accounting firms while continuing discussions with firms or jurisdictions in an attempt to resolve outstanding issues; or (2) proceed with inspections by making inspection demands on individual firms over the likely objection of a number of local authorities.
Comments the Board received from investor representatives varied in terms of the level of support. Examples included the following:
Jeff Mahoney from the Council of Institutional Investors wrote, “[W]e obviously have great concern with the … proposal to ‘allow the Board to postpone, for up to three years, the first inspection of any non-U.S. firm.…’” He further stated, “Our support for this proposal is … contingent on the final rule including … at a minimum … [certain] conditions to ensure that the quality of the Board’s inspections of U.S. and non-U.S. registered firms becomes ‘better’ and more responsive to the needs of investors going forward.”
Mary Morris from the California Public Employees' Retirement System (CalPERS) wrote, “Although CalPERS supports the amendment’s [extended timetables,] … it does so with reservations and strongly believes the Board should maintain on its Web site an up-to-date list of all registered firms that have not yet had their first inspection and the reason why.”
And Barbara Roper from the Consumer Federation of America offered “… reluctant and conditional support for the proposal to delay for up to three years first inspections of some foreign audit firms …” provided that “… the proposed inspection delay is conditioned on [certain] factors.”
It is clear from these comments and others that representatives of investors believe that greater transparency about those jurisdictions and firms that have yet to be inspected is essential, given the delays. Investor representatives also believe that the delays should be used to improve, where possible, the overall international inspection process and that any further inspection delays beyond this three-year extension would be unacceptable.
I agree with these investor group comments.
Vital to the final rule we are about to vote on today are the transparency initiatives it includes. More specifically:
- At the beginning of each year and until 2012, the Board will list on its Web site all non-U.S. jurisdictions in which there are firms scheduled to be inspected by the PCAOB during that year. Further, the Board will not remove a jurisdiction from the list without publicly explaining why the schedule has changed for that jurisdiction.
- The Board will post on its Web site a list of all registered firms that have not yet had their first PCAOB inspection, even though more than four years have passed since they first issued an audit report while registered with the Board. Further, the Board will update this list in January and July of each year.
- In addition, the Board will retain the policy it announced last December to post on its Web site a list of the non-U.S. jurisdictions in which the PCAOB has already conducted inspections.
- And, finally, the Board intends to report biannually on its progress in meeting the scheduling thresholds described in the release.
These disclosures will provide crucial and timely information to investors as they consider their investment strategies and risk tolerances. I am confident that the Board will make every effort to use this inspection delay to continue its efforts to advance its coordination and cooperation with local authorities. I also fully expect that the additional time will provide the Board with an opportunity to enhance our international inspection program in other ways.
Borrowing from the comment letter of Jack Ciesielski, the publisher of The Analyst's Accounting Observer, “The inspections are critical, and, so is their proper execution; therefore I support the extended timetable so that the inspections are done with due care and diligence.”
I want to make one further point on the broader issue of transparency. I do not want to lose sight of other initiatives before us to improve disclosures about the Board’s activities with respect to firms’ inspection and remediation efforts.
As I have stated before, at the Board’s open meeting on December 4, 2008, I believe that the Board should prominently disclose on its Web site those firms that have failed to remediate quality control concerns identified in our inspection reports within the 12-month time frame.
I also think it is extremely important to clearly identify on our Web site those firms that have been inspected by the PCAOB, and those that have not. For example, I doubt that many investors realize that while the PCAOB has a little over 2,000 registered firms, we only inspect about half of those firms (a little over 1,000). This is because registered firms that have not issued audit opinions for public companies during any of the previous three-years are not inspected by the PCAOB, even though they may have issued audit opinions for their non-public clients.
I look forward to working with you, Mr. Chairman, on these initiatives and completing our deliberations on them as soon as possible so that investors will have readily available access to this information.
I know how much hard work was put into this release by Rhonda Schnare and her team in International Affairs, Michael Stevenson in the General Counsel’s office, and Carl Calender in Inspections -- and I commend them for their efforts.
And, finally, Mr. Chairman, I would be remiss if I did recognize your leadership in achieving today’s positive outcome.