I am very pleased to be here this morning to speak with this distinguished group of individuals who serve on and advise audit committees. As a Board Member of the Public Company Accounting Oversight Board (PCAOB), much of my professional life revolves around investor protection and audit quality. I know that all of you share the PCAOB's focus on these areas. It is our common interest that has brought me here today to discuss with you our ongoing initiatives relating to audit committees and how we can hopefully help each other achieve our respective goals.
Before I go any further, let me note that the views I express here today are my own, and not necessarily those of the PCAOB, any other PCAOB Board Member, or any member of our staff.
I would like to start by acknowledging our appreciation for the important role that audit committees play in protecting investors and ensuring audit quality. Since the passage of the Sarbanes-Oxley Act of 2002, audit committees have become increasingly independent, enhanced their financial expertise, and sharpened their focus on the hiring and oversight of their company's auditor. These efforts have led, in my experience, to more rigorous oversight over the work of auditors, at a time of ever increasing business complexity and risk. We understand the challenges you face in overseeing complex financial reporting processes, increasingly difficult accounting issues, and the expansion in the responsibilities of audit committees into areas beyond financial reporting and auditing.
Although the work audit committees appears to be increasing and becoming more difficult, we find that the audit committee members with whom we interact are at the top of their game. They work hard, they spend time trying to understand the issues, and they want to do their job well. We at the PCAOB believe that we can help you by sharing with you our experiences, inspection findings and concerns, so that you can better understand the challenges faced by your company's auditors and the issues you might wish to consider in connection with your oversight role. And we believe that you can help us by telling us about your challenges and providing us with your views about our work and ideas for how we can to continue to improve.
The Board announced in late 2012 six near-term priorities intended to achieve improvements in how we do things and how useful our work is to our stakeholders. We believed it was important to highlight our views of some of our most important challenges as we looked forward to the next 10 years. The priorities include:
All of these priorities are consistent with our goal to enhance the PCAOB's transparency and communications with our stakeholders, including, in particular, investors and audit committees.
With respect to our review of inspection reports, we are evaluating both our firm-specific inspections report (which are made public in part, consistent with the Sarbanes-Oxley Act) as well as our periodic summary reports used to convey inspection findings over a period of time and across firms. We are considering whether these reports are useful and how they can be improved. One recent improvement to our general reports, also known as Rule 4010 reports, has been the addition of an "executive summary" written in plain English that we hope will be helpful to a variety of readers, including audit committees. Historically, the Board's general reports have been used primarily to recount inspection findings; more recently we also have attempted to provide more context and meaning to those results.
Board Members also have challenged themselves and the PCAOB's inspection staff to consider improvements to the firm-specific reports. We are often criticized for the time it takes to issue these reports, and our staff has been working diligently to issue inspection reports more quickly without compromising accuracy or fairness, and they have made substantial progress. Many of our reports are issued within a matter of months, and for those that take longer than a year, there is usually a good reason, such as the need to consult about complex accounting questions or delays in obtaining relevant information. We continue to strive for even more improvements in the timeliness of reports, but I also ask myself and our staff whether more could be done to enhance the content of the reports. We accumulate substantial useful information about firm's practices through our oversight activities, and I would like to find ways to share more of it with the investing public. I hope our planned outreach in this area will help us focus our efforts.
One particular criticism with respect to our reporting has been the focus of the reports — including firm-specific inspection reports and our general reports — on the negative. In keeping with our regulatory mandate, we look for and report audit deficiencies. Indeed, with respect to quality control deficiencies, we have a specific statutory mandate to include applicable criticisms in the report and to publish that information only if firms do not take appropriate actions to remediate the problems. But some of our stakeholders have asked us to consider whether audit quality also could be enhanced through PCAOB reporting of what auditors do right and why, allowing auditors to learn from each other. Our current inspection program and available resources do not contemplate the collection of data needed to determine and report comprehensively on auditor "best practices," but our work in connection with a near-term priority project to identify and report on audit quality indicators may be a step in that direction.
The audit quality indicator project is focused, in its early stages, on attempting to define audit quality, establish a framework for thinking about audit quality, and develop specific, quantitative indicators that may, ultimately, be used as objective measures of audit quality. In the spring of this year, the Board and the staff of the Office of Research and Analysis discussed this project with our Standing Advisory Group (SAG). The staff's preliminary thinking of the framework for audit quality includes three segments — audit inputs, processes, and results — and the SAG discussed potential quality indicators in each category. SAG members provided valuable feedback, assisting the staff in their continuing analysis.
We hope to issue a concept release in the coming months to seek comment on a list of potential audit quality indicators that, based on feedback received and our own analysis, seem to show the most promise. Although we see this project as a marathon, rather than a sprint, it could have wide-ranging implications on many of our activities if successful. It could affect the content or focus of inspections and inspection reports, influence potential future standard-setting projects, and may, ultimately, lead to the publication of certain indicators that could help audit committees and investors better evaluate the quality of work by their auditors. Focusing firms on these indicators also could allow them to track their progress over time.
As we have considered how to improve the content and timeliness of information we make available to the public, we have also asked ourselves about who our stakeholders are and how best to reach them. Audit committees are clearly a very significant stakeholder group. We recognize their important role, complementary to our own, in overseeing public company audits. Ultimately, audit committees hire and fire the auditors. I believe that regulatory activities like inspections, enforcement and standard setting can and should drive improvements over time. In addition audit committees — equipped with relevant information about how to evaluate the quality of work by auditors — are a powerful market force that can and should drive improvements in audit quality through market incentives.
In an effort to ensure that audit committees receive important information about the audit, the Board issued last year a new standard, AS 16, governing the required communications between auditors and audit committees. This standard is intended to improve the quality of audits by providing both auditors and audit committees with information they need to discharge their respective responsibilities. The standard is effective for the audits of 2013 financial statements, and we look forward to learning about how its implementation has been received by auditors, audit committees, issuers and others.
In addition, in August 2012, in order to help audit committees understand the context and meaning behind our inspection reports, we issued a release to provide information to audit committees about the Board's inspection process and the meaning of reported inspection results.  The objective of the release was to better equip audit committees to engage in meaningful discussion with audit firms about the process, results and context of PCAOB inspections.
We also intend to provide more transparency about our process of evaluating whether firms have remediated the quality control deficiencies or weaknesses identified by PCAOB inspectors. Although the details of particular firms' deficiencies must, by law, remain confidential unless a firm fails to remediate to the Board's satisfaction, we want to ensure that firms and the public have a good understanding of the process and our criteria in evaluating remediation efforts. Our dialog with firms in connection with their individual remediation efforts, and our requirements, has been increasingly robust. In addition, we are in the process of preparing a written summary of the guidelines and criteria we use to help firms understand the remediation determination process. I also hope we can issue an updated report summarizing firm remedial actions that we believe have been successful.
Some important aspects of a good remediation process that we have highlighted for firms is the need to do a thorough root cause analysis of what may be causing audit deficiencies and to design remedial measures to address these specific causes, monitor on an ongoing basis whether quality is improving, and adjust the remediation approach mid-stream, if necessary. As audit committee members, you may want to discuss the remediation process with your auditors in order to understand the PCAOB's expectations, how firms intend to comply and the progress being made by the firm.
In addition to providing better information to audit committees, the Board also is interested in fostering a better two-way dialog with audit committees so that we can hear more about what you do and what is important to you. We are interested in hearing from audit committees their perspectives on our standards and oversight activities intended to improve audit quality. Our near term priority relating to audit committee outreach is underway. In May, we discussed with the SAG potential outreach approaches, ranging from the issuance of additional publications, to attendance at conferences or webcasts, to hosting town hall-style meetings or round tables specifically tailored toward audit committees. We are considering changes to our website to make it easier for audit committee members to find relevant information. We have actively reached out to corporate governance organizations to increase participation by PCAOB Board members and staff in conferences and other events that are targeted toward audit committee members. We are letting audit firms know that we are interested in a dialog with their clients, such as by attending firm forums for audit committee members. Town hall meetings or roundtables could be done through stand-alone meetings hosted by the Board for audit committee members, or we could add audit committee sessions to our already existing Small Business Forums, which we conduct several times each year in cities around the country.
One important topic we have been talking about with investors, audit committees, audit firms and others is auditor independence, objectivity and professional skepticism. In our 2012 roundtables and other feedback in response to a 2011 concept release that discussed, among other things, mandatory auditor rotation, two common themes emerged. First, we heard that mandatory rotation is not a good idea. It is hard to implement and potentially very costly. Moreover, it is entirely unclear whether frequent auditor rotation would improve or harm audit quality. In my view, it is unlikely that we will move forward with a proposal for mandatory auditor rotation.
A second theme was whether audit committees could do more to enhance auditor independence. We have heard some good suggestions along these lines already, but we continue to be interested in your ideas. One area that I would like to highlight is the relationship between the audit firm and its client. In connection with PCAOB inspections, we have observed written firm proposals that include inappropriate language about the auditor becoming a client's business partner. While we believe firms have taken appropriate steps in recent years to eliminate these types of promises from their formal proposals, audit committees may still be hearing statements along these lines orally from audit partners. I challenge you to push back on any firm that pitches this as a way to gain or keep your business. There are many regulatory safeguards around auditor independence, but not every situation is (or should be) covered by a rule. For example, auditor client social interaction is something that audit committees may want to understand, including who is attending and paying for premium events. One of the overarching safeguards over auditor independence, objectivity and skepticism is your diligence about knowing about and eliminating behavior that could impair auditor independence.
Finally, I would like to highlight just briefly the Board's recent proposal of a standard governing the auditor's report. This proposal, if adopted, would require auditors to go beyond the current model of providing only an opinion on whether the company's financial statements are fairly stated (or whether internal controls are effective) and would require auditors also to discuss in their reports so-called "critical audit matters" in order to provide investors and others with more insight into the audit. As defined, critical audit matters are those matters addressed during the audit that (1) involved the most difficult, subjective or complex auditor judgments; (2) posed the most difficulty to the auditor in obtaining sufficient appropriate evidence; or (3) posed the most difficulty to the auditor in forming the opinion on the financial statements.
We issued this proposal after a long period of public outreach, during which investors clearly voiced their interest in learning more from auditors about what they do and what they are learning about the company in the process. Our approach was tailored to achieve a careful balance — between satisfying the investor need for more information while not undermining management's role in providing financial information about the company. I urge all of you to take a look at the proposal and to consider how it may affect your companies and your work as audit committee members. I have encouraged audit firms to consider doing an informal "field test" of this standard during the comment period in order to determine the degree of difficulty and effort involved in reporting critical audit matters. I encourage you to work with your auditor on this, and to provide us with feedback on your experiences. The comment period is open until December 11, and we hope to hear from all of you.
In closing, I would like to ask you to help us achieve our goals with respect to our near term priorities generally, and audit committee outreach in particular. Please provide us with feedback in response to our concept releases, proposed standards, and other public outreach. Apply for membership on our Standing Advisory Group or nominate a colleague — we appoint a number of new members each year, and audit committee members are always in short supply. Contact us if you have an interest in participating in other outreach meetings that we may schedule over the next year. Talk to your auditors about the PCAOB's inspection process, results and reporting practices. Discuss with your auditor their planned improvements to their quality control systems and their dialog with the Board about the remediation process and our expectations. Consider how you evaluate your own auditors and provide us with feedback on our audit quality indicators project. And tell us how else we can help you — whether it is by adjusting the information we currently provide, suggesting other means of communication that we have yet to explore, or addressing through standard setting an area of the audit that you believe merits our attention. We want to reach as many of you as possible, and we are open to new ideas.
With that, thank you again for listening, and I am happy to take any questions that you may have.
 See Public Company Accounting Oversight Board Strategic Plan: Improving the Relevance and Quality of the Audit for the Protection and Benefit of Investors 2012-2016 (Nov. 30, 2012) at 5.
 See Auditing Standard No. 16, Communications with Audit Committees; Related Amendments to PCAOB Standards; and Transitional Amendments to AU SEC. 380, PCAOB Release No. 2012-004, PCAOB Rulemaking Docket Matter No. 030 (August 15, 2012).
 See Information for Audit Committees about the PCAOB Inspection Process, PCAOB Release No. 2012-003 (August 1, 2012).
 The PCAOB previously issued a report about firm remediation efforts in 2006. See Observations on the Initial Implementation of the Process for Addressing Quality Control Criticisms within 12 Months after an Inspection Report, PCAOB Release No. 104-2006-078 (March 21, 2006).