Welcome everyone to the Public Company Accounting Oversight Board's third public meeting on the Board's concept release on ways to enhance auditor independence.
I want to thank Rice University and Dean Bill Glick for providing such an inspiring venue for this meeting.
We have assembled an august set of panelists today to assist the Board in an in-depth examination of an issue that continues to trouble many of the most thoughtful supporters of the audit profession — the subtle (and not so subtle) influences on the auditor's mindset, and the implication for the integrity of the audit.
Enhancing auditor independence was one of the main goals of the Sarbanes-Oxley Act of 2002. We have one of the draftsmen of that Act seated to my left at the table.
In the weeks and months leading up to the enactment of Sarbanes-Oxley, Congress considered requiring audit firm rotation to improve auditor independence. But the final statute as enacted stepped back. Instead, it provided for partner rotation on public company audits. In addition, it asked for further study of firm rotation.
Shortly thereafter, in 2003, the Government Accountability Office embarked on a review of the arguments for and against audit firm rotation. The review was preliminary in light of other Sarbanes-Oxley reforms that were only beginning to be implemented. Thus it concluded that the SEC and the Board would need several years to evaluate whether the Sarbanes-Oxley reforms, including audit partner rotation, were sufficient, or whether further independence measures are necessary to protect investors.
We are fortunate to have on the PCAOB board one of the drafters of the GAO report to help us put it in context.
Since then, the financial crisis of 2008 has caused us as a nation to reflect on how dependent our financial system is on high quality, unbiased audits.
It has prompted us to look again at auditor independence, objectivity and professional skepticism, and to ask whether features of our financial system have allowed companies to become too close to their auditors. And to consider whether there are ways we can improve the reliability and usefulness of audit reports to the public.
We are not alone in this inquiry. Many other countries have commenced their own reviews of audit practices. We are fortunate to be able to hear from a representative of the European Commission later today about potential reforms that are currently under consideration in Europe.
Just last month, the United Kingdom published a regulation that would entail mandatory retendering every ten years for FTSE 350 companies, with corresponding disclosure requirements. I don't mean to exclude other important actions in other countries. There are many. The U.K.'s is just the most recent.
Given the breadth of the international debate, it is not surprising that people disagree on what the best reforms will be, or how to implement them, or indeed whether reform is necessary. Or whether the costs to those who would incur them outweigh the benefits to those who would receive them.
I hear no doubt in any corner, however, about the importance of independent audits.
Let me say that I believe it is the rare case in which an auditor knowingly compromises his or her integrity. But well-intentioned auditors, as with other people, sometimes fail to recognize and guard against their own unconscious biases.
We are nearly ten years from the adoption of Sarbanes-Oxley, during which we have had time to observe whether its reforms were sufficient.
Against this historical background, in August 2011, the PCAOB issued a concept release, seeking public comment on a variety of questions about how to improve auditor independence, objectivity and professional skepticism.
The concept release notes the importance of auditor independence to the viability of auditing as a profession and highlights the risk to independence arising from the "client-pays" model.
As noted in the concept release, the PCAOB inspectors continue to find what is to me an unacceptable level of deficient audits. In addition, inspectors continue to find troubling suggestions of firms showing willingness to put management's short-term interest ahead of investors'.
The concept release seeks public comment on ways that auditor independence, objectivity and professional skepticism can be enhanced. In this regard, the release notes that there may be risks to professional skepticism in both the relatively new audit that the auditor may hope to turn into a long-term engagement, as well as the very long engagement that no partner wants to be the one to lose.
We have received more than 600 comment letters, primarily from auditors and their clients. On the whole, they counsel for more time and study, and more modest reforms.
To be sure, I want to be cautious in making any decisions, and that is why I have asked for meetings like this and two previous meetings in Washington, D.C., and San Francisco.
We have the benefit of the record of our first two meetings. Therefore, although today's panelists have been invited to provide views on any of the issues raised in the Board's concept release, they have also been asked to comment specifically on certain themes, issues and suggestions from the prior public meetings.
I want to thank the panelists, my fellow board members, the SEC's Deputy Chief Accountant Brian Croteau who has joined us today, and the PCAOB staff who have made the meeting possible. I look forward to a thoughtful discussion that will help the Board advance its inquiry.