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 Obtaining Investor Input

DATE Nov. 9, 2011
SPEAKER(S): Steven B. Harris, Board Member
EVENT: Remarks to Staff
LOCATION: Washington, DC

The views expressed in this statement are my own and should not be attributed to the PCAOB as a whole or any other members of the staff.

Next year will mark the tenth anniversary of the enactment of the Sarbanes-Oxley Act ("Act"). At the time, I was the Staff Director and Chief Counsel for Senate Banking Committee Chairman Paul Sarbanes. One of the primary purposes of the Act was to remind auditors that their duty under the law is to serve the interests of investors and the centerpiece of the Act was the end of self-regulation of the auditing profession and the establishment of the PCAOB. The Act specifically established the Board "to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports."

PCAOB Investor Advisory Group

This fundamental mandate to protect investors was a central reason for the Board's establishment of an Investor Advisory Group (IAG) in July 2009. As described in the IAG charter, the IAG provides a forum for the Board to obtain the views and advice of "experts who have a demonstrated history of commitment to investor protection." In September 2009, the Board named nineteen inaugural members to the IAG and appointed me as its chair.[1]

The group's first meeting was on May 4, 2010 where SEC Commissioner Elisse Walter, joined the Board and the IAG members for the morning session. For that meeting, the IAG members formed panels to present five topics identified by the members for Board consideration. Those topics included: "Lessons Learned From the Financial Crisis and the Establishment of a Fraud Center," "Foreign Inspections," "Greater Transparency and Governance of Audit Firms," "Greater Transparency of the Audit Process," and "Auditor Expertise and Responsibilities." In addition, a sixth panel discussed miscellaneous recommendations for the Board to consider.

Several IAG members also submitted statements providing their views and recommendations for the Board. These statements, together with a summary of the day's discussion, can be found on our website.

During the meeting, IAG members provided clear recommendations for the Board to consider. For example, IAG members asked the Board to increase its efforts to obtain access to foreign registered accounting firms in order to begin conducting inspections. The members also wanted the Board to consider providing investors with the names of issuer clients of PCAOB-registered firms in jurisdictions where the PCAOB is denied access to conduct inspections. Some members felt that the Board should issue timely guidance on "hot issues" for auditors and boards of directors. Members also asked the Board to study and report on lessons learned from the financial crisis as well as consider whether there should be changes to the auditor's report.

Subsequent to that meeting, the Board has acted on several of the IAG recommendations including obtaining cooperative agreements with the United Kingdom, Switzerland, Norway, Japan, Israel and, most recently, Taiwan. Also, on May 18, 2010, the Board published a list of issuer clients of PCAOB-registered firms in jurisdictions where the PCAOB is denied access to conduct inspections and this list is updated annually.

The Board and its staff have also published several Staff Audit Practice Alerts — one on the principal auditor's use of the work of foreign auditors, particularly in the China region, one on the audit implications of breakdowns in the mortgage foreclosure process and one on audit risks in certain emerging markets. With respect to lessons learned from the economic crisis, in September 2010, the Board published a Report on Observations of PCAOB Inspectors Related To Audit Risk Areas Affected by the Economic Crisis.

Following up on the discussion of that first meeting, members of the IAG formed working groups to address three topics in particular at the next meeting. These topics included the "Auditor's Report and the Role of the Auditor," "Lessons Learned from the Financial Crisis," and the "Global Networks and Audit Firm Governance." The second meeting took place on March 16, 2011, with SEC Chairman, Mary Schapiro, attending the morning session.

While all three working group discussions were informative, the session on the auditor's reporting model generated the most interest. Led by Professor Joe Carcello, this working group presented the results of a survey of leaders of mutual funds, pension funds, investment banks, hedge funds, private equity funds, and other investments to obtain a sense of what investors would like to learn from auditors.

The individuals who responded to the survey managed more than eight trillion dollars in investments and two points stood out. First, according to the survey results, investors want auditors' reports to include the auditor's assessment of the estimates and judgments used by management to prepare the financial statements. And second, investors want auditors to discuss how they addressed the areas that presented the most significant risks that the financial statements might be materially misstated.

As many of you know, the Board issued a concept release in June of this year on changes in the auditor's reporting model, held a roundtable in September and expects to issue a proposed standard during the second quarter of 2012.

While many of the recommendations were not new, the interest and concerns expressed by the IAG members during these meetings helped to underscore the importance to investors of the underlying issues and the need for the Board to address them.

The next IAG meeting is scheduled for March 28, 2012. While the topics have yet to be finalized, I am confident that with the current global focus on the role, relevance and value of the audit, the discussion will be both lively and informative.

IFIAR Investor Working Group

At about the same time that the IAG was established, the International Forum of Independent Audit Regulators (IFIAR) formed an Investor Working Group at the request of the PCAOB. I also chair that group, which includes regulators from Brazil, Dubai, France, Japan, the UK and the US. The objective of the IFIAR Investor Working Group as described in its charter is "to organize meetings with investor representatives and develop discussion agendas based on suggestions from the IFIAR membership and participating investor representatives."

Since the Investor Working Group was established, investor representatives have presented to the IFIAR membership twice — in September 2009 in Singapore and again in 2010 in Madrid. In addition, while in Madrid, investors participated in a joint session with the CEOs of the six largest accounting firms. Some of the topics discussed during those meetings included: "Improving Audit Quality," "Structural Risks of the Audit Market," "Audit Firm Governance and Transparency of the Global Auditing Networks," "Improving the Scope and Focus of Audit Regulation," "Improving Choice Among Auditing Firms," and "Improving the Auditor's Report." As you can see, many of these topics overlap the topics discussed by the IAG.

In addition, in response to the investors' discussion on improving the auditor's report, last April during the IFIAR meeting in Berlin, the IFIAR membership was updated on the activities of regulators around the world with respect to improving the auditor's reporting model. At that meeting, the Chartered Financial Analysts' Institute provided a briefing on the results of a CFA Institute poll on the utility of the current auditor's reporting model. The European Commission and the UK's Financial Reporting Council also provided updates on initiatives in their jurisdictions to reconsider the auditor's reporting model, and the IAASB and PCAOB provided similar updates on their reporting projects.

In conclusion, I think it is fair to say that the activities of the PCAOB's Investor Advisory Group and the IFIAR Investor Working Group have contributed to the work of both bodies. At a time when we often hear that "it is difficult to know what investors want" these groups provide invaluable input.

If you have suggestions for how the Board might further gain investor input, please let us know.


[1] Rich Ferlauto stepped down from the IAG in November 2009 after being named Director of Policy in the SEC's Office of Investor Education and Advocacy.