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 Statement on Strategic Plan for 2010–2014 and 2011 Budget

DATE Nov. 23, 2010
SPEAKER(S): Steven B. Harris, Board Member
EVENT: PCAOB Open Board Meeting
LOCATION: Washington, DC

Thank you, Mr. Chairman.

I support both items we will vote on this morning — the PCAOB Five-Year Strategic Plan for 2010-2014 and the Annual Budget for 2011. I also want to compliment you for your leadership in developing a strategic plan and budget we are all able to support.

Similar to last year's budget, I am prepared to vote in favor of these two documents with the understanding that each is subject to revision by our three prospective new Board Members. While the Strategic Plan and Budget are good faith efforts to address the Board's anticipated needs and direction, as you have made clear, it is not our intention to bind new Board Members to our decisions today.

The Strategic Plan and the 2011 Budget recognize that the Board faces significant new and uncertain challenges in the coming year. These include, but are not limited to:

  • Implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("the Dodd-Frank Act"), particularly with respect to audits of broker-dealers;
  • The Board's efforts to oversee the Global Network Firms;
  • Issues related to the Board's inability to gain access to inspect certain non-U.S. firms;
  • Potential increases in litigation and enforcement referrals;
  • Changes in financial accounting and reporting standards; and
  • The continued effects of the Global Financial Crisis.

The Strategic Plan for 2010-2014

The Strategic Plan sets forth goals, objectives and initiatives to achieve the PCAOB's mission to protect investors "…in the preparation of informative, accurate and independent audit reports" and to oversee "the audits of broker-dealer compliance reports under federal securities laws, to promote investor protection."

The four goals stated in the Strategic Plan describe how the Board will achieve its mission. Three are consistent with those of previous years, and focus on protecting investors through oversight of registered firms' audits of public companies, open communications with a broad cross-section of the public and the profession, and careful stewardship of resources.

New this year is a goal to protect investors by developing an oversight program for broker-dealer audits. With the enactment of the Dodd-Frank Act, the Board's responsibilities have been expanded to include standard-setting, inspection, investigation and disciplinary authority over the preparation and issuance of audits of the compliance reports of brokers and dealers. In the coming year, therefore, the Board will update its rules, standards, and procedures accordingly, and this budget accounts for this added responsibility.

The Annual Budget for 2011

The 2011 Budget is approximately 12% above that of last year. This supports a 13% increase in staff from 636 to 717 positions. The greatest increase in staffing supports our expanded responsibilities to oversee broker-dealer audits and includes new positions in Inspections, Enforcement and Research and Analysis. In addition, the Board plans to increase staff for other priorities in Inspections by 4%, Enforcement by 14% and International by 43%. These increases reflect, among other things, the continued need to address inspection and enforcement issues raised by the global financial crisis and the challenges to some of our international inspections.

Considering our new responsibilities and the ongoing challenges of the financial crisis, the Board, working closely with the SEC, exercised restraint in today's request. For example, staffing levels remain stable for many offices, including that of the Chief Auditor, Communications, Information Technology, Budget and Facilities. Notwithstanding the stable funding for the Office of Chief Auditor, I think it is important to recognize that office’s aggressive agenda in response to the financial crisis, their new additional broker-dealer audit oversight responsibilities and their focus on making the auditor’s report more relevant to investors.

The Global Financial Crisis

The Strategic Plan and Budget reflect our continued responses to deficiencies in audit areas affected by the global financial crisis. The Board issued a report in September summarizing recent inspection observations. Its key finding was that auditing practices and quality control systems need to continue to improve in audit areas made more difficult by the crisis. These include:

  • Fair value measurements;
  • Allowances for loan losses;
  • Off-balance-sheet structures;
  • Impairment determinations;
  • Revenue recognition;
  • Inventory valuation; and,
  • Income taxes.

In addition to examining firms' efforts to tackle audit deficiencies in these areas, the Board recognizes the need for firms to identify and address the root causes of these audit quality issues, continue its aggressive standard-setting activity in response to these findings and further pursue the complex investigations being conducted by our Enforcement staff.

Office of Research and Analysis

In addition, audit inspections of 2010 financial statements will include the examination of new and complex accounting and auditing issues. "Looking around the corner," by identifying emerging audit risks, has always been an important element of the PCAOB inspection program. The need for expanded research and analysis has become increasingly apparent as the problems of the global economy have grown more complex and the Board's oversight authority has expanded. For these reasons, the 2011 Budget reflects increased spending in the Office of Research and Analysis.

The benefit of the collection and analysis of data is well recognized. For example, in discussions during consideration of the Dodd-Frank Act to establish an Office of Financial Research at the Treasury Department, Senate Banking Committee, Securities Subcommittee Chairman Jack Reed, expressed a need for the government to "gather and analyze financial data to help prevent, detect, and manage systemic risk in our financial system." Former SEC Chairman Harvey Pitt has also made the case for regulators to collect more data and to "analyze the data they collect and disseminate that analysis in real time so that the public and our markets would be fully informed." Both have indicated that better data collection and analysis may have helped to prevent the recent economic crisis. The PCAOB's Office of Research and Analysis is designed to do exactly what Senator Reed and Chairman Pitt have suggested in addition to serving the various data and analysis needs of all the Board's various offices.

International Inspections

Issues affecting PCAOB inspections in the European Union and other jurisdictions, such as China and Switzerland, present continued challenges in 2011. These matters require careful consideration by the Board, in close consultation with the SEC. To meet these challenges today's Budget provides for three new staff positions in the Office of International Affairs.

The Global Networks

In addition, the Board's inspections have shown that audits requiring work in multiple jurisdictions pose a variety of special risks. To understand and evaluate how the firms address these risks, the Board must understand the largest firms' global networks, including their governance structures, sustainability, and assurance of network-wide audit quality. For these reasons, the 2011 Budget anticipates that the PCAOB will continue to carefully evaluate the global networks' impact upon audit quality and methodology, training, and independence programs.

Financial Reporting Fraud Prevention Resource Center

In response to a recommendation from the 2008 Treasury Department Advisory Committee on the Auditing Profession ("ACAP"), the 2011 Budget includes the continued development of a Financial Reporting Fraud Prevention Resource Center. This Center will maintain, develop, and disseminate information to share knowledge and raise awareness of the risks of financial reporting fraud. I anticipate that making the Center fully operational in 2011 will be an immediate and high priority of the new Board and an important tool for investors and regulators alike. I appreciate the continued support from the SEC for the Center.

Enforcement

And the Budget clearly reflects the immediate needs of our Enforcement Division whose caseload continues to increase.

Personal Priorities

Overall, the five-year Strategic Plan and 2011 Budget being considered today are consistent with my priorities for the Board. These include a heightened emphasis on issues that directly affect investors, such as an enhanced remediation process, an emphasis on auditor independence from their clients, and active consideration of the ACAP recommendations.

Remediation

The remediation issue arises because under the Sarbanes-Oxley Act any audit firm that the PCAOB criticizes for defects in its quality control system has 12 months after the date of the inspection report to address, or remediate, those deficiencies to the Board's satisfaction. If the Board is not satisfied that the deficiencies are being addressed, then the quality control deficiencies are made public.

I believe that our oversight of firms' remediation will benefit when the PCAOB, working with the firms, improves our evaluations of the underlying root causes of certain perennial audit problems. PCAOB inspections show that some firms have repeated quality control criticisms year after year, and more timely remedial steps must be taken to assure the implementation of appropriate corrective actions.

Auditor Independence

Concerns about auditor independence are not new. As a result of the Sarbanes-Oxley Act, there was a reduction in non-audit services provided by firms to their audit clients. More recently, however, on a global scale, many auditing firms have reportedly begun to acquire, or affiliate with, non-audit service providers, or to aggressively grow their existing non-audit businesses. I believe that it is critically important that the profession not regress, or in any way begin to compromise auditor independence. It is essential that the PCAOB continue to monitor aggressively auditor independence to determine if and when additional Board action is necessary.

Treasury Advisory Committee Recommendations

I appreciate that the Board is addressing some of the 2008 Treasury ACAP recommendations, such as the establishment of the Fraud Prevention Resource Center and the evaluation of the auditor's report. Still, there are other important outstanding recommendations that I would like to see the Board pursue. These include:

  • Improving the transparency of audit firms;
  • Monitoring sources of catastrophic risk;
  • Requiring the engagement partners' signatures on audit reports; and
  • Appointing independent members to serve on audit firm boards

Many of these issues already have been dealt with abroad and I see no compelling reason for us not to address them here in the United States.

I would also be remiss if I did not state publicly what I have often said privately: that is, as we monitor catastrophic risk, I believe the Board has a responsibility to devote more time and resources to understanding the financial condition and safety and soundness of the firms that we regulate.

Investor Advisory Group

Finally, since I view the investor community as the primary stakeholder of the PCAOB, I would like to express my appreciation for the Board's continued funding of the Investor Advisory Group. I believe that it is critically important for the Board not only to provide investors with this opportunity to present their views, but also to address their concerns.

Conclusion

In conclusion, I believe that the Budget provides funding to address the key issues facing the Board in carrying out its mission. I join you, Mr. Chairman, in acknowledging the contributions of Darrell Pauley, Bill Wiggins, Yoss Missaghian and Lily Lin in providing the Board with a fiscally responsible 2011 Budget and for their work on the Strategic Plan. I would also like to acknowledge the SEC’s contribution to the development of both of these plans, and to commend you, Mr. Chairman, for guiding the development of a Strategic Plan and a Budget that we all can agree is in the best interests of investors.

 

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