The purpose of our meeting today is to approve the PCAOB’s budget for calendar year 2009. For the past 12 months, the markets have grappled with a number of complex accounting issues that, in turn, have raised audit challenges. Added to that, the final report of the Treasury’s Advisory Committee on the Auditing Profession contains 16 recommendations specifically directed to the PCAOB, as well as other recommendations, that could impact us.
In the two years that I have been Chairman of the PCAOB, I have seen our programs continue to mature and reach new levels of effectiveness and efficiency. Yet, I am sure that we are all aware that additional challenges lay ahead. We are committed to fulfilling our mandate to protect the interest of investors and we will continue to adjust our programs to more effectively assess whether public accounting firms are able to – and are -- performing high quality audits even when the most complex accounting issues are involved.
During 2008, the PCAOB made significant progress in standard setting, including proposing seven new risk assessment standards that would replace a number of the interim standards, and proposing a new standard on engagement quality reviews. Looking forward, the PCAOB has a number of important standard setting initiatives before us, which were shared with the public during our most recent meeting with the PCAOB’s Standing Advisory Group.
We have a significant role to play with other standard setters domestically and internationally to eliminate unnecessary differences and assure quality audit standards are appropriately robust and consistent across markets. The PCAOB also needs to continue to work with non-U.S. audit regulators to promote consistent, independent, and effective oversight regimes, and to coordinate our inspections of non-U.S. firms. This is an important and challenging area of the PCAOB’s work.
With respect to inspections more broadly, our Division of Inspections and Office of Research and Analysis are working more closely than ever to enhance our risk assessment techniques so that our inspections target the highest risk audits and, therefore, are more effective. With over 10,000 issuers, it is critical that we have a risk based approach for selecting a registered firm’s audits for review when we go into the field.
Current market conditions suggest that our inspectors may be dealing with even more complex issues next year when they review 2008 audits. Moreover, we plan to continue to push firms to continuously improve their quality controls and risk management programs in order to assure that they perform the highest quality audits. During 2009, we intend to perform an annual inspection of the eleven largest accounting firms, plus about 200 domestic firms that are on a three year cycle. International inspections form a large component of these inspections – more than 100 foreign inspections are planned for next year and our preference remains to perform inspections jointly with the home country audit regulator, where there is one. Performing foreign inspections within our inspection frequency mandates is extremely challenging given the complexities involved in performing work abroad. However, having addressed this issue with our inspectinos leadership, I am comfortable that that budget will allow our inspections program to perform sufficient work to fulfill our investor protection mandate.
This budget also continues to fund a robust enforcement program to assure that when we find a serious violation of PCAOB standards or violations of the securities laws, we can pursue an action in an effective and efficient manner.
The Board plans to continue sharing key findings and observations derived from our inspection program with registered accounting firms of all sizes, the public, and other interested parties – and to continue to seek input from those parties about our standard-setting and other activities. In particular, we plan to continue our forums on auditing in the small business environment, which we have found is an effective way to communicate with smaller firms and issuers, as well as develop and publish thematic reports on select inspection areas.
At $157.6 million, I believe this budget allows the PCAOB to respond to these challenges and to assure that our standard setting, inspection and enforcement programs are sufficiently robust.
This budget reflects an intensive review of the PCAOB’s 2008 expenditures to date and a careful projection of its funding needs for 2009. We expect that 2009 will be an exceptionally busy year for all our program areas. Toward that end, our 2009 Budget is strategically aligned with -- and supports fulfillment of -- our statutory mandates. Those statutory mandates, as well as our commitment to operate efficiently, effectively and with the greatest integrity, form the basis for our multi-year Strategic Plan, which now contains measurable performance indicators.
The Board is highly conscious that our mission is supported by public issuers and, in turn, by their shareholders. Accordingly, in developing our budget for 2009, we have been careful to assure that the amount is conservative and reflects the Board’s commitment to efficiency and stewardship. Throughout the planning process, the Board complied with the provisions of the SEC’s budget rule for the PCAOB and devoted considerable resources to discussing program and funding issues in depth with the SEC staff. We have benefited from their views during the budget process.
The PCAOB’s 2009 Budget of $157.6 million is approximately $12 million over the amount approved by the SEC for 2008. (The 2009 accounting support fee, which will be reduced by the amount we under spend the budget during 2008, will be $151.8 million) Over 70 percent of the budget is appropriately related to personnel and approximately one-half of the PCAOB’s headcount is devoted to its inspection program. It is critically important that we staff our programs with highly skilled and experienced professionals who are capable of exercising good judgment and can recognize issues and practices that could lead to financial reporting and auditing failures.
During 2009, we plan to emphasize hiring in our key program areas while cutting back in our support offices and streamlining our technology platforms. With respect to technology, our budget is effectively flat next year. Yet, we plan to have a new registration and annual reporting system in place by mid-year so that it will be ready when the annual and special reporting rules are approved by the SEC and become effective. We also plan to continue work on building a new system that will improve our inspections process and allow for more extensive analysis of inspections information.