The proposed 2010 budget would, if approved by the SEC, permit the Board to spend $183.3 million next year. That would be an increase of about $25.7 million from the 2009 budget. The 2010 budget projects that headcount will increase from 576 at the end of 2009 to 636 at the end of 2010.
The two largest non-administrative components of the 2010 budget are Inspections and Enforcement. Consistent with our responsibilities under the Sarbanes-Oxley Act, the Board devotes the lion’s share of its resources to conducting inspections of the registered public accounting firms – both domestic and foreign -- that audit U.S. publicly-traded companies. Approximately $87 million, or 47.5 percent, of the 2010 budget would be used to fund the Division of Inspections and Registration. A considerable portion of the resources of several other units – such as the Office of Research and Analysis, the Office of Information Technology, and the Office of International Affairs – directly support the inspections program. About $15 million, or 8.2 percent, of the budget would be allocated directly to the Division of Enforcement.
Consistent with prior years, personnel costs will represent over 70 percent of the Board’s 2010 expenditures. These costs will, of course, increase over 2009 in absolute terms because of the headcount increase. However, the 2010 budget does not provide for any cost-of-living or other across-the-board compensation adjustments. The budget does include a pool of money for limited salary increases based on merit, as determined on a case-by-case basis under our performance review system. The budget does not provide for any increase in Board member compensation.
Overall, the proposed 2010 budget would reflect growth of roughly 16 percent over the 2009 budget. It is certainly legitimate to ask why this is justified, given the current economic climate. As I mentioned earlier, the strategic plan discusses environmental challenges that the Board is currently facing. I would like to highlight several of those factors that are key drivers of the 2010 budget.
First, as I noted in connection with the strategic plan, the economic crisis has affected public company auditing. Without repeating my prior comments, I would emphasize that Inspections and ORA are both devoting effort to matching our inspections focus to changes in audit risk. In addition, the Inspections staff has deployed additional resources to enhance inspections performance and documentation.
Second, resource demands related to international inspections have become more apparent as we have increased the pace of those inspections. In 2010, we expect to conduct 90 inspections in 27 countries. As this program has expanded, we have come to recognize some of the risks and complexities associated with inspecting crossborder audits. Those complexities include the need to focus on the quality control mechanisms of the large, global network firms and the importance to U.S. financial reporting of “referred work” -- that is, work that is performed by audit firms other than the firm that signs the audit report. The Inspections and Research and Analysis staffs are re-assessing and strengthening inspection procedures to respond to these matters.
Third, the Board faces an upsurge in enforcement litigation. The Enforcement Division has a full docket of investigations, and a significant number of those investigations are likely to lead to disciplinary proceedings. The Division expects that many of these cases will be litigated. As required by the Sarbanes-Oxley Act, the Board’s contested enforcement matters are non-public until there is a final resolution. As a result, respondents sometimes perceive that litigation – and delay in public disclosure -- is in their interest for reasons not always related to the merits of the case.
Fourth, the Office of the Chief Auditor has been re-assessing its standard-setting program and has an ambitious 2010 agenda. OCA is focusing on some of the “nuts and bolts” auditing issues that the inspections and enforcement programs have highlighted as areas where the standards can be improved or modernized. Additionally, we are increasingly challenged to look at the international auditing standards as part of the Board’s standard-setting process.
Predicting the challenges in public company auditing and financial reporting is inherently an imprecise process in the volatile economic and business climate we currently face. I believe, however, that this budget will provide the Board with the resources it needs to fulfill its statutory mission in 2010.
I want to thank all of the staff members that were involved in preparing the 2010 budget. Every office and division plays a role, and it is not possible to single out everyone who made a significant contribution. I would, however, like to particularly thank Darrell Pauley, the Board’s Chief Administrative Officer, for his thoughtful oversight, and Bill Wiggins, the Board’s Budget Officer, and Yoss Missaghian, our Senior Budget Analyst, for the hard work they have put in to the 2010 budget. I would also again like to recognize the role of the SEC staff, which devoted many hours to reviewing and commenting on this budget. I appreciate their help and support for the Board’s mission.