Thank you, Mr. Chairman.
I support both the items we will be voting on – the PCAOB Five-Year Strategic Plan for 2009-2013, and the Board’s Annual Budget for 2010 – with the understanding, as the Chairman made clear, that prospective Board Members may amend either document.
The Strategic Plan for 2009-2013
Looking first at the strategic plan, we explain the Board’s roadmap of objectives and goals that we will pursue to continue to fulfill our mission to protect investors. The founding principle of the strategic plan is the PCAOB’s mission statement, as derived from the Sarbanes-Oxley Act of 2002:
“…to oversee the auditors of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, fair and independent audit reports.”
The plan talks about the Board’s core values and discusses at length the key environmental factors and risks that the PCAOB, and the firms we oversee, face in the coming years. In short, the plan spells out our thinking about how we intend to protect investors.
The Annual Budget for 2010
The 2010 budget before us calls for an increase of 16 percent over the 2009 budget. Following a year when investors incurred tremendous losses due to the financial crisis on Wall Street and in the housing markets, investors are looking to regulators – including the PCAOB – for reassurance about the quality of financial reporting in the marketplace and to see that their interests are safeguarded.
For example, the SEC is experiencing a call for more robust oversight and regulation -- which is expected to result in a substantial increase in its funding over the next five years. The 2010 PCAOB budget also reflects an increase in demand on its resources.
This budget is the product of extensive discussion and negotiation among all Board Members and division leaders, as well as the SEC. All division leaders were asked whether they were satisfied that they could accomplish their necessary tasks within this budget, and they all answered “yes.”
The 2010 budget total is $183.3 million, and anticipates staffing levels of 636 by year-end, up 20 percent from the 2009 budget projection of 531 staff, and 10 percent from the actual expected year-end 2009 staffing level of 576.
The bulk of the funding increases from the 2009 budget are in Registration and Inspections, as they have been every year to date (up $17.4 million or 25 percent). After that, increases follow in Enforcement (up $2.8 million or 23 percent); the Office of Chief Auditor (up $1.1 million or 16 percent); and the Office of Research & Analysis (up $0.7 million or 10 percent).
These spending increases over 2009 budgeted levels generally cover an increase in staffing. Inspections staff will increase by 31 percent next year and account for more than half of all PCAOB employees. This staffing level is necessary to respond to the heightened risk environment for audits over the past two years. In addition, increased staffing is needed to implement and enforce new annual and special reporting rules, as well as to respond to SEC recommendations intended to strengthen the inspection program.
The staffing increase will extend to our international inspection program as well. This program remains a focus of the Board, particularly with respect to enhancing our international inspection methodologies and issuing more timely inspection reports.
Similarly, the 2010 budget reflects increases in staffing in the Division of Enforcement and Investigations and the Office of Research and Analysis. These increases also are in response to the increase in risk in financial reporting related to the current economy. The Board’s enforcement program is the Board’s main tool for holding auditors accountable for serious audit failures. Our Enforcement staff is called to investigate registered firms’ alleged auditing failures around the world. The investigations of large, complex audits, including those relating to the credit-crisis, are resource-intensive exercises. In addition, as persons choose to litigate the Board’s disciplinary proceedings, additional enforcement resources are needed to bring those proceedings to their appropriate completion.
And, in these difficult financial times, the collection of reliable and meaningful data, and the identification and analysis of audit risks revealed by that data, are vital to the Board’s inspection and enforcement processes. The Office of Research and Analysis is responsible for “looking around the corner,” and identifying emerging audit risks. Its risk assessment has become an indispensable part of the PCAOB’s risk-based inspection program. The financial crisis only heightens the importance of the vital role played by ORA in supporting the activities of the Board and its various divisions.
Staffing will also increase in the Office of Chief Auditor to help it achieve its aggressive standards-setting agenda. The agenda was developed as a result of issues identified in inspections, registration, and enforcement as needing our immediate and future attention. Additionally, the agenda includes recommendations from the U.S. Treasury Department’s Advisory Committee on the Auditing Profession, such as the engagement partner’s signature. The agenda also was influenced by developments of accounting standard setters and others whose actions will have a potential impact on auditing standards, such as the FASB’s proposed standard on going concern. The staffing increase is also needed so that we are in a position to respond to new issues that will likely need our attention, such as establishing standards for auditors of broker-dealers.
The budget also reflects an increase in funding for the Office of Internal Oversight and Assurance (IOPA) – our internal check on ourselves to ensure we maintain high levels of quality assurance and controls in the work of the PCAOB. IOPA provides an essential first-level independent review of all PCAOB activities.
Taken together, the five-year strategic plan and 2010 budget provide the Board direction and an allocation of funds for programs that I strongly support.
The 2008 Recommendations of the Treasury Advisory Committee
In particular, both the Board’s Strategic Plan and the 2010 Narrative make clear that the Board intends to continue to consult with the SEC about its plans with regard to the recommendations of the Treasury Advisory Committee on the Auditing Profession. While the Board has begun the process of taking up some of the Treasury Committee’s recommendations, including the development of a National Fraud Center, we have not taken up a number of those I consider to be the most important. Recommendations I believe the Board should consider in 2010 include:
- Requiring the larger auditing firms to file on a confidential basis audited financial statements with the PCAOB
- Monitoring sources of catastrophic risk
- Undertaking a standard-setting initiative to improve the auditor’s reporting model, and
- Clarifying in the auditor’s report the auditor’s role and limitation in detecting fraud under current auditing standards.
As I have stated in previous Board meetings, I believe that the Board should know more about the financial condition of the firms we regulate, and that investors want more information than they receive from current, pass-fail, audit reports. I would note that the Strategic Plan and Budget we are voting on today makes active consideration of all the Treasury Advisory Committee’s proposals possible – and, hopefully, probable in the coming year.
Risks Associated with Global Networks
Both the strategic plan and budget also direct the Board to consider risks associated with the global networks of registered accounting firms. Specifically, the strategic plan requires that the Board “identify and evaluate risks associated with global networks of firms and determine appropriate PCAOB action to adjust such risks, including by considering appropriate standards on quality control.”
I have heard from numerous thoughtful commentators that there is currently a regulatory gap with respect to the firms that manage international audit networks and that, as a first step, we should consider improving our knowledge of the structure, operation and governance of these networks. Both the strategic plan and budget recognize this critical need.
Enhancing Transparency of PCAOB Programs
The strategic plan and budget also recognize the PCAOB’s commitment to “enhance transparency with respect to its programs.”
For example, in the budget, we state that “the Office of General Counsel will work on approaches to providing the public with clear information about the scope of the Board’s inspection authorities as it relates to different categories of registered firms, and providing additional transparency about the inspection status of firms.”
This follows our recent initiative to more clearly and accessibly disclose on our Web site the names of firms that have failed to address quality control criticisms satisfactorily, as prescribed by the Act. The Board soon will be considering other transparency initiatives for the benefit of investors and issuers, including one to disclose firms that have registered with the PCAOB but have not been inspected.
The budget states that in 2010, “the [Inspection] Division expects to have made recommendations to the Board regarding the sufficiency of approximately 10 annual firms’ remediation quality control criticisms of potential defects that were included in the reports of the 2008 inspections. The Division also expects to make recommendations regarding the remediation of quality control criticisms or potential defects that were included in more than 90 triennial firm inspection reports (related to triennial firm inspections conducted in 2006, 2007, 2008, and 2009).”
I continue to feel strongly that we must explore new ways to see that firms address, in a more timely fashion, quality control issues reported in inspection reports.
Implementing a Merit Scholarship Program
Section 109(c)(2) of the Sarbanes-Oxley Act requires the PCAOB to use the money penalties its assesses on registered firms in enforcement proceedings to “fund a merit scholarship program for undergraduate and graduate students enrolled in accredited accounting degree programs.” The strategic plan requires that the Board not only develop, but also implement this program, which, in my opinion, is long overdue.
Commitment to Diversity
In the strategic plan and budget, the Board also recognizes that its staff should bring a diversity of experiences, skills, cultures, and backgrounds to the PCAOB. As you know, Mr. Chairman, I strongly endorse this commitment to enhance the inclusive nature and diversity of the Board staff.
Investor Participation in Board Proceedings
Finally, I would note that the Board has established the Investor Advisory Group, which will provide a vital investor perspective on appropriate topics related to the Board’s programs. Investors are the PCAOB’s most important stakeholder and I look forward to chairing this group and hearing their views.
The SEC has exercised its plenary authority regarding the development of the Strategic Plan and Budget we are voting on today and I want to acknowledge their contribution in ensuring that we utilize our resources wisely.
In particular, I would like to commend you, Mr. Chairman, and Bill Wiggins, Yoss Missaghian, Lily Lin, Darrell Pauley, Robin Smith, Phoebe Brown, Samantha Ross and all those who worked on these projects for a strategic plan and budget process that was not only comprehensive and inclusive but also responsive to a diverse set of priorities and players. You handled all the demands and pressures of putting these packages together with patience, open-mindedness and professionalism. I especially want to recognize Bill Wiggins for his yeomen service.
In conclusion, the strategic plan and budget address and fund work on a number of key issues I have focused on at the PCAOB over the past year and I appreciate that they have been recognized as priorities for 2010 and beyond.