On March 3, 2005, the SEC issued an order directing the Board, in conjunction with the preparation of its 2006 budget, to provide the Commission with “the PCAOB’s long-range strategic plan for its operations and budget.” The requirement that the Board maintain a five-year strategic plan was subsequently embodied in the Commission’s “budget rule”, which sets out the process by which the Commission reviews and approves the Board’s annual budgets.
The Board’s initial strategic plan was based largely on the blueprint for Board operations in Title I of the Sarbanes-Oxley Act. However, during the nearly five years that we have been engaged in strategic planning, we have refined both the plan and the process by which it is created. As the Board has matured, subsequent iterations of the strategic plan have focused, not solely on the Act, but on developments and changes in financial reporting and auditor oversight. While there is still room for improvement, the version of the plan before us today reflects more thought about the specific challenges we face, and is more tightly correlated to next year’s budget, than was true of previous editions. Also, while the Board has always made its strategic plan public, this is the first time we have discussed and voted on the plan in an open meeting.
This strategic plan, if approved, will serve as the framework for the Board’s programs and operations during the coming year. The plan sets forth five high-level goals. Under each goal, specific objectives and initiatives describe with more precision how the Board seeks to achieve that goal and, in turn, accomplish the Board’s mission under the Sarbanes-Oxley Act. These objectives and initiatives underpin the proposed expenditures in the Board’s 2010 budget.
In some important ways, the environment has changed significantly since the last strategic plan was developed in March 2008. While I do not want to try to summarize all of the developments discussed on the nine pages that the plan devotes to “Key Environmental Factors,” I do want to highlight three of those things –
Changes in economic and business conditions during the past 18 months have made auditing more difficult, particularly in areas like financial instrument valuation, impairment, going concern evaluation and other aspects of financial reporting that require significant estimates and judgments. As a result, our inspections are more challenging and the need for thoughtful risk assessment is greater.
I will mention two examples: As a result of the revelation of the Madoff Ponzi scheme, the auditors of the 5,500 or so non-public securities broker-dealers are now required to register with the Board. Legislation pending in Congress would extend the Board’s inspections, enforcement, and standard-setting responsibilities to encompass broker-dealer audits. In addition, some of the recommendations of the Treasury’s Advisory Committee on the Auditing Profession would take us in new directions in terms of the nature and scope of our oversight of the major accounting firms.
One of the things we have learned during the last several years is that conducting inspections outside of the United States requires greater resources and a greater degree of insight and analysis concerning the audit environments in other jurisdictions than I at least had originally anticipated. In addition, developing cooperative relationships with our non-U.S. counterparts has proven complex and time-consuming. This is another area in which pending legislation, if enacted, would give us additional tools to accomplish our mission.
Finally, I want to emphasize what the strategic plan does not do. While it is – as required by the SEC’s budget rule – styled as a five-year plan, it does not in any way bind or limit future Board decision-making. As a practical matter, this plan primarily provides justification and support for the next item on today’s agenda – the Board’s 2010 budget. We are well-aware that the Commission is in the process of selecting three new Board members. These individuals will constitute a new majority of the Board, and I am looking forward to their input and guidance as to the Board’s future direction. Nothing in this strategic plan will constrain their choices. In fact, our strategic planning is a continual and iterative process. That process will start again in January when the Board – presumably with its new membership -- begins the annual reevaluation of its goals, objectives, and initiatives and the formulation of its 2011 budget.
Given all the people whose views must be considered, preparing, editing, and revising the strategic plan is a labor-intensive and time-consuming process. I especially want to thank Phoebe Brown, my Special Counsel, Samantha Ross, Special Counsel to Board Member Niemeier, and Bill Wiggins, the Board’s Budget Officer, for their efforts. I also want to acknowledge the work that our former Chairman, Mark Olson, and his Chief of Staff, Angela Desmond, devoted to the initial draft of the plan, which was submitted to the SEC in June. I also want to thank the SEC staff for their detailed and helpful comments and suggestions on that draft.