Thank you for that introduction, Jim. It is a pleasure to be here and to have the opportunity to participate in this discussion on "International Developments in Audit Regulation."
As a member of the Public Company Accounting Oversight Board (PCAOB), I appreciate any invitation that brings me to Canada. Canada is not only our neighbor and close ally, but also the home of our counterpart audit regulator, CPAB, which is led so ably by Nick Le Pan and my colleague Brian Hunt. I have had the pleasure of working with Brian both bilaterally and in the context of the International Forum of Independent Audit Regulators (IFIAR), where Brian and I both chair working groups. Brian is truly a global leader when it comes to audit oversight and regulation.
In light of this, it will come as no surprise to you that CPAB and the PCAOB have, in my opinion, been the model for effective cross-border cooperation in audit oversight. Our relationship with CPAB began formally in 2005 when we concluded the first international protocol on cross-border inspections. Since then, the PCAOB has conducted more than 102 inspections of audit firms that cover 629 issuers in Canada, with the vast majority of these inspections conducted jointly with CPAB. Of course, this is in both our interests as our primary shared objective as audit regulators is to protect investors and improve audit quality both in Canada and the United States. This relationship with CPAB is vital to both countries given that Canada's global market capitalization is more than $1 trillion (U.S.), and there are more Canadian issuers listed on U.S. exchanges than any other country.
Last July marked the 10th anniversary of the enactment of the Sarbanes-Oxley Act ("Act") in the United States, which established the PCAOB. One of the primary purposes of the Act was to end the era of self-regulation and self-review in the auditing profession and to subject auditors of public companies to independent oversight. In establishing the PCAOB, the Act specifically directed the Board "to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports." That mission, with its emphasis on the protection of investors and the need for informative and independent audit reports, is the driving force not only for most of my remarks today, but also for most of the decisions I have made at the Board during the last four years.
With the PCAOB mission in mind and in response to what Brian asked me to address in my remarks, I will speak about our efforts to obtain and incorporate investor input into our decision-making processes; give an update on two standard-setting projects at the PCAOB that have received strong investor support — namely, revising the auditor reporting model and enhancing auditor independence; discuss the measures we are taking to ensure that our standards are cost effective; and conclude with a few thoughts about the relevance and value of the audit and the roles of both auditors and audit committees in the financial reporting process. Before going any further, however, I must state our customary disclaimer that the views I express today are my own and do not necessarily reflect those of the PCAOB, other Board members or PCAOB staff.
One of the challenges our Board faced in its formative years was getting advice from investors. While the Board received an abundance of advice from auditing firms, companies, government regulators, and many others, advice from the group that our Board was created to protect — namely, investors — was hard to come by. Rarely, if ever, did investors send representatives to meet with Board members or staff.
In an attempt to fill this gap and to carry out more effectively its mandate with respect to investors, the PCAOB in 2009 established an Investor Advisory Group ("IAG"). Members were to be "experts who have a demonstrated history of commitment to investor protection." At the time the IAG was formed, I was appointed by our Board as Chairman of this group. Eighteen members were initially appointed in late 2009 and the group's first meeting was held in May 2010, followed by two additional meetings in March 2011 and 2012.
As I think back, there is no doubt that the success of those initial meetings was due to the high caliber of individuals from the investment community who volunteered significant amounts of their time to serve as members of the IAG and to diligently prepare for, and participate in, meetings these investors had with our Board.
From the start, our meetings with these investors have been lively and highly informative, with IAG members providing clear recommendations to the PCAOB. For example, they recommended that the Board explore audit issues that arose during the financial crisis. Other examples of IAG recommendations for the Board to consider include:
Many of these and other IAG recommendations to the Board were based on surveys of other investors conducted by individual group members. It has been estimated that those surveyed collectively managed as much as $8 trillion (U.S.) in invested funds.
I can say without hesitation that our Board has seriously considered each of the investor group's recommendations and has acted on a number of them. Many of these recommendations have also been considered over time by the PCAOB's Standing Advisory Group (SAG), headed by the PCAOB's Chief Auditor Martin F. Baumann, who is here with us today.
At about the same time that the Investor Advisory Group was established in the United States, at the request of the PCAOB the International Forum of Independent Audit Regulators ("IFIAR") also established an Investor Working Group. IFIAR consists of independent audit regulators in 44 jurisdictions from around the world. I also chair the IFIAR Investor Working Group, which includes audit regulators from Brazil, France, Japan, Korea, the Netherlands, the UK and the U.S. The objective of the IFIAR Investor Working Group as described in its terms of reference is "to organize meetings with investor representatives and develop discussion agendas based on suggestions from the IFIAR membership and participating investor representatives."
I should point out that the composition of the IFIAR Investor Working Group is different from that of the PCAOB's Investor Advisory Group in that the IFIAR group's members are audit regulators rather than investors. The main task so far of the IFIAR Investor Working Group has been to identify investor representatives from around the world who are willing to travel to IFIAR meetings to present their views on audit matters directly to the full IFIAR membership. To date, the working group has recruited more than a dozen investor representatives from around the world to attend IFIAR plenary meetings.
Topics discussed by these global investor representatives during IFIAR meetings have been similar to those raised by U.S. investor representatives during PCAOB IAG meetings. Such topics have included, for example:
I think it is fair to say that the activities of the PCAOB's Investor Advisory Group and the IFIAR Investor Working Group have contributed to the work of both the PCAOB and IFIAR in promoting and improving audit quality and in protecting the interests of investors.
As I previously mentioned, our Board has been responsive to many of the standards-related recommendations of our investor group. To be clear, PCAOB standard-setting projects are not only informed by input from investors. There are numerous sources of information that inform our standard-setting activities ranging from the advice we receive from our Standing Advisory Group, to public hearings, to matters we learn from our inspections process. With regard to the latter, our inspectors continue to identify areas and circumstances where new or refined auditing standards could likely improve audit quality.
It is not surprising, however, that many of our current standard-setting projects relate to auditing issues that became a matter of heightened concern during the financial crisis. These include:
We also have projects underway that may be less directly tied to the financial crisis, but remain important to improving audit quality. These projects generally relate to:
In today's presentation, however, I will limit myself to commenting on the two standard-setting projects that Brian specifically asked me to address — the Auditor's Reporting Model and Auditor Independence.
In June 2011 the PCAOB issued a concept release setting forth several alternatives for changing the auditor's report in the U.S., including (1) a required and expanded use of emphasis paragraphs in audit reports; (2) a supplemental auditor's discussion and analysis of significant matters affecting the audit and the company's financial statements; (3) auditor assurance on other information outside the financial statements; and (4) clarification of language in the existing standard auditor's report. Additionally, our Board held a roundtable in September 2011 and has discussed the topic with both our Standing Advisory Group and our Investor Advisory Group on several occasions.
Views expressed have been wide-ranging and diverse. Not surprisingly, investors strongly support changes to the auditor's report to make it more relevant and useful. On the other hand, most financial statement preparers and audit committee members see little need for change. Auditors seem to be generally supportive of certain changes, but believe that any additional reporting must be objective and factual. All of these views will be taken into account as our Board prepares a proposed new standard for the auditor's reporting model, which we expect to issue during the first half of next year.
As for the issue of auditor independence, as the PCAOB's mission statement makes clear, it is not enough that an audit report be accurate and informative. To have value for investors, such a report must also be issued by an auditor who is independent from the company being audited.
It would be hard to overstate the importance of auditor independence and auditor skepticism for capital formation. In 1984, the U.S. Supreme Court summarized the importance of auditor independence and skepticism when it stated that "the independent auditor assumes a public responsibility transcending any employment relationship with the client," and that "this 'public watchdog' function demands that the accountant maintain total independence from the client at all times and requires complete fidelity to the public trust."
The principle of auditor independence was certainly put to the test in 2002 during the collapse of a number of major public companies including, Enron and WorldCom, both in the U.S. You will recall that Enron, WorldCom and a significant number of other public companies had released false financial statements about their revenues and earnings and used complex transactions to hide their true financial position from investors, regulators and the public marketplace. In the lead up to passage of the Sarbanes-Oxley Act, the Senate Banking Committee (where I served at the time as the Staff Director and Chief Counsel for Chairman Paul Sarbanes) repeatedly heard testimony that auditors might be "pulling punches" on audit issues to retain or secure from the companies they were auditing the more remunerative non-audit engagements the auditing firms had with, or wished to obtain from, these companies.
The legislators who drafted the Sarbanes-Oxley Act recognized, as the Securities and Exchange Commission and the auditing profession itself had done before, that auditor independence is the bedrock upon which audit quality is built. Congress, therefore, included several reforms in Sarbanes-Oxley designed to enhance auditor independence. Among other things, in addition to giving responsibility for selecting and overseeing the external auditor to independent audit committees of listed companies, auditors were banned from providing numerous non-audit services to their audit clients, and audit firms were required to rotate lead engagement partners and concurring (or reviewing) partners every five years.
Even with these reforms, however, information from the Board's inspection and enforcement activities continue to raise concerns about auditing firms' consistency and diligence in remaining independent from their audit clients and in applying an appropriate level of professional skepticism when making decisions during public company audits.
To address these continuing concerns, on August 16, 2011, the PCAOB issued its Concept Release on Auditor Independence and Audit Firm Rotation. The concept release notes the critical importance of auditor independence to the viability of auditing as a profession and highlights the risk to independence arising from the "client-pays" model.
The Board has received more than 600 comment letters in response to our concept release so far and has held three public roundtables. Witnesses at these roundtables have included investors, CEOs of audit firms, senior corporate executives, audit committee chairs of major corporations and other interested parties. They have made numerous suggestions for enhancing auditor independence in the U.S., including, but certainly not limited to, enhanced independent audit committee oversight, greater transparency of audit firm tenure, periodic re-tendering of the audit engagement, mandatory review, and mandatory rotation of auditing firms.
Many jurisdictions are moving ahead with solutions tailored to their own circumstances. For example:
In short, across the globe there appears to be an emerging consensus among audit regulators that more must be done to ensure the independence, objectivity and skepticism of auditors so investors will have confidence that high quality audits are being performed to test the accuracy and reliability of companies' financial statements.
As our Board begins to consider changes to the auditor's reporting model and to auditor independence requirements, as well as new or revised standards in other areas, we are mindful that there are costs associated with implementing any new or revised auditing standard. During my years on the Board, we have been particularly sensitive to this issue. One of the reasons we not only propose draft standards but often re-propose standards, and hold roundtables to hear from representatives of all of our constituent groups about concept releases and draft standards, is because we are trying to find ways to develop our standards so they can be implemented in a cost efficient way.
I believe that our Board will continue to work to design our standards to address clearly defined problems and, to the extent possible, make standards less complex and more targeted, while always keeping in mind their economic and cost implications. A new or revised standard that results in unnecessary additional costs on auditors or companies simply does not serve the interest of investors who, at the end of the day, are the ones paying for public company audits.
As our Board works to improve auditing standards, we are mindful that the auditor does not work in a vacuum. Others in the financial reporting process have significant reporting and oversight responsibilities. Since the adoption of the Sarbanes-Oxley Act, audit committees in particular have taken on a more visible and important role in financial reporting matters.
In recognition of audit committees' enhanced new role, our Board recently adopted a new auditing standard, AS No. 16, Communications with the Audit Committee, which is currently pending before the Securities and Exchange Commission awaiting approval before the standard can become effective. In brief, this standard updates and expands the requirements for certain communications by the auditor to the audit committee. Additionally, this new standard reflects the new relationship between the auditor and the audit committee as defined by the Sarbanes-Oxley Act, which required that, for listed companies, a company's independent audit committee — and not management — must hire and oversee the work of the external auditor.
This new standard includes a number of features that will directly benefit investors, but I think three are of particular interest. First, the standard requires auditors to communicate significant unusual transactions to the audit committee. Second, it requires the auditor to communicate to the audit committee its views on the company's ability to continue as a going concern. And, third, the standard requires the auditor to inform the audit committee of the auditor's plans to use other firms to perform required audit procedures. Most importantly, though, the standard encourages robust, two-way communications between the auditor and the audit committee, which should improve the quality of the audit and further enhance the role of the independent audit committee.
To enhance the audit committee's ability to oversee the audit, shortly before the Board adopted AS No. 16, we also published a release designed to provide information to audit committees about the Board's inspection process and the meaning of reported inspection results. The Board encourages registered public accounting firms to communicate openly and candidly with audit committees about the results of PCAOB inspections, and one of the Board's goals in issuing the release was to better equip audit committees for those discussions. For example, the release highlights certain areas that audit committees may wish to discuss with their auditors, such as:
Audit committees are likely to be even more active in the future. I believe the Board's recent actions should strengthen their ability to have more meaningful communications with auditors and hence their ability to effectively oversee the work of the auditor.
Underlying the initiatives that audit regulators everywhere are taking to improve auditing standards is a shared belief that the audit continues to have relevance and value for today's investors.
But one of the questions that is at the heart of the discussion at this symposium on audit quality must surely be: "What will be the role and relevancy of the audit and the auditor in the future?"
As James Turley, Global CEO of Ernst and Young, said in a recent interview with Accounting Today:
"The most important issue facing our profession is the relevancy of our audit service [and its] product and making sure that we communicate with stakeholders in ways that are of importance to them. When almost every set of financial statements are correct, yet the world experiences the biggest financial surprise in decades, something is wrong."
In thinking about Mr. Turley's statement, several immediate questions come to mind.
Can we correct what Mr. Turley says is "wrong" just by improving auditing standards, or is more required?
Do we as regulators also need to take another look at what auditors are reporting on and when? For example, should auditors be reviewing in "real-time" the earnings releases that have the potential to move stock prices instead of only financial statements that are issued months after a fiscal year has ended? Some have suggested that we consider an integrated reporting model which would provide a holistic view of a company and its ability to sustain value over the short, medium and long term. 
The major auditing firms are organized as global networks, yet the jurisdiction of most audit regulators is confined to national boundaries. In light of this, how can national regulators collaborate more closely than they already do on inspections of the audit of a public company's global operations so that audit quality issues do not fall between the regulatory cracks arising from separate national regulatory regimes?
How does the profession continue to attract top talent to ensure audit quality and investor protection?
And how should regulators monitor the profession's increasing use of offshore centers?
At this point, there seem to be far more questions than easy answers. It seems clear to me, though, that the future role and relevancy of the audit and auditors is going to depend in large part on the value and relevance that investors continue to place on the audit and the auditor.
In light of this, I end where I began, with the mission of the PCAOB as stated in the Sarbanes-Oxley Act. Whatever we as audit regulators do, it should be designed to protect investors and to provide them with informative and useful reports that have been prepared by competent and independent auditors.
Thank you and I look forward to the discussion.
 The FASB and SEC have established similar investor advisory groups.
 See United States v. Arthur Young, 465 U.S. 805, 817-818 (1984).
 PCAOB Release No. 2012-003 (August 1, 2012).
 See Accounting Today: Top 100 Extra: The Biggest Issues Facing the Profession; September 1, 2012; at www.accountingtoday.com .
 See Integrated Reporting Draft Framework Outline; International Integrated Reporting Council; July 11, 2012; at http://www.theiirc.org/2012/07/11/draft-framework-outline/.