A motion has been made and seconded, so the question before the Board is whether to release for public comment the proposed policy statement.
Before I ask my fellow Board members for their comments, I would like to commend Rhonda Schnare and her team – Karen Dietrich and Michelle Wildstein - in the Office of International Affairs, who have worked tirelessly…across many time zones…and across PCAOB programs…to develop the proposal before us today. Each committed her individual expertise to bring the proposal before the Board today. In addition, Carl Calender, who leads our international inspections program, contributed his knowledge to this effort, as did Michael Stevenson and Susan Yashar in our Office of the General Counsel. I thank each of you.
As I mentioned at the opening of this meeting, since our inception, the PCAOB has carefully considered the manner in which it could best carry out its supervisory mandate over non-U.S. audit firms. The PCAOB has made cooperation with counterparts in other jurisdictions a fundamental part of our cross-border inspections program. We have been fortunate that our counterparts in the time since the establishment of the PCAOB have quickly grown in number and ability. Today, the PCAOB has audit firms registered with it from over 80 jurisdictions. Fortunately, many of these jurisdictions have established – or are in the process of establishing -- an independent auditor oversight body. Not even the most prescient of us could have imagined how rapidly auditor oversight bodies would develop in the wake of the various accounting scandals that unfortunately have taken place in a number of jurisdictions around the world.
As more peers have been established and become operational, coordination and cooperation among oversight bodies has become ever more essential. Rather than looking at this as duplicative mandates, I see shared supervisory jurisdictions as a strength. If well-executed, joint oversight should fundamentally strengthen audit quality globally due to the inter-connected nature of capital markets and the global reach of many audit networks today.
I believe that the proposed framework that Rhonda has just introduced – including the essential criteria against which the PCAOB will assess whether it can fully rely on a given counterpart – underscores the importance which the PCAOB places on the role of high-quality inspections. Inspections have proven to be invaluable in our overall mandate to enhance audit quality and I am comforted by the evolving quality of inspections taking place around the world today.
The proposal also places a critical focus on the independence from the profession. I will reiterate what Rhonda also mentioned – the PCAOB takes seriously the need for an oversight body to operate with independence. The proposal’s criteria looks at the make-up of the governing body and the inspections staff. The independence of both are critical to credible and effective oversight. Other auditor oversight bodies share this conviction regarding independent oversight, although we see a range of models to governing boards, including some that include representatives of the profession. While the PCAOB was established to be completely independent of the audit profession, the proposal recognizes that, with appropriate controls in place, a non-U.S governing body can safely respect independence if the majority of its members are not from the profession. In another context, I have seen independence successfully safeguarded under supervisory boards that include a minority from the regulated profession. This is the case with the boards of the Federal Reserve banks, which also have a supervisory mandate.
It is important to note that the proposed Policy Statement was carefully constructed to remain consistent with the requirements of Sarbanes-Oxley.
The PCAOB will not take the determination to move to full reliance lightly. We take seriously the authority that Congress granted us, and before placing full reliance on a non-U.S. counterpart, we will take measures to carefully assess the adequacy of our counterpart’s program. We will also continue to be engaged with our counterparts when in a full reliance mode. In return, we expect that our counterparts will thoroughly review our capabilities and seek to monitor our inspections of firms also under their regulatory purview as part of their seeking reciprocity.
Before I close, I want to reiterate the importance of the public comment process, particularly for a guidance this significance. Any guidance that involves a cross-border element undoubtedly can present a number of challenges. To ensure that the final product is well-balanced, I encourage stakeholders to take the time to consider the proposal and submit comments. Comments will be carefully reviewed as part of developing the final policy statement.
I would now like to open the floor for comments and questions from my fellow Board members.