I am pleased to be here with you today, at what is, I imagine, the world’s largest gathering of accountants who practice before the SEC.
The first time I attended this conference was in 1979, as a member of then-SEC Chairman Harold Williams’ staff. Chairman Williams spoke about the profession’s fledgling efforts at self-regulation, particularly the peer review process. He challenged the audience to respond to "the changing needs of those who rely on accountants’ independent assurances of corporate accountability" and predicted that the coming years would be "eventful and change-laden" for the profession. 
A lot has indeed changed in the 30 years since Chairman Williams made those comments. Most importantly, in 2002, Congress decided that self-regulation and peer review should be replaced by oversight administered by a new body – the Public Company Accounting Oversight Board – operating independently of the profession under direct SEC supervision.
The Board has now been in operation for a few weeks short of seven years – just over 2,500 days. Today is a good opportunity to take stock of what the Board has done in that time. For one thing, the Board is in transition. Two of the founding Board members – Bill Gradison and Charley Niemeier – are about to leave the Board, after seven years of outstanding service, and the SEC is in the process of selecting three new members who will constitute a new Board majority.
And, as I am sure most of you are aware, a few hours ago, the Supreme Court heard argument in a case that challenges the Board’s Constitutionality. I don’t, of course, know how that case will turn out – although the lower courts ruled in the Board’s favor. The litigation deals with the way that Board members are appointed and the circumstances under which we could be removed. The basic principle that investors and our capital markets benefit from auditor oversight that is independent of the profession is not at issue. Still, the litigation once again focuses attention on how public company auditing should be regulated.
With these things in mind, I thought it would be useful to spend a few minutes this afternoon outlining what the PCAOB has accomplished during the seven years it has been in operation and talking about some of the challenges facing the Board and its soon-to-be-appointed new members. Of course, my views on these matters are solely my own, and do not reflect the views of the Board or its other members or staff.
Seven years ago there was no PCAOB -- just a Congressional blueprint for auditor oversight, based on the idea that inspections of public company audits performed independently of the profession would strengthen audit quality and restore damaged confidence in financial reporting.
Since those early days, the Board and its staff have turned the blueprint into a mature regulatory organization that oversees a large and diverse population of public accounting firms – ranging from sole proprietorships to major firms with extensive global networks. A few statistics shed some light on the scope of the Board’s work during the past seven years:
The Board has also tackled its responsibilities for the standards under which public company audits are performed. During the first several years of the Board’s life, much of the time and energy of the standards program was focused on just one topic -- developing a standard for audits of internal control over financial reporting. While the evolution from Auditing Standard No. 2 to Auditing Standard No. 5 was time-consuming, I believe that we now have a sound basis for effective and efficient internal control auditing of companies of all sizes.
During the past year, our standards-setting program has undergone something of a re-set. We have begun to address some fundamental matters that were put on hold while internal control auditing dominated the agenda. For example, in July the Board adopted a new standard on concurring or second partner review – what we call EQR or engagement quality review. Based on things we have seen in inspections, strengthening these reviews has great potential to improve audit quality and to protect investors -- and public companies and auditors – against the costs and burdens of audits that miss significant issues. I expect the SEC to approve the EQR standard in time for it to take effect for quarterly reviews and audits of fiscal years beginning after December 15.
The Board has also proposed a suite of seven standards on risk-assessment. These standards, which deal with planning and executing the audit so that it appropriately addresses risk, will lay a new foundation for the PCAOB’s future standards-setting. We received many useful comments on the original proposal, and I anticipate that a revised version will go out for comment in the near future, hopefully before the end of this year.
There are several other important standards projects underway, and, following my comments, the Board’s Chief Auditor, Marty Baumann, will discuss the standards-setting agenda in detail.
Of course, in evaluating the Board’s work, the question is not how many inspections have been conducted or how many pages of standards have been written. It is whether investors are better off as a result. While that is not a question that is likely to be resolved based on anything I might say today, I believe that evidence is accumulating that they are. I want to highlight three points.
First, we know from the visibility that we have through the inspections and remediation process, that the large firms have made important changes to their systems of quality control in response to PCAOB inspections findings.  These have included such things as changes related to partner evaluation and compensation to place greater emphasis on audit quality and technical skills; changes to management structures to provide greater separation between the audit quality function and audit business operations; creation of national- or regional-level positions or committees to promote and monitor audit quality; and modifications to internal inspection programs.  The effects of these steps remain to be seen, and we continue to find deficiencies in important audit areas. Nevertheless, I believe that the Board’s work has caused firms to focus on their quality controls, and that is an important step in the right direction.
Second, objective measures of the quality of financial reporting are improving. For example, restatements have fallen considerably. The number of restatements initially increased, as issuers went through the process of reviewing their controls in response to the internal control reporting and auditing requirements. However, restatements have decreased since 2007, from 1,584 to 1,128.  As to internal control reporting itself, the number of adverse ICFR opinions is down substantially -- from 17 percent of all opinions issued during 2005 (the first full year of ICFR reporting for accelerated filers) to 4 percent for the most recent period. The downward trend holds for large firms, small firms, and non-U.S. firms.
Third, investor confidence in audited financial statements has strengthened. For example, 53 percent of respondents to an AARP survey said they were more confident in the financial information they receive post-SOX.  Similarly, 87 percent of respondents to a Center for Audit Quality survey said that they had a great deal of confidence, or quite a bit of confidence, in the audited financial information released by public companies. In the same survey, 58 percent said the changes implemented by Sarbanes-Oxley had a positive impact. Additional evidence of increased investor confidence in the U.S. securities markets can be derived from the premiums that initial public offerings command when the issuer complies with U.S. registration requirements, as compared to issuers that offer their securities solely overseas. In the wake of the Enron and WorldCom scandals, the U.S. listing premium decreased significantly. It rebounded again following the implementation of Sarbanes-Oxley. 
While I believe that the Board has accomplished a lot, and has made a difference in the reliability of financial reporting and public confidence, there is certainly much left to do. Without trying cover everything that could be viewed as a future Board challenge, I want to mention four issues.
First, we have encountered obstacles to making our foreign inspections as robust as those we conduct in the U.S. Putting domestic and foreign inspections on a more equal footing will be one of the Board’s 2010 priorities.
As I mentioned earlier, about 930 of the firms registered with the Board are located outside the U.S., in 86 countries. While not all are subject to regular, periodic inspections, many are. By the end of year, the Board will have conducted over 180 non-U.S. inspections in 33 jurisdictions.
Along the way, we have learned some lessons. For example, while all firms participating in U.S. public company audits are of course required to follow PCAOB standards, the audit environment varies from country to country. That is, how audits are conducted and what the risks are depend on local culture, on local audit oversight and securities law enforcement, and on attitudes toward business and financial reporting, among other things. The Board has become increasingly sensitive to the need for our inspectors to understand these differences when they plan and conduct an inspection.
Of course, we seek the cooperation of local audit oversight authorities when we go into another country. That cooperation can range from simply making the home country regulator aware that we will be conducting an inspection to working side-by-side with them in simultaneous inspections of the same firm. By-and-large, these relationships have worked out well and, I think, have benefitted both the Board and our foreign colleagues.
In some cases, however, we have had difficulty in reaching agreement with foreign counter-parts. For example, recently, we have experienced challenges with respect to our inspections in the European Union. The major obstacle is the Board's inability to share inspections information, due to confidentiality provisions in the Sarbanes-Oxley Act. Both Houses of Congress are considering legislation that would correct this problem by permitting information-sharing with non-U.S. audit oversight bodies. However, we are currently unable to conduct further inspections in EU Member States. There are a handful of other countries in which similar issues have arisen.
This presents both the Board and the firms involved with something of a dilemma. We are required to conduct inspections of firms that audit U.S. companies according to a schedule. Firms are required to cooperate in those inspections. If we are unable to inspect certain registered firms because of prohibitions in local law or because local authorities will not permit us to do so, the Board will have to consider how to respond.
The Board has a range of options. We already disclose on our Web site the name of any firm that has not been inspected, despite the passage of four years since it became subject to inspection. One possibility would be to expand this disclosure to include the reason no inspection has occurred and possibly the firm’s U.S. public company audit clients. The Board could also require firms to include some sort of disclosure in their audit reports, in a communication to clients, or in the firms’ reports filed with the Board. Of course, the Board can also bring disciplinary proceedings against firms that fail to cooperate in the inspection process.
Second, we face challenges in keeping up with the reality that auditing is an activity that occurs across borders. Even in the case of audit reports signed by a U.S. firm, an audit failure in India or Italy can affect U.S. investors. The Board needs to make sure that it is addressing that risk.
Some problems in multi-location audits that Board inspectors have already observed include –
Getting a handle on cross-border quality control is difficult, both for the Board’s inspection staff and, I suspect, for firms. The Board is enhancing its risk assessment and inspection methodology to better evaluate how global firms control their cross-border practices and the risks related multinational auditing. Developing an approach to quality control for these global networks will be one of the Board’s 2010 challenges.
Third, as a corollary to the globalization of auditing, the Board needs to take into account that it is not the world’s only setter of auditing standards. The International Auditing and Assurance Standards Board promulgates the International Standards on Auditing -- the ISAs – and practitioners with an international clientele must be familiar with the applicable standards in the countries in which they operate. Further, U.S. auditors with both a public company and a private company practice must be able to apply both PCAOB standards and the standards issued by the Auditing Standards Board. While this multi-standard environment imposes burdens, there are some good reasons for the differences – beginning with the fact that PCAOB standards envision an integrated audit of the financial statements and of internal control.
At the same time, I think it is important that we avoid needless differences. When the Board engages in standards-setting, one of the first steps the staff takes is to look at the comparable ISA and consider how it can be used to inform our work. In addition, we have begun to identify in our standards-setting releases differences between the Board's standard and the analogous ISA and ASB standard. I believe that over time the differences are likely to narrow – or at least to become more readily understandable.
Finally, the Board faces challenges because its mission is something of a moving target.
A good example is broker-dealer auditing. As a result of the Madoff Ponzi scheme, the SEC required the auditors of the 5,500 or so non-public securities broker-dealers to register with the Board. However, the Sarbanes-Oxley Act does not empower the Board to inspect, set standards for, or investigate these audits. This creates a gap in the level of protection that PCAOB registration affords and creates a risk that the public may believe we are exercising oversight – when in fact we lack the necessary authority. The Board needs to be vigilant in avoiding this sort of disconnect between registration requirements and the power to actually oversee audits on which the public depends.
In the case of broker-dealer auditors, legislation under consideration in both the House and Senate would close the gap by giving the Board full oversight authority. If this legislation is enacted, the Board will need to develop an inspection methodology, including appropriate risk analyses, and hire and train additional staff with experience related to broker-dealer audits. We may also be required to adjust our funding system so that broker-dealers, like public companies, pay part of the cost of overseeing their auditors.
Another area where some have suggested a broader role for the Board is firm governance and transparency. For example, last year, the U.S. Treasury’s Advisory Committee on the Auditing Profession issued a report with a number of recommendations aimed at the Board, including that we should require the larger auditing firms to produce a public annual report and to file on a confidential basis audited financial statements with the Board. These ideas would take us in new directions in the nature of our oversight of the major firms. To date, the Board’s focus has been on how firms perform public company audits and on improving audit quality. In contrast, transparency requirements would respond to the view that the large accounting firms are public interest entities that owe a level of disclosure because of the key role they play in our financial system. Whether to go down that road is one of the tough issues the Board will face next year.
Harold Williams concluded his 1979 speech by predicting that the coming year would be "a year of change." I think it is probably safe to make the same prediction again today. While the Board has accomplished a lot over the past seven years, and there is evidence to suggest that investors may have benefitted, many challenges still lie ahead.
Ultimately, though, auditors, preparers and regulators, face the same challenge – to foster and maintain confidence in financial reporting. The Board is committed to continuing to work toward that goal.
 Williams, "The Accounting Profession: Responses to an Environment of Change", AICPA Sixth Annual National Conference on Current SEC Developments (January 6, 1979).
 Further, a study has shown that PCAOB inspections are useful in discriminating audit quality, while peer reviews are not. See Gunny and Zhang, “PCAOB Inspection Reports and Audit Quality”, Working Paper (2009). Several papers have also shown that PCAOB inspection reports provide a powerful signal of audit quality for small firms. See Abbott et al., “When the PCAOB Talks, Who Listens? Evidence from Client Firm Reaction to Adverse, GAAP-Deficient PCAOB Inspection Reports”, Working Paper (2008); Daugherty, Dickens and Tervo, “The Impact of PCAOB Inspectons on Triennially Inspected Auditing Firms”, Working Paper.
 In a report issued last December, the Board discussed some of the findings in its 2004-2007 inspections of the eight largest firms. See Report on the PCAOB’s 2004, 2005, 2006, and 2007 Inspections of Domestic Annually Inspected Firms , PCAOB Release No. 2008-008 (December 5, 2008).
 PCAOB Office of Research and Analysis, based on data by Audit Analytics. In addition, studies have shown that there has been a significant decrease in discretionary accruals and increased earnings quality in the wake of Sarbanes-Oxley. In other words, earnings management is more difficult with Sarbanes-Oxley in place. See Lobo and Zhou, “Did Conservatism in Financial Reporting Increase after the Sarbanes-Oxley Act? Initial Evidence”, Accounting Horizons (2006) 20(1) at 57-73; Cohen, et al., “Trends in Earnings Management and Informativeness of Earnings Announcements in Pre- and Post-Sarbanes-Oxley Periods”, Working Paper (2005).
 Love, Sarbanes-Oxley: A Survey of Investor Opinions, AARP Knowledge Management Group (2007).
 Center for Audit Quality. Report on the Survey of Audit Committee Members (March 2008).
 See Doidge, Karolyi, and Stulz, “Why do Countries Matters so Much for Corporate Governance?”, Journal of Financial Economics (2007) 86(1) at 1-39; Hail and Leuz, “Cost of Capital Effects and Changes in Growth Expectations Around U.S. Cross-Listings”, Journal of Financial Economics (2009). 93(3), at 428-454. Doidge, Karolyi and Stulz (2007) show that U.S. cross-listing provides a boost in foreign companies’ domestic and foreign capital-raising activities. However, the same result does not hold for cross-listings in London. The evidence is consistent with the theory that investors have more faith in companies that commit to complying with U.S. disclosure rules.
 See supra note 3 at 23.
 See Final Report of the Advisory Committee on the Auditing Profession to the U.S. Department of the Treasury (October 6, 2008).