Opening Remarks: The Importance of Views and Advice From the Investor Advisory Group

 

Welcome and Introduction

Thank you, Steve, for your continued leadership as Chair of the Investor Advisory Group. I join you in thanking SEC Chair Mary Jo White and the staff of the SEC for taking time to attend this meeting and supporting the work of this important group.*

Thanks also to each IAG member for your dedicated service and thoughtful contributions to the Board on behalf of investors.

In order for the PCAOB to effectively carry out its mission of protecting the interests of investors and furthering the public interest in informative, accurate, and independent audit reports, the Board needs the views and advice of investors on all policy matters that we address.

Furthermore, your focus and input on the particular topics that you have selected today and in the past continue to inform the Board's long-term strategic direction in audit regulation and the policy choices we make in carrying out our audit oversight.

The Importance of IAG Views and Advice to the PCAOB

During my tenure on the Board, beginning in 2012, the IAG has identified and focused on important issues related to the state of auditing and the role and impact of the PCAOB's oversight activities. You have raised many questions and provided substantive suggestions and recommendations for the PCAOB to consider.

As a Board member, I highly value the input from the IAG and other investor representatives who I regularly interact with through our Standing Advisory Group and during the course of my other PCAOB outreach activities.

In preparing for today's meeting, I went back and reviewed the materials and my notes from our 2012 and 2013 meetings to analyze whether we have made progress on issues important to the IAG.

I thought it was important to review the record, because I will say that I sometimes get frustrated by the slow pace at the PCAOB and the difficulties we sometimes have internally with making progress on various issues. But, after reviewing the IAG working group reports and materials from the last two years, I am encouraged that we have work ongoing at the PCAOB in many of the areas that are important to investors and the IAG. But I know we need to achieve demonstrable progress and, in some cases, do much more.

The topics we've discussed in the prior IAG meetings during my time on the Board continue to be relevant and important for the Board's oversight now and into the future.

2012 IAG Meeting

At the March 2012 meeting, the IAG, through its various working groups, discussed a number of topics and presented views and advice to the Board in the following areas:

  • Role, relevancy, and value of the audit — The IAG presented the results of a survey of investors on matters related to the past, present, and future of public company audits, and included views on the effectiveness of PCAOB oversight and suggestions for areas where improvements are needed.

In going back over that report from the working group, I find the results compelling and still highly relevant. I believe we should use that report as one of the tools for measuring our progress and determining where additional efforts and focus are needed.

I was struck by the strong support for PCAOB's oversight role along with the strong message about the need for more transparent and timely information from the PCAOB about the results of our programs and the impact on audit quality.

In addition, IAG members' strong support for the audit function was accompanied with a call for the increased value that could be provided through a more informative audit report and more auditor involvement in areas such as assessing financial condition, estimates, and quality of disclosures.

  • Going concern and related global initiatives — The IAG presented a history of the concept of "going concern" in accounting, auditing, and corporate reporting, and identified a number of issues for U.S. regulators in those areas. The IAG recommended a number of ways to improve auditing standards, including clarifying the auditor's objective as it relates to going concern procedures, strengthening specific performance requirements, and requiring enhanced communications with the audit committee.

In light of recent changes to U.S. GAAP, the PCAOB is currently focused on its auditing standard-setting project related to going concern. I believe that the IAG's previous recommendations and work in this area, as well as ongoing input, will be critical for our current standard-setting work on this issue.

  • Audit firm practice and transparency — The IAG discussed suggestions for the PCAOB to issue a concept release on the subject of publishing audit quality indicators for use by audit committees and others, as well as suggestions for a study of the role of auditors in detecting fraud.

I'm pleased that the PCAOB has plans to publish a concept release on audit quality indicators in the near future. I have actively supported PCAOB's work on this project.[1] The staff has made significant progress and I'm encouraged by the depth and insight in this work.

Unfortunately, this project has experienced some delays as the staff are delving into complex issues and obtaining additional data for testing and analysis. At the same time, the firms are conducting their own analyses of audit quality indicators and are starting to incorporate some of those results into their processes. Both we and the firms need to move forward with transparent and measurable progress in this area in the very near future.

On the issue of further study on the role of auditors in detecting fraud, I am pleased that the Office of the Chief Accountant is actively planning to involve the SAG in the study of fraud, and I look forward to moving forward on that project.

  • Independence, objectivity and professional skepticism of auditors — The IAG surveyed the history of independence and its application in public company auditing, along with the problems and regulatory responses over the years. Clearly, independence, objectivity, and professional skepticism form the cornerstone for the value of the audit. We must continually monitor auditor independence and take actions when we find violations in this area.

Board members have actively reached out to audit committees, emphasizing our complimentary roles of overseeing the independence and professional skepticism of auditors. Lack of appropriate application of professional skepticism is frequently cited as a root cause of audit quality problems,[2] and is a topic that we frequently dissect with firm leaders, audit committees,[3] academics,[4] and students.

Also, as part of this project, the IAG summarized persistent audit quality problems identified in PCAOB inspection reports and those of non-U.S. regulators and some steps being taken to address them. The Board and staff are highly focused, on a day-to-day basis, on promoting the need for firms to improve audit quality, remediate systemic problems, and reduce the number of audit deficiencies.

2013 IAG Meeting

At the Oct. 16, 2013 meeting, the IAG presented the following topics and provided views and advice to the Board:

  • Audit quality indicators — The IAG provided additional views and recommendations on PCAOB's project on audit quality indicators. The IAG noted that investors are most interested in the reliability and creditability of audits for the individual companies in which they have invested or are evaluating for future investment.

The IAG recommended that PCAOB's project should lead to the dissemination of indicators that provide useful information to investors and audit committees, including information about risks to the credibility of individual audits. I value and appreciate the interests of investors in obtaining decision-useful information as well as suggestions for enhancing confidence in the audit, and I agree that exploring audit-specific quality indicators needs to be an important aspect of the project.

  • PCAOB general and inspection reports — The IAG responded to a number of questions from PCAOB staff about its initiatives on improving the timeliness and content of its inspection reports. This is another area where the staff are still working on responding to the input provided by you. I agree that there are a number of improvements we can make to enhance the usefulness of PCAOB reports to investors. I wish we were further along in these efforts, but the staff's work is ongoing in this area.
  • Audit firm governance and incentives — The IAG presented several topics and related suggestions for the PCAOB to consider related to enhancing investor confidence in audits. The IAG encouraged further enhancements to auditors' systems of evaluating and incentivizing their personnel to improve audit quality, including approaches for the auditing profession to attract and retain talent.

The IAG also addressed a number of concerns and suggestions for audit firms to strengthen their governance practices, such as the establishment of independent advisory or oversight boards, and issues associated with firm management of non-audit business lines. I look forward to hearing more about these issues today during the IAG's presentation on "Audit Firm Business Model and Incentives," and I look forward to future PCAOB work in this area.

  • Auditor Interaction with Audit Committees — The IAG presented information and updates on auditor interactions with audit committees as well as audit committee communications to investors. I am encouraged by the progress in this area, and look forward to additional discussion on these topics today.

Framework for Considering IAG Views and Advice

Clearly, I value views and advice from the investor community. As we go forward, I hope that we can find a way at the PCAOB to analyze IAG input and track PCAOB's progress on these issues in a deliberate manner and within a clear framework, consistent with PCAOB's values of excellence, integrity, impartiality, fairness, and consideration of the public interest.[5]

I believe that a strong, reliable, and relevant audit function is absolutely necessary to protect investors and for the effective functioning of our markets. Currently, there is an impressive amount of activity at the PCAOB aimed at strengthening audits and improving their value to serve the needs of investors.

Unfortunately, we struggle at times to effectively articulate PCAOB's beneficial impact on audit quality and sometimes our work does not happen as quickly as many of us and our stakeholders would want. At the same time, some of these issues require multi-year efforts.

The PCAOB has a challenging mission and while the Board must prioritize among myriad strategic risks and opportunities, our mission demands that we listen to your views and advice and act responsively and appropriately to have the most effective and positive strategic impact on the investing public.

And, in those areas where we've made progress, we cannot ever declare victory and become complacent. Even if we think we've successfully addressed an issue, we can't check the box and think we are done. We need to continue to adapt quickly to changing circumstances in the business environment to ensure that we are an agile regulator capable of protecting investors and the public interest now and in the future.

I look forward to the presentations from each of the IAG working groups today on the topics of (1) audit firm business model and incentives; (2) how to improve audit quality and the relevancy of the audit; and (3) the relationship and role of the auditor with the audit committee.

Again, thank you for your very important work to support the Board and its mission.

* The views I express are my own, and do not necessarily reflect the views of the Board or staff of the PCAOB.

[1] Protecting Investors by Seizing the Opportunity to Strengthen Audit Quality, Franzel statement at the American Accounting Association Midyear Conference and Doctoral Consortium, Jan. 18, 2013 http://pcaobus.org/News/Speech/Pages/01182013_New%20Orleans.aspx.

[2] PCAOB Staff Audit Practice Alert No. 10, Maintaining and Applying Professional Skepticism in Audits (Dec. 4, 2012) http://pcaobus.org/Standards/Pages/Guidance.aspx.

[3] Protecting Investors through Independent, High Quality Audits, Franzel statement at the NACD 2012 Board Leadership Conference, Oct. 14, 2012 http://pcaobus.org/News/Speech/Pages/10142012_FranzelNACD.aspx.

[4] Auditor Objectivity and Skepticism — What's Next? Franzel statement at the American Accounting Association Annual Meeting, Aug. 5, 2013 http://pcaobus.org/News/Speech/Pages/08052013_AAA.aspx.

[5] See PCAOB, Strategic Plan: Improving the Quality of the Audit for the Protection and Benefit of Investors, 2013-2017, Nov. 26, 2013, at 9.