Investors' Expectations of Regulators

Thank you, Bruce. I join you and my fellow Board Members in welcoming our regulatory guests from more than 30 jurisdictions around the world to our 8^th Annual International Auditor Regulatory Institute.

At the outset, I must say that the views I express today are my own and do not necessarily reflect those of the Board or staff of the PCAOB.

I chair two investor groups — the PCAOB's Investor Advisory Group as well as the Investor and Other Stakeholders Working Group of the International Forum of Independent Audit Regulators (IFIAR).

I want to share with you some of what I am hearing from these groups.

Investors are not satisfied with the current state of audit quality. They see the rate of audit deficiencies reported by regulators from around the world and, while they are appreciative of our efforts thus far, they expect more.

In April 2014, IFIAR issued its 2013 Inspection Findings Survey.^[1] The survey, which reflects responses from 38 independent regulators, noted that the highest number of inspection findings were in the areas of fair value measurement, internal control testing, and the adequacy of financial statements and disclosures.

These results are consistent with the findings of our own PCAOB inspectors.

Investors want regulators to make sure that auditors are knowledgeable about the complexities of the business they are auditing; and, to have the independence, objectivity and professional skepticism to do the job right.

They also believe auditors should be doing more to detect and expose fraud and be more actively involved in challenging management when things don't seem to be right. They want auditors to respond in the audit report -- "if they see something, say something" -- to management, the audit committee and/or directly to investors.

Investors want audit firms to compete on the basis of quality and not price. As such, they support the PCAOB's initiative to identify audit quality indicators to distinguish firms from each other and thereby provide for greater competition among firms based on quality.

They also want more independent, accurate and informative audit reports. They believe that the current pass-fail boilerplate report is no longer enough.

They want an expanded audit report that informs them about the auditor's assessment of management's estimates and judgments; discusses unusual transactions, restatements, and other changes; and includes the auditor's assessment of the quality of the company's accounting policies and practices.^[2]

In addition to the expanded auditor's report, investors want more transparency and accountability with respect to those involved in an audit engagement. While the PCAOB is currently examining how to address these concerns, other countries currently require the identification of the audit partner in the audit report.

Investors are also concerned about the future direction of audit quality as the largest accounting firms expand into ever increasing lines of business activity that include a variety of consulting and advisory services.

As many of you are aware, the Big Four accounting firms have been continually expanding their consulting businesses, either internally or through acquisitions and some are expanding into services not generally associated with accounting firms. For example, a foreign affiliate of a Big Four announced in March its ambitions to become a global top-20 legal services player within the next five years.

Firms have asserted that these acquisitions and investments will improve their auditing capabilities and, while this may be true, investors want to know how these additional services will assist firms in improving audit quality.

In the United States, our Supreme Court in United States v. Arthur Young, described the audit as a "public watchdog" function that "demands that the accountant maintain total independence from the client at all times and requires complete fidelity to the public trust."^[3]

As firms broaden their activities, investor representatives I hear from are concerned that regulators and the firms alike not lose sight of this "total independence" and "public trust" responsibility.

Investors also want regulators to exercise more oversight of the global network firms and their affiliates with an enhanced focus on audit quality. Some have suggested that the global firms change their governance structures to include more independent representation on the global firms' managing boards, something that is currently in place in a number of countries.

Investor representatives I hear from also are concerned that we may have reached a point where the largest firms may be too big to fail. They wonder if these firms are so systemically important to the economy, that the market would not allow one to fail.

Currently, regulators in certain jurisdictions around the world require that the major accounting firms provide audited financial statements. For example, certain large accounting firms in the United Kingdom, the Netherlands and Austria include audited financial statements in their annual transparency reports, which are posted on their respective websites.

I believe, along with a number of investor representatives, that having audited financial statements may provide the necessary transparency to allow the marketplace to monitor the growth and activities of these firms and identify any catastrophic risk that may expose a firm to failure.

Investors want audit committees and their auditors to share more information among themselves, independent of management, in order to better protect their interests in receiving independent, accurate and informative audit reports.

And they would like us to carefully monitor and consider the role of the auditor regarding global initiatives to promote sustainability and integrated reporting.

In sum, these are a few of the issues that investors and others have brought to our attention.

On Wednesday, you will hear directly from a panel of investor representatives about some of their concerns.

In the end, what investors want are independent, objective, skeptical auditors watching out for their best interests through a high quality audit. They see themselves — and believe that investors should be recognized by auditors and regulators alike — as the auditor's primary client and that protecting their interests must be the primary objective of everything we do as regulators.

Thank you and I am happy to answer any questions.