Evolution and Innovation to Meet Emerging Risks and Challenges

Good afternoon and welcome to the 13th annual meeting of the PCAOB and the Auditing Section of the American Accounting Association (AAA).

It's good to be here with such a large crowd of dedicated academics who are interested in audit policy issues and emerging areas of research that are critical to advancing the public interest in audit quality.

As the auditing profession faces an ever-changing array of pressures, risks, and opportunities that may impact audit quality, policy makers and academics need a robust working relationship to monitor and assess the impact of these trends and related audit regulation matters.

This meeting provides an excellent opportunity to share information among PCAOB and academics and consider research opportunities that inform policy making to help serve the public interest and protect the interests of investors through informative, accurate, and independent audit reports.

As you've heard so far from PCAOB program leaders and my fellow Board members, we, and other audit regulators around the world, are monitoring emerging trends that may drastically impact auditing in the future while we are also tackling long-standing audit quality issues.

I'm pleased that our meeting agenda highlights a rich mix of discussions related to current and recent inspections, enforcement, and standard setting activities, along with key takeaways for the classroom. I look forward to tomorrow's sessions on the use of data and technology in the audit and emerging issues in financial reporting, auditing and education. In my view, these issues will have a dramatic effect on auditing, audit regulation, and certainly, the education of future audit professionals.

In light of the current environment of potentially disruptive change, I want to highlight just a few areas where the PCAOB is evolving and changing certain aspects of our programs to be well-positioned as an effective and efficient regulator, capable of fulfilling our important mission.

Auditing Standards

First, as Marty Baumann mentioned in his presentation, we are implementing an enhanced standard setting process following an extensive study of the strengths and weaknesses of our historical approach.

The enhanced process is implemented through an interdivisional team[1] using a multi-disciplinary approach to screening the marketplace and PCAOB oversight information to (1) identify and understand current and emerging audit issues; (2) define early in the process potential problems that may need to be solved; (3) design appropriate research and monitoring activities; and (4) decide whether an issue requires action, including whether it should be placed on the standard-setting agenda. The approach includes defined points in the process for seeking diverse perspectives outside the PCAOB.

The process includes a newly implemented Research Agenda with projects where PCAOB is dedicating resources to determine whether further standard setting or other actions are needed. It is included in the Office of the Chief Auditor's quarterly Standard-Setting Update[2] and currently includes the following research projects:

  • quality control standards, including assignment and documentation of firm-level supervisory responsibilities
  • changes in the use of data and technology in the conduct of audits
  • the auditor's role regarding other information outside the financial statements and company performance measures, including non-GAAP measures
  • the auditor's consideration of non-compliance with laws and regulations

Although we are still early in our implementation, I've been pleased with the innovations made to our process and the outcomes to date, the range of issues the staff has under consideration, and the innovative mindset that our interdisciplinary teams are applying as they tackle complex issues. As we move forward in this process I would expect to see positive benefits related to the speed and effectiveness of the standard setting process and the integration of knowledge across PCAOB functions.

Economic Analysis

A second area of innovation and evolution is our use of economic analysis throughout our standard setting and rulemaking processes. Economic analysis helps ensure that our regulatory decisions, including whether to adopt new requirements and impose corresponding burdens, are informed by a rigorous review and analysis of the available information.

We started down the economic analysis path in 2012 by developing staff capabilities, hiring additional staff, and developing guidance, approaches and methods for effective economic analysis in our specialized area of audit regulation. This has been a difficult and complex challenge and a journey of continuous improvement. I am pleased that the process is now operational, with economists and interdisciplinary teams working together to create high quality economic analysis as part of the process for deciding whether and how to move forward with standard-setting projects.


A third area where I see ongoing innovation and evolution is in our inspections program. Just last month, our inspections staff came together in Washington, D.C. for their annual inspections training. Staff from our other divisions and offices attended as well. I attended many of the sessions myself and can personally attest to the high quality of the training and the excellent opportunity for our staff to share knowledge, broaden perspectives, enhance skills, and coordinate across PCAOB's functional lines. (And the CPAs among us made a good dent in our Continuing Professional Education requirements for the year!)

The theme of this year's training conference was "Evolution," which is particularly relevant and crucial given the current environment of potentially disruptive changes in auditing. Topics included trends in fraud, independence, data analytics and use of technology in auditing, new and upcoming accounting standards, and recent academic research findings. The theme of evolution permeated the program.

Audit firms have invested significant resources into changing the model of auditing, using data analytics, artificial intelligence, and automated testing of entire populations of transactions and certain internal controls, among other innovations. Some of these approaches may be fully deployed in the near future. There are also questions about how blockchain technology, "big data," and cybersecurity issues could impact financial reporting and auditing in the future.

And, although our inspections approaches have been evolving and changing over the years in response to risks and trends, the pace of these changes and the necessary evolution in our inspections approaches will likely accelerate drastically in the coming years. As such, we will need to continually evaluate and adapt, as necessary, our approach to inspections, the subject areas of inspection focus, and the professional development and training of our inspectors. In support of these efforts, we will also need to foster and further support a culture of innovation.

I believe we are well-poised to meet these challenges, but it will also require that we stay continually focused on innovations and enhancements to the quality and effectiveness of the inspections program.


A fourth area at PCAOB that has evolved through innovation is in the Division of Enforcement and Investigations (DEI). In 2016, the Board made public a record 54 settled disciplinary proceedings, imposing sanctions including censures, monetary penalties, revocations of firm registration, and bars on individuals' association with registered firms. Thus far in 2017, the Board has already made public 24 disciplinary proceedings.

The enforcement and investigations programs have been very active, and the results are directly related to DEI's efforts to continue to be innovative in its approach to evaluating potential matters for investigation, with a laser-focus on maximizing investor protection.

DEI's case identification processes are continuously adapting and improving to match the complexity and trends in the financial markets. DEI has a dedicated Public Source Analysis team that constantly monitors and assesses public disclosures in SEC filings, news articles, as well as other sources in order to identify potential new matters that warrant investigation. Our Enforcement staff also carefully examines patterns in the migrations of issuers among auditors in order to spot potential areas of misconduct by registered firms and their associated persons.

The enforcement program also utilizes innovative and creative techniques in analyzing a wide-spectrum of data – including data and referrals from the Inspection program — in order to fulfill its mission to protect investors and enhance audit quality.

PCAOB's Interest in and Use of Auditing Research

The final area I want to talk about for innovation and evolution is the PCAOB's use of audit research.

Some might be skeptical about the possibility of innovation in audit regulation and oversight, but we are working on it. And I'll go out on a limb here and add academia to the call to action for innovation because audit educators and researches will certainly be impacted by the potentially disruptive changes in auditing.

Over the past year, the PCAOB and the AAA Auditing Section have enhanced our working relationship by involving Auditing Section members in the review of PCAOB economic fellow research proposals for PCAOB's Economic Fellows Research program and papers submitted for the annual Conference on Auditing and Capital Markets.

We've also had a number of audit researchers present their preliminary or published research to the PCAOB on various topics, including:

  • the effects of PCAOB inspections on auditor-client relationships (Chris Hogan)
  • audit efficiency and audit quality (W. Robert Knechel)
  • fraud brainstorming practices (Karla Johnstone)
  • informational efficiency of going concern opinions (Joseph Gerakos)
  • evidence from the United Kingdom on the consequences of changes to the auditor's report (Miguel Minutti-Meza)

These enhancements have been important to us and represent evolutions in our Center for Economic Analysis and its working relationship with the AAA Auditing Section.

At the AAA Auditing Section mid-year meeting in January 2016, I spoke about the PCAOB's interest in auditing research and related opportunities for both the PCAOB and the academic community.[3] I described the PCAOB's emerging approach to using and fostering research, and I suggested five additional opportunities to foster research relevant to PCAOB audit oversight.

These five topics are still relevant and may help both PCAOB and the academic community be positioned for rapid changes in auditing. We and the academic community can make progress in these areas while preserving the independence of the academic research processes and advance our respective, distinct missions. I reiterate those five areas below with some updates:

  1. The Board could engage in a more structured process of reviewing its oversight programs to identify and publish specific topics and questions that may be suitable for research that would help inform standard setting and other PCAOB oversight programs.

  2. PCAOB staff could, like the SEC staff, publish papers describing relevant economic and auditing theories and the state of the literature on particular topics.

    Such publications could provide a framework not only for guiding original research, but also for articulating the relationship between original research and the unique discipline of the economics of auditing.[4]

  3.  The PCAOB could summarize the results of its conferences, seminars, and other deliberations over ongoing research. Dissemination of such information could benefit the academic community, investors, and other regulators around the world as they address their own needs.

  4. PCAOB could make available to academics information about data that is potentially available to researchers. Because the viability of a research question, and of potential methodologies, depends on the availability of reliable data, the PCAOB should continue to look for ways to share information about the categories and structure of its proprietary data that could be used for research purposes.

    In this regard, the PCAOB has been working to inform prospective PCAOB research fellows of available proprietary PCAOB data. And the CEA has enhanced its processes for discussing and sharing data inventories with prospective fellows directly in the fellowship application process. In my view, making this information more widely available to academics could help spur additional research related to the audit process, audit quality, and regulatory impacts.
  5. Finally, I'd like to see a regular and predictable mechanism in place for interacting with the academic community and communicating about the above issues, so that we can continue to evolve the productive working relationship between PCAOB and academia to achieve the goals of advancing research to inform regulation that enhances audit quality, protects investors, and promotes confidence in the capital markets.


As the markets and technology continue to evolve, the auditing profession, academia, and regulators must continue to innovate to respond to risks and maximize opportunities to benefit investors and the public interest.

At the PCAOB, we are embracing this opportunity to fully understanding how technology can support this innovation, and we are poised to evolve our own programs and our business processes to maximize our efficiency and effectiveness.

A significant challenge for both the PCAOB and the academic community will be cultural. We cannot simply rely on long-standing processes without continuous critical evaluation and a willingness to evolve.

Again, thank you for your participation in today's meeting and thank your efforts in research and teaching to advance the public interest through a vibrant auditing profession.

[1] The interdisciplinary team includes staff from PCAOB's Office of the Chief Auditor, Office of Research and Analysis, Center for Economic Analysis, Division of Registration and Inspections, Division of Enforcement and Investigations, Office of the General Counsel, and other PCAOB offices, as applicable.

[3] Jeanette M. Franzel, The PCAOB's Interests In and Use of Auditing Research, American Accounting Association, 2016 Auditing Section Mid-Year Meeting, Jan. 15. 2016.

[4]In the view of these academics, such an approach will stimulate researchers to produce "a body of research that is coherent and generalizable and will help to overcome some of the limitations of existing research." Jeffrey R. Cohen and W. Robert Knechel, "A Call for Academic Inquiry: Challenges and Opportunities from the PCAOB Synthesis Projects," Auditing: A Journal of Practice & Theory, vol. 32, Issue Supp. 1, page 1 (2013).