Statement on the PCAOB 2020-2024 Strategic Plan and 2021 Budget

I want to first thank our staff for the hard work that went into the development of the 2021 Budget and related Strategic Plan.^[1]

Preparing these materials takes extraordinary effort. This includes monthly meetings with the staff from the Securities and Exchange Commission (SEC) to answer questions and develop a budget request that is in line with the SEC's expectations. The team operated under the difficult circumstances caused by the current health crisis. And, as soon as we finish today, they will maybe get a weekend off before having to start all over again. There is truly no rest for the weary.

Our job as Board members is made much easier by their professionalism and expertise. Let me put some actual names on this team. In particular, I want to thank our acting Chief Administrative Officer and Chief Financial Officer Holly Greaves, our Budget Officer Jim Hearn, as well as Yoss Missaghian and Alfredo Azocar.

I. Summary

As for the merits, the budget presents a number of serious and unaddressed issues.

The budget includes inadequate resources for at least two of the PCAOB's operating divisions, limiting their ability to perform functions critical to the mission of the PCAOB, does not sufficiently reflect the lessons learned from the current health crisis, and sets reserves at levels that are not adequate. The priorities of the PCAOB set out in the Strategic Plan have hardly changed over the last three years, as if the pandemic, the collapse of a number of significant public companies overseas, and the global debate over audit quality, had never occurred.

In taking these actions today, a majority of the Board once again refuses to make public the budget submitted to the SEC and the budget justification, despite language in the relevant rule that seems to require it.^[2] Anyone wanting the information will have to get it from the SEC under the Freedom of Information Act (FOIA).^[3] The Board's actions today therefore impose on investors and the public unnecessary cost and delay for information that could simply be made available on the PCAOB's website.

Finally, the budget does not adequately take into account the disquieting trend of reduced investor and public input at the PCAOB.

The PCAOB's Standing Advisory Group (SAG) and Investor Advisory Group (IAG) have been shuttered. Decisions on key projects, including changes to the standard setting agendas, are resolved without adequate investor input. As made clear today, notice and opportunity for public comment on changes to the PCAOB's standards, something expected by the investor community, are no longer assured but can be eliminated at any time by a majority of the Board.

These concerns over the adequacy of investor input, including input from underrepresented segments of the investor community, need to be addressed through changes to the PCAOB's rules and bylaws and they need to be addressed through structural changes that are adequately funded in the budget.^[4]

In considering what to do, we should take as a starting point the direction provided by Congress. Dodd-Frank mandated that financial regulators, including the SEC, put in place an Office of Minority and Women Inclusion and that the SEC put in place an Office of the Investor Advocate. The PCAOB would benefit from both offices.

In my view, the PCAOB's 2021 Budget and related Strategic Plan does not adequately address ongoing challenges nor present a vision for the future.

I therefore believe it is not ready to be submitted to the SEC and, as a result, cannot support this recommendation.

II. Failure to Prioritize Audit Quality

The budgets for both the Office of the Chief Auditor (OCA) and the Division of Registration and Inspections (DRI) do not adequately reflect the PCAOB's mission to protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audit reports.

OCA. Modernization of the PCAOB's auditing and quality control standards is probably the most important, effective and efficient mechanism for improving audit quality. Ideally, this means a meaningful standard-setting agenda that promotes this goal.

Such an agenda should include reconsideration and modernization of these out-of-date "interim" standards,^[5] changes arising out of the evolving nature of the audit,^[6] and incorporation of lessons learned from the current health pandemic. ^[7] The agenda should address the specific concerns of investors and the public.

The PCAOB's standard setting agenda, however, falls short of what is needed to address these issues. Moreover, the consideration and revision of auditing standards appears to have slowed significantly from past Boards. In the three years since the arrival of the current Board, the PCAOB has only finalized two auditing standards written principally by the prior Board,^[8] issued a single concept release on standards for audit firms' quality control systems^[9] and, as of today, adopted amendments to independence requirements that merely incorporate changes made by the SEC.^[10]

The budget also does not address structural changes in OCA designed to provide more relevant and timely feedback on issues of audit quality. The SEC has in place a comment letter process that largely does this.^[11] PCAOB, audit firms, investors and other stakeholders would benefit from something similar.

The 29 FTEs included in the budget for OCA does not, therefore, ensure what is necessary to maintain an adequate standard-setting agenda or add structures that would facilitate its ability to issue guidance on a real time basis.

DRI. The staffing levels for DRI is 480 FTEs, the same number in the budget for 2019 and 2020.^[12] Even in the best of times this staffing model raises concerns. Only around 50 to 55 of public company audits are inspected for each of the Big Four each year, ^[13] less than ten percent of the total.^[14] The PCAOB has in fact never inspected audits of some of the largest public companies that trade in our capital markets.

And, of course, these are not the best of times. The health pandemic has had a significant effect on inspections, particularly international inspections. The number of overall inspections conducted this year has fallen. By the end of 2020, the PCAOB will inspect around 14% fewer audits and around 23% fewer firms than what had been planned. With respect to non-U.S. firms, DRI will conduct around 40 of the 67 budgeted inspections. Although a portion of the decline was due to withdrawal and revocation of firms' registrations, most of the decrease was a result of the pandemic.

These reductions are more than a failure to meet a planned inspection schedule. The statute commands that firms auditing 100 or fewer issuers be inspected at least every three years.^[15] A significant number of the non-U.S. firms that were statutorily mandated to be inspected this year were not as a result of the health crisis and the resulting inability to conduct inspections remotely in certain jurisdictions.

DRI will, therefore, need to "catch up" next year. Yet the budget maintains a staffing level unchanged from prior years, as if this "catch-up" need didn't exist. This budget, in my view, fails to take into account these unique circumstances and provide DRI with the necessary resources for 2021.

III. Adequacy of Reserves

The PCAOB is a non-profit corporation.^[16] Like other non-profit corporations, we have to manage our money, pay our bills, and compensate our employees.

The PCAOB is mostly funded from an accounting support fee assessed on public companies and broker-dealers registered with the SEC.^[17] The 2021 budget provides for five months of reserves (January – May). Due to reasons such as delayed availability of data and filings, as well as the time needed for the staff to properly calculate and allocate the assessment, our billing invoices ordinarily do not go out of the door until month four (April). A significant portion of the assessment is collected in month five (May), providing the PCAOB with the funds needed to continue operations before the reserves are depleted.

If this time frame seems exceptionally tight, that's because it is. A black or green swan event or any other development that threw off this time line could result in the PCAOB actually running out of money.^[18]

This was brought home with some force this year. The pandemic struck in March, just as the new billing cycle was gearing up. Fortunately, the extraordinary efforts by the staff ensured a successful billing and collection process.

The PCAOB may not, however, be so lucky the next time. If the IT system incurs an unexpected shutdown, it is possible that the bills would not get out. If anything impairs the ability of public companies to pay the assessments, collections could be delayed. Indeed, had the COVID-19 crisis started a bit later, the effect on billing and collections may have been far more severe.

The PCAOB's reserves are also inadequate when compared with comparable organizations. FASB apparently maintains reserves for a full year.^[19] FINRA's reserves also outpace the PCAOB's.^[20]

The PCAOB is, as a result, taking unnecessary risks by retaining reserves at these levels. This budget provided a particularly good opportunity to begin to address these risks. By the end of 2020, the PCAOB will underspend what was budgeted, in no small part due to the pandemic. The underspending could have been used to fund additional reserves without having to increase the accounting support fee assessed on public companies and broker-dealers.

IV. Budget Opacity

My final concern relates to the continued unwillingness of the Board to make the budget submitted to the SEC and the budget justification accessible to the public.

The information is useful to investors and the public. Federal independent agencies, including the SEC, disclose the information. So do state and local governments. The PCAOB, however, does not.

The PCAOB could and, in my view, is required to do so. Once the budget is approved by the Board and submitted to the SEC, SEC Rule 190 provides that the "budget and budget justification, subject to any applicable exemption under the Freedom of Information Act . . . shall be made available to the public."^[21] Instead, investors and the public will again receive a five-page, high level summary.^[22]

Anyone interested in the PCAOB's budget or budget justification will be forced to file a FOIA request with the SEC.^[23] FOIA requests are not free and agency responses take time. The Board, therefore, is causing investors and the public to undertake unnecessary costs and incur unnecessary delay in obtaining information that could simply be posted on the PCAOB's website.

As a regulator that acts in the public interest, the PCAOB can, and should, do better than this.

V. Office of the Investor Advocate and Office of Diversity and Women Inclusion

Recent efforts by the PCAOB to obtain investor and public input, particularly underrepresented segments of these communities, have been inadequate.^[24]

Advisory groups no longer meet. The PCAOB did not adequately consult with investors when making significant changes to the standard setting agenda, including dropping matters that investors asked the PCAOB to include. A majority of the Board agreed to eliminate the opportunity for public comment on amendments to the PCAOB's independence standards.^[25]

This needs to change. The PCAOB is obligated to act in the public interest. The mission is set out in the statute with unmistakable clarity.^[26] The PCAOB cannot simultaneously claim to adhere to this mission while failing to communicate with, and seek input from, investors and the public.

The rules, bylaws and other governing documents should be amended to make avenues of investor and public input a requirement rather than a choice.^[27] But that is not enough. The PCAOB needs to undertake structural changes that are adequately funded in the budget.

In addressing these concerns, the PCAOB should start with what Congress expected. Section 342 of the Dodd-Frank Act required financial regulators, including the SEC, to establish an Office of Minority and Women Inclusion.^[28] The office is responsible for all matters related to diversity in management, employment and business activities.^[29] In addition, Dodd-Frank required the SEC to set up the Office of the Investor Advocate.^[30] The Investor Advocate must have experience "in advocating for the interests of investors in securities and investor protection issues, from the perspective of investors."^[31]

Both of these offices provide models for the PCAOB to consider and implement.^[32] They are not in this budget.

VI. Conclusion

The mission of the PCAOB to promote audit quality in order to protect the interests of investors and the public remains unchanged.^[33] Fulfilling that mission means reacting to, and changing with, developments that affect audits and audit quality.

We need a budget that reflects these developments.

The budget today does not.