It is a genuine honor to be with you today. I want to thank Stephen Haddrill, Paul George, the U.K. delegation and the many members of the Financial Reporting Council for hosting this twelfth congregation of what is now 43 national audit regulators hailing from Europe, the Americas, Asia, Africa and the Middle East. In addition, Paul, you have my gratitude and admiration for your leadership these last two years as Chairman of IFIAR.
In addition, on behalf of my fellow board members who have joined me here — Lew Ferguson, Vice Chair of IFIAR, and Steve Harris, who chairs IFIAR's Investor Working Group — I want to thank you, Stephen and Paul, for the extraordinary partnership we have enjoyed since our first meeting. Together, in our joint inspections and our work on audit reform, we have advanced the interest of the public in global cooperation to improve the rigor of audits and cast new light into the interstices of regulatory gaps that attract fraud and self-dealing.
It is appropriate now to say that the remainder of my remarks today are my own and should not be attributed to the PCAOB as a whole or any other members or staff.
We meet in London on this occasion, not only because the FRC is a great host. As in so many other examples in history, London is a place where journeys begin.
I began a personal journey of my own, about one hundred kilometers from here, at Merton College at Oxford, where I read modern history. Under the tutelage of the late John Morris Roberts, I awoke to the value of debate in critical thought and analysis. Some of you may remember his BBC series on Western history. He was also a prolific writer.
He introduced me to a generation of historians deeply rooted in the practical details of the past — Asa Briggs, Richard Cobb, and others. They saw the big ideas that lurked in the everyday patterns of contemporary life, and drew out those grand themes to guide us forward — a difficult task. As John said, "It will always remain true that the closer we get to our own times, the harder it is to see what is the history that really matters."
John remained a lifelong friend until his death in 2003. But after my two years at Oxford, I returned to the United States to study law and specialize in corporate and securities law.
I. The History of the Corporate Form is a Story of Irrepressible Innovation to Suit the Needs and Opportunities of Investors.
But Oxford was hard to shake off. My history lessons traveled with me. One of the grand themes was an understanding of the fact that the corporate paradigm is not immutable. It lurches forward, toward a transient solution for a moment's purpose. As the moment passes, we change it to suit the next.
The modern corporation spawned from the quite basic and ancient commercial need to amass large sums to finance high-risk trading expeditions across oceans. Many such voyages, as you know, were financed by the various European states.
A. Merchant Adventurers Pooled Resources to Capitalize on State Monopolies.
Others were financed privately, by merchant adventurers or what were known as "regulated companies" that had been granted a royal or Parliamentary charter to monopolize trade. In the 14th century, England began exporting manufactured goods to Prussia, the Netherlands, and Scandinavia.
Many think of globalization as a 20th century phenomenon. But as European nations transformed from agricultural economies to mercantile and manufacturing activities, private international trade burgeoned. Thus, centuries ago, in Britain, long-distance trade became more significant economically than domestic trade.
B. Joint Stock Companies Allowed Passive Investors to Participate in Voyages and Other Ventures.
Fast forward: in the 16th century, a new corporate form emerges to conduct overseas trade — joint stock companies. This was the precursor to the modern-day public company. In regulated companies, all members enjoyed and participated in the monopoly together, but each supplied his own ships and inventory to the venture.
In joint stock companies, officers are appointed to trade on behalf of the members, some of whom, to a greater and greater extent as the centuries passed, are passive investors. Over time, investors find means to transfer shares of joint stock companies.
Again, these joint stock companies were audited by committees of shareholders.
The use of auditors was also prevalent in early America. For example, the Massachusetts Bay Company was a joint stock company chartered in 1629. Responding to an early liquidity crisis, it used an audit committee of "eight Adventurers" to "clear up the confused state of [its] accounts" after ship purchases depleted the Puritans' initial funds.
C. 19th Century European Legislation Provided for Limited Liability Partnerships, Incorporation Outside of Crown Monopolies and Transfer of Shares, and Use of Professional Auditors.
Fast forward again, and we find other countries also develop sophisticated forms for group enterprise. Notably, Napoleon's 1807 Code introduced a significant innovation by allowing limited liability partnerships. Half a century later, the UK Parliament allowed private incorporation of joint stock companies by registration — that is, without the need for a royal or Parliamentary charter — through the Joint Stock Companies Act of 1844 and the Companies Clauses Consolidation Act of 1845.
These laws provided for incorporators to appoint auditors to prepare a report for the annual general meeting of shareholders, which in those days was a meaningful part of corporate governance.
Consistent with the prior 600 years of practice, they envisioned the appointment of auditors from among the body of shareholders. They required that "every auditor shall have at least one share in the undertaking; and he shall not hold any office in the company, nor be in any other manner interested in its concerns, except as a shareholder."
Moreover, I note that the 1845 Act also required rotation of auditors, such that one member was required to go out of office after the first ordinary meeting each year, with eligibility to rotate back on the committee upon re-election.
Of relevance to our endeavors, the legislation also, for the first time, acknowledged the right of the auditing committee to employ accountants or other persons as they deemed appropriate, at company expense. Enter the professional auditing assistant, who became a popular resource nearly overnight.
These two developments — administratively-organized joint stock companies and professional experts in auditing who could vouch for agents' management of corporate funds — ushered in yet more innovations as the 19th century closed: the floating of new securities and the advent of securities markets organized for the purpose of trading shares.
Thus came the earliest of the large U.S. corporations — the Baltimore & Ohio Railroad — in the early 1820s, capitalized by Baltimore merchants eager to exploit the new technology of drawing carriages by horse over railed-roads even before steam power was fully established.
What made railroads modern businesses was the scope of their operations and the size of their capital requirements, which were far in excess of contemporary, owner-operated enterprises whose financing needs were seasonal and generally limited to loans. Like its corporate forbearers, the B&O Railroad used a committee of the merchant investors to audit the financial records on a regular basis. An annual report to investors was also required under the corporate charter.
D. The 20th Century Heralded Public Securities Markets, Multi-National Corporations, and New Audit Challenges.
On this groundwork, the 20th Century continued to build massive companies on a scale that could not have been imagined as that century began, including companies that were truly international, with operations in multiple countries.
All the corporate building blocks developed over centuries were required: skilled managers, limited liability for large populations of investors, freedom from political direction or intervention, effective engineering works and techniques scaled large for efficient production, and the means to keep the cost of finance to a minimum.
Unlike the shareholders of the past, the growing class of public investors had no realistic ability to participate in or even monitor the use of funds. As my friend Bernard Black, a prominent U.S. securities law professor, wrote —
Creating strong public securities markets is hard. That securities markets exist at all is magical, in a way. Investors pay enormous amounts of money to strangers for completely intangible rights, whose value depends entirely on the quality of information that the investors receive and on the sellers' honesty.
Professional auditors were key to helping investors separate the credible managers from the charlatans. By building confidence, auditors would reduce financing costs, and contributed to an efficient allocation of capital to fuel economic growth.
Unlike the auditors of old, modern auditors are not shareholders. They do not examine accounts to determine their own shares and profits. Rather, their independence derives from disinterest in the company's performance — both in appearance and in fact.
Historians remind us that each generation — managers, auditors, audit regulators — we are all in a sense custodians of and fiduciaries for the best ideas the past has given us. It is our job to figure out (as Edmund Burke thought) what absolutely must be kept, and what absolutely must be discarded, to preserve the former. (Here, I paraphrase, with your permission.)
I will turn back to a caution learned from professional historians. As my Oxford tutor John Roberts advised, "In deciding how to set out the story, the most dangerous, trap, potentially, [is] that of familiarity."
Since the financial reporting debacles at the turn of our 21st century, we audit regulators have had the opportunity to examine in depth the effectiveness of this external audit model for public companies.
I feel confident in saying that our work and collective findings demonstrate the need for rigorous, skeptical auditing to sustain wide-scale investment by diverse public investors. Time and time again, we see evidence that auditing makes a difference.
But we also see, as we each deepen our understanding of the various firms that intermediate our capital markets, that the competitive markets present challenges for auditors who are trained for technical excellence but are subject to pressures to compromise audit quality.
II. The Investing Public Values Audits.
In this regard, there appears to be a certain current of malaise about the auditing profession that I believe, based upon deeper examination, is misplaced. It focuses on the opinion of some that the audit is a low-value, compliance activity, made further unpleasant by the burdens of regulation and enhanced oversight. It suggests that those attitudes and burdens may repel bright minds from the profession and leave us with shrunken public markets.
The argument proves too much. We know audits are relevant, indeed critical to further economic development. It is the fact that they are so critical that, I believe, is pushing auditors to change, that is, to deepen their commitment to the investing public.
Some see venture capital and private equity as a trend that will sweep us up. They are a throwback to earlier times — co-adventurers who can fit together within the walls of a coffee house, counting house, or modern conference room to negotiate shares and profits. They are a partial solution to the problem of agency costs. But I see them as just an eddy.
We will yet see more innovation of the public company.
Fourteenth century consumers desired fine English wools, and English merchants found a way to satisfy. Twenty-first century consumers from Delphi to Delhi crave the latest smartphone, and MNCs find a way to dazzle and deliver.
The individual investors of today seek value and return as restlessly as the sponsors of early voyages of discovery.
Unlike past generations, investors now have you promoting their interests. Each of you, through IFIAR and in your home country, are engaged in intellectual inquiry about ways to improve the reliability of audits for the investing public.
Commissioner Michel Barnier and Director-General Jonathan Faull of the European Commission have initiated, in concert with the EU's 27 member states, a reexamination of the audit and its role in investor protection.
Leaders of the profession exhibit willingness to embark on initiatives such as the International Audit and Assurance Standard's Board's proposal to meet investor needs with an expanded auditor's report. I believe your interest has accelerated this process.
I applaud IFIAR members for the various, creative initiatives you have tabled at home and at past IFIAR meetings.
III. Public Investors Require New Safeguards of Auditor Independence and Stronger Ties Among Regulators to Eliminate Gaps in Auditor Oversight.
Investors have charged us to find ways to make the work of the auditor more useful to investors and to improve audit quality. This is the organizing question for IFIAR's agenda of meetings this week.
For my contribution to the week's debates, I would encourage you to devote attention to two themes to enhance investor protection: (1) the lode star of auditor independence, and (2) the benefits of deepening cooperation between and among us.
A. Auditor Independence
First, on auditor independence: We need to find appropriate structures to reinforce auditor independence. In the U.S., we are in the middle of a series of high-level public discussions on ways to enhance auditor independence, including possibly through mandatory term limits.
Could term limits release auditors from the natural incentive to do what they think may be necessary to foster and maintain long client relationships? And under what combination of circumstances? Would knowing that another auditor will follow cause the first to stand firmer?
What length of term would encourage an audit firm to plan and make appropriate investments of staff and other resources but at the same time discourage commitment to the client's success, about which the auditor should be neutral?
We have received constructive suggestions about both the merits of different approaches, as well as ways to minimize potential disruptions. Would grace periods for extenuating circumstances be appropriate? Say when there has already been a change in a key participant in financial reporting? The CEO, the CFO, the internal auditor. Or a key corporate event? A restatement, a merger, a material weakness in internal control.
Is the appropriate balance a disclosure approach, such as "tender or explain," or "if you retain you must explain"? These are all ideas put forth in our public meetings.
And how does all of this implicate audit committees and other governance constructs?
In addition, the IAASB and the PCAOB are both actively engaged in considering ways to enhance the auditor's report, to make it more relevant and useful for investors. I believe appropriate innovations in this regard could also re-orient auditors to see public investors as their client. Therefore, I see in this project independence-related benefits and seminal implications for governance and the corporate paradigm.
B. Close Cooperation Among National Regulators Better Protects Investors Everywhere
The second area I encourage you to consider is how to deepen our regulatory coordination, which I believe has delivered important investor protections already.
Many investors in the modern, multi-national corporation do not fully appreciate the fact that most multi-national audits are conducted by a consortium of affiliated firms. It is an easy fact to miss, given that it is not explained in the standard auditor's report. When one is aware, though, it is equally easy to see there are hand-off risks.
At the PCAOB, we have seen first hand the benefits of evaluating the various pieces of audits performed by different registered firms in multiple jurisdictions.
Our inspectors often see more than the principal auditor — or signing firm — does. In many cases principal auditors rely on high-level reports from subsidiary auditors. They often don't review the work papers of the other subsidiary auditors, and their own work papers don't necessarily reveal deficiencies that may exist in the work of other auditors — or even simply the principal auditor's understanding of the work of other auditors.
When our inspectors have looked directly at the work of subsidiary auditors, many times they have found problems.
These findings demonstrate why it's so important that we look at the parts of the audit performed by the principal auditor as well as the auditor of a subsidiary, wherever they are located. We are all aware of notorious examples of frauds directed by corporate headquarters but perpetrated in remote locations, beyond the expected gaze of auditors and regulators.
If we each looked only at one side of the communication between affiliated firms, we would, collectively, miss these audit errors, despite our significant, but isolated, efforts. I can say this based on our experience now that, in recent years, we have been able to inspect firms that participate in audits of U.S. public companies but are based outside the U.S.
It is an amazing feat of regulatory cooperation that, in the last few years, we have found ways to work together, to inspect the various members of the global networks of audit firms, on behalf of investors in all of our markets. Working side-by-side with many of you, we have been able to gain insights about cross-border audits that neither of us would have learned separately.
Therefore, let me conclude with this note of urgency for continuing and deepening our regulatory cooperation. I know that some had envisioned that after an initial period of trust-building, we would each go back to our national borders.
I know that coordinated inspections are attended by complicated logistics and issues of resource allocation. The more the PCAOB works with another regulator, the more we learn about how to reduce the logistical complexities and make our work together as meaningful as possible.
But now that we have found that working together is effective — that it does lead to identification of audit failures we otherwise would miss — why would we turn back ? Public expectations for regulatory cooperation will likely increase, not abate. How could we turn back?
* * *
History is made by people confronting emerging challenges with new ideas. As I said at the outset, the corporate paradigm is not immutable. Nor are the investor protections that attend it. We may pause to take a bearing. But we do not set anchor. The past yet urges us forward. It is a journey I hope we will continue together.
 John M. Roberts, Twentieth Century, xv (1999).
 The U.K. Privy Council maintains an excellent website providing background on royal charters, including a list of all charters ever granted, going back to the charter for the University of Cambridge in 1231. The website can be found at http://privycouncil.independent.gov.uk/royal-charters/chartered-bodies/.
 Ross L. Watts & Jerold L. Zimmerman, Agency Problems, Auditing, and the Theory of the Firm: Some Evidence, 26 (3) J.L. & Econ. 613, 620 (1983).
 Id. at 620-21.
 Id. at 622.
 Id. at 622.
 See Kenneth W. Dam, Equity Markets, the Corporation and Economic Development 2(Univ. of Chicago, Working Paper No. 280, rev. October 2006).
 See Watts & Zimmerman, supra note 2, at 624. The only noteworthy exception being Charles Snell, Writing Master and Accountant, of Foster Lane, London, who in 1720 was appointed to quell the investor outrage precipitated by the fraudulent South Seas Company scheme. See C. J. Hasson, The South Sea Bubble and Mr. Snell" Journal of Accountancy, 128-137 (1932). At about the same time, France experienced a similar fraud involving the Mississippi Company, which had exclusive trading rights to the French-owned Mississippi territory.
 See Frances Rose-Troup, The Massachusetts Bay Company and its Predecessors 70 (2009); see also Gary J. Previts & Barbara D. Merino, A History of Accounting in America 3-4 (1979).
 See Dam, supra note 3, at 4 ("That shareholders could not be held liable for the debts of the company was not fully established until Parliament enacted the limited liability acts of 1855 and 1856.")
 Kenneth Dam points out that under the charter system, Parliament [was] the source of the privilege of incorporation in England," which permitted "'political actors [to] manipulate the economic system to create economic rents that politicians could use to secure control of the government." Dam, supra note 3, at 3-4 (footnote omitted). He attributes "the move to free incorporation in England in 1844, calling for articles of incorporation to be issued under administrative procedures to all entrepreneurs meeting statutorily prescribed standards, [as] a major step toward a rule of law." Id. at 4 (footnote omitted).
 Id. at § 103 (Rotation of Auditors).
 Id. at § 108 (Powers of Auditors) ("It shall be lawful for the auditors to employ such accountants and other persons as they may think proper, at the expence [sic] of the company, and they shall either make a special report on the said accounts, or simply confirm the same; and such report or confirmation shall be read, together with the report of the directors, at the ordinary meeting.")
 See Watts & Zimmerman, supra note 2, at 629 ("By 1881 there was a tendency to employ professional accountants directly as auditors and that tendency appears to be connected to the floating of new securities (as would be expected if an independent audit reduces the agency costs of promoters).")
 D.L. Flesher, G.J. Previts and W. D. Samson, "Auditing in the United States, A Historical Perspective," Abacus, February,2005.
 As John Roberts described this development, "the volume of trade in manufactured goods between the advanced industrial companies was itself a symptom of another structural change, the development of truly international companies." Roberts, supra note 1, at 611.
 Bernard Black, The Legal and Institutional Preconditions for Strong Securities Markets, 48 U.C.L.A. L. Rev. 781, 782 (2001).
 Roberts, supra note 1, at xvii (1999).