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SubscribeChair Williams: “Trustworthy Audit: Why Society Deserves It”
Remarks as prepared for delivery
Thank you, Dr. Anyahara for that kind introduction. Thank you to Dr. Olowo for inviting me to speak to you today and to everyone at the Financial Reporting Council of Nigeria and the Audit Committee Institute who has worked hard to make this program a success.
Before we begin, I must provide the standard disclaimer that the views I express today are my own and do not necessarily reflect the views of my fellow PCAOB Board Members or our talented and dedicated staff.
I was asked to speak today about trust, which I believe is the most valuable asset we have, because nothing is more fundamental to well-functioning capital markets.
As I reflected on where to begin this speech, I immediately thought of my grandmother.
She and my grandfather were farmers in the rural South of the United States. She kept what little money she had under her mattress because she didn’t trust it to a bank. And she certainly didn’t trust it to the stock market.
When I became the first person in my family to go to law school, I had the opportunity to specialize in securities enforcement and hold wrongdoers accountable. And that was my way of helping to bolster the integrity of, and breed confidence in, our capital markets.
Because the problem with money under the mattress is that it doesn’t grow. Building wealth requires investing.
And investing requires trust.
That is why reliable, independent audits are so important.
In the United States, the modern auditing profession was born from the need to restore trust following the major stock market crash of 1929 and the Great Depression.
Almost a century later, the role of auditors in maintaining trust and confidence in our capital markets is as important as ever.
Investors depend on auditors to apply due care and skepticism to ensure the financial statements they use to make decisions for their families and their futures are accurate.
And capital markets depend on investors.
As Paul Sarbanes, the United States Senator who helped create the PCAOB said, “Investors, after all, make the whole thing work. They’re the ones who are providing the resources so the entrepreneurial system can move forward, innovate, expand, and contribute to the strength of the economy.”
Investor confidence is essential. But it is not inevitable.
Trust must be earned.
And that is where audit oversight comes in.
Just as the modern auditing profession was born out of a need to restore trust following a crisis, so too was the PCAOB.
Before the PCAOB’s creation in 2003, the auditing profession in the United States was self-regulated.
Then in the early 2000s, accounting scandals from Enron to WorldCom sent ripple effects across the global economy.
At the turn of the century, Enron was ranked seventh on the Fortune 500. Throughout the ‘90s, it had built a reputation as a blue-chip company, admired for its innovation.
But that reputation was built on fraud. Enron was lying about its earnings, while hiding billions of dollars in bad debt. And by the fall of 2001, it all came crashing down.
After hitting a mid-2000 high of $91, Enron’s share price was all but worthless by 2001. Investors lost billions of dollars in savings, 20,000 employees lost their jobs and their retirement, and trust in our markets eroded.
Enron’s collapse was followed by the failure of its auditor, Arthur Andersen, one of the largest audit firms in the world at the time.
And Enron wasn’t alone.
In 2001, Enron’s bankruptcy was the largest in U.S. history. Just a few months later it was dwarfed by the bankruptcy of WorldCom – yet another corporation caught cooking the books and leaving destruction in the wake of its scandal.
And with each new scandal that broke, there were hardworking people, retirees and families who got hurt. Lifesavings lost. Dreams destroyed.
Investors and others began to raise serious questions about the independence and quality of public company auditing around the world.
In the United States, Congress took action to address gaps in the regulation of financial reporting and auditing to help restore confidence in our capital markets.
Led by U.S. Senator Paul Sarbanes, who I mentioned a moment ago, and U.S. House of Representatives Member Michael Oxley, both political parties and both chambers of the U.S. Congress came together to pass the Sarbanes-Oxley Act of 2002 into law with near unanimous support.
Among other things, the law we refer to today as “SOX” established the PCAOB.
For the first time, investors in U.S. markets would have an independent audit watchdog putting their interests first.
The PCAOB was given three important tools to accomplish our mission:
One, we set the standards auditors must follow when auditing companies on U.S. markets. These include auditing and attestation standards, quality control standards, ethics standards, and independence standards.
Two, we inspect registered audit firms to determine if those standards are followed. Our inspections include reviews of specific audit engagements, and they also assess the firm’s overall quality control.
And, three, we investigate and take enforcement actions where appropriate when our standards are violated.
All with the goal of protecting investors by ensuring that the information they rely on in audited financial statements is accurate.
In the more than 20 years since the PCAOB was created, we have:
Registered more than 3,900 audit firms worldwide,
Completed more than 4,940 firm inspections in 58 jurisdictions – reviewing more than 17,370 audits of public companies and more than 1,260 broker-dealer engagements, and
Issued 445 settled enforcement orders – and sanctioned more than 326 firms and 328 individuals.
And it has made a difference.
Multiple academic studies have found that PCAOB inspections improve audit quality not only in the United States, but in countries around the world where the PCAOB inspects.
Today we are focused on modernizing our standards to ensure they are best fit to protect investors from today’s risks, enhancing our inspections through increased transparency, and strengthening our enforcement.
Our markets are evolving every day. To keep investors protected in an era of rapid change, our standards must keep up.
Last year, the PCAOB took more formal actions on standard setting and rulemaking than any year in the previous 10.
Since 2022, the PCAOB has issued 10 proposals for rules and standards and adopted six.
The standards we’re working to update include everything from quality control, which sets the foundation for how audit firms perform their work to noncompliance with laws and regulations, which helps detect and prevent fraud.
Public comment is a critical part of our process. Hearing from stakeholders not only ensures we get the best possible policy outcome, it also helps build trust in the process.
In addition to the formal comment period for each new standard we propose, we also established advisory groups made up of investors, experts, and other stakeholders to ensure we are receiving input and ideas on our entire agenda.
Of course, standards on paper don’t earn trust unless they are followed in practice, which is why our inspections are so important.
Our Inspections division is the largest division at the PCAOB, because inspections are one of the most important tools we have to keep investors protected. In fact, the Division of Registration and Inspections inspects over 800 issuer audits in more than 30 jurisdictions around the world each year.
As part of our inspection process, we issue public reports.
This is particularly important over the last few years as we have seen deficiency rates in our inspections trending in the wrong direction.
Making inspection findings public puts pressure on firms to improve and arms audit committees and investors with information to demand accountability.
Transparency is an important component of trust. And we are constantly working to boost transparency in our inspection process.
Last year, we began including new information about independence and other matters in our inspection reports for the first time.
And we expanded the tools available on our website to make it easier to find and compare deficiency rates across audit firms.
Each year our inspection staff outline their priorities for that year’s inspections in a public report. This provides transparency for investors and provides firms with important insights to help them plan and perform high-quality audits investors deserve.
The priorities for 2024 include key risks such as high interest rates and other considerations, like audit areas with recurring deficiencies that auditors should be focused on when planning and performing audit procedures.
And this is just one of the many public reports PCAOB staff produce as part of their frequent communication to firms. These reports provide valuable insights about how to improve, not only highlighting key risks, but also lifting up examples of good practices to follow.
At the same time, we are focused on strong enforcement. Removing bad actors from the profession and punishing wrongdoing protects investors, promotes deterrence, and bolsters trust in the vast majority of honest auditors who are working hard to live up to the trust investors have placed in them.
Under this Board we are making sanctions count. We are expanding how we identify cases. And we are expanding the types of cases we are pursuing.
We have repeatedly broken records for monetary penalties, and we are just getting started. But monetary penalties are not the only tool we have at our disposal.
Another important way that strong enforcement protects investors is by removing bad actors from the profession, and we have not hesitated to impose bars on bad actors or revoke firms’ registrations where appropriate.
We have also required functional changes to a firm’s supervisory structure for the very first time.
And we have required firms to retain an independent monitor to drive improvements and best protect investors.
Earlier this year, we announced the largest civil money penalty in the history of the PCAOB – a $25 million fine against KPMG Netherlands for violations of PCAOB rules and quality control standards relating to exam cheating and misinforming investigators.
This historic action was taken in cooperation with our Dutch counterparts, and it provides an excellent example of how by working together, international regulators can bolster our efforts to protect investors.
The need for trust is not unique to the United States. And in a global economy, the work of protecting investors does not stop at U.S. borders.
Under U.S law, the PCAOB’s authority extends to audits of all public companies listed on U.S. exchanges and certain SEC-registered broker dealers, regardless of where the audit firm is located.
And effective oversight requires cooperation.
Since 2007, the PCAOB has entered into bilateral cooperative agreements with almost 30 jurisdictions, and, as I mentioned, we have been able to conduct inspections on a regular basis in more than 50 jurisdictions around the world, including here in Nigeria.
The importance of international cooperation is why the PCAOB brings audit officials from around the world together each year at the PCAOB International Institute on Audit Regulation.
We established the Institute in 2007 as an annual event to provide audit regulators from around the world with a forum for robust dialogue on critical, timely audit issues. Historically, a distinguished group of nearly 100 officials representing audit regulators from close to 50 jurisdictions, as well as representatives of other financial regulatory agencies and international organizations, have participated.
We were pleased that representatives from the Financial Reporting Council of Nigeria have participated in the Institute, and we hope to see you again this October in Washington, DC. And we appreciate the Financial Reporting Council of Nigeria’s efforts to improve audit quality in Nigeria.
This work is not easy. But it is worthwhile.
Trustworthy audits help give people confidence that their money is better off in the market than under the mattress.
That confidence is what powers investment and capital formation that moves our economies forward and improves the lives of the people we serve.
And that is what this work is all about. High quality, trustworthy audits matter, because quality audits protect people – from workers saving for retirement, to families investing for their futures, to businesses creating jobs because they can raise money through sound, liquid markets.
As you continue this important discussion over the next two days, I encourage you to keep the people you serve at the heart of the conversation.
Thank you again for hosting this important conversation and for inviting me to be a part of it.