Forum on Auditing in the Small Business Environment and on Auditing Broker-Dealers

Remarks as prepared for delivery

Good morning.

Thank you, Kent, for that introduction.

I am excited to be in the mile-high city of Denver, Colorado, and even more excited to be opening the third of the PCAOB’s forums dedicated to issues facing auditors of smaller businesses and auditors of brokers and dealers.

Today, you will hear presentations from the PCAOB’s experts:

• staff from our Office of the Chief Auditor are here to answer technical questions about the PCAOB’s audit standards.
  
• staff from our Division of Registration and Inspections are here to answer questions about registration and the inspection and remediation processes.
  
• staff from our Division of Enforcement and Investigations are here to talk about our enforcement program.
  

You will also be hearing from staff from both the United States Securities and Exchange Commission and the Financial Industry Regulatory Authority. I want to thank both for their participation.

Our hope is that this will be a day of education and engagement, that you can come to understand more deeply what the PCAOB, the SEC, and FINRA do, and we can expand our understanding of the challenges you face in the trenches.

I would like to open with a few remarks, but I must first provide the standard disclaimer that the views I express today are my own and do not necessarily reflect the views of the PCAOB, my fellow Board Members or the PCAOB staff.

The Board is conducting a number of these forums in select cities across the nation. Why?

Our capital markets are diverse, and our forums are focused on hearing from varied voices outside the Capital Beltway about the realities of audit practice.

Those markets are a place where investors and businesses can come together regardless of the size, business model, or capital needs of a company.

Whatever the stage or type of small business, it should be able to get the capital it needs to grow in a form it is willing to live with as it grows. But it cannot obtain that capital without sound financial statements.

This, of course, is where you come in. Your fundamental obligation to protect investors through the preparation of informative, accurate, and independent auditor’s reports, in the words of the recently adopted revised AS 1000, is the linchpin upon which the system rests. 

It is you who are auditing the financial statements of a startup based upon an entrepreneur’s good idea.

And it is you who are conducting audits or examinations of broker-dealers that are relied upon by the Securities and Exchange Commission in its oversight of the broker-dealer financial responsibility and customer protection requirements, including compliance with the net capital rule and required books, records and reports rules.

The 23 smaller firms attending today’s Forum audit a total of about 300 issuers and more than 250 broker-dealers. The three medium-sized firms audit approximately 310 issuers. 

Simply put, your work is vital in ensuring that the US capital markets remain the crown jewel of our financial system. And audit quality is the key to maintaining credibility and confidence in those markets.

Many of the Board’s latest rules are tailored to the characteristics of particular audit firms. For example, on Monday, the Commission approved an update to the standards that govern an audit firm’s system of quality control.

In particular, audit firms that have registered with the PCAOB but do not yet audit issuers or broker dealers are exempted from full compliance with the standard. 

Registered firms need only to design a system of quality control and are exempted from operating or monitoring its effectiveness unless and until the firm takes on an audit of an issuer or broker-dealer.

And the firm decides how to design the system to fit its size and operations. The QC objectives are the same in all cases, but one size does not fit all in building a system to implement them.

If an audit firm then decides to accept an engagement involving an audit of an issuer or an audit or examination of a broker dealer, the firm becomes subject to the requirements to operate and monitor the QC system it has designed. This means that the firm is set to meet its professional and investor protection objectives the moment it begins to perform a covered audit.

We think that strikes the right balance in assessing the risk to investors and the cost of compliance.

We want to hear from you – not just today, but as you see issues or frictions that relate to auditing oversight. Often times, you see them before we do. I hope that you will reach out to us as part of a continuing conversation about audit quality.

I want to thank each of you, in advance, for the thoughts and insights you share today.

I also want to thank our team from our Office of Communications and Engagement that has worked to make this forum a reality, and in particular, Brian Goodnough – for their work in putting this event together.