FY 2011 PCAOB Budget

The proposed 2011 budget would, if approved by the SEC, authorize the Board to spend $204.4 million next year. That would be an increase of about $21.1 million, or 11 percent, from the 2010 budget. Staffing would increase from 636 at the end of 2010 to 717 at the end of 2011.

As in past years, the largest non-administrative components of the 2011 budget are Inspections and Enforcement. The Board devotes the bulk of its resources to conducting inspections of the registered public accounting firms — both domestic and foreign — that audit U.S. publicly-traded companies. Approximately $91.7 million, or 45 percent, of the 2011 budget will be used to fund the Division of Inspections and Registration. A considerable portion of the resources of several other units — such as the Office of Research and Analysis, the Office of Information Technology, and the Office of International Affairs — directly support the inspections program. With respect to Enforcement, about $17.5 million, or 9 percent, of the 2011 budget would be allocated directly to the Division of Investigations and Enforcement.

I want to highlight three primary reasons for the growth in the 2011 budget.

The first — and largest — driver of the 2011 budget increase is that the Board has been directed by Congress to take on substantial new responsibilities. More than half of the projected 2011 headcount increase, or 49 additional staff, will be devoted to implementation of the provisions of the Dodd-Frank Act that require the Board to inspect, set auditing standards for, and apply enforcement resources to, the auditors of SEC-registered securities broker-dealers. There are over 5,400 SEC-registered broker-dealers. In excess of 500 accounting firms audit these entities. While the Board may ultimately conclude that the auditors of some categories of brokerage firms should be exempted from oversight, creating a program to oversee broker-dealer audits will be a major undertaking and will require significant resources.

The second 2011 budget driver relates to inspections methodology. Based in part on recommendations by the Commission's staff and in part on our own evolving experience, the Board has adopted enhanced requirements for performing and documenting its inspections work. Implementation of these enhancements began this year, and the new procedures will be fully in effect during 2011. While these changes strengthen the program, they have a significant impact on the resources consumed by each inspection, particularly those of the largest firms. This, in turn, has placed considerable stress on Inspections staffing and scheduling. The 2011 budget contains 15 positions to increase Inspections staffing in light of these factors.

A third 2011 budget driver is increasing workload in the Enforcement program. The Division of Enforcement has a full docket of investigations, and a significant number of those investigations are likely to lead to charges against firms or individual auditors. The Division expects that many of these cases will be litigated. The 2011 budget provides for 7 additional enforcement staff members to handle that workload.

The Board also faces significant uncertainties that are not fully reflected in the 2011 budget. First, the budget assumes that the Board will conduct 43 non-U.S. inspections in 2011 — considerably fewer than the 109 that are required under the Board's rules. The obstacles that we face in conducting required inspections in certain foreign jurisdictions are well-known. If — as I very much hope will be the case — we are able to reach agreement with additional foreign oversight authorities, we will need additional resources to fully fund the foreign inspections program.

A second uncertainty relates to our ability to retain and hire the experienced staff of auditing professionals that is essential to the success of our inspections program. The budget envisions a net increase of 56 in the inspections staff. Based on past experience, recruiting 56 additional inspectors, in addition to replacing staff lost through attrition, will severely test our ability to hire in the competitive market for veteran public company and broker-dealer auditors. On the other hand, there are some indications that our recruiting pipeline is opening up, and that we may be able to hire more inspectors than previously projected. During the next several months, we should be able to develop a better sense of our 2011 hiring prospects.

Because of these uncertainties, the Board contemplates asking the SEC to permit us to create a modest contingency reserve. Under that approach, the Board would collect somewhat more than its budgeted 2011 spending. In the event that resource needs for which we have not budgeted materialize, the Board would then ask the Commission, through the vehicle of a supplemental budget request, for authority to tap the reserve. I believe that the concept of a contingency reserve would be particularly appropriate in 2011, in light of the uncertainties currently surrounding the level of our foreign inspections activity. The Board intends to assess what the situation is with respect to foreign inspections, and with respect to the hiring market, early next year and, as appropriate, to ask the Commission to adjust the 2011 accounting support fee to fund such a reserve.

Finally, I want to comment about the way the accounting support fee will be set in 2011. Since the Board's inception, pursuant to the Sarbanes-Oxley Act, each year our budget, after approval by the SEC, has been allocated among U.S. public companies in proportion to market capitalization. This year, that will change. In light of the Board's new responsibilities to oversee the auditors of broker-dealers, the Dodd-Frank Act provided that the costs of running the PCAOB should be shared by public companies and by SEC-registered securities broker-dealers. To implement that provision, we have made an estimate of the portion of our 2011 costs that will be related to oversight of broker-dealer audits. The costs of the broker-dealer oversight program will be assessed against brokerage firms in proportion to their net capital. The costs associated with the oversight of issuer audits will be assessed against public companies, in proportion to their market capitalization, as in the past.

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I want to conclude by thanking all of the staff members that were involved in preparing the 2011 budget. Each office and division plays a role, and it is not possible to single out everyone who made a significant contribution. I would, however, like to particularly thank Darrell Pauley, the Board's Chief Administrative Officer, for his thoughtful oversight, Bill Wiggins, Deputy Chief Administrative Officer, and all of the members of the budget staff, especially Yoss Missaghian and Lily Lin, for the hard work they have put in to the 2011 budget. I would also like to recognize the role of the SEC staff, which devoted many hours to reviewing and commenting on this budget. I appreciate their help and their support for the Board's mission.