Good morning, and welcome to Washington and the Public Company Accounting Oversight Board.
I am required, at the outset, to let you know that the views I express today are my own and do not necessarily reflect those of the Board or the staff of the PCAOB. That will also be the case with all our speakers this morning.
You will be hearing from representatives of our Office of the Chief Auditor, Division of Registration and Inspections, Division of Enforcement and Investigations, and Office of Research and Analysis, so I will be brief in my remarks and talk a little about the Board, the background relating to its establishment, and a few of my own priorities. And, time permitting, take questions.
First, let me congratulate you on your chosen field of study. I don't think there is a more important profession in our country than accounting, and Kennesaw State is known for its program, so I am truly glad that you are here to learn more about the PCAOB.
I have spent the vast majority of my career in public policy, and you, as future Certified Public Accountants have a public policy mission. And I hope you will never forget that "public" trust aspect of your profession.
According to the AICPA's 2013 Trends in the Supply of Accounting Graduates and the Demand for Public Accounting Recruits, hiring by public accounting firms is at an all-time high and the demand for accounting professionals is projected to continue to grow in the coming years, so I believe your futures are indeed extremely bright.
Regarding your future roles, you should keep in mind throughout your career that transparent, informative and accurate financial reporting is the lifeblood of the capital markets and is essential for investors to make informed decisions as to how to allocate their capital.
Without accurate and reliable corporate disclosures and financial statements—and competent auditors to audit them—our competitive free market system simply would not be able to function efficiently.
It is a fact that investors' confidence in verified, accurate corporate disclosures and financial statements reduce the cost of capital for public companies which, in turn, provides more value to investors.
Under our federal securities laws, any public company that raises money through our capital markets, or has securities listed on an exchange, must hire an independent public accountant to audit its financial statements. This gives auditors a unique franchise—and an enormous responsibility.
The Supreme Court, in United States v. Arthur Young, described that responsibility as a "public watchdog" function that "demands that the accountant maintain total independence from the client at all times and requires complete fidelity to the public trust."  It is important that you never forget that public obligation throughout your careers.
Now turning to the background and the creation of the PCAOB:
In the early 2000s, a large number of accounting scandals shook the U.S. financial markets and, for that matter, many other markets throughout the world—which resulted in the creation of this Board.
Accounting gimmickry at companies such as Enron, WorldCom, Tyco, Adelphia and Global Crossing, to name just a few, included phony earnings statements, undisclosed related party transactions and inflated revenues, all of which led to massive restatements and many failed businesses and investor losses.
This created a major crisis of confidence in our markets. Investors lost approximately $67 billion at Enron alone and more than $160 billion at WorldCom. And between April and July 2002, the stock market dropped more than 22 percent—or some 2,300 points.
At the time, I was serving as the Staff Director and Chief Counsel of the US Senate Banking, Housing and Urban Affairs Committee under Chairman Paul S. Sarbanes.
In the Senate, Chairman Sarbanes led 10 days of hearings and heard from some 40 witnesses. In the end, the Congress passed the Sarbanes-Oxley Act to reform auditing and to protect investors by improving the accuracy and reliability of corporate disclosures by a vote of 99-0 in the Senate and 423-3 in the House.
Contrary to some assertions, the Act was not crafted in a hurry. There had been decades of studies and testimony on the audit profession from which to draw, including, by way of example, the Metcalf-Moss hearings, the Cohen Commission Report, and the Treadway and O'Malley Commission studies.
Every section of the Sarbanes-Oxley Act has a foundation in the Senate and House hearing records, which cover more than 2,000 pages.
The most critical provisions of the Act ended the auditing profession's framework of self-regulation by creating the PCAOB—an independent regulatory body to oversee the profession.
The mission of the PCAOB, as spelled out clearly in Section 101 of the Act, is "to protect the interests of investors … in the preparation of informative, accurate and independent audit reports…." Basically, we at the Board work to ensure that audits are conducted properly by independent auditors.
In 2010, after the Bernie Madoff fraud was exposed, Congress added oversight of the audits of securities brokers and dealers to the PCAOB's responsibilities.
So, what exactly is the PCAOB and what do we do?
We are a District of Columbia nonprofit corporation subject to the plenary authority and oversight of the Securities and Exchange Commission.
First, we register accounting firms. Any accounting firm that wants to audit public companies or broker-dealers must register with us. At the end of April 2015, there were 2,186 firms registered with the PCAOB, including 1,284 domestic firms and 902 non-US firms located in 86 jurisdictions.
Second, we inspect the audits conducted by firms. Registered firms are subject to regular inspections by our staff. The largest firms are inspected annually while the rest are inspected on a three-year cycle. In 2014, the PCAOB inspected 219 firms that audit public companies, 57 of which were non-U.S. firms located in 23 jurisdictions, and we examined portions of more than 780 audits. We also inspected 66 firms that audit broker-dealers and looked at portions of 118 of their audits.
Third, the PCAOB sets standards for the profession's audits of public companies and other issuers—including auditing, quality control, ethics, independence and other standards. To date, the Board has adopted 18 new auditing standards, 2 new attestation standards, as well as certain ethics and independence rules.
Last, we enforce the federal securities laws related to auditing, and our rules and standards. If registered firms or associated persons violate our standards or other laws pertaining to audits, we have the authority to investigate and discipline the firm and individuals. In 2014, the Board made public 24 settled disciplinary orders with sanctions ranging from monetary penalties, to revoking a firm's registration, to barring an individual from associating with a registered firm.
We have a budget of some $250 million and a staff of more than 800.
Now turning very briefly to some of my priorities:
Since coming to the Board, my primary focus has been to promote investor protection through improving audit quality and ensuring that the investor—not management—is recognized as the primary client of the auditor.
While the phrase "independent public accountant" is used all the time, we have found that maintaining an independent state of mind from a company's management is still challenging for many auditors, given the inherent reality that the auditor is hired, paid, and evaluated by management.
The audit profession is unique in that it does not directly interface with its real client—the investor.
Many of our policy projects at the Board seek to address this issue by providing investors with more information to make smart investment decisions. These projects include, by way of example, expanding the information provided in audit reports, calling for the audit partner and other participants in the audit to be identified publicly, and identifying audit quality indicators at both the firm and engagement level so that firms compete more aggressively on the basis of quality.
Such projects are aimed, at least in part, at further focusing auditors' behavior on increasing their sense of accountability and providing greater transparency into what they do and the results of their actions.
Since the creation of the PCAOB, it is generally accepted that audit quality has improved. Nonetheless, investors tell us that they are not satisfied with the current state of audit quality. They see the rate of audit deficiencies reported by regulators from around the world and, while they are appreciative of our efforts thus far, they expect more.
In April 2015, the International Forum of Independent Audit Regulators issued its 2014 Inspection Findings Survey.  The survey, which reflects responses from 30 independent regulators, noted that the highest number of inspection findings were in the areas of fair value measurement, internal control testing, and revenue recognition. These results are consistent with the findings of our own PCAOB inspectors.
What does this tell you? There is still more work to be done to achieve high audit quality.
As future accountants and auditors, you have an opportunity to raise audit quality and to provide a public service as you fulfill your role as the watchdog envisioned by the Supreme Court and the Sarbanes-Oxley Act.
In the end, you must always protect your independence, remain professionally skeptical, and remember that there is nothing more important than preserving your integrity and character, and honoring the public trust that is bestowed upon you as public accountants.
 The AICPA's 2013 Trends in the Supply of Accounting Graduates and the Demand for Public Accounting Recruits report is located at: http://www.aicpa.org/InterestAreas/AccountingEducation/NewsAndPublications/DownloadableDocuments/2013-TrendsReport.PDF.
 United States v. Arthur Young, 465 U.S. 805, 818 (1984).
 The PCAOB's budget is located at: http://pcaobus.org/About/Ops/Documents/Fiscal%20Year%20Budgets/2015.pdf