Opening Remarks

Welcome and Introduction

As Chairman of the Investor Advisory Group of the Public Company Accounting Oversight Board, welcome to our second meeting.

I want to thank all of the members for participating and donating your time and expertise to this Advisory Group.

I especially want to thank Securities and Exchange Commission Chairman Schapiro for attending, and also Jim Kroeker, the Chief Accountant, and Mike Starr and Brian Croteau from the Office of Chief Accountant.

Chairman Schapiro — We all know how valuable your time is and your presence today means a tremendous amount to us. I know you will only be able to stay until 11:15 a.m., but the fact that you would take time out to attend today's meeting in order to hear directly from this Advisory Group is a reminder that protecting the interests of investors is at the heart of everything the SEC and the PCAOB do.

I also know that you have already testified six times before Congress this year, including: yesterday before the House Appropriations Committee on the SEC budget, twice last week, and three other times since mid-February.

And, we know that the Dodd-Frank Act mandates over 100 rulemakings and requires you to conduct over 20 studies.

So, once again, thank you for coming and for your leadership of the SEC during these highly challenging times.

Achieving the best results for investors often requires that the Board work closely with the Commission, and particularly with Jim Kroeker and his office, and we appreciate the cooperative relationship that has developed between our two organizations.

Our Mandate

The auditors regulated by the Board have a clear mandate to protect investors, which comes from the statutory franchise granted by Congress to the accounting profession in the 1930s to audit the financial statements of U.S. publicly traded companies. The U.S. Supreme Court reminded auditors that this "‘public watchdog' function demands that … [they] maintain total independence from the client at all times and requires complete fidelity to the public trust."[1] (Emphasis added). And I would stress that those words, "total independence" come directly from the Supreme Court.

The Board, in turn, has an equally clear mandate, which is stated in the very first words of the Sarbanes-Oxley Act of 2002: "An Act to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws …". And the very first section of Title I of that Act states that there "is established the Public Company Accounting Oversight Board to oversee the audit of companies … to protect the interest of investors … in the preparation of informative, accurate and independent audit reports … ." (Emphasis added).

So, hearing from this group and other investor representatives is vital to the Board and to the auditing profession successfully fulfilling its statutory mandates.

In my opinion, Chairman Schapiro, you foresaw much of what is on our agenda today in your speech before the American Institute of Certified Public Accountants last year, on Dec. 6, 2010, when you not only recognized the critical role played by accountants in our capital markets, but you also queried whether "… questions could have been asked early on by preparers and auditors, or if warning flags were simply ignored. We wonder if the eventual losses to shareholders and investors were multiplied many times because material information was not made available in a timely fashion by people who should have been able to produce accurate disclosures."

Our Investor Advisory Group will be discussing those issues, among others, today.

Before turning to the schedule, I would like to recognize at the outset, our new Chairman, Jim Doty and then, you, Chairman Schapiro, for any brief remarks you each would like to make. And then I will recognize our former Acting Chairman Dan Goelzer and our other new Board members, Lew Ferguson and Jay Hanson. Afterwards, I would like all members at the table to introduce themselves, and then we will get on with the day's program.

Previous Recommendations

Since the last Investor Advisory Group meeting on May 4, 2010, under the leadership of Acting Chairman Dan Goelzer, the Board has taken up, in close coordination with the SEC, a number of the recommendations made by this group at that time.

You asked that the Board redouble its efforts to obtain access to foreign registered accounting firms for the purpose of conducting inspections and, in January, our efforts resulted in a cooperative agreement with the United Kingdom.

You also asked the Board to consider providing investors with the names of issuer clients of PCAOB-registered firms in jurisdictions where the PCAOB is denied access to conduct inspections and, on May 18, 2010, the PCAOB published such a list on its Web site.

You wanted the Board to issue timely guidance on "hot issues" for auditors and boards of directors and, since the May meeting, the Board and its staff have published two Staff Audit Practice Alerts — one on the principal auditor's use of the work of foreign auditors, particularly in the China region, and one on the audit implications of breakdowns in the mortgage foreclosure process. In addition, the Board adopted eight new auditing standards, proposed an additional auditing standard, issued a concept release on the "failure to supervise" provision of the Sarbanes-Oxley Act, and proposed two rules related to our new authority over audits of brokers and dealers.

You asked that the Board study and report on lessons learned from the financial crisis, and in September of last year, we published such a report (Report on Observations of PCAOB Inspectors Related To Audit Risk Areas Affected by the Economic Crisis ). We will continue that discussion today.

In addition, you asked us to consider whether there should be changes to the auditor's report and, under Dan's leadership and that of our Chief Auditor, Marty Baumann, we have begun that effort in earnest. In fact, as shown in the Standard-Setting Agenda found on our Web site, Marty and his staff are planning to update the Board on the results of their research by the end of this month, issue a concept release for public comment sometime during the second quarter, hold a roundtable during the third quarter, and issue a proposed standard during the first quarter of 2012.

So, clearly the recommendations of this Investor Advisory Group have made a difference and helped the Board to establish its priorities.

That is also why the specific topics that will be discussed today have been identified by the Advisory Group members rather than by the PCAOB. These topics go directly to maintaining investor confidence in the reports issued by PCAOB-registered auditors and we will be considering them in the following order:

First, the "Auditor's Report and the Role of the Auditor."

Second, "Lessons Learned from the Financial Crisis."

And, third, "The Global Networks and Audit Firm Governance."

These issues are particularly topical in light of the current debate taking place internationally. The current debate started in 2008 with the deliberations and recommendations of the U.S. Treasury Advisory Committee on the Auditing Profession, with many of the issues being carried into subsequent studies and reports, such as the European Commission's Green Paper and the Financial Reporting Council's report on enhancing corporate reporting and audits.

What virtually all parties to the debate agree upon is that "the status quo is not an option" for the auditing world. These exact words, "the status quo is not an option," have been used both by leaders of the accounting and audit profession here in the United States, and by Michel Barnier, the Commissioner for Internal Market and Services at the European Commission.

Presentations and Discussions

Each discussion today will begin with a presentation by the working group that has been researching and considering that topic. After the presentation, the working group will lead a discussion among all Investor Advisory Group members.

As I mentioned, unlike Board meetings with other advisory groups, this group developed these discussion topics, not the PCAOB staff, and, as such, the members will present each topic.

At the end of the day, there will be an opportunity for each Investor Advisory Group member to bring up additional topics or issues that were not discussed during one of the day's panels.

Also, I would like to note that today's meeting is being Webcast. This meeting is open to the public and information connected with the presentations will be posted on the PCAOB Web site.

Finally, the standard PCAOB disclaimers apply, that anything that anyone from the Board may say today will be the views of the speaker and not necessarily reflect the views of the Board or its staff.

The Auditor's Report and the Role of the Auditor

Now, our first presentation relates to possible revisions to the auditor's report and an examination of the role of the auditor in today's securities markets. The working group looking at these issues is led by Professor Joe Carcello and includes Brandon Becker, Norman Harrison, Pete Nachtwey, Gus Sauter, and Ann Yerger. Others participating with this group include Anne Simpson, Bonnie Hill and Mike Head.

While Pete, Bonnie, and Mike could not be here, it is my understanding that their views and those of Eric Vincent are incorporated in Joe's presentation.

Lessons Learned for the Financial Crisis

Our next presentation is by the working group that has been examining the lessons for the auditing profession that may be learned from the recent financial crisis. The working group has been led by Barbara Roper and includes Anne Simpson, Tony Sondhi, Damon Silvers and Michael Head. I understand that Brandon Becker and Peter Nachtwey also have made contributions to the presentation.

When the Investor Advisory Group discussed this topic at its last meeting, it was combined with a discussion of the possible creation of an "Anti-Fraud Center" at the PCAOB. Some members suggested that such a Center could examine not only instances of possible fraud but also systemic risks to financial reporting beyond fraud. The Center then could publish information, in an anonymized form, that might assist auditors and others to look forward to find where the next fraud or significant market event might occur. The Board is continuing to consider the formation of such a Center.

The Global Networks and Audit Firm Communication

Our third presentation and discussion today expands the discussion to include the global networks and audit firm governance.

Shortly after arriving at the PCAOB, I was struck by a statement I read by the then head of the International Forum of Independent Audit Regulators, Paul Boyle. Discussing the audit regulatory environment, he said, "The first regulatory gap is that the firms which manage the international audit networks are currently not subject to regulation or oversight. As a first step we should consider improving our knowledge of the structure, operations and governance of the networks."

Ever since, I have shared Mr. Boyle's concerns about this issue. In light of the fact that the largest public accounting firms (including their foreign affiliates) audit the vast majority of the global market capitalization, the influence over the audit process asserted by those running their international networks is clearly important to the smooth functioning of the world's capital markets. While, as regulators representing sovereign nations we certainly have the power and the right to disagree, it would seem that we have the common goal of high quality audits performed by independent and competent professionals for the benefit of investors. That common goal should allow us to come together to close this regulatory gap and resolve inspection and other issues.

Lynn Turner has been leading the working group looking at measures that would provide a minimum level of worldwide audit quality, and how regulators across the globe can come together to improve and monitor international firms' performance. With Lynn on the working group are Stanley Sporkin, Bob Tarola, Meredith Williams, Kelvin Blake, and Bonnie Hill.

Closing

To wrap up, I would like to thank all of you again for donating your time and expertise to help the Board better understand investors' points of view.

I would especially like to thank Joanne O'Rourke Hindman who has been invaluable in helping us on all aspects of today's meeting, both substantively and organizationally.

As I have said before, I believe that both the auditing profession and the Board are here to serve investors.

This morning I mentioned some of the things the Board has done that address the recommendations you made last May, but obviously, much more remains to be done. The one thing that most people seem to agree on is that "the status quo is not an option."

Maybe the best way to summarize this morning's discussion is with the question that, last May, Lynn Turner told us Warren Buffett used to ask when he was on a company's audit committee: "What is it that the auditors know that, if they were investing in this company, they, as investors, would want to know and have out there publicly?"

We have gone over the lessons we can learn from the recent financial crisis, discussed what auditors do and how they communicate their opinions, and the effects of firm governance and the global networks on auditor performance.

I am particularly interested in ways the PCAOB can:

• Improve auditor objectivity
• Improve and boost the transparency of auditor skepticism
• Monitor conflicts of interest, and
• Police auditor independence

I expect that under Chairman Doty's leadership the Board will be following up on what we have heard today.

I look forward to giving you another progress report when we next convene.

Thank you again. Safe travels.

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