Remarks as prepared for delivery
Good morning, everyone.
It’s my privilege to welcome you to our 14th International Institute on Audit Regulation, here in Washington, for the first time since 2019.
We know the pandemic continues to present challenges, particularly when it comes to travel. And we are grateful that so many of you were able to join us for this opportunity to meet and exchange ideas face-to-face.
We have nearly 80 officials from audit regulators in nearly 40 non-U.S. jurisdictions with us, as well as representatives from several international organizations.
Thank you for coming.
Before we begin, I must start with the standard disclaimer that the views that I express here are my own and not necessarily the views of the other Board Members or the PCAOB staff.
This year is special for us. Not only are we celebrating the opportunity to gather together with you again in person for the first time in three years, we are also marking 20 years since the PCAOB was created.
In the early 2000s, our markets were rocked by major accounting scandals.
From Enron to WorldCom, corporations were lying about their earnings and hiding their debt.
And when it all came crashing down, investors lost billions, workers lost jobs and retirement savings, and trust in our markets was eroded – sending ripple effects across the global economy.
A major global audit firm network collapsed, and investors and others began to raise serious questions about the independence and quality of public company auditing in the U.S. and 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 Senator Paul Sarbanes, a Democrat from Maryland, and Representative Michael Oxley, a Republican from Ohio, both parties came together to pass the Sarbanes-Oxley Act of 2002 into law with near unanimous, bipartisan support.
Among other things, the law we refer to today as “SOX” established the PCAOB.
For the first time, investors would have an independent audit watchdog putting their interests first. The PCAOB would set clear standards to uphold the integrity of public audits, inspect for compliance with those standards, and enforce them to help restore
trust in our capital markets.
Since our creation, the PCAOB has:
- Registered over 3,800 audit firms worldwide,
- Completed more than 4,300 firm inspections in 55 countries – reviewing more than 15,000 audits of public companies and over 1,000 broker-dealer engagements,
- Issued more than 330 settled orders, and
- Sanctioned more than 230 firms and 270 individuals.
But we have not done it alone.
In a global economy, the work of protecting investors in U.S. markets does not stop at our borders. Oversight of multinational companies and cross-border audits requires communication and cooperation.
And that is what brings us here over the next two days – to listen, to learn and to work together to improve audit quality and protect investors.
At the same time as the PCAOB was getting off the ground in the United States, similar oversight bodies were taking shape around the world.
In 2006, regulators from 18 jurisdictions came together in Paris to form the International Forum of Independent Audit Regulators. Today, IFIAR has grown to 54 members.
And the PCAOB has bilateral cooperative agreements with almost 30 jurisdictions around the world – many of whom are represented in this room today. We have been able to conduct inspections in over 50 jurisdictions, including joint inspections where
we work closely with our non-U.S. counterparts.
A lot has changed over the last 20 years.
Like all of you, I am looking forward to learning more from our distinguished speakers and panelists about what those changes mean for the future of auditing.
But one thing that has not changed — and will not change — is the PCAOB’s mission.
Protecting investors prompted our creation 20 years ago, and protecting investors is what continues to drive us forward today.
Reflecting on SOX in the years after it was signed, Senator Sarbanes warned: “When things get better, companies tend to forget what happened or how serious it was at the time. Trying to maintain high standards is a difficult job.”
Working together, I believe we are up to the task.
At the PCAOB, we have set forward four strategic goals to help us achieve our mission and keep investors protected:
- One: Modernizing our standards,
- Two: Enhancing our inspections,
- Three: Strengthening our enforcement, and
- Four: Improving our organizational effectiveness.
Of course, international cooperation is essential to our success.
First, let’s start with our standards.
Strong, effective standards are the foundation for quality audits. That’s why earlier this year, the Board announced one of the most ambitious standard-setting agendas in the PCAOB’s history.
Less than a year into this Board’s term, we are working actively to update more than 30 standards within 10 standard-setting projects.
As we advance our agenda, it is important for us to obtain the perspectives of all our stakeholders – both domestically and internationally.
This Friday, the Board will consider a proposal to update our quality control standards. This proposal follows a concept release that we previously issued where we described an approach similar to the approach taken by the then-proposed International
Standard on Quality Management 1, with certain differences and alternative requirements.
When developing proposed standards, we consider the IAASB’s efforts as part of our analysis.
If possible, we try to avoid unnecessary differences.
However, some differences cannot be avoided, such as those that are necessary to align with U.S. federal securities law, SEC rules, and other PCAOB standards and rules. In some cases, we may have differences to address specific emerging risks and issues
observed through our oversight activities.
It is imperative that we are mindful when there are differences and that such differences are justified and do not create unintended consequences. I encourage you all to share with us your perspectives on this quality control proposal as we continue this
very important project.
Next: inspections. Perhaps nowhere is cooperation more critical.
Each year, the PCAOB inspects approximately 250 audit firms and reviews 900 audits from across the globe.
That simply does not happen without your cooperation. Thank you for your partnership.
Our inspections team is constantly adjusting to stay responsive to new and emerging risks and issues around the world – whether it’s SPACs and de-SPAC transactions, cryptocurrencies, or how firms are addressing the effects of supply chain
disruptions and rising costs.
We look forward to learning more from you about how you are thinking about, and staying ahead of, these emerging issues and more.
We will also remain vigilant and proactive to make sure our inspectors can do their jobs properly, as mandated by U.S. law.
A major development on this front, of course, was our recently signed Statement of Protocol with the China Securities Regulatory Commission and the Ministry of Finance of the People’s Republic of China.
This is the most detailed and prescriptive agreement we have ever reached with Chinese authorities. Signing it was an historic first step. But it was only a first step.
On paper, the agreement guarantees the PCAOB the ability to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong completely.
That last word – completely – is critical because it is required by U.S. law.
In 2020, Congress passed the Holding Foreign Companies Accountable Act. That law requires our Board to determine whether it is unable to inspect or investigate registered public accounting firms located in a foreign jurisdiction, quote, “completely,”
because of a position taken by one or more authorities in that jurisdiction.
So, in September, our teams of inspectors landed in Hong Kong to begin putting our agreement to the test. They have returned home. But their work is ongoing.
As you know well, onsite work is only one part of the inspections process. And complete access means complete access throughout every step of the process – no loopholes and no exceptions.
In December, the PCAOB will make determinations whether the PRC authorities have allowed us to inspect and investigate completely or whether they have continued to obstruct.
U.S. law demands complete access. The agreement we signed with our PRC counterparts guarantees complete access. And the PCAOB will accept nothing less than complete access when we make our determinations next month.
That brings me to our third strategic goal: strengthening enforcement.
We know our standards are only as effective as our ability to enforce them. And in many cases, that requires your cooperation, because enforcement actions cross borders.
Just this year, the Board has sanctioned 11 non-U.S. audit firms and associated persons in nine jurisdictions for violations of PCAOB standards and rules.
Most of those matters involved PCAOB-registered firms located in countries where the PCAOB and the home-country audit regulator have entered into cooperative arrangements and where PCAOB enforcement staff coordinated with our non-U.S. counterparts.
We thank those regulators sincerely for working with us to protect investors.
Removing bad actors from the profession and punishing wrongdoing protects investors and promotes deterrence.
That is why this Board is approaching enforcement with renewed vigilance.
We are rethinking how we identify cases, the types of cases we pursue, and the sanctions we impose.
We’ve more than doubled the total dollar amount of penalties imposed against individuals in 2022 as compared to each of the past five years. This includes breaking the record for the largest monetary penalty ever imposed on an individual in a settled
case – twice.
At the same time, we’ve quadrupled the average penalty against firms in cases where firms fail to meet PCAOB reporting requirements. And we’ve increased the average penalties against firms in all other cases by about 50%.
In the past five years, the PCAOB assessed penalties against individuals less than half of the time and firms only about 86% of the time. This year it’s 100%.
We will continue to use every tool in our enforcement toolbox, including working cooperatively with our international counterparts.
Finally, our fourth goal is to improve organizational effectiveness.
The slowing pipeline of young people entering the audit profession impacts all of us.
We need to bring more young people into the field and expand the diversity of young people who see accounting as a potential career path.
At the PCAOB we are working to do our part through our scholarship program and other initiatives.
But we must do more. And I look forward to hearing from you about how we can collaborate on solutions and learn more about the work you are doing in this area.
Learning from each other and finding ways to strengthen cooperation and solve challenges together are what the next two days are all about.
We are grateful to you for your engagement, perspective, and dedication to improving audit quality.
Because audit quality protects people.
- Retirement savers.
- People buying a home.
- Workers getting jobs because companies can raise money to fund growth through sound, liquid capital markets.
People are the heart of everything we do.
With the people we serve in mind, over the next two days, let’s share our knowledge. Let’s highlight what’s working — and let’s focus on what’s not working too.
Let’s fulfill our purpose of communicating across borders for the benefit of investors.