Remarks as prepared for delivery
Thank you, [Barbara Vanich]. And thank you to everyone participating today, both here with us in this room and virtually. It is good to be back together.
Before we begin, I want to provide the usual disclaimer that the views that I express today are my own and do not necessarily reflect the views of my fellow Board Members or our talented and dedicated staff.
Since we last met, our dedicated PCAOB teams have been hard at work continuing to further our key goals of modernizing our standards, enhancing our inspections, and strengthening our enforcement.
You will hear more about our progress on modernizing our standards in a moment from Barb and her team.
Thanks to their hard work, earlier this week, we proposed amendments to give auditors additional direction addressing specific aspects of designing and performing audit procedures that involve technology-assisted analysis of information in electronic form.
The use of technology by auditors and financial statement preparers never stops evolving, and PCAOB standards must keep up to fulfill our mission to protect investors.
This week’s proposal is informed by our research project on technology. That project remains active, and insights from it may give rise to new standard-setting projects while also informing the scope or nature of our other standard-setting and rulemaking projects.
Earlier this month, we proposed for comment a new standard on noncompliance with laws and regulations, or NOCLAR.
When sanctions, fines, and civil settlements directly affect a company’s bottom line, or reputational damage causes a company’s stock value to decline, investors pay a price.
And the proposed new standard aims to better protect investors by strengthening the requirements for auditors to identify, evaluate, and communicate information that may indicate a company’s noncompliance with laws and regulations.
In March, we issued proposed changes to modernize a suite of standards that address core auditing principles and responsibilities, including reasonable assurance, professional judgment, due professional care, and professional skepticism, known as AS 1000. The proposed changes will center investors by making clear that auditors have a fundamental obligation to protect them.
Your feedback will be vital as we continue, and we look forward to hearing from you on all of our proposed standards.
As much progress as we are making on standards, there is still much work ahead of us. In May we updated our agenda, moving important projects up to the short-term agenda, including Firm and Engagement Performance Metrics and adding new projects, including several rulemaking projects, which Barb and her team will cover in more detail in a moment.
At the same time, [George R. Botic] and his team in inspections have also been hard at work. Our teams inspect roughly 800 audits in more than 30 jurisdictions around the world each year.
Last year we expanded the PCAOB’s reach even further by securing access to inspect completely in China for the first time in history.
In May, we released the inspection reports for a firm located in mainland China and another firm headquartered in Hong Kong, which were both inspected in 2022.
The deficiencies we found are unacceptable. And we are using every tool we have to hold the firms accountable for fixing them, including shining a light through our public reports and referring inspection findings to our enforcement team where appropriate. If enforcement violations are found, we will not hesitate to order sanctions, including imposing significant money penalties and barring bad actors from performing future audits.
The fact that our inspectors found these deficiencies is a sign that the inspection process worked as it is supposed to.
Of course, last year was only the beginning of our work. Firms in China and Hong Kong will be inspected on a regular basis going forward.
Inspectors have begun fieldwork for China and Hong Kong firms for 2023’s inspections. We anticipate fieldwork will continue off and on throughout most of the year, which is common practice for inspections such as these in jurisdictions around the world.
The two firms we inspected in 2022 audited 40% of the total market share of U.S.-listed companies audited by Hong Kong and mainland China firms, and we are on track to hit 99% of the total market share by the end of this year.
We are continuing to demand complete access with no loopholes and no exceptions. Should People’s Republic of China (PRC) authorities obstruct or otherwise fail to facilitate the PCAOB’s access – in any way and at any time – the Board will act immediately to consider the need to issue a new determination.
In May, we announced enhancements to make our inspection reports more transparent with a new section on auditor independence and a range of other improvements to make more relevant, reliable, and useful information available for investors and other stakeholders.
This was just a first step, not a final step. We are continuing to look for more ways we can expand the information available in our reports.
Many of you have also heard me speak about a troubling trend in audit quality as our inspectors have found an increased number of Part I.A deficiencies.
A third of the audits we inspected in 2021 had deficiencies of such significance that PCAOB staff believe the audit firm failed to obtain sufficient appropriate audit evidence to support its opinion on the public company’s financial statements or internal control over financial reporting.
In December, I challenged auditors to sharpen their focus and prioritize their efforts to increase audit quality and ensure investors are protected. And the PCAOB is working to continue holding firms accountable for improving audit quality by modernizing our standards, enhancing our inspections, and strengthening our enforcement.
In April, George and his team released a Spotlight outlining their inspection priorities for this year, and it tackles the challenges we are seeing to audit quality head on.
Our inspection priorities are designed to stay ahead of new and emerging risks, hold firms accountable, and drive improvements in audit quality for investors.
That includes increasing the focus on fraud-related audit procedures, continuing to prioritize risks related to material digital assets – also known as cryptocurrency – and continuing to select audits in the financial services sector for inspection.
Of course, these are just some of our priorities. Our Spotlight publications related to our oversight activities include much more information along with helpful reminders for auditors.
Earlier this month, the inspection staff released a Spotlight related to audit procedures performed related to crypto assets that are material to the financial statements. The Spotlight addressed inspection observations, good practices, and reminders for auditors when auditing crypto assets.
And just last week, the inspection staff released another Spotlight with helpful questions for audit committees to consider as they carry out their oversight and engage in steady dialogue with auditors throughout the audit.
Finally, as you know, this Board has committed to strengthening enforcement so that bad actors know there will be consequences for anyone who puts investors at risk.
Last year, we imposed the highest penalties ever, and we doubled the number of enforcement orders from the previous year. In March, we were proud to announce Bob Rice has joined us as our new head of enforcement. And just last week, we announced another record-breaking sanction with the largest ever penalty imposed on a non-affiliate firm.
Bob has more than 30 years of white-collar litigation and investigations experience, including in the private sector, and a long history of public service in government. He has hit the ground running, and his decades of experience holding wrongdoers accountable are already proving invaluable to our continued efforts to keep investors protected.
Thank you all for being here and for all time and hard work you dedicate to the SEIAG.
Now I would like to turn the floor back over to Barb to get us started on today’s agenda.