Thank you, Dr. [Patricia] Wellmeyer.
I will start by providing the standard disclaimer that the views that I express here are my own and not necessarily the views of my fellow Board Members or the PCAOB’s staff.
I am delighted to be here and to have the chance to address this distinguished audience.
I’m also honored to be on an agenda with so many great speakers, starting with Commissioner Peirce.
Like all of you, I am really looking forward to Commissioner Peirce’s remarks, which are always insightful and thought-provoking.
I am not the first PCAOB Board Member to address this summit. Since this event began in 2014, several Board Members have delivered keynote remarks here, because engaging with audit committees is vital to the work we do at the PCAOB.
In fact, since 2019, the PCAOB has held conversations with more than 1,000 audit committee chairs to hear your perspectives and insights on a broad range of topics.
After all, we share a common aim – audit committees are guided by a fiduciary responsibility, and the PCAOB is guided by our mission, but our goal is the same: to protect investors.
As Senator Paul Sarbanes said shortly after he helped create the PCAOB, “If you don’t protect the interests of the investors, it deals a major blow to the workings of the economic system…Investors, after all, make the whole thing work.”
This summer marked 20 years since Senator Sarbanes joined Representative Mike Oxley and Members from across both parties to create the PCAOB.
As we think about where we are going, it’s worth reflecting on where we’ve been.
Lawmakers came together to pass the Sarbanes-Oxley Act nearly unanimously after major accounting scandals from Enron to WorldCom rocked our markets in the early 2000s.
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.
Since then, the PCAOB has:
- Registered over 3,800 audit firms,
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, and
- Issued more than 330 settled enforcement orders – and sanctioned more than 230 firms and 270 individuals.
And it has made a difference.
Multiple academic studies have found that PCAOB inspections improve audit quality, both here in the U.S. and in other countries where the PCAOB has inspection access.
We know that increasing audit quality boosts confidence in the credibility of financial reporting, which supports capital formation and is good for everyday investors.
Continuing to strengthen that credibility is a top priority for our Board as we carry out our mission to protect investors.
We understand that the integrity and success of our capital markets are not inevitable. Like the lawmakers who passed the Sarbanes-Oxley Act 20 years ago, we must continue to take action to keep investors protected today.
This summer, the Board released our five-year strategic plan, outlining four key goals:
- One, modernizing our standards,
- Two, enhancing our inspections,
- Three, strengthening our enforcement, and
- Four, improving organizational effectiveness.
First, modernizing our standards.
High 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 25 standards within eight standard-setting projects. And we are just getting started.
Number two, enhancing our inspections.
Our inspections team is constantly adjusting to be responsive to new and emerging risks across the globe – whether it’s SPACs and de-SPAC transactions, cryptocurrencies, or how firms are addressing the effects of supply chain disruptions and rising costs on company operations.
Our team likes to say, “the sun never sets on PCAOB inspections,” because each year, the PCAOB inspects approximately 250 audit firms and reviews 900 audits from across the globe.
But, for more than a decade, our access in mainland China and Hong Kong has been restricted.
In August, we took a first step toward opening up our access in mainland China and Hong Kong. I joined the China Securities Regulatory Commission and the Ministry of Finance of the People’s Republic of China (PRC) in signing the most detailed and prescriptive agreement we have ever reached.
On paper, the agreement guarantees the PCAOB complete access to inspect and investigate any firm we choose, with no loopholes and no exceptions.
Now we must find out whether what we have on paper holds up in practice.
Last month, PCAOB teams began arriving in Hong Kong where they are conducting inspections of firms headquartered in mainland China and Hong Kong and putting that agreement to the test.
By the end of this year, the PCAOB will make determinations whether the PRC authorities have allowed us to inspect and investigate completely or they have continued to obstruct our efforts.
The law demands complete access. The agreement we signed with our Chinese counterparts guarantees complete access. And the PCAOB will accept nothing less than complete access when we make those determinations.
That brings me to our third key goal: strengthening enforcement.
This Board is approaching enforcement with a renewed vigilance.
We intend to use every tool in our enforcement toolbox and impose significant sanctions, where appropriate, to ensure there are consequences for putting investors at risk and that bad actors are removed. This includes substantial monetary penalties and significant or permanent individual bars and firm registration revocations.
Working together, strong standards, inspections, and enforcement reinforce each other and help keep investors protected.
And robust communication with audit committees and other PCAOB stakeholders is critical to all three – which brings me to goal number four: improving organizational effectiveness.
We are most effective when we hear from you.
So, we are reimagining the PCAOB’s approach to stakeholder engagement.
As our first major action as a Board, we established two new advisory groups: the Investor Advisory Group and the Standards and Emerging Issues Advisory Group. Both groups bring together extraordinary experts from across the world of auditing and financial reporting, including audit committee members.
We’ve elevated the voice of investors by hiring the first-ever Investor Advocate. And we hired a stakeholder liaison specifically focused on building relationships with preparers and you, the audit committee community. His name is Todd Cranford, and I urge you to reach out to him.
Your insight enhances our understanding of the auditing and financial reporting environment and can help shape our oversight. Todd’s contact information can be found on our website, where we have an entire page dedicated to resources for audit committees.
There is no substitute for the role engaged and informed audit committees play when it comes to maintaining and improving audit quality.
You are the gatekeepers on the ground, vetting and hiring auditors, and overseeing their work.
It’s important that you engage in a robust dialogue with your auditors every step of the way, from auditor selection to completion of each audit.
And the PCAOB is here to help you be an effective voice on behalf of investors as you are having those conversations.
We recently issued a Spotlight publication specifically for audit committees, focused on questions for you to consider as you interact with your auditors. It covers everything from fraud and other risks to auditor independence, to quality control.
Our inspection reports can also serve as a valuable tool as you are evaluating your auditors and considering what questions to ask. If you see a particular firm has had deficiencies in the past, ask them what they are doing to avoid repeating those deficiencies in your audits.
At the same time, don’t limit yourselves to what is in our public reports. The law restricts what information the PCAOB can share about firms. But nothing restricts audit committees from asking for information you need to do your jobs.
Find out what your firms are doing to ensure the highest quality in your audit. How does their system of quality control work, and how do they determine that it is working effectively both at the engagement and the firm levels?
Assess your auditor’s independence carefully and regularly. Auditor independence is not only the responsibility of the auditor, but also the company. And that is where you play a vital role in helping to ensure independence both in fact and in appearance.
As you know, very few things erode trust in an audit more than impaired ethics.
Make sure your auditor’s skills, expertise, and experience are the right fit for the specific needs of your company. That starts by making sure you understand exactly what your company needs.
Get to know your company’s control environment, communication, monitoring, risk assessment, and policies and procedures. The better you understand your company’s control and compliance environment, the better you can protect the integrity of its financial disclosures.
Earlier, I mentioned our ambitious standard-setting agenda. In the coming months, we will be releasing proposals around quality control along with noncompliance with laws and regulations, or NOCLAR.
The audit profession really has a way with acronyms.
Auditors are required to assess illegal acts and notify audit committees. That puts you in a position to be an important line of defense against fraud. And robust two-way communication between you and the auditor is key.
I encourage you weigh in as our proposals are released.
Before I close, I understand we may have some accounting students participating in the Summit.
Thank you for choosing a career in accounting. You will be critical as we work to continue improving audit quality, upholding the integrity of our markets and protecting investors for the next 20 years.
As you think about where your studies will take you, I encourage you to consider public service.
I am here today as the Chair of the PCAOB just two generations away from Alabama crop farmers.
My grandmother literally kept her money under her mattress because she didn’t trust the banks, let alone the stock market.
So, when I became the first person in my family to go to law school, I chose to go into securities enforcement. I wanted to go after cheaters – because I understood that in order to help people like my grandmother and my community build wealth, we first have to build trust in the capital markets. And by holding wrongdoers accountable, I could help bolster the integrity of, and breed confidence in, the financial system.
Quality audits do the same.
Every day in your classes, I’m sure you are hit with a lot of numbers, jargon, and acronyms. That’s important. But when we cut through it, the heart of what we do is about people.
When we talk about protecting investors, we are talking about people: workers saving for retirement – maybe parents like yours saving to help with tuition – your families, your communities, and anyone who depends on the soundness of our capital markets to invest and pursue their version of the American dream.
All of those people depend on quality, accurate audits to make decisions that impact their futures.
So don’t let anyone tell you accounting is boring. It’s all about people.
Thank you again for having me here today. The PCAOB looks forward to continuing to work alongside audit committees as we protect investors and uphold the integrity of our markets.