PCAOB Transitions for the Future

It's a pleasure to be here today. As I begin my tenure as Chairman of the PCAOB, I look forward to finding opportunities, such as this, to engage with our key constituents, including investors, public companies, audit committee members, auditors, and academics, just to name a few.

We all share many common interests, not the least of which is to identify and pursue efficient and effective means to promote audit quality, with the goal of advancing investor protection and well-functioning capital markets.

In discharging our diverse roles in pursuit of that goal, it's imperative that we maintain an active dialogue and collaborate on issues of shared importance. I understand this symposium has a rich history of promoting exactly that type of conversation and I'm grateful to our hosts at KU for inviting me to participate.[1]

I. Introduction

This is an interesting time to lead the Public Company Accounting Oversight Board. Not since the PCAOB was first founded in 2003, following the passage of the Sarbanes-Oxley Act, have five new Board members joined the organization at roughly the same time. With such a significant change in the Board's composition, comes a significant opportunity — a chance to reflect on lessons learned, to innovate, and ultimately to improve how we approach our oversight of the auditing profession in an increasingly dynamic environment.

I had the pleasure of joining the Board in January, along with my fellow Board member Kathleen Hamm. In February, Jay Brown joined, and Jim Kaiser followed in March. Finally, early last month, our last Board member, Duane DesParte, arrived on board.

I hope that it is apparent that Chairman Jay Clayton at the U.S. Securities and Exchange Commission and his fellow Commissioners brought together a diverse set of talented and dedicated individuals. Each of my fellow Board members brings a wealth of relevant experience and skills to the Board.

Collectively, their backgrounds span the entire spectrum of the financial reporting process and include investor-related, public company, auditor, academic, and board experience. In the short time we have worked together, I have developed tremendous respect for their expertise, valuable insights, and collaborative approach.

I look forward to working closely with each of them over the next several years. Together, we are deeply committed to promoting audit quality and, in so doing, to protecting investors and furthering the public interest in the preparation of informative, accurate, and independent audit reports.

During the initial stages of this transition, we have focused on carrying out the PCAOB's day-to-day oversight responsibilities — with respect to inspections, standard setting, enforcement, and economic and risk analysis.

While the continuity of the PCAOB's core activities remains one of our highest priorities, we are focused simultaneously on defining the key pillars of the Board's vision, strategy, and operational plans for the next five years.

I will spend my time this morning discussing our approach to developing our vision and strategy. I'll then address some of the questions we, as Board members, have been asking ourselves since we joined, with particular focus on how we can best achieve our statutory mission. At the conclusion of my remarks, I'll be happy to address any questions you may have.

II. Strategic Planning Process

Let me begin with the PCAOB's strategic planning process for 2019. First, let me provide some historical context. Each year since 2007, the PCAOB has drafted a strategic plan with a five-year outlook. Traditionally, that plan has been developed — and updated — through an inward-facing process, based primarily on input from the top leadership of the organization.

Like most strategic plans, those plans generally did not change materially from year-to-year, except as necessary to adapt to changes in the external environment and the emergence of new opportunities and threats.

While that approach has served the PCAOB in the past, it's appropriate to take a step back and reflect more broadly on the PCAOB's journey since 2003. Without question, audit quality has significantly improved since that journey began, and the PCAOB has contributed to that progress in various ways, even if we have not clearly articulated the causal relationships.

The organization, however, is no longer in its infancy. We have reached a relative state of maturity. With that maturity comes an opportunity to consider where the journey has taken the organization and where the PCAOB should be headed in the future.

As an organization, we cannot simply stand on our prior successes and assume success will continue to come. We must, instead, take to heart lessons learned over the past 15 years and set a clear vision to guide us towards sustained success in the years to come.

Therefore, our approach to strategic planning for 2019 has differed substantially from our prior approach. Let me highlight a few of the most significant changes to our planning process.

Most notably, the Board has decided to reach beyond our own four walls for input into what strategic direction we should take to improve audit quality. We believe consistent and meaningful engagement with key constituencies is critical to effectively shaping our future direction.

We've used two primary means to reach out. First, over the last month, we've hosted, through an outside consultant, a survey seeking public input into our strategic priorities. That survey closed this past Tuesday.

Although we've not yet seen the full results of that survey, we received an overwhelming response. Hundreds have weighed in, including dozens of investors, public company management representatives, audit committee members and directors, academics, foreign audit regulators, and auditors.

I've been told preliminarily that the responses reveal thoughtful consideration of the current state of audit quality, the rapidly changing environment in which the profession operates, and the need for the PCAOB to improve our approach to driving continued improvement in audit quality.

The second means we have used to engage external parties is through a series of one-on-one facilitated interviews. Our outside consultant has conducted approximately three dozen interviews of key constituents, again including investors, academics, regulators, public company interest groups, and audit firms.

Like the public survey, those interviews have provided a wealth of thoughtful ideas for us to consider. As a Board, we welcome and embrace this feedback — and we encourage interested parties to continue to share their feedback in the future.

We believe that we have much to learn from those who are dedicated, like us, to improving the state of audit quality for the benefit of the investing community.

Our efforts have not been directed entirely externally, however. To the contrary, we've also reached deeper into our own organization than we have ever done before. Rather than focusing exclusively on input from our senior leadership team, we've asked every member of the PCAOB staff to weigh in on our path forward.

Tapping into our entire workforce — with its incredible talent, diversity of backgrounds and experience, and firsthand work in the audit quality trenches — has provided incredible insight. Our employees are not shy about sharing their ideas, and we are not — and cannot be — afraid to listen to them.

As a Board, we are carefully studying the fruits of these efforts as we define our key priorities for the coming years. Ultimately, we expect our planning process to yield a strategic plan that will articulate the Board's vision for the organization and the strategic goals and specific objectives we will pursue.

We also anticipate the process will identify key performance measures by which we can judge our progress in fulfilling our mission and vision and accomplishing our identified strategic goals and objectives.

We expect to complete a draft of our 2019 strategic plan by the end of July. At that time, we intend to publish the draft for public review and comment, reflecting an additional innovation in our planning process. After considering any input received, we will finalize our plan in November, alongside our final budget for 2019.

III. Core Values

Although our planning process remains very much an active one, some elements are coming into focus. In particular, we have preliminarily identified five core values that will define our ability to successfully achieve our mission: integrity, excellence, effectiveness, collaboration, and accountability.

These values represent the fundamental beliefs we want our organization to embrace and will serve as the key principles that guide our actions and our decision-making.

A. Integrity

Foremost among our values is integrity. Our conduct as an organization and as individuals must be above reproach at all times. We must adhere to the highest standards of ethical and professional conduct in everything we do. We, in turn, will expect the same from the profession we oversee. Investors demand it and are entitled to it.

B. Excellence

Second, we must embrace excellence in pursuit of our mission. We cannot settle for doing things as we've always done them. Instead, we must be a leader and promote positive and effective change. That begins with how we operate and how we deploy our talented workforce — whether it be with respect to inspections, standard setting, enforcement, or economic and risk analysis.

This is an exciting time for the auditing profession, which, as everyone here appreciates, sits on the precipice of substantial change. Innovations in data, analytics, and technology unquestionably will disrupt the profession over the coming years. These disruptions will change not only how audits are conducted, but also the business and staffing models of audit firms. As an organization, we must not stand in the way of these coming innovations. We must, instead, foster them and focus our efforts on ensuring that they advance audit quality and thus promote the efficiency of our capital markets.

C. Effectiveness

Third, we must be effective. As we develop and refine our regulatory approach, we must consistently target the most effective and efficient means to achieve our mission. That means that we not only use our own resources effectively, but also that we pursue policies that are responsive to the changing environment and that are developed only after the careful weighing of all relevant costs and benefits. We must carefully consider relevant research of all types, and use evidence-based principles to inform our decision-making. In other words, we must leverage our strong economic and risk analysis capabilities to facilitate effective policy making.

D. Collaboration

Fourth, we must embrace collaboration. Our work environment within the PCAOB must be based on a culture of openness, trust, and respect. We must break down internal silos and barriers and listen to the best ideas, from wherever they arise. Those same ideals must also translate to how we engage with those outside of our organization. Our engagement with all of our constituents — including with investors, academia, audit committees, and audit firms alike — must be consistent and based on principles of appropriate transparency, impartiality, and fairness.

E. Accountability

Finally, we must be accountable. That means we intend to be a results-oriented organization, always seeking opportunities to advance audit quality for the benefit of investors and readjusting our approach as necessary.

We likewise embrace transparency, as transparency reinforces our accountability. Therefore, we are committed to removing and preventing barriers to effective communication and to enhancing our accessibility to those outside of our organization.

While we are committed to holding ourselves accountable, we must demand the same from the profession we oversee. We expect registered audit firms to comply with our rules and standards and we will not hesitate to hold them accountable when their actions require it, whether through our inspections program or our enforcement efforts.

IV. Organizational Assessment

With the backdrop of those values, let me turn to some of the Board's ongoing activities. In connection with our strategic planning process, the Board has undertaken a comprehensive organizational assessment.

In performing that assessment, we have paid particular attention to identifying what we do well and what we need to do better to accomplish our mission. Our evaluation is currently ongoing and, while we expect it will continue for some time, we've reached several conclusions as a result of our process to date.

First, although the PCAOB is no longer a nascent organization, many of our operations and programs maintain their original design. It is time we give them a fresh look to consider whether their design continues to meet our needs in a rapidly changing environment and to support us in achieving our mission.

Second, substantial opportunities exist for us to improve our policy making and our external engagement. Based on our initial internal and external outreach, it appears that much of our workforce and many of you perceive similar opportunities. We look forward to defining the contours of changes that are responsive to what we've learned.

In reflecting on our programs and operations, we've focused on asking ourselves difficult questions that challenge our current thinking and approach. We must be willing to adapt and evolve based on facts as they exist today. I'd like to share a few of the questions that we, as a Board, are wrestling with at present.

In asking ourselves these questions, we may find that the answers take us down entirely new paths or that, in some cases, they instead confirm our past practices. Successfully achieving our mission, however, requires not only that we ask them, but that we also institutionalize a culture of self-examination.

I'll begin with questions focused on our inspections process, our most visible external activity. Through the 2017 inspection cycle, the PCAOB has conducted more than 3,500 inspections of PCAOB-registered audit firms. Our inspectors have looked at significant portions of more than 13,000 public company and broker-dealer audit engagements. That work has yielded a significant amount of data for analysis, as well as a wealth of lessons learned.

It has given us deep insight into the progression of audit quality over the last 15 years. And quality has, without a doubt, improved significantly as a result of our inspections process. My predecessors and the staff at the PCAOB — as well as many others in and around the profession — deserve credit for those meaningful improvements.

Notwithstanding these improvements, however, many firms appear to have "plateaued" in their progress toward achieving improved inspection results. Therefore, now is an excellent time for us to consider the potential reasons for those plateaus, including considering the continuing effectiveness of our current inspection approach in driving further improvement in audit quality.

We are asking ourselves questions such as:

  • Are there targeted actions we can take in our inspection approach to drive improvements in specific areas of continuing concern?
  • Can we more effectively integrate research from our economic and risk analysis efforts in shaping our inspection priorities and approach?
  • Can we more effectively leverage the data we have collected through our inspections and other sources to identify meaningful insights to further audit quality, including sharing these insights with audit committees, audit firms, and the investing community?
  • Can, and should, we calibrate our inspection process to focus firms more directly on the role of quality control systems in preventing audit deficiencies?
  • Would modifying our approach to selecting individual audits by increasing the number of random selections provide potentially greater insight into the overall state of audit quality?
  • Should we decrease the number of individual audits we inspect at specific firms that have shown improvement in Part 1 findings, and refocus our inspection procedures to drill more deeply into those firms' quality control systems?
  • Should we modify the timing or frequency of our inspections of certain firms, based on the nature and degree of their demonstrated audit quality (or lack thereof) over time?
  • Is there additional guidance or transparency that we can provide about our remediation decisions?
  • Finally, does our inspection approach introduce unnecessary and unexpected costs into the financial reporting system, without achieving corresponding benefits to audit quality and thus investor protection?

We're also considering difficult questions surrounding our approach to defining and presenting inspection findings, as well as the content and geography of matters presented in our inspection reports.

Subject always to our enabling statute, we are asking ourselves questions such as:

  • Does our current reporting format and approach meet the needs of investors and audit committee members, as well as the broader public interest?
  • Is there additional information we can provide that would enhance the value of our reports for interested parties?
  • Are there more effective or transparent means to communicate not only the nature of our findings but also their severity?
  • Aside from the number of audits with Part 1 deficiencies, are there better ways to present or quantify inspection results?
  • Finally, what methods or tools can we use to more accurately define and then promote audit quality?

In asking ourselves these questions, we are open to ideas from across the spectrum, whether from investors, public companies, researchers, audit firms, or others. We are also open to learning lessons from other audit regulators around the world.

Audit regulators across the globe have in recent years adopted a range of distinct approaches to promoting audit quality. It's imperative that we collaborate with them and share information on the benefits and risks associated with differing inspection approaches.

Let me share with you a few examples of the types of inspection approaches with which other audit regulators are experimenting and which are distinct from the PCAOB's approach.

The Financial Reporting Council, or FRC, in the United Kingdom takes a two-pronged approach to inspecting audit firms. In addition to firm-specific inspections focused on reviewing a sample of individual audits and firm quality controls, the FRC performs thematic inspections across a sample of the firms it regulates.

Those thematic reviews allow the FRC to consider a variety of different firms' policies, procedures, and practices in defined subject matter areas and then to compare what they find across the population of firms reviewed. Those reviews allow the FRC to identify — and then publish to the marketplace — not only areas of common weakness identified, but also best practices.

Just this past week, the FRC issued its latest thematic review, detailing lessons learned from its analysis of firms' activities to establish, promote, and embed a culture committed to delivering high quality audits.[2]

The Dutch Authority for Financial Markets, or AFM, has also adopted a unique inspections approach. That approach centers around a thematic review of what the AFM refers to as the "three pillars" of the audit firms: (1) control, (2) behavior and culture, and (3) internal supervision.

Based on its review, the AFM has created a dashboard that monitors the performance of the largest audit firms in the Netherlands in a number of defined areas under each of the three pillars. The dashboard, which is available in a published report on the AFM's website,[3] is designed to track audit firm progress toward meeting expectations in each of the key areas over time.

Of course, these ideas won't necessarily translate neatly into our governing statutory framework or our capital markets system. They do, however, allow us to ask ourselves whether there are different or better ways to promote audit quality that we should actively consider.

In addition to inspections, we're considering what improvements we can and should make in our other oversight programs. Briefly, we are asking ourselves questions such as:

  • How can we more effectively communicate with the investors that Congress has charged us with protecting?
  • How can we be more responsive to, and further the needs of, audit committees in discharging their responsibilities?
  • Given the rapidly changing data and technology landscape, are our standards sufficient to withstand major changes in audit methodology, staffing, and tools?
  • Can we improve the transparency of our standard-setting process?
  • Do we have the right skill sets and resources to ensure that we can respond adequately to our changing environment?
  • How can we better leverage our capabilities in the Office of Economic & Risk Analysis, along with emerging technology and analytical tools and processes, to enhance our effectiveness?
  • Are we pursuing the right mix of enforcement cases, and are we pursuing and adjudicating them in a timely manner?
  • And, finally, are we imposing effective and appropriate remedies in the enforcement cases we choose to pursue?

None of these questions have easy answers. But we must be willing to ask them and give the answers serious consideration.

V. Conclusion

Let me close with some final observations. Since its creation 15 years ago, the PCAOB has served a critical role in strengthening our nation's capital markets. It will continue to serve that role, attentive always to the needs of investors and changes in the financial reporting environment.

As an organization, we must and will be a trusted leader in driving continuous improvement in audit quality. We also must be proactive, responsive, and innovative in overseeing the audit profession.

We look forward to working together with all of our constituencies to further enhance audit quality across the profession in the most effective, efficient and least intrusive way we can devise.

Thank you.

[1] The views I express today are my personal views and do not necessarily reflect the views of the Board, any individual Board member, or the staff of the PCAOB.