Good afternoon Chair White and Commissioners Aguilar, Gallagher, Stein and Piwowar. Thank you for inviting me here today. I am here to present for your consideration the PCAOB's 2014 budget of $258.4 million.
In my view, this budget request strengthens the PCAOB's ability to continue to protect investors, and to further the public interest in the preparation of informative, accurate and independent audit reports.
The budget builds upon important initiatives to protect the investing public's interest in high quality audits. We also are carefully monitoring our programs and operations with the goal of making them as meaningful as possible and our regulatory initiatives as cost-effective as possible.
To this end, as I have discussed with each of you, the PCAOB has established a Center for Economic Analysis. This initiative, I believe, holds the promise of enhancing our work by deepening the understanding of the role of the audit in today's financial markets, the structure of the profession, and the effectiveness of audits in facilitating capital formation and protecting investors. I have appreciated your support as we have developed the Center.
The Center will work closely with each of the PCAOB's programs across the organization to evaluate and refine the PCAOB's performance metrics for our programs. I look forward to consultations with your staff as we refine these metrics.
Another of the Center's tasks will be to develop a post-implementation review program to evaluate the effectiveness of new auditing standards. We plan to consider how we can most effectively bring to bear insights available to us through our oversight programs.
As we consider the budget for 2014, it is worthwhile to highlight where we are as a result of our work in 2013, so we can build upon those accomplishments.
In the area of inspections, we have cleared a backlog of inspection reports that existed when I arrived. In 2013, we also devoted significant resources to address a backlog of firms' submissions concerning their efforts to remediate quality control concerns described in past reports. The Board is currently considering the staff's recommendation on the last of that backlog.
As we monitor firms' compliance with existing standards through our inspections, we also are developing new standards where we see the need.
In 2013, the PCAOB adopted final standards for use in broker-dealer audit engagements, reproposed a new performance standard on auditing related party and significant, unusual transactions, and proposed a reorganization of existing auditing standards to make them more usable and understandable.
We are updating performance standards. I expect that we will be in a position this year to consider adoption of the related party standard. We also expect to propose performance standards regarding the use of other auditors and specialists, and the auditing of estimates and fair value measurements.
In all these projects, I am mindful that adding procedures can involve incremental costs. I am committed to rigorous economic analysis to consider those costs, as well as alternatives to achieve the most effective result.
Our enforcement program remains active and supports the Commission's efforts with the Financial Reporting and Audit Task Force, Operation Broken Gate and other initiatives to enforce auditing and other federal securities laws' requirements.
During 2013, we concluded 17 disciplinary proceedings, including one against a Big Four firm. We also issued a policy on credit for extraordinary cooperation.
There is also the international aspect of our work to consider. The audits that affect most investors are global. Together with our counterparts abroad, we are moving toward more coordinated interaction among regulators on oversight of firms.
I am pleased to report that we are now able to inspect in most major European countries. Since July, we have renewed existing cooperation agreements with EU member state regulators. And we are close to concluding accords with the remaining ones.
Gaining access to audits of Chinese registered firms has been particularly challenging. But I am grateful to the Secretaries of the Treasury and State for their inviting me, with your support, to participate in the Strategic & Economic Dialogue in each of the last three years.
These meetings proved instrumental to achieving some success. In 2013, we were able to reach an enforcement cooperation agreement with Chinese authorities.
Based on recent discussions, I am also optimistic that we will be able, during 2014, to sign a long-sought agreement to inspect the audit work of PCAOB-registered firms based in China.
With that background, let me turn to how the proposed 2014 Budget before you supports this work. This 2014 Budget represents a $12.8 million increase — roughly 5 percent — over the approved 2013 Budget of $245.6 million.
The budget aligns with our strategic plan. It invests in new mandates related to broker-dealer audits and economics, vital programs and personnel needs.
Nearly three-quarters of the PCAOB's Budget is attributable to the cost of hiring and maintaining skilled personnel with expertise in critical areas, such as experience in auditing banks, broker-dealers and other financial institutions.
Also of note, the 2014 Budget includes funds to continue the transformation of our Office of Information Technology. This funding level will enable us to continue to improve our IT cyber-security and technology infrastructure and applications for key functions.
The 2014 Budget takes into account the fact that audit and audit oversight challenges remain. Firms' deficiencies remain high, and there is more work to do in remediation. At the same time, we need to continue to improve standards and to gain access to those jurisdictions where PCAOB-registered firms are located.
To conclude, I believe that auditors must serve as a reliable compass for corporate management. The PCAOB serves as a compass for the auditors, thereby serving the investing public.