Good morning 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 2015 Budget of $250.9 million.
In my view the budget before you today strengthens our ability to protect investors and build the trust that enables essential capital formation.
The budget aligns with our strategic plan, invests in vital programs, economic analysis, improved audit oversight and essential technology, all in a cost-effective way.
It will help us identify and implement ways to advance new standards more efficiently, as well as address unacceptably high rates of noncompliance with existing standards.
The budget enables the PCAOB to continue to be the essential oversight body that Congress envisioned. And our request reflects our continuing commitment to core values that investors expect and deserve in audits: independence, integrity, accuracy, accountability and transparency.
Before I go further, I would like to thank the Chief Accountant (Jim Schnurr) and his staff as well as the Commission's Chief Financial Officer (Ken Johnson) and his staff, for their support and counsel as we developed this budget.
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Now let me go deeper into how the 2015 Budget will empower us to act on behalf of investors and promote capital formation by building market confidence in the audit.
This budget will allow us to conduct 300 inspections of registered firms, including 75 inspections of firms that audit broker-dealers. We will also work closely with firms whose past inspections revealed quality control problems, to evaluate the firms' measures to improve quality.
The first cycle of inspections of broker-dealer audits under the Commission's new broker-dealer rule and our audit standards are underway. We have coordinated with Commission staff in monitoring implementation of the new rule and PCAOB standards, including our new auditor attestation standards.
To this end, last June we released staff guidance, largely directed to auditors of brokers and dealers who were new to PCAOB standards. In August, we issued our third annual inspection report on broker-dealer audits. And last week, we issued a supplemental report to assist auditors in preparing for the upcoming busy season.
Sixty of our inspections will be conducted in 26 jurisdictions outside the United States. Based on protocols we have established over many years, we will conduct many of these non-U.S. inspections jointly with local authorities.
We will also continue to pursue protocols with the shrinking number of jurisdictions where we can't inspect, of which China is a significant example. We are in regular communication with all of these remaining jurisdictions. And we engage in active dialogue with Chinese authorities as we pursue an agreement on access.
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Our enforcement program continues to focus on holding auditors accountable for audit failures.
During 2014, we made public a record 24 settled disciplinary proceedings, imposing sanctions including censures, monetary penalties, revocations of firm registration and bars on individuals' association with registered firms.
In 2014, we stepped up international enforcement activity. In 2015, we foresee an increase in the need to address potential audit failures in cross-jurisdictional audits, and the budget reflects that need. We have several pending investigations and proceedings involving work by foreign registered accounting firms. I expect more of our resources than in years past will have to be targeted to international enforcement activity.
In all of this work, we coordinate closely with the Commission's Division of Enforcement, including in our mutual efforts to leverage data and analysis to allocate enforcement resources efficiently.
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While we monitor and enforce compliance with existing standards, we also are continuing to develop new standards and audit practice alerts as needed.
I have been meeting with the Commission's Chief Accountant Jim Schnurr, and we are exploring potential ways to make the standard setting process more efficient.
It is a rulemaking process. There are a lot of perspectives, interests and effects that have to be considered. But I agree that the process can be improved. Our Chief Auditor and I are committed to seeking ways to make it more efficient.
The 2015 Budget funds a review of our standard-setting agenda, with a view to identifying ways to advance standard-setting initiatives more efficiently. I am working closely with Jim Schnurr in this effort, and I know we are both committed to achieving a result that will benefit the PCAOB, the Commission and the public.
At the same time, we want to gather as much relevant information as we can, through outreach and economic analysis, to come to appropriate and cost-effective approaches to solve problems in audit practices.
In May 2014, we released staff guidance on the use of economic analysis in standard-setting, modeled after the Commission's own staff guidance and developed through close coordination with Commission staff.
From this foundation, we have advanced all the projects on our standard-setting agenda and, in particular, have made significant progress in developing new performance standards in several areas. The 2015 Budget will allow us to further those efforts.
To mention a few:
In June 2014, we adopted a new standard to strengthen auditor performance requirements in three critical areas of the audit: related party transactions, significant unusual transactions, and a company's financial relationships and transactions with its executive officers.
In July 2014, the PCAOB staff sought comment on potential changes to the auditing standards on accounting estimates and fair value measurements.
This led to a day-long, special meeting of our Standing Advisory Group to hear from several panels of experts in the field. Robust and valuable public comment is now informing formulation of a revised new standard. We are discussing the key issues emanating from these comments with Commission staff, and we're actively planning next steps.
Also, during 2014, the staff drafted proposed auditing standards for the Board's consideration on the supervision of other auditors in multi-location audits and on the use of specialists. To advance these projects expeditiously and with consensus, we have bifurcated them. We should be in a position to seek public comment on both shortly.
We also continue to issue Staff Audit Practice Alerts, a timely and cost-effective vehicle to improve audit quality, often in areas where our inspections identify significant audit deficiencies. For example, in 2014, we released an alert on auditing revenue, one of the most critical aspects of almost every audit and where our inspectors frequently find deficient audit work.
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The 2015 Budget will also allow the PCAOB to continue to integrate economic analysis into our programs, by continuing to develop our Center for Economic Analysis.
The Center is not a high-cost component of the budget, but it is high impact, high yield. I appreciate your support as we develop it.
We have begun to staff the Center and have several important initiatives underway.
In addition to the Center's permanent staff, we have recently welcomed our first three economic research fellows. To support their work, the Center developed a research environment that can be used for fellows' projects, as well as to develop baseline analyses to inform standard-setting. Center staff now work closely with standard-setting personnel on scoping and planning data analyses.
We have also established an Inspections Fellowship Program to give economists the benefit of the insights and knowledge of our experienced inspectors.
In conjunction with the Journal of Accounting Research, we held our first annual Conference on Auditing and Capital Markets. Six papers were selected from more than 80 submissions, based on a double-blind review conducted with a panel of editors of the Journal and other academic experts. The Conference has already provided foundational insights for standard setting.
The Center has also been developing the groundwork for a post-implementation review program to evaluate the effectiveness of new auditing standards and is planning to conduct the first such review this year.
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This 2015 Budget represents a $7.5 million decrease from last year's budget.
The reduction reflects an appropriate reassessment of assumptions relating to personnel and other costs. We project approximately 850 staff by the end of 2015. This projection is based on a more conservative assessment of our ability to hire in today's fairly competitive market for experienced professionals. But it will still allow us to achieve the objectives we've set out.
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In closing, I just want to reiterate that by allocating resources efficiently, the budget strengthens our ability to protect investors and inspire trust. The investment will enable capital formation and build upon initiatives that improve audit quality and sustain robust inspection, enforcement and standard-setting programs.
The budget supports our strategic plan.
Also of note, the 2015 Budget includes funds to continue the strategic transformations of our Offices of Information Technology and Administration.
The 2015 Budget also takes into account the fact that audit and audit oversight challenges remain. Our inspections continue to find far too many audit deficiencies, and too many related shortcomings in firms' quality control policies and procedures, which must be addressed.
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I believe that the continued work of the PCAOB is critical to economic growth and job creation in the United States. High quality, reliable audits are good for investors, good for companies, and good for our markets.
This 2015 Budget request will help us continue that vital service. I appreciate your time and attention, and I would be happy to answer any questions you may have.