Statement on 2009 PCAOB Budget

I would like to thank you, Mr. Chairman, as well as Bill Wiggins, Angela Desmond, and Yoss Missaghian, for your inclusive and thorough approach in developing the budget before us today. I support this budget.

As the newest member of this Board, I have benefited from the many budget discussions we have had.

The development of any budget involves balance and trade-offs among the issues involved, and I appreciate your consideration of my concerns as you crafted this proposal.

In my first six months at the Board, I have been very impressed with the caliber of the PCAOB staff and the Board’s numerous accomplishments -- including many that are not public, due to confidentiality restrictions within the Sarbanes-Oxley Act.

In my opinion, the fundamental accomplishment of the PCAOB has been to implement the historic shift from self-regulation of the auditing profession to its regulation by an independent oversight body, as required by Sarbanes-Oxley.

Growing from zero to nine offices and nearly 500 staff -- overseeing close to 2,000 audit firms in 86 countries – the PCAOB is today the independent audit regulator for investor protection. And the PCAOB model of independent audit regulation is being replicated in many other countries throughout the world.

The Board’s primary accomplishment is that the Inspections, Standards, and Enforcement Divisions are holding firms more accountable than ever before for the quality of their audits.

But, clearly, more work needs to be done.

I hope that, during my tenure here at the PCAOB, I may assist and promote the Board’s efforts to bring greater transparency and accountability to the auditing profession – for the benefit of the investing public.

We know that 2009 will be a challenging year for the PCAOB, with issuers and auditors alike grappling with the impact of the economic downtown.

Among the many complexities auditors are likely to be faced with are pension valuations, fair value measurements, accounting estimates, adequacy of disclosures, and consideration of a company’s ability to continue as a going concern —to list just a few.

All these issues and more present increased financial reporting and, in turn, audit risks, and this year’s budget appropriately contemplates our need to respond to these risks.

It is our job to make sure that investors know the true condition of the companies they own – through quality audit reports.

As regulators, we will be watching carefully to make sure that auditors maintain high standards in their audits of public companies. Investors deserve no less.

These objectives are reflected in the 2009 budget.

The budget calls for an expenditure of $157.6 million, a 9 percent increase over last year’s budget. Consistent with prior years, this primarily fulfills additional staffing needs.

I am particularly supportive of the increased funding for the PCAOB’s Division of Enforcement and Investigations; as well as for the Division of Registration and Inspections; the Office of the Chief Auditor – our standards-setters; the Office of Research and Analysis; and the Office of General Counsel.

The increase in staffing will help us meet our enforcement needs, inspections mandate, rulemaking endeavors, and risk monitoring responsibilities.

Given the current market crisis, I believe the PCAOB must be especially mindful of:

  • An increase in pressure on auditors from companies to stretch accounting and auditing principles that can amount to financial reporting fraud;
  • The need to maintain strict compliance with independence rules on the part of auditors;
  • Auditing firms’ compensation plans that are not directly related to audit quality;
  • Risks associated with all audit work, including work performed abroad; and,
  • The importance of adequate supervision of auditing firm personnel to assuring audit quality, and the need for rulemaking in this area.

In addition, the 2009 budget provides resources to explore the recommendations made recently by the Treasury’s Advisory Committee on the Auditing Profession.

While all of the Treasury Committee’s recommendations merit very serious consideration, let me focus on just a few.

I believe the Board should consider ways to improve the auditor’s reporting model. As the Treasury Committee concluded, an improved auditor’s report would likely give investors and analysts more relevant information about the financial statements of public companies.

The Committee’s final reports states:

“While there is not yet agreement as to precisely what additional information is sought by and would be useful to investors and other users of financial statements, the Committee concludes that an improved auditor’s report would likely lead to more relevant information for users of financial statements and would clarify the role of the auditor in the financial statement audit.”

I hope that the Board will make significant progress next year to get us closer to rulemaking in this area.

In addition, I believe that we should improve auditor accountability by adding the engagement partner’s signature to the auditor’s report. I appreciate your willingness, Mr. Chairman, to consider this recommendation from the Treasury Committee.

Furthermore, I believe we should host more roundtable meetings. The Treasury Committee suggests additional meetings with other regulators and governmental enforcement authorities to improve our effectiveness.

As you know, Mr. Chairman, I am a great believer in transparency and open forums for discussion with investor groups and other interested parties and -- while we have held a number of valuable roundtables in the past, on such topics as independence, internal control and reliance -- I would hope that we would hold even more in the future.

In my opinion, these open roundtables, where a variety of viewpoints are expressed, are vital to our policy-making process.

I appreciate that there is money in the budget that would allow us to do this, as well as to continue to host Standing Advisory Group meetings and the Small Business Group Forums.

In addition, like Mr. Gradison, I would like to see the PCAOB staff host a roundtable discussion that addresses whether our schools are appropriately training and preparing accounting students, particularly given the SEC’s recent effort toward adopting International Financial Reporting Standards.

The Treasury Committee also recommended several other important considerations, such as the development of key audit quality indicators; the creation of a National Fraud Center; requiring firms to file annual reports and audited financial statements; the appointment of independent board members to firm boards; and ways to enhance competition in the industry.

I support each of these recommendations, and believe that they are important measures needed to improve the transparency and accountability of the auditing profession. I appreciate there being funding in the budget for our consideration of many of these initiatives.

Let me end by, again, thanking you, Mr. Chairman, and Angela Desmond, Bill Wiggins, and the staff for all your efforts. As I mentioned, I commend the inclusive nature of this 2009 budget process and I am pleased to support the final product.

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