The purpose of our meeting today is to discuss the PCAOB’s budget for calendar year 2008. This budget reflects an intensive review of the PCAOB’s 2007 expenditures to date and a careful projection of its funding needs for 2008. At $144.6 million, this budget represents the PCAOB’s continuing transition to a steady-state organization. I use the word “continuing” purposefully because now that I am in my second year as Chairman, it has become clear to me that while we have established appropriate program frameworks for meeting our statutory responsibilities with respect to standard setting and our oversight of public auditing firms, the programs themselves are still evolving, and there continue to be some significant variables.
During 2006 and a large part of this year, work on our new standard on an integrated audit of internal control over financial reporting dominated the workload of our Office of the Chief Auditor. Looking forward, the PCAOB has a number of important standard setting initiatives before us. Work on specific standards is underway, for example on concurring partner review, risk assessment, and the interim standards. We also must play a more active role in working with international audit standard setters. These tasks cannot be performed seriatim. Accordingly, we are seeking a modest expansion of resources in the Office of the Chief Accountant to assure it can accomplish priority tasks.
Let me add that Auditing Standard No. 5 – the number one priority a year ago -- is not behind us. We have a significant responsibility to train our inspectors and work with firms to ensure that the new standard is implemented appropriately. The Board established a technical policy position at the Board level to assist in implementation of AS 5, among other things, and our Division of Inspections is working closely with our Office of Research and Analysis and Office of the Chief Auditor to provide that training—particularly in the critical areas that require the application of judgment – and to provide subject matter expertise during inspections of audit firms for compliance with the new standard.
With respect to inspections, our Division of Inspections and the Office of Research and Analysis are working closely together to enhance our risk assessment techniques so that our inspections target the highest risk audits and are therefore, more effective in meeting our twin mandates of investor protection and helping to assure that audit reports are informative, fair and independent. With over 10,000 issuers and only 256 inspections staff, it is critical that we have an accurate method for selecting audits for review when we go into the field.
During 2008, we intend to inspect the eleven largest accounting firms we inspect on an annual basis, plus about 220 domestic firms that are on a three year cycle (compared to roughly 180 in 2007). Moreover, this year we expect to begin inspections in certain European Union member states, as well as in Asia and South America. International inspections are particularly costly in terms of time and travel, and require ongoing coordination with foreign authorities. These international inspections place additional demands on our scarce inspections resources, and this pressure requires us to assure that our inspections at home are precisely focused and work efficiently.
The Board also is resolved to continue to share key findings and observations derived from our inspection program through a wide range of appropriate channels with registered accounting firms of all sizes, the public, and other interested parties – and to continue to seek input from those parties about our standard-setting and other activities.
During 2008, we will continue to meet our responsibilities head-on. Toward that end, our 2008 Budget is strategically aligned with -- and supports fulfillment of -- our statutory mandates. Those statutory mandates, as well as our commitment to operate efficiently, effectively and with the greatest integrity, were incorporated in a multi-year Strategic Plan last May. The plan is available on our Web site, and the budget we are adopting today is explicitly aligned with our Strategic Plan.
The Board also was careful to assure that that the budget is appropriate and conservative because we are highly conscious that our mission is supported by public issuers and, in turn, by their shareholders. This year, the SEC’s budget rule for the PCAOB went into full effect and the PCAOB fully complied with the new rule. We devoted considerable resources to discussing program and funding issues in depth with the SEC staff and benefited from the Commission’s views during the budget process.
The PCAOB’s 2008 Budget of $144.6 million is approximately $8 million over the amount approved by the SEC for 2007. That translates into roughly a 6 percent increase over this year. (The support fee for 2008 will be $134.5 million and increase over last year’s $123 million in large part because we are becoming more precise in our budgeting.) Over 70 percent of the budget is appropriately related to personnel. As in prior years, approximately one-half of the Board’s headcount is devoted to our inspection program, which this year, for the first time, was able to meet its hiring goal for the year, due largely to innovative approaches such as our “retired partner program.” In other areas though, we again fell short of our hiring goals, specifically in hiring experienced accountants for the Office of the Chief Auditor and the Division of Enforcement and Investigations. In order to meet the PCAOB’s statutory mandates, it is critically important that we staff our programs with highly skilled and experienced professionals who are capable of exercising good judgment and can recognize the kinds of practices and problems that can grow into financial reporting and auditing failures.
Our 2008 budget reflects our continued commitment to efficiency and stewardship. It contains a reduction in the budget for information technology from 2007 even though we plan to begin work on several very significant program projects, including an annual and special reporting system. Our ability to improve our performance and cut costs in delivering information technology is the direct result of the management initiatives that we implemented over the past 12 months. The budget also reflects reduction in the Office of Research and Analysis of over $1 million.