Thank you Ken, Drew, Liza, and Beth for that overview of the proposed rule.
The U.S. capital markets are—and have long been—the envy of the world. Companies that seek access to capital, list securities in the U.S. because of the strength and consistency of our markets. That strength and consistency comes from many features of our system. Among the defining features, is that our system promotes access to high quality, reliable financial statements audited by independent auditors.
Recognizing the importance of audit quality to our capital markets, Congress created the PCAOB. It specifically assigned the organization a mission, the purpose of which is to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports. The PCAOB accomplishes that mission, consistent with the Sarbanes-Oxley Act, by performing three main oversight activities. First, we set auditing standards and related rules for audit firms to follow. Second, we inspect registered firms’ compliance with those auditing standards and related rules. Third, we investigate potential violations of our auditing standards, rules, and the securities laws, and where appropriate, discipline registered firms and their associated persons for violations.
Given the global nature of our capital markets, our oversight activities necessarily extend beyond our own borders. Consistent with our statutory mandate, we seek to inspect and, where appropriate, investigate and discipline, PCAOB registered firms regardless of the jurisdiction where those firms are located.
Currently, there are 1,727 PCAOB registered firms. Of those firms, 853 are located in 90 separate jurisdictions outside of the U.S. 298 of the firms located outside of the U.S. perform activities requiring registration with us, and those firms are located in 62 jurisdictions. For the 12-month period ended March 31, 2021, PCAOB-registered firms located outside of the U.S. issued 1,166 audit reports on issuer financial statements. Those issuers had a combined market capitalization as of March of this year of more than $11 trillion.
Over the years, the PCAOB has achieved remarkable success in executing its oversight role across the globe. That success is due, in no small part, to the immense cooperation we have received from numerous foreign regulatory authorities. We have been fortunate over the years to forge strong bilateral relationships with regulatory authorities that, like us, are dedicated to promoting high quality financial reporting and audits. Such authorities, where required, have worked side-by-side with us to ensure that we can accomplish our oversight mandate in their jurisdiction—including by providing us with the access we need to conduct inspections and investigations. Together with our international partners, we share a vision that international cooperation strengthens audit quality globally.
International cooperation, unfortunately, has not been uniform and thus an unlevel playing field currently exists. To address this issue, Congress recently passed and the President signed into law the Holding Foreign Companies Accountable Act. The statute vests the PCAOB with the responsibility of determining whether it is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken by an authority in that jurisdiction.
The rule we propose today provides a framework to guide the Board in carrying out its responsibility under the statute. The draft rule sets forth the specific factors that the Board proposes to consider when weighing whether it is unable to inspect or investigate completely, as required by the statute. These three factors are not new. Rather, they represent the very foundational principles on which all of the Board’s cooperative arrangements with foreign authorities are based. These principles articulate the basis on which we determine whether we have the access we need to perform inspections and investigations consistent with our mandate under the Sarbanes-Oxley Act. The remainder of the rule sets forth the manner in which the Board will make its determinations; the form, public availability, and duration of the Board’s determinations; and the process by which the Board can modify or vacate its determinations.
Although the statute does not mandate that the Board issue a rule to govern the determinations it is required to make, I strongly support issuing a rule. A rule will promote transparency into the Board’s processes and will ensure consistency over time in how the Board exercises its judgment in applying the statute.
To ensure the Board considers all relevant facets of the proposed rule, we are seeking public comment. We hope that our stakeholders—and, in particular, investors—will weigh in on the proposed rule and provide us with their insights. We greatly look forward to receiving and reviewing your comments.
I fully support today’s recommendation. I would like to thank all of the staff members who have assisted with getting us to this point, particularly our staff in the Office of the General Counsel and the Office of International Affairs.
I would also like to extend my appreciation to the Commission’s staff for collaborating with us on the proposing release.