Statement on Proposed 2014 Budget and Strategic Plan

Mr. Chairman, I support the Board's 2013-2017 Strategic Plan and the accompanying Budget.

The Strategic Plan builds upon last year's near-term priorities, and includes an increased focus on the use of economic analysis within the PCAOB. This plan also outlines the mandate and composition of a new Center for Economic Analysis, discusses the Board's commitment to enhanced auditor-audit committee communications, and captures the changing regulatory landscape of broker-dealer reporting and its effect on our interim inspection program.

The Chairman has outlined the major priorities of the Board. I would like to address a few ongoing interests of mine, which are reflected in the plan before us today.

Investor Protection

The Strategic Plan appropriately continues to emphasize the Board's statutory investor protection mission. It is important for us to keep the statutory directive in mind and to continually remind the auditing profession that its primary client is the investor community. The profession must never lose sight of its "public watchdog" function.

Expansion of Consulting Practice and other Non-Audit Businesses

The Board's Strategic Plan includes an examination of "trends in the profession and the future direction of the profession."

We have observed a growing rate of increase in consulting revenue and acquisition activity by firms over the past several years. Consulting revenue for the Big 4 global network firms has increased over the past five years by 33 percent versus only 6 percent in audit revenue. Based on acquisitions and other activities at the firms, it is likely that consulting revenue will continue its rise.

In the past 18 months, the Big 4 global network firms and their affiliates have announced more than 36 acquisitions of consulting businesses, with the Big 4 U.S. firms accounting for 19 of those acquisitions. Recently, one of these firms announced the creation of an investment fund with the aim to invest in, partner with, and acquire organizations that specialize in data and analytics tools and assets.

These developments point to a future in which the relationship between the largest audit firms and their clients will become ever more complex. As outlined in the Strategic Plan, the Board will remain focused on holding auditors accountable to high standards of professional independence, objectivity and professional skepticism through its inspections and enforcement divisions.

The Board also recognizes as an opportunity in its Strategic Plan a need "to deepen [its] understanding of audit quality through analyzing the changing and evolving business models of the major audit firms to understand the implications of such models for audit quality." That is appropriate. As the largest firms grow and diversify, they must not only ensure the total independence of their audit practices; they must maintain and enhance their focus on investor protection through superior audit quality.

I also believe that the Board should monitor any sources of risk to the profession. This was a recommendation made by the Bush Administration Treasury Department's Advisory Committee on the Auditing Profession in 2008, which I continue to support.

Improving Audit Quality

With respect to audit quality, this Strategic Plan also highlights the Board's initiative to develop audit quality indicators focusing not only on indicators at the firm level but at the engagement level as well. Developing such indicators should allow firms to compete first and foremost based on audit quality and should be of value not only to audit firms but to audit committees, investors and PCAOB inspectors alike. I support this being a high priority of the Board and look forward to the issuance of a concept release on the subject.

Additionally, this Strategic Plan includes information about our performance standards initiative, which includes, for example, related parties, fair value measurements, the use of specialists, and firm supervision.

Our Inspections staff continues to find high rates of audit failures in the area of revenue recognition and this topic, as well, should be addressed in 2014.

Cybersecurity

The Board will also continue to monitor current events and emerging trends that may lead to increased audit risk. For example, cybersecurity risk recently has become a topic of concern for the Securities and Exchange Commission and other financial regulators.^[1] Such risk pose significant issues for companies such as: increased security costs; loss of material intellectual property; claims by customers; and litigation. Therefore, I believe that auditors must examine the internal controls companies have in place to address such risks. I think it important that the Board will consider forming an internal task force and preparing a practice alert related to cybersecurity and its impact on audits. I support the formation of such a task force and the issuance of an audit alert, if the Board deems such an alert appropriate.

International Initiatives

The Board's international agenda, as described in the Strategic Plan, captures the increasingly important role that the Office of International Affairs plays at the Board.

In addition to negotiating agreements and memoranda of understanding with a large number of our foreign counterparts, the Budget and Strategic Plan note the United States' role in chairing the International Forum of Independent Audit Regulators (IFIAR), a group consisting of some 46 independent audit regulators from around the world.

As noted in the Strategic Plan, "PCAOB inspections continue to find high rates of deficiencies at the global networks." Under the Chairmanship of Lewis Ferguson, IFIAR has initiated and published its first survey of inspection findings across its member regulators and has committed to repeat this survey annually. What the survey results clearly demonstrate is that regulators around the world are encountering similar issues with respect to audit quality.

The Strategic Plan recognizes that our participation in international forums like IFIAR will enable us to contribute to the international dialogue about how regulators can address these issues in a meaningful and timely manner.

A brief word on China. While we have made some progress in improving our relationship with the China Securities Regulation Commission and the Ministry of Finance, we must continue to work towards a broader agreement that enables us to inspect PCAOB-registered firms in China. I also believe that the Board needs to actively consider alternative actions with regard to jurisdictions that disallow PCAOB inspections in order to remain faithful to our legislative mandate.

Timely Remediation

I fully support our ongoing focus on timely remediation of the Board's Inspections Division findings.

In 2013, our Inspections staff made significant inroads in addressing the backlog in remediation determinations relating to its inspection findings and providing additional information about the remediation process. The 2013-2017 Strategic Plan builds on these efforts by requiring that we update the PCAOB's 2006 remediation release to further enhance firms' understanding of the Board's criteria and process for evaluating their remedial actions. I support this updated release being completed in 2014.

Root Cause Analysis

An important component of remediation is effective root cause analysis. I have heard that some firms would like more guidance from the Board in this area. In the Strategic Plan, we have committed ourselves to issuing public guidance on how we expect firms to conduct root cause analysis of systemic risks. I believe such guidance would benefit from examples of what may be considered effective practices used by firms to address their root cause problems.

Information about firms on our website

The Board is also planning to enhance the information contained on our website about registered firms. Such information will be of value to investors, audit committees and others by improving the transparency of the Board's activities. I especially would like to see a tool on our website that enables investors and other interested stakeholders to easily identify the auditor of an issuer by simply inputting the issuer's ticker symbol. That way an investor could readily identify the issuer's auditor and, through other avenues on the website, do his or her own due diligence regarding that auditor. Our Office of Information Technology has developed a prototype for accomplishing this and I am hopeful it will be finalized and made operational in 2014.

Economic Analysis

As noted in the Strategic Plan, the PCAOB will be focusing on internal guidance for the integration of economic analysis into our program activities to aid in the evaluation of economic considerations, including costs and benefits, in our standards and rules. While I believe we have always included economic considerations in what we do, I support the Board's added focus on formalizing the incorporation of economic analysis into our activities. In light of the passage of the JOBS Act, such analysis has assumed a more critical role in our standard-setting process and the Strategic Plan appropriately highlights our efforts in this area.

Budget

Finally, I would like to say a word about our Budget. I believe the proposed budget of $258.4 million supports the Strategic Plan and reflects the appropriate resource needs for the PCAOB to achieve its goals and objectives for the coming year.

While I support the 2014 Budget before us today, I do so with the caveat that the PCAOB has historically underspent its budget. This will be the case again in 2013. Though we have underspent in the past for reasons such as difficulty in identifying qualified candidates for open positions, I believe we need to do better in the future. That said, I am pleased that any underspending of funds in the current fiscal year reduces the accounting support fee for the next fiscal year.

In sum, I believe the Strategic Plan and Budget are well crafted to address the Board's statutory mandate under the Sarbanes-Oxley Act "to protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit reports for companies the securities of which are sold to, and held by and for, public investors."

Before closing, I join you, Mr. Chairman, in acknowledging the contributions of Darrell Pauley, Bill Wiggins, Jim Hearn, Yoss Missaghian, and Bobbie Reichert on the Budget and for their work on the Strategic Plan, along with that of Phoebe Brown, the PCAOB Corporate Secretary. I also want to acknowledge the staff at the SEC for their assistance on the development of both the Budget and our Strategic Plan.