Thank you Mr. Chairman. I support the Board's 2014-2018 Strategic Plan and the accompanying Budget.
The Board's proposed budget, as discussed in detail by the staff's earlier presentation for 2015, is $250.9 million. This is equivalent to our revised spending plan for this year and reflects a decrease from the budget approved last year.
The 2015 budget reflects a compromise amongst Board priorities and resources. I believe it represents a reasonable approach to meeting the goals spelled out in the 2014-2018 Strategic Plan and fulfilling our mandate "to protect the interest of investors and further the public interest in the preparation of informative, accurate and independent audit reports."
I want to touch on a number of accomplishments during 2014, and some of the priorities reflected in the Strategic Plan which I particularly support.
Maintaining a Focus on Auditor Independence and Audit Quality
In the Strategic Plan, the Board appropriately stresses the importance of continuing to focus on the independence, objectivity and professional skepticism of the auditor.
As framed in the Strategic Plan, I agree that we need to continue to carefully monitor and analyze the business models of the largest firms to ensure that audit quality and auditor independence are not compromised as the largest firms expand into additional lines of business. Improving audit quality and ensuring auditor independence must remain top priorities as the firms grow their consulting and advisory services.
I further support the Board examining whether certain kinds of tax consulting services create conflicts of interests that may impair auditor independence.
The Strategic Plan makes clear that we will continue to hold auditors accountable for violations of our auditing standards and independence rules during inspections and as part of our enforcement oversight.
I likewise support the PCAOB's continuing its outreach to audit committees and constructively engaging with them in areas of common interest, including auditor independence, audit quality, and PCAOB inspection findings.
The PCAOB, as with other audit regulators around the world, remains concerned about the continued high number of observed audit deficiencies. Improving audit quality continues to be the underlying theme throughout the Strategic Plan.
The results of the findings of the 2013 Inspections Findings Survey of the International Forum of Independent Audit Regulators, issued in April 2014, are consistent with the findings of our own PCAOB inspectors — that the areas of fair value measurements and internal controls continue to have the highest number of inspection findings.
As referenced in the Strategic Plan, the Board has an active standard-setting agenda.
For example, in August 2014, the PCAOB issued for public comment a Staff Consultation Paper on standard-setting activities related to auditing accounting estimates and fair value measurements.
I support this project as well as the Board's ongoing initiatives to improve our audit quality control standards. In this regard, I continue to believe the Board should focus on the Failure to Supervise provisions of the Sarbanes-Oxley Act. I further support the consideration of whether independent non-executives should be required on the governance boards of firms, something that is currently required in a number of jurisdictions.
I also support the Board's priority to identify audit quality indicators. The goal is to promote competition based on audit quality amongst the firms and develop concise, summary reporting on the state of audit quality and other relevant information about auditing. This important initiative should be of considerable value not only to the PCAOB, but to audit committees, auditors, investors, and companies alike. This issue is also of importance to regulators around the world.
Informative Audit Reports
Last December the Board published for comment a proposal to expand the current auditor's reporting model and in April 2014, we held a public roundtable on the subject. This project, which involves examining possible changes to the auditor's report, is consistent with the Board's mandate to further "the public interest in the preparation of informative, accurate and independent audit reports."
Investors have been asking for an expanded auditor's report for a number of years now. As the Strategic Plan notes, the PCAOB will continue to analyze insights gained from research, roundtables, consultation, economic analysis and public comment regarding potential changes to the model.
Regulators in other jurisdictions are likewise considering and, in fact, many have already required an expanded auditor's report. For example, the European Parliament has voted to adopt a broad package of audit reforms for European Union countries that includes an expanded auditor's report. The United Kingdom already requires such an expanded report.
The United Kingdom's move has been well received by investors, auditors and companies alike. I believe we should move forward and finalize this project in the near future so that U.S. investors also are provided with a more informative and meaningful audit report.
Likewise, we should adopt the Board's initiative on transparency and the identification of the engagement partner in the audit report. I look forward to the Board successfully concluding this project as soon as possible in the new-year.
I note that such transparency is already common practice in much of the world.
The current proposal on the auditor's reporting model includes enhancements to clearly indicate the auditor's responsibilities for fraud. Investors want, and expect the auditor to do more, to detect and expose fraud.
As the Strategic Plan notes, in the coming year, the PCAOB will work to "develop economic analysis that focuses on external economic factors that cause potential fraud pressures and risks." This work will be done through the collaborative efforts of the PCAOB's Center for Economic Analysis and the Office of Chief Auditor.
This collaboration is part of the Board's Standards Division studying the auditors responsibility relating to fraud that began in 2012. The discussion at last week's Standing Advisory Meeting, which dealt primarily with this topic, will inform the Board as it explores potential actionable ideas to enhance the effectiveness of audits in detecting financial statement fraud in 2015.
In early 2014, the PCAOB staff issued "Staff Guidance on Economic Analysis in PCAOB Standard Setting." Under this guidance, each of the Board's proposed standards would address the following elements: (1) the need for the proposed action; (2) the baseline against which to measure the likely economic consequences of the proposed regulation; (3) the alternative regulatory approaches considered; and (4) an evaluation of the economic impact, including the benefits and costs—both quantitative and qualitative—of the proposed action and the main alternatives identified by the analysis. The Board also considers whether the proposed action is in the public interest, whether it will protect investors, and if it promotes efficiency, competition and capital formation.
Integration of the Center for Economic Analysis to the Work of the Board
The Board's Center for Economic Analysis was formed earlier this year as well. The center is designed to enhance the role of analysis in and of our programs, whether in providing perspectives on proposed actions or helping to structure post implementation reviews of our standards.
I am particularly interested in the center's project to catalogue the potential uses of the data the Board already has and explore what additional data we may need to enhance our inspection and standard setting processes, as well as to carefully consider the potential costs and benefits of the Board's programs.
Improving Data Analysis and Timeliness of Firm Remediation
Each year, the PCAOB strives to improve its oversight activities in many ways, including through an examination of our data. For example, in 2014, the Division of Registration and Inspections continued to aggregate the findings in our inspection reports for large and small firms in a compendium for internal use and analysis.
Strengthening the analyses of our data and processes through the use of sophisticated information technology and data management tools, as envisioned in the Strategic Plan, will contribute positively to the effectiveness of our oversight programs.
With respect to the Board's remediation determinations, I support our efforts to improve the timeliness of the Board's remediation determinations which the Strategic Plan notes is one of the Board's near term priorities.
I also support the Board providing additional information about the PCAOB's remediation process to the investing public and audit firms; focusing on improving the timeliness, content and readability of inspection reports; and improving the firms' root cause analysis, where appropriate.
Broker Dealer Audits
With respect to the Board's broker-dealer program, I believe we are making considerable progress in developing a regulatory and operational infrastructure to carry out our oversight authority for broker-dealer auditors as authorized under the Dodd-Frank Act.
On the international front, I would like to acknowledge the PCAOB's continued work with our international regulatory counterparts with the goal of achieving greater access to cross-border inspections. In 2014, the PCAOB entered into cooperation agreements with Sweden and Denmark, bringing the total number of cooperative agreements reached with non-U.S. auditor oversight authorities to 18.
I view this as a significant achievement and would like to commend Chairman Doty, and our Office of International Affairs, under the leadership of Bruce Wilson, for the Board's success in this area.
The PCAOB further reinforces international cooperation through its participation and leadership in the International Forum of Independent Audit Regulators , which brings together independent audit regulators from some 50 jurisdictions around the world.
The Strategic Plan also appropriately focuses and highlights the Board's ongoing efforts on reinforcing quality control at the global network firms.
In considering and finalizing the Board's 2015 budget — which now must be approved by the Securities and Exchange Commission -- I believe the Board has carefully assessed, and continues to assess, the growth of the PCAOB with an eye towards reaching a steady-state level in its budget.
The Board understands the need to budget to reasonably achievable activity and provide justification of its spending, and to carefully oversee its divisions and offices. I believe this budget responsibly represents that effort.
Before closing, I join you, Mr. Chairman, and the other Board members in acknowledging and thanking the staff for all their hard work on the budget and strategic plan. Most people are unaware of how many people contribute to the final product that is before us today. I want to particularly thank Suzanne Kinzer, our Chief Administrative Officer, and Bill Wiggins, Jim Hearn, Amy Hargrett, Yoss Missaghian, and Bobbie Reichert. Also, Phoebe Brown, our Corporate Secretary. I also want to acknowledge the assistance of the staff at the SEC on the development of both the budget and strategic plan.