Summary of Activities of the Investor Working Group of the International Forum of Independent Audit Regulators

Thank you for participating in this year's Institute and asking me to discuss the activities to date of the Investor Working Group of the International Forum of Independent Audit Regulators (IFIAR). I am delighted that so many of you have taken time out of your schedules to participate in the Institute's sessions. Before turning to the subject matter at hand, let me preface my remarks by saying that the views expressed are my own and do not necessarily reflect the views of the PCAOB or other Board members or staff, or of the IFIAR membership.

As the first Chair of the Investor Working Group, it has been exciting for me to watch not only how IFIAR has grown into an important international organization over the years, but also to participate in its development. In particular, I am pleased that I have been able to play a role in ensuring that investors have an opportunity to be heard by independent regulators from around the world.

As many of you are aware, a major objective of the 2002 Sarbanes-Oxley Act that created the PCAOB was to protect investors by ensuring that auditors produce informative, accurate, and independent audit reports. Similarly, the Investor Working Group was created in 2009 to provide a forum for IFIAR Members to discuss audit-related issues directly with investor stakeholders who, after all, are the primary clients of auditors.

Effective auditor oversight depends on frank dialogue between audit regulators and the audit firms they regulate, and also with investors and other stakeholders. To that end, the Investor Working Group remains committed to recruiting high caliber investor representatives from all over the world to participate in meetings with IFIAR and to developing agendas that stimulate robust discussions between investors and the IFIAR membership. Ideally, these meetings should assist regulators around the world in considering investor perspectives as they set policy in their various jurisdictions to improve audit quality for the benefit of both investors and the public at large.

The Investor Working Group includes audit regulators from Canada, France, Japan, Korea, the Netherlands, the United Kingdom and the United States. Since 2009, it has hosted six investor sessions at IFIAR plenary meetings — in Singapore in 2009; Madrid, Spain in 2010; Berlin, Germany in 2011; Busan, Korea and London, England in 2012; and Noordwijk, Netherlands in 2013. The next investor session will be held during the IFIAR 2014 plenary in Washington, DC in April. At each of these sessions, investor representatives have provided IFIAR Members with suggestions on how audit regulators might improve audit quality and enhance investor protection.

Common Themes Emerging from the Investor Sessions

The Investor Working Group has identified a number of common themes and recommendations that have emerged from the different investor sessions to date. These include:

1. The format and content of the audit report needs to be improved.

• Audit reports should be expanded to include more content and broader disclosures on key issues such as assumptions of auditors, discussions with the audit committee, discussions with management, how much of the information in the report has been verified, how much testing was done, and what portion of the information is based on management representations.
• The audit report should use simple and clear language and should define any terminology used.
• The audit report should include a more detailed discussion on judgments made by the auditor in preparing the audit report.

2. The dominance of the Big Four within the audit market needs to be addressed.

• Regulators need to address the dominance of the Big Four within the audit market and take steps to reduce the risk if one or more of these firms were to fail.

3. Corporate governance should be a priority for audit firms.

• The profession should provide more transparency regarding the corporate governance of audit firms.
• The profession should provide more training to staff.

4. Auditors should exercise more professional skepticism when conducting an audit.

• Auditors should be independent of the audit firm.
• Auditors should have a solid understanding of the business they are auditing.
• Auditors should actively challenge management.
• There should be a prohibition on non-audit and audit services being performed by the same firm.

Summary of IFIAR Investor Working Group Sessions, 2009-2013

While each Investor Working Group session has been focused on a particular theme or a suite of suggested topics, investor representatives also have been encouraged to discuss audit-related topics of their choice and to express themselves freely.

I will now turn briefly to a summary of these Investor Working Group Sessions:

Singapore — September 2009

In our first ever investor session in Singapore in the fall of 2009, the discussion agenda focused on the structural risks of the audit market, audit quality, audit firm transparency, and governance. This session included five investor representatives from Asia, Europe, and the United States. In particular, the investor representatives raised concerns about the dominance of the Big Four in the audit market and suggested that audit regulators should consider ways to minimize the risk to the audit market if one of the Big Four were to fail.

Madrid — September 2010

At the Madrid plenary in September 2010, the Investor Working Group collaborated with the Global Public Policy Committee Working Group (GPPC) to organize two investor sessions — one with the Investor Working Group and the IFIAR membership and a second joint session with the GPPC and the IFIAR membership.

During the investor session with the IFIAR membership, the investor representatives discussed improving choice among auditing firms; improving the scope and focus of audit regulation; and improving the auditor's report. In the joint session with the GPPC representatives from the audit firms BDO, Deloitte, EY, Grant Thornton, KPMG and PwC, the investor representatives focused on how to improve the auditor's report and how to enhance the governance and transparency of auditing firms.

During the session with the IFIAR membership, some investor representatives argued that the dominance of the Big Four was a reason for lower quality audits. To remedy this situation, those investor representatives believed audit regulators needed to implement legislation to reduce barriers to entry to the market of auditing public companies. They stressed that increased competition in the audit market would result in more robust audits. To further this effort, the investor representatives recommended that audit regulators make efforts to improve the name recognition of smaller audit firms. They also stressed to the IFIAR Members that greater transparency would not only improve the value of the audit report, but also investors' confidence that the report provided reliable information. In particular, they wanted to see more content and broader disclosures within the audit report. The investor representatives also stated their desire for firms to enhance their governance structures, including better risk management and more communication between regulators and audit firms.

During the joint session with representatives of the audit firms, the investor representatives again mentioned that audit firms could improve their reputations by strengthening their corporate governance regimes. In this regard, they asked audit firms to include in their audit reports an assessment of the quality of management's critical judgments and estimates, and a disclosure of auditing time spent on the five most important audit areas as viewed by the auditor. They also recommended that the audit firms have non-executive directors to guarantee the independence of audit partners and that audit reports should include a disclosure of the auditor's understanding of the business profile of the entity being audited.

Berlin — April 2011

The Investor Working Group session in Berlin focused on proposals under consideration in various jurisdictions to improve the audit report. For example, the representative from the Chartered Financial Analysts Institute (CFA) reported that their studies had revealed that investors were seeking further information from auditors on critical management estimates, materiality assessments, audit time spent on key risk areas, and an explanation as to whether the financial information presented in the audit report was reliable. The CFA also found that investors would like to see a detailed discussion of the judgments the auditor made while preparing the audit report.

A European Commission official spoke about the then newly issued Green Paper on audit policy, noting that European Union investors were seeking a more informative audit report, including information on the assumptions of auditors, how much of the information in the report had been verified, how much testing was done and what portion of the information was based on management representation. Investors also wanted more information in the audit report on going concern matters, such as guarantees, comfort letters and other support measures that have been relied upon by the audited entity.

This discussion left IFIAR Members with a broader understanding of what investors were seeking globally from audit regulation, including the fact that investors would like to see management held accountable for the financial information included in the audit report. It was noted that investors wanted to see auditors include their subjective views in their reports to the audit committees. As for audit committees, investors reported their desire that audit committees be required to create a report about the conduct of the audit and that auditors be required to report on whether they found the accounting of the audited entity to be fair and balanced. The discussion concluded with the membership acknowledging that investors were searching for a more thorough audit report including industry-specific and informative disclosures from directors to investors.

Busan — April 2012

For the April 2012 plenary in Busan, the investor session focused on independent audit regulation in Asia. IFIAR Members learned about developments in Asia on audit regulation, the coalition of independent Asian audit regulators that are working together to share inspection information about the Big Four accounting firms in their jurisdictions, and the measures being taken to enhance investors' confidence in the audit. This session also gave Members a greater understanding of issues that were important to Asian investors, such as the need to improve corporate governance, to enhance professional skepticism by auditors, and for auditors to challenge management. Investor representatives from Asia also expressed their concern about the market dominance of the Big Four and stated that they wanted regulators to promote best practices within Asian audit firms.

London — October 2012

At the London plenary in 2012, the Investor Working Group organized two investor sessions in which seven investor representatives from Europe, Japan, Canada and the United States participated. The first session with the plenary addressed what audit regulators could do to improve audit quality. The second session, jointly organized with the GPPC Working Group, was a dialogue between the seven investor representatives with the CEOs of the world's six largest auditing firms and addressed how audit firms could improve audit quality.

In the session with the audit regulators, the investor representatives recommended that investors be provided with critical information that audit committees gather during the appointment process. The investor representatives also stated that audit regulators should take whatever steps are necessary to ensure that auditors remain independent and exercise professional skepticism. They also suggested that audit regulators might consider prohibiting audit firms from performing non-audit services in order to enhance the auditor's independence.

During the joint session, the investor representatives challenged the audit firms to issue audit reports in language that was easy to understand for the average reader, noting that the current audit report falls short of investors' needs. To improve the audit report, the investor representatives suggested including supplemental information such as audit risk; factors the auditor evaluated; the topics discussed with the audit committee and management; the assessment of the audit committee; expanded discussion about key accounting issues in the financial statements; an overview of significant changes in the audited company; and information about management's projections. The investor representatives also recommended that auditors include a section on management's critical accounting judgments in the audit report. Once again, IFIAR Members heard from investor representatives about the need for auditors to have an understanding of the business model they were auditing. The investor representatives encouraged the audit firm leaders to improve consistency within their brand across borders and recommended that the audit report include more information on the discussions with audit committees.

Noordwijk — April 2013

The most recent IFIAR plenary earlier this year also featured two sessions with investor representatives -- including three European investors and one Japanese investor -- all of whom managed significant investment funds. During the first session, the investor representatives elaborated on various themes, including the auditor's role in the audit report, the auditor's legal responsibility and the need for auditors to review and ensure adequate corporate governance. The session highlighted the investor representatives' belief that the auditor should view the public as their client and not the company they are auditing and that reliable information must be included in the audit report. The investor representatives again stated that the audit report needed to be written in "plain English." Also, the investor representatives supported audit reports being published in the home country language and not just in English. As in previous sessions, the investor representatives stressed the need for the audit reports to be reliable and to be an accurate reflection of the entity. The investor representatives also stressed to the plenary that investors are looking for independent auditors who remain accountable to shareholders.

In addition, the investor representatives suggested that audit regulators should encourage firms to compete on audit quality — as opposed to price — in order to enhance audit quality. The investor representatives also looked towards professional skepticism as a key factor in improving audit quality. To accomplish this goal, one investor representative suggested that all members of the audit team should be held accountable and that audit firms should ensure they have enough time and staff to follow up on any suspicions before the audit report is issued.

During the joint session with the Standards Coordination Working Group, the investor representatives commented on what they were seeking from standard setters. They expressed the need for annual reports to once again be in the language of the home country jurisdiction, and that standard setters should require certain information in the audit report. The investor representatives were also clear that audit firms performing an audit should also not be providing non-audit services to the same client.

The investor representatives asked the standard setters to encourage auditors to challenge management and to consider a staggered approach to deadlines for audit reports to allow time for auditors to follow up on any suspicions they might have as a result of their audit. The investor representatives sent a clear message to IFIAR Members that a framework was needed from regulators to assess the value of audit reports and that dialogue between investors and companies, and audit committees and investors, was essential to improving audit quality.

Washington, DC — April 2014

As can be seen from these examples, IFIAR has outreached to the investor community and engaged in an ongoing dialogue with them since the creation of the Investor Working Group in 2009.

In addition to those topics discussed earlier, the Investor Working Group has also identified integrated reporting as a topic of importance that has gained considerable traction in the international community. Integrated reports would include not only financial information about a company, but also an analysis about a range of non-financial issues affecting the performance and long term prospects of that company. As defined by the International Integrated Reporting Council, "An integrated report is a concise communication about how an organization's strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value over the short, medium and long term."

As we prepare for the 2014 investor session, the Investor Working Group will, for the first time, bring audit committee chairs into the dialogue with IFIAR between investors and audit regulators, and investors and audit firms. We will ask the investor representatives to address the question of how audit committees can best serve the interests of investors; the audit committee chairs to address what they would most like to hear and receive from the auditors; and the auditors to discuss what they would most like to hear and receive from audit committees.

After our Washington session, I envision that the Investor Working Group will be expanded to include other stakeholders such as audit committees, economists and academics. This would be a natural progression, based on the Investor Working Group's extended and consistent engagement with various stakeholders throughout its existence.

So our work continues. I am proud of everything that the Investor Working Group has achieved thus far, and the debate that has ensued surrounding many of the issues that it has raised over the years at these sessions. I believe that the Investor Working Group will continue to serve as a vital forum for investors, audit regulators, and other important stakeholders to discuss important audit regulation issues, all of which are designed to improve audit quality, protect investors, and facilitate capital formation.

I welcome your questions.