Testimony on the PCAOB 2017 Budget and Strategic Plan

Good morning Chair White and Commissioners Stein and Piwowar.

I am here to present for your consideration the PCAOB's 2017 budget of $268.5 million.

Before I go further, I would like to thank the Chief Accountant (Wes Bricker) and his staff, as well as the Commission's Chief Financial Officer (Ken Johnson) and his staff, for their support and counsel as we developed this budget.

In this period of change, I would also like to thank you, Chair White, for your leadership and support for the PCAOB.

While priorities change over time, what should not change is recognition of the critical importance of audits and reliable financial reporting in our markets.

The PCAOB is a cost-effective vital resource protecting investors and fostering economic resilience by promoting reliable, informative and independent audit reports through effective inspection, enforcement, and standard-setting programs.

In executing this mission, the intent of the budget is to enable the PCAOB to continue to protect investors and to enhance the trust that facilitates capital formation.

My fellow Board members and I have carefully examined the PCAOB's cost categories with a view to identifying and implementing savings and efficiencies.

The 2017 budget reflects cost-effective strategies to automate, streamline and improve our processes, maximize staff utilization and productivity, and promote the careful stewardship of our resources.

Reliable audits are a cornerstone of promoting investor trust and facilitating investment that grows capital markets and a healthy economy.

Experience tells us the PCAOB's role is essential, and our standards and oversight programs are making a real difference on behalf of investors and companies.

But as we've seen from both the PCAOB's and the Commission's enforcement programs, it is critically important that the PCAOB remain vigilant and independent, because persistent economic pressures can threaten the integrity of audits.

On the whole, and in my view, audits and investor protection have improved significantly.

This budget allows the PCAOB to sustain those improvements and continue to fulfill its Congressional mandate to promote the values that investors expect in audits: accuracy, integrity, transparency, independence, and ultimately accountability.

To this end, the 2017 budget will allow us to conduct rigorous inspections in both the United States and abroad, to meet mandatory annual and triennial inspection cycles applicable to the auditors of issuers.

It will also allow us to continue to inspect audits of brokers and dealers. This is an area where we have identified significant audit and independence problems.

We will also continue to analyze the potential economic impact of a permanent broker-dealer program.

On the international front, in July, we secured renewal of the European Commission's adequacy determination, which allows us to continue to conduct joint inspections with European regulators.

The renewal runs for another six years – double the period of previous such determinations. It allows us to continue to deepen our relationships with local European regulators. We also announced last month a new protocol with Italian authorities.

Investors in U.S. corporations rely considerably on audit work by non-U.S. firms. Standard & Poor's estimates that more than 40 percent of the sales reported by S&P 500 companies are generated abroad. As with many other financial accounts, revenue is typically audited at the local level. Investors in U.S. securities are therefore dependent on the quality of this audit work.

Our enforcement program focuses on holding auditors accountable and demonstrates that the risks for which our vigilance is needed are real.

Just last week, the Board announced settled actions involving audit failures in two firms of an international network. In both cases, PCAOB enforcement staff also uncovered evidence that the firms' personnel had improperly deleted, added to, or altered information in documents provided to PCAOB inspectors.

In one of those cases, the affiliated firm agreed to pay an $8 million civil penalty. We imposed sanctions against 12 former partners, including leaders, and other audit personnel of the firm.

This is by far the largest number of individuals charged in a single PCAOB enforcement action. They are no longer with the firm, and the firm took other remedial measures. That is real accountability that protected investors.

In 2017, we expect to continue to be active in our investigative and disciplinary work on the international front, as well as in cases involving U.S.-based auditors.

Our budget justification reflects the critical resources needed to continue this work.

Of course, we collaborate closely with SEC enforcement to ensure that between the two programs we cover the waterfront of possible audit misconduct and avoid duplication of effort.

In standard setting, we have worked with audit firms to implement our new standard on disclosure of the name of the engagement partner and other firms involved in an audit. Those disclosures will begin to be available to investors and markets in 2017.

We will also continue to implement a new standard-setting process, based on a comprehensive, two-year review of the process from start to finish.

The new process recognizes the importance of conducting deep research, outreach, and economic analysis – first to assess the need for a standard-setting project and then, if there is one, to design innovative and cost-effective approaches to address that need.

This has already borne fruit.

In April, we proposed a new standard on supervising the work of other auditors. As reflected in the cases I described, supervising the work of affiliates in multi-national audits is important for investor protection.

In May, we issued a revised proposal on improvements to the auditor's reporting model, reflecting changes in light of comments received on the original proposal. Working closely with your staff, we are near completion of this project.

Our standard-setting process also involves considerable interaction with economists in our Center for Economic Analysis. They conduct economic analyses to promote solid policy decisions based on the best evidence and information available.

Economists in the Center enable the correct identification of problems and help develop tailored solutions.

Recent Center research has focused on materiality, audit adjustments, internal control deficiencies and auditor specialization, producing valuable insights for standard setting.

The Center also is well underway in its first post-implementation review of a standard previously adopted by the Board.

Center researchers have also contributed to our project to develop audit quality indicators for use by audit committees and others, by conducting empirical tests on many of the potential indicators in the Board's 2015 concept release.

In 2017, we plan to integrate the Center for Economic Analysis with our Office of Research and Analysis, which monitors areas of potential audit risk. This integration is modeled on the Commission's own Division of Economic and Risk Analysis.

By consolidating the groups, we can enhance our use of data analysis and make all of our programs and policy analysis more efficient and more relevant.

Let me now turn to the funds required.

The 2017 budget and related strategic plan reflect careful planning, responsible stewardship, and a deep commitment to the PCAOB's public interest mission.

This is not a growth budget. It assumes the same number of positions as budgeted in 2016.

The 4 percent dollar increase over the 2016 budget reflects the full-year cost of recent hires; rent increases; standard annual benefit and compensation adjustments; and other administrative expenses.

The budget also funds critical needs related to information technology, in particular to address cybersecurity risks and business continuity needs.

We will inspect in more jurisdictions than ever before. We face growing demand to bring accountability where it is needed. These will be funds well spent to protect investors and foster confidence.

The 2017 budget also reflects a number of actions we have taken to achieve savings and efficiencies, reduce certain cost categories in 2017, and constrain the rate of growth in other areas over the next several years. For example:

  • As we developed the final budget, we reduced recruitment and relocation costs by $450,000.
  • We've reduced variable pay by $300,000.
  • We achieved savings in IT costs of $400,000.
  • We've identified savings in training of $400,000. And additional facilities cost savings of $300,000.

Regarding our D.C. renovation project, we've done two value engineering studies, which resulted in some savings. In addition, changes to the timing of the project have brought its effect on the 2017 budget down. And I'm committed to continuing to look for ways to minimize the cost of the overall project.

Our regional space planning framework will achieve significant rental cost savings over the next decade.

We are investing in video conferencing and webcast technology, in order to minimize interoffice travel and conserve our travel dollars for critical inspection field work. We estimate this will save meaningful amounts by forgoing certain interoffice travel.

As we head into 2017, we are looking for ways to be even more efficient. I've asked our Chief Administrative Officer to accelerate our review of our compensation structure. We also will pursue better tools to track savings and efficiencies. And we will assess our staff skills and allocations for the 2018 budget.

It is our responsibility, as leaders, to ensure that the audit mandated by the securities laws serves our markets in the most effective and cost-efficient way possible, so that those markets can continue to deliver economic growth in our country.

By funding the PCAOB's programs in the manner I've described, the 2017 budget promotes capital formation by protecting investors and building market confidence in the audit.

I appreciate your time and support, and I would be happy to answer any questions you may have.