Protecting Investors Requires a Strong PCAOB

Speech

Protecting Investors Requires a Strong PCAOB

Commissioner Luis A. Aguilar

U.S. Securities and Exchange Commission

SEC Open Meeting, Washington, D.C.

Feb. 5, 2014

Investor confidence in the reliability of public company financial statements—and in the effectiveness of their internal controls—is essential to true capital formation.  This requires, among other things, that a company’s financial statements benefit from the rigor of high-quality, independent audits.  To that end, and to protect the interests of investors and the public interest, Congress established the Public Company Accounting Oversight Board (“PCAOB”), and gave it authority to oversee the audits of certain companies subject to the federal securities laws.[1]

To fulfill that responsibility, the PCAOB has four primary functions, which it exercises subject to the oversight and enforcement authority of the Commission:

  • To register accounting firms that participate in the preparation or issuance of audit reports for public issuers, as well as firms that audit securities brokers and dealers;
  • To set auditing, quality control, independence, ethics, and other standards applicable to the preparation of such audit reports;
  • To inspect these accounting firms; and
  • To enforce compliance by these accounting firms and their associated persons with their obligations relating to audit reports.

These responsibilities are important.  It is clearly in the public interest and the interest of investors to ensure that the PCAOB has the financial resources required to carry them out effectively.  It is also important to ensure that the PCAOB employs its resources efficiently. 

Today, we consider the PCAOB’s budget to fund its operations for the fiscal year ended December 31, 2014.  I support the PCAOB’s 2014 budget and the accounting support fee because, in my view, the budget provides the PCAOB with an appropriate level of resources to fulfill its mission and because the PCAOB has demonstrated an ability to use those resources prudently.

The PCAOB’s mission is all the more critical today, given continued concerns about audit quality.  Recent reports by the PCAOB have noted widespread deficiencies in audit performance and quality control.  In the case of the smaller domestic audit firms (that is, those issuing no more than 100 public company audit reports in a year), 44% of the firms inspected between 2007 and 2010 had at least one significant audit performance deficiency.[2]  Although this actually represents an improvement from the even greater deficiency rate identified in the PCAOB’s prior triennial report,[3] it is without question that the level of reported audit failures remains unacceptably high.

Additional concerns were raised by the PCAOB’s 2013 progress report on the interim inspection program for firms that audit broker-dealers.[4]  That report noted that 95% of the audits selected for inspection had deficiencies.  In fact, deficiencies were found in one or more of the audits conducted by each of the firms inspected.  It is particularly troubling that, in 37% of the broker-dealer audits selected for inspection, auditors appeared to have been involved in the preparation of the very financial statements they audited, a violation of the independence required by SEC rules.[5]

Moreover, as recently as last month, the PCAOB reported concerns with the quality control reviews at many audit firms.  The Board noted that in 2011, PCAOB staff inspected 213 firms, in which they reviewed parts of more than 815 audits.  The PCAOB inspection staff found audit failures in approximately 310 of these audit engagements.  Notably, the PCAOB found that a significant portion of the audit deficiencies occurred in areas that were or should have been reviewed in the audit firm’s engagement quality review process, but were not identified because the engagement quality reviews were themselves deficient.

These observations raise serious concerns regarding audit quality across the full spectrum of public accounting firms.  The pervasiveness of the audit failures identified by the PCAOB raises a real risk that investors will ultimately lose confidence in the benefits of the audit process.[6]

As I have said before, the status quo is unacceptable.[7]  The PCAOB seems to agree.  The PCAOB’s current five-year strategic plan is entitled, “Improving the Quality of the Audit for the Protection and Benefit of Investors.”  The plan outlines strategies to improve audit quality through continued emphasis on standard setting, remediation, root cause analysis, risk-based inspection and enforcement, transparency, auditor independence and accountability, as well as potential enhancements to the auditor’s reporting model.  I look forward to continued progress in each of these initiatives, but ultimately, success must be measured by significant and sustained reductions in the number of audit deficiencies identified through the inspection process. 

While I commend the PCAOB’s on-going efforts, I also call upon the accounting profession to renew its longstanding commitment to audit quality for the benefit of investors and the public interest.  As the Supreme Court has noted, the independent auditor is “a public watchdog,” whose role is “a public responsibility transcending any employment relationship with the client.”[8]  Fulfilment of this responsibility is critical to the proper functioning of the capital markets and our economy.

I would like to thank Chairman Doty, and the members and staff of the PCAOB, as well as SEC staff from the Office of the Chief Accountant and the Office of Financial Management, for their hard work throughout the budget process, as well as the time spent with myself and my staff to respond to all my questions.  I appreciate your dedication, and the important work you do to protect investors.

Thank you.



[1] Section 101(a), Sarbanes-Oxley Act of 2002, as amended, 15 U.S.C.A. §§ 7201-7266 (the “Sarbanes-Oxley Act”).

[2] PCAOB Rel. No. 2013-001, Report on 2007-2010 Inspections of Domestic Firms That Audit 100 or Fewer Public Companies (Feb. 25, 2013), http://pcaobus.org/Inspections/Documents/02252013_Release_2013_001.pdf.  As used in the report, "significant audit performance deficiency" means a deficiency of such significance as to appear to inspection staff that the firm did not obtain sufficient appropriate audit evidence to support its opinion.

[3] Approximately 61% of domestic triennial firms inspected between 2004 and 2006 had at least one significant audit performance deficiency.  PCAOB Rel. No. 2007-010, Report on the PCAOB’s 2004, 2005, and 2006 Inspections of Domestic Triennially Inspected Firms (Oct. 22, 2007), http://pcaobus.org/Inspections/Documents/2007_10-22_4010_Report.pdf.

[4] PCAOB Rel. No. 2013-006, Second Report on the Progress of the Interim Inspection Program Related to Audits of Brokers and Dealers (Aug. 19, 2013), http://pcaobus.org/Inspections/Documents/BD_Interim_Inspection_Program_2013.pdf.

[5] Id., Executive Summary, i.

[6] See, James R. Doty, Chairman, PCAOB, “Enhancing Capital Formation, Investor Protection and Our Economy,” remarks at the AICPA National Conference on SEC and PCAOB Developments, Washington, D.C. (Dec. 9, 2013), http://pcaobus.org/News/Speech/Pages/12092013_Doty_AICPA.aspx.

[7] See, e.g. Commissioner Luis A. Aguilar, “Capital Formation from the Investor’s Perspective,” remarks at the AICPA Conference on Current SEC and PCAOB Developments, Washington, D.C. (Dec. 3, 2012), http://www.sec.gov/News/Speech/Detail/Speech/1365171491900.

[8] United States v. Arthur Young & Co., 465 U.S. 805, 817 (1984) (emphasis in the original).


Last modified: Feb. 5, 2014