Remarks before the 2020 AICPA Conference on Current SEC and PCAOB Developments
Professional Accounting Fellow, Office of the Chief Accountant
Dec. 7, 2020
The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This speech expresses the author's views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff.
Good morning and it is an honor to speak with you at the conference this year.
Today, I would like to discuss two topics: the Monitoring Group Recommendations to Strengthen the International Audit and Ethics Standard-Setting System, and the Commission’s recent amendments to its auditor independence rules.
Monitoring Group Recommendations to Strengthen the International Audit and Ethics Standard-Setting System
In recent years, members of the SEC staff have spoken about why international audit quality matters to U.S. investors. For example, U.S. investors’ holdings in foreign equity and long-term debt securities has increased from $6.0 trillion at the end of 2009 to $13.1 trillion at the end of 2019. Many of these companies are based outside the U.S., with securities listed in non-U.S. jurisdictions and their financial statements audited under international standards developed by the International Auditing and Assurance Standards Board (“IAASB”).
Therefore, how international auditing and independence standards are developed can have an effect on U.S. investors. Consequently, improvements in international audit and ethics standard-setting should lead to higher audit quality outside the U. S., which ultimately benefits U.S. investors and our capital markets.
In this regard, the Monitoring Group (“MG”) is responsible for the oversight of the international audit and ethics standard-setting process. On July 14, 2020, the MG published its recommendations to strengthen international audit and ethics standard-setting to enhance its responsiveness to the public interest and improve audit quality. I want to highlight some of the key recommendations that when implemented would improve the current international standard-setting structure:
- Independent standard-setting structure - The IAASB and the International Ethics Standards Board for Accountants (“IESBA”), collectively the standard-setting boards (“SSBs”), will be housed in an independent standard-setting structure outside of and independent from the International Federation of Accountants (“IFAC”);
- Multi-stakeholder participation - The Public Interest Oversight Board (“PIOB”), which oversees the SSBs, and the SSBs will have a multi-stakeholder composition;
- Clearly defined roles and responsibilities – The roles and responsibilities of each level of the three-tiered model, namely Monitoring Group, PIOB and SSBs, are clearly delineated and properly balanced to demonstrate transparency and accountability;
- Funding diversification - Funding sources will be diversified beyond the accountancy profession and there will be a separation between the source of funding and the management of the funds; and
- Public Interest Framework - The Recommendations established a framework that is responsive to the public interest by which the SSBs will perform their responsibilities and the PIOB will oversee their work.
The MG recommendations envision that a transition plan will be developed within nine months from its publication and will be implemented within three years thereafter. Stakeholders are now working collaboratively to transition and implement the recommended reforms. I want to thank all those stakeholders who have participated in the process to date, and encourage all of you to follow these developments and engage in the standard-setting process to help achieve the collective goal of improved audit quality globally.
Continuing with the theme of audit quality, I would like to focus the rest of my discussion on auditor independence, which is foundational to the credibility of financial statements. The auditor independence requirements are critical to fostering high quality audits by minimizing the possibility that external factors will influence an auditor’s judgments and to promote investor confidence in the financial statements of public companies.
On October 16, 2020, the SEC adopted final amendments to certain auditor independence requirements to more effectively focus the analysis on relationships and services that are more likely to pose threats to an auditor’s objectivity and impartiality. The amendments updated aspects of the nearly two-decade-old auditor independence requirements based on fact patterns OCA staff has observed, which triggered rule breaches or required potentially time consuming audit committee review of matters that did not impair an auditor’s independence and objectivity.
These amendments maintain the bedrock principle that auditors must be independent in fact and in appearance while improving the relevance of the Commission’s auditor independence standards in light of existing market conditions. The final amendments are another example of how we can focus attention and effort on improving audit quality, which ultimately benefits U.S. investors and our capital markets.
This concludes my prepared remarks. Thank you for your kind attention.
 See e.g., Nigel J. James, Associate Chief Accountant, Office of the Chief Accountant, U.S. Securities and Exchange Commission, Remarks before the 2017 AICPA Conference on Current SEC and PCAOB Developments (Dec. 4, 2017), available at https://www.sec.gov/news/speech/speech-james-2017-12-04.
 See U.S. Department of the Treasury, Federal Reserve Bank of New York, and Board of Governors of the Federal Reserve System, U.S. Portfolio Holdings of Foreign Securities as of December 31, 2019, at page 5 (Oct. 2020), available at https://ticdata.treasury.gov/Publish/shca2019_report.pdf and U.S. Portfolio Holdings of Foreign Securities as of December 31, 2009, at page 3 (Oct. 2010), available at https://ticdata.treasury.gov/Publish/shc2009r.pdf.
 Members of the Monitoring Group are the Basel Committee on Banking Supervision, European Commission, Financial Stability Board, International Association of Insurance Supervisors, International Forum of Independent Audit Regulators, International Organization of Securities Commissions, and the World Bank Group. See https://www.iosco.org/about/?subsection=monitoring_group for further information on the Monitoring Group.
 See Monitoring Group, Strengthening the International Audit and Ethics Standard-Setting System (July 14, 2020), available at https://www.iosco.org/about/monitoring_group/pdf/2020-07-MG-Paper-Strengthening-The-International-Audit-And-Ethics-Standard-Setting-System.pdf.
 See also Nipa Patel, Professional Accounting Fellow, Office of the Chief Accountant, U.S. Securities and Exchange Commission, Remarks before the 2019 AICPA Conference on Current SEC and PCAOB Developments (Dec. 9, 2019), available at https://www.sec.gov/news/speech/patel-speech-2019-aicpa-conference.
 See Vassilios Karapanos, Associate Chief Accountant, Office of the Chief Accountant, U.S. Securities and Exchange Commission, Remarks before the 2019 AICPA Conference on Current SEC and PCAOB Developments (Dec. 9, 2019), available at https://www.sec.gov/news/speech/karapanos-speech-2019-aicpa-conference.