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U.S. Securities and Exchange Commission

Speech by SEC Staff:
Opening Remarks before the Open Meeting on PCAOB Budget and PCAOB and FASB Support Fees


Donald T. Nicolaisen

Chief Accountant
U.S. Securities and Exchange Commission

Washington, D.C.
March 3, 2005

Chairman Donaldson and members of the Commission:

As Chairman Donaldson noted, under the Sarbanes-Oxley Act the Commission must approve each annual budget of the Public Company Accounting Oversight Board. The Commission staff believes this is a serious responsibility. The Offices of the Executive Director, Information Technology and Chief Accountant devoted considerable resources to determine whether there is a reasonable and well-considered basis for the PCAOB budget. We are here today to recommend that you approve the PCAOB's revised budget request that was filed with the Commission on January 6, 2005.

As you may recall, the PCAOB held its first public meeting and officially commenced operations in January 2003. In just a little over two years, it has grown from a concept expressed in the Sarbanes-Oxley Act to a functioning organization that is having an important impact on the way audits are conducted in this country. The PCAOB started with only the Board members and a handful of dedicated staff. Its budget for 2003 was about $65.8 million ($47.4 million spent in 2003). It ended 2003 with about 150 employees and requested a budget for 2004 of $103 million ($77.3 spent in 2004). At the end of 2004, it had 260 employees and currently is requesting a budget for 2005 of $137.1 million. This level of growth was to be expected as the organization moved from the startup phase into operations. That rate of growth reflects the startup nature of the Board and will stabilize.

While we are in ongoing dialogue with the PCAOB, our review of the PCAOB 2005 budget began in earnest when the PCAOB adopted an initial budget in October and forwarded that budget to the Commission. This original budget request was for $152,750,000.

The adoption of the October budget was viewed by both the PCAOB and our SEC staff as the beginning of a process - not an end.

As soon as that budget request was submitted, we began to collect the appropriate information and data from the PCAOB. Our staff visited their offices frequently and were provided with documentation and the Board's justifications for the amounts in the budget request. We met with PCAOB staff from many of their internal offices and divisions, including those responsible for administration, finance, and personnel. We also met with the Board's IT specialists and reviewed their current and planned technology systems. And on numerous occasions we consulted directly with PCAOB Member Charley Niemeier and Chairman Bill McDonough, and others at the PCAOB.

Those discussions and the completion of our effort took several months. The SEC staff reviewed multiple binders of information and documents provided by the PCAOB and we conducted our own analysis of the information we received. Our efforts were to assess the reasonableness of the PCAOB's estimates for the coming year and not to audit its historical financial results or position. The audit of the PCAOB's financial statements will be performed in the coming months by an independent, non-registered accounting firm.

During our consultations with the PCAOB staff we noted several areas where we thought the budget estimates could be tightened. Also during our review, the PCAOB developed a clearer picture of what its resources actually would be at the end of 2004. Our discussions resulted in reductions in the personnel costs reflected in the PCAOB budget, including amounts for salaries and relocation and recruitment costs. Other areas reduced included the projected costs for hiring consultants and for travel, training and technology expenses. While our staff made inquiries and suggestions, at the end of the day, the budget is the responsibility of the PCAOB.

The PCAOB revised its original budget request downward by approximately $15,600,000 and submitted a revised budget request for $137,100,000. That is the request before you today.

Throughout this process, our staff attempted to keep the Commissioners and your legal counsels informed of our progress and we met with each of you individually to discuss our findings and obtain your views firsthand. The PCAOB has been open in discussions with us and the Commissioners also had the opportunity to visit the PCAOB and ask them about their budget and other topics. I sincerely appreciate the time the Commissioners and their staff made available.

The PCAOB often is referred to as a centerpiece of the Sarbanes-Oxley Act and indeed the Board has a very large job to do. Over 1400 accounting firms at this point have registered with the PCAOB and over 500 of those registered are non-US firms located in 75 countries. Every year, the PCAOB must inspect each accounting firm that provides audit reports for more than 100 issuers. Currently, there are eight domestic firms in this category and the four largest of these firms have offices literally around the world. Under the Act, firms that provide audit reports to fewer than 100 issuers must be inspected at least once every three years. The manpower required to be kept in the field to conduct inspections within the US alone is considerable.

In addition, the PCAOB must be ready to take appropriate corrective and disciplinary actions to address audit related problems identified during its inspections or that otherwise come to its attention. The ability to strengthen the profession is very important to the PCAOB's success.

The PCAOB also must address many pending standard-setting issues. The need for audit guidance in evolving areas such as fair market valuations will be critical to effective financial statement audits.

In all of this, the PCAOB has been tasked to develop a highly knowledgeable and professional staff during a very tight job market for accountants. I am reminded continually by businessmen and auditors alike that the supply of talent is scarce.

We have been assured by the PCAOB that, although the revised budget requires them to tighten their belts, they will be able to accomplish their mission with the amount reflected in the revised budget.

Based on both the representations from the PCAOB and the considerable analysis conducted by Jim's office, Corey Booth, and my office, we believe that the revised budget is reasonable and we recommend that you approve it.

Going forward, we intend to meet in the near-term with the PCAOB to consider how to make subsequent budget approval processes more efficient. We also believe that the PCAOB has reached the stage where it should begin to develop more refined long-range operational and financial plans. Chairman McDonough agrees and has indicated that in connection with the PCAOB budget request for 2006 he expects to provide a long-range strategic plan, as well as an assessment by the PCAOB of its internal controls over its budget and operations.

Finally, in the coming months, my office and the Office of Compliance, Inspections and Examinations anticipate beginning inspections of selected areas of the PCAOB's operations. We will brief you on those inspections as they occur.

As the Chairman indicated, we also have reviewed the support fee for the Financial Accounting Standards Board. Because the FASB is a more mature organization than the PCAOB, the FASB budget tends to be more stable and there are few changes from last year.

There are two items to note, however. First, the FASB has begun a project to create a new comprehensive and integrated codification of all U.S. generally accepted accounting principles. My office will be working with the FASB on the inclusion of SEC guidance in that codification. This is a major project that will take years to complete, but it should result in an integrated and well-organized online database of information that will make accounting standards and rules much easier to research, understand and use. I am a strong supporter of this effort.

The second point to note is that the total budgeted expenses for 2005 are approximately $26,924,000. The support fee, however, is about $20,244,000 due to offsetting amounts that the FASB has received from the sale of its publications. The budget has been reviewed and approved by the Financial Accounting Foundation.

We believe the FASB budget is consistent with the funding provisions in section 109 of the Sarbanes-Oxley Act and recommend that the Commission issue an appropriate order.

In addition to recognizing the cooperation and patience of the PCAOB in this process, I particularly want to thank Melanie Jacobsen and Brian Croteau from my office and Ken Johnson and Bill Wiggins from the Executive Director's office, as well as Corey Booth, head of IT, for their relentless efforts in tracking down the data and doing the analysis that we needed to complete the staff's review of the PCAOB budget. I also want to thank Melanie, Bill and Bert Mehrer for their work on the FASB budget.

We are happy to accept your questions.


Modified: 03/03/2005