Remarks before the 2017 AICPA Conference on Current SEC and PCAOB Developments
Nigel J. James
Associate Chief Accountant, Office of the Chief Accountant
Dec. 4, 2017
The Securities and Exchange Commission ("SEC" or "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.
What is this about?
The Monitoring Group (MG), a group of international financial institutions and regulatory bodies committed to advancing the public interest, monitors and oversees the governance structure of international audit, ethics and education standard-setting for accountants. On November 9, 2017, the MG issued a consultation paper (the Paper) for public comment that is intended to reform the international audit and ethics standard-setting model, primarily to address the perception of undue influence by the profession over the standard-setting process.
Why is this important?
U.S. investors routinely invest in companies based outside the United States and listed in non-U.S. jurisdictions to diversify their portfolios. Recent data indicates that U.S. investors have invested $9.58 trillion in foreign equity and long-term debt (out of which over $4 trillion is held by U.S. mutual funds, and over $1 trillion is held by U.S. pension funds).
As a result of the connection between international capital markets, raising the quality of audit standards outside the United States benefits U.S. investors and our markets. International Standards on Auditing (ISAs) are developed by the International Auditing and Assurance Standards Board (IAASB). The International Code of Ethics for Accountants is issued by the International Ethics Standards Board for Accountants (IESBA). Both are housed under the International Federation of Accountants (IFAC) and form the primary basis for audits of non-issuers in the U.S. This stems from the fact that the AICPA’s Statements on Auditing Standards (SASs) were drafted using the corresponding ISAs issued by the IAASB as a base, with differences remaining only where the AICPA believes compelling reasons for such differences exist.
This is important as in certain circumstances the SEC accepts audits of financial statements audited under AICPA standards, for example, in certain Regulation Crowdfunding filings. I expect that many of you in the audience are engaged as an auditor, or have engaged an auditor, to perform audits of financial statements under AICPA standards, some of which are filed with the SEC.
Increasingly, the PCAOB and the IAASB have been collaborating on projects of mutual interest, engaging in dialogue and/or officially observing each other’s workstreams and are informed by the research and feedback received by each other.
In short, developments affecting the IAASB and the IESBA (collectively, the standard-setting boards or “SSBs”) can have a direct and/or indirect effect on both U.S. issuers and non-issuers.
What is the Content of the Paper?
The MG is seeking stakeholder views on several topics in the Paper including, among other things:
- Changing to a structure with a single board for the development and adoption of both auditing/assurance and ethical standards for auditors; or retaining separate boards with one covering auditing/assurance and the other covering ethical standards for auditors;
- IFAC continuing to set education standards and ethical standards for professional accountants in business;
- Changes to the nominations process to appoint members to the SSBs; and
- Changes to the funding model including diversifying the funding base and establishing a "contractual" levy on the profession to fund the new, reformed structure.
Globally Accepted Model:
As stakeholders evaluate the proposed options in the Paper, I believe the resulting model and standards should be judged based on the acceptance and confidence of the international public in the process and final outcome. One example where there appears to be global acceptance and confidence is the member selection criteria established for international accounting standard-setting. Under this model, the International Accounting Standards Board (IASB) – an independent standard-setting board of experts selected on the basis of professional competence and practical experience and drawn from a variety of backgrounds, including former users, preparers, standard setters and auditors – is governed and overseen by trustees from around the world (IFRS Foundation) who in turn are accountable to a monitoring board of public authorities (Monitoring Board). Perhaps stakeholders may wish to consider this model in formulating a response to the Paper.
Funding must be stable and independent:
The funding structure should not undermine the reform objective of independence and should guard against any link between funding contributions and the ability to influence the standard-setting process.
Composition of the Boards:
The composition and focus of the board is critically important. Consideration of the composition should balance the need for independence and expertise as well as the need to focus on both strategic and technical matters in board deliberations. Also, one has to consider the dynamics of whether the entire board should be full-time or certain members part-time. If the latter, how will the work be divided and will each of the board members’ views be considered equally?
Size of the Boards:
Currently, there are a total of 36 Board members serving on the auditing and ethics Boards (18 members per Board). While 36 Board members may be too many, I believe any reduction in size of the Boards should accommodate the geographic diversity necessary for an international board. Once again, the IASB, with similar considerations about geographic diversity, may be an example worth studying.
What Do We Anticipate Next?
The Paper can be found on IOSCO’s website at http://www.iosco.org/ under the "Publications" tab. The comment period to respond to the Paper closes on February 9, 2018. I encourage each of you and the organizations you represent to carefully consider the issues raised in the Paper and provide your feedback by submitting a comment letter. Comment letters can be submitted via the IOSCO website.
Once the comment period closes, the feedback will be analyzed by the MG. As the Paper includes options for reform, the MG expects a second round of public consultation on the final proposals, together with the transition plan and impact assessment.
The MG Paper represents an important opportunity for each of you, as stakeholders in the audit process, to influence the future of international auditing and ethics standard-setting. Your perspectives can help determine what type of funding arrangements should be established to fund the reformed structure in a manner that does not compromise the independence and objectivity of the Boards. Your feedback can assist in determining the level of competence needed to be eligible for selection to the Boards. You can make a difference. Let your perspectives be heard by submitting a comment letter in response to the Paper. Thank you.
 See The Monitoring Group, Monitoring Group Consultation: Strengthening the Governance and Oversight of the International Audit-Related Standard-Setting Boards in the Public Interest, available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD586.pdf.
 See U.S. Department of the Treasury, Report on U.S. Portfolio Holdings of Foreign Securities as of December 31, 2016, at pages 10 and 27 (Oct. 2017), available at http://ticdata.treasury.gov/Publish/shc2016_report.pdf.