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Statement on the Commission’s Consideration of the Public Company Accounting Oversight Board’s Proposed 2015 Budget and Accounting Support Fee

Commissioner Kara M. Stein

Feb. 4, 2015

Over twelve years ago, a series of revelations of corporate misconduct at some of our nation’s largest companies shook the U.S capital markets.   It was revealed that some large and very respected companies had simply fabricated their financial information.   Companies collapsed.   Employees were sent packing.  One of the largest accounting firms imploded.  Investors and our communities suffered.   Nine months after Enron’s financial misdeeds were first reported and weeks after the WorldCom scandal became public, Congress passed the Sarbanes-Oxley Act.[1]

Title I of the Sarbanes-Oxley Act created a new entity called the the Public Company Accounting Oversight Board (PCAOB).  The PCAOB was created to require external and independent oversight of the auditors of U.S. public companies for the first time in history.  Previously, the audit profession had been self-regulated.  When establishing the PCAOB in 2002, Congress vested the Commission with authority to review and approve the Board’s rules, standards, and budget. [2]      

We are here this morning to fulfill the Commission’s statutory obligation to approve the PCAOB’s annual budget. I want to begin by commending the PCAOB and its staff for the hard work they have been doing to ensure that financial information provided through the conduct of the independent audit is accurate, reliable, and transparent.  As we all know, relevant and reliable financial information is critical to investor confidence in our capital markets. 

A cornerstone of the Board’s approach to ensuring investor confidence is their audit firm inspection program.  While the PCAOB’s inspections program continues to mature, I, like many others, remain concerned about the high percentage and reoccurrence of audit deficiencies at the firms.  There has been, and I hope will continue to be, additional progress in reducing the number and rate of audit deficiencies.  Audit firms should be asking questions to find out what happened, why it happened, and how to prevent it from happening again.  The continued number and rate of audit deficiencies may be symptomatic of a need to address deeper issues. 

Since 2011, the PCAOB has also been remarkably successful in working with regulators around the globe, which enabled inspections and oversight of firms in more than 20 jurisdictions last year.  The PCAOB can be particularly proud of the collaborative arrangements it has achieved that allow PCAOB inspectors to jointly inspect firms with their international counterparts.  The PCAOB’s joint inspections ensure consistent oversight for auditors of companies with significant operations all over the world, and also help to build partnerships and trust between regulators. 

I am also pleased to see that the PCAOB remains focused on improving its processes and its communication with stakeholders and the public.  The Board continues to actively encourage academic research, and in October of last year, hosted the First Annual Economic Conference on Auditing and Capital Markets.  The PCAOB is also doing more to reach out to the audit committees of public companies, who are charged with overseeing the work of the auditors.  I encourage the PCAOB and the auditing profession to continue to engage audit committees to enrich the discussion of audit risks and challenges. 

The PCAOB also has focused on the importance of objectivity and professional skepticism.  PCAOB inspection reports, as well as other reports from other regulators around the world, frequently reveal concerns about whether firms are sufficiently executing their obligations to apply professional skepticism.  The application of professional skepticism, as well as objectivity, underpins all of our auditing standards.  In fact, there is no more fundamental aspect of audit quality than stressing the importance of a constantly questioning mind, engaged in the objective search for financial truth.   And, I’m glad that both the PCAOB and the audit profession are working to strengthen it.  The auditor needs to be able to make the tough calls, just as a referee, does. Investors and the public put their trust in the auditor to make the critical calls. 

To that end, I’m pleased that the Board has taken a measured approach.  Rather than promulgating a myriad of rules and procedures, it has been focused on enhancing application of the core standards, or principles, that everyone knows are critical.  Improved guidance through audit practice alerts on such topics as assessing internal controls, revenue recognition, and the going concern assumption appear to have been particularly useful.  In addition, the PCAOB has developed staff consultation papers to target and solicit comments on the potential need for change or revision to areas of professional practice.  This approach respects the idea that one size does not fit all, and that auditors should have the freedom – and the responsibility—to construct their own procedures based upon the complexity and risks inherent in today’s increasingly complex financial transactions.  

Stepping back though, I believe that the PCAOB’s focus on investor confidence should remain paramount.   The PCAOB was created in the wake of accounting and auditing scandals.   One of its primary missions is to restore confidence in the financial statements of publiclyu traded companies and, as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, in the financial statements and compliance reports of broker-dealers.  In many ways, the PCAOB embodies the statement James Landis made in 1933, “that the public interest and the protection of investors must be the guiding consideration” of the public accountant. [3]

The PCAOB should be asking questions, such as how does the audit report help investors?  In an era of monumental developments in technology, and with financial transactions occurring across the world, how can the work of auditors help investors more?  Does the auditor sound the alarm when it is necessary?  Are there other areas, such as an issuer’s key performance indicators, where the auditor’s opinion would be useful? Should auditors have a role in assessing and providing assurance on data that issuers provide?

I look forward to continued progress on the PCAOB’s near-term and long-term priorities.  I want to extend my thanks to the team in the Office of the Chief Accountant that works every day with the PCAOB to help it best perform its critical mission, including Jim Schnurr, Brian Croteau, Kevin Stout, Khalid Shah, and Matt Hodder, and to the team in our Office of Financial Management, Ken Johnson, Caryn Kauffman, and Richard Taylor. 

I also want to extend my thanks to Chairman James Doty for appearing here today and to the members and staff of the PCAOB for their hard work throughout the budget process. Thank you.

[1] Congress passed the Sarbanes-Oxley Act of 2002 (passage in the U.S. House of Representatives by vote of 423-3 and in the U.S. Senate by vote of 99-0) and President Bush signed it into law on July 30, 2002.

[2] Congress has also passed laws that address the funding of Board activities, primarily through the annual accounting support fees assessed on public companies and on brokers and dealers.  For example, Section 109 of the Sarbanes-Oxley Act of 2002 provides the mechanism of funding the PCAOB through an accounting support fee.  Section 982 of the Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Sarbanes Oxley Act to provide the PCAOB with authority over the auditors of broker-dealers registered with the Commission. 

[3] J.M. Landis, Liability Sections of the Securities Act Authoritatively Discussed, an address before the Eleventh Annual Fall Conference of the NYS Society of CPAs, October 30, 1933.

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