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Ensuring the Necessary Resources at the PCAOB

Commissioner Luis A. Aguilar

Feb. 4, 2015

The Public Company Accounting Oversight Board (“PCAOB” or “Board”) plays an important role in our capital markets by overseeing the independent audits of America’s public companies and broker-dealers.[1] It is thus critical that the PCAOB have the necessary resources to protect investors and the public interest by promoting the preparation of informative, accurate, and independent audit reports.[2] Under the law, the PCAOB’s annual budget is subject to the Commission’s review and approval,[3] and it is incumbent upon us to carefully consider whether the PCAOB has sufficient resources to be able to carry out its mission, and that it employs those resources in an efficient manner. To that end, today the Commission considers the PCAOB’s proposed 2015 budget and the underlying accounting support fee.

Although the 2015 budget addresses many of the PCAOB’s functions, today I want to focus on two specific challenges that the PCAOB continues to encounter, and will be working to address in 2015 and beyond:

  • First, the inspection of registered auditing firms in certain foreign countries; and
  • Second, its oversight of PCAOB-registered accounting firms that audit broker-dealers registered with the SEC.

In fulfilling its mission, one of the most important tasks that the PCAOB carries out each year is to conduct inspections of accounting firms registered with the Board. This task requires a global reach. Of the more than 2,300 accounting firms registered with the PCAOB, over 900 of them are located outside our borders.[4] These foreign-registered firms are subject—or should be subject—to the same PCAOB inspection regime as their U.S. counterparts.

As to foreign jurisdictions, I recognize that the Board has continued to make progress in negotiating with foreign authorities to gain access to relevant audit documents and/or to conduct required inspections.[5] However, the PCAOB continues to face challenges in certain member countries of the European Union (“EU”) and in China (and Hong Kong, to the extent that the audit clients have operations in China).[6] This raises unnecessary risks for American investors, who cannot be assured that companies with foreign operations in these countries will be subject to audits that meet the requisite independence and high quality professional standards. I, therefore, am particularly interested in the Board’s progress in 2015, as outlined in its five-year strategic plan, to complete bilateral cooperative arrangements in the remaining EU countries, and to achieve a viable cooperative agreement for cross-border inspections with China.[7] These arrangements are long overdue.

In addition to its global inspection program, the PCAOB has a statutory mandate to inspect the auditors of SEC-registered broker-dealers. As reflected in its strategic plan, one of the Board’s principal objectives is to further develop the infrastructure to enable implementation of these inspections.[8] I highlight this objective because the Board’s 2014 report on the interim inspection program for firms that audit broker-dealers reflects that 78% of the audits had deficiencies.[9] Although this is an improvement from the 95% deficiency rate identified in the prior year’s report,[10] the fact that more than two-thirds of the audits had deficiencies is still too high.

Moreover, less than two months ago, the PCAOB announced disciplinary orders against seven audit firms for violating rules requiring that the auditors of broker-dealers be independent of their audit clients.[11] In addition, just last week, the Board released a report on the recent inspections of the audit and attestation engagements of five accounting firms that audit broker-dealers.[12] This report found deficiencies in all five of the audits, and four of the five attestation engagements. These recent enforcement actions and inspections demonstrate the importance of the PCAOB’s role in overseeing broker-dealer audits, and I commend the Board for focusing resources to continue to expand its interim broker-dealer inspection program while developing a permanent program in this area.[13]

Ultimately, the success of today’s budget will be measured in the continued progress that the PCAOB makes on the near-term priorities described in its strategic plan.[14] Beyond the areas I’ve mentioned, these priorities include improving the Board’s reporting as to inspections and remediation, identifying audit quality measures, enhancing its analysis of inspection findings, and improving the Board’s standard setting program. I look forward to reports from the Board on its progress on these near-term priorities.

After careful consideration, I support the Board’s 2015 budget and accounting support fee. I believe it will provide the PCAOB with the necessary resources to fulfill its mission, and do so in a way that is efficient and effective.

In closing, I would like to thank Chairman Doty, and the members of the staff of the PCAOB, as well as staff from the Office of the Chief Accountant and the Office of Financial Management, for their careful and deliberate work throughout this budget process. I also want to thank them for the time spent with my office in responding to questions and concerns. I appreciate your efforts, dedication, and the important work you do to protect investors.



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

[2] See id.

[3] See Sarbanes-Oxley Act § 109(b), 15 U.S.C. 7219(b). This oversight function is an interactive process in which the Board works with the Commission staff to finalize a proposed budget request and justification that, among other things, expects to lead to the accomplishment of the PCAOB’s long-term strategic goals and the fulfillment of its duties and responsibilities. See Amendments to the Informal and Other Procedures; Public Company Accounting Oversight Board Budget Approval Process, SEC Release No. 33-8724 (July 18, 2006), available at https://www.sec.gov/rules/final/2006/33-8724.pdf.

[4] See PCAOB website, International subsection, available at http://pcaobus.org/International/Pages/default.aspx.

[5] See, e.g., PCAOB Statements of Protocol entered into with France (Feb. 4, 2013), Finland (Feb. 4, 2013), Sweden (March 31, 2014), and Denmark (July 18, 2014), available at http://pcaobus.org/International/Pages/RegulatoryCooperation.aspx ; see also PCAOB Press Release, PCAOB Enters into Enforcement Cooperation Agreement with Chinese Regulators (May 24, 2013), available at http://pcaobus.org/News/Releases/Pages/05202013_ChinaMOU.aspx.

[6] See PCAOB 2013 Annual Report, at pp. 8-9, available at http://pcaobus.org/About/Ops/Documents/Annual%20Reports/2013.pdf.

[7] See Public Company Accounting Oversight Board Strategic Plan: Improving the Quality of the Audit for the Protection and Benefit of Investors, 2014 — 2018 (Nov. 26, 2014), at pp. 15-16 (Goal 1, Objective E), available at http://pcaobus.org/About/Ops/Documents/Strategic%20Plans/2014-2018.pdf.

[8] See id. at p. 14 (Goal 1, Objective C).

[9] See Third Report on the Progress of the Interim Inspection Program Related to Audits of Brokers and Dealers (Aug.18, 2014), PCAOB Rel. No. 2014-003, available at http://pcaobus.org/Inspections/Documents/BD_Interim_Inspection_Program_2014.pdf.

[10] See Second Report on the Progress of the Interim Inspection Program Related to Audits of Brokers and Dealers (Aug.19, 2013), PCAOB Rel. No. 2013-006 (noting that 57 of 60 audits, or 95%, were discovered to have audit deficiencies), available at http://pcaobus.org/Inspections/Documents/BD_Interim_Inspection_Program_2013.pdf.

[11] Specifically, these audit firms violated Commission independence rules by preparing the financial statements of their clients. This is particularly troubling because these were the same financial statements that supposedly were subject to these firms’ independent audits. See PCAOB Press Release, PCAOB Announces Settled Disciplinary Orders Against Seven Audit Firms for Independence Violations When Auditing Broker-Dealers (Dec. 8, 2014), available at http://pcaobus.org/news/Releases/Pages/12082014_Enforcement.aspx.

[12] See Observations From PCAOB Inspections Covering Five Audits of Brokers and Dealers Required To Be Conducted In Accordance With PCAOB Standards (Jan. 28, 2015), PCAOB Rel. No. 2015-001 (these PCAOB inspections covered broker-dealer audits that were required to be conducted, for the first time, in accordance with PCAOB standards), available at http://pcaobus.org/Inspections/Documents/BD_Interim_Inspections_2015.pdf;.see also PCAOB Press Release, PCAOB Reports Deficiencies in Broker-Dealer Audits under PCAOB Standards (Jan. 28, 2015), available at http://pcaobus.org/News/Releases/Pages/01262015_Broker_Dealer.aspx.

[13] See James R. Doty, Chairman, PCAOB, Statement on Proposed 2015 Budget and Strategic Plan (Nov. 25, 2014) (noting that “[w]e will also continue to expand the interim Broker-Dealer Audit Inspection Program while working to establish the permanent program”), available at http://pcaobus.org/News/Speech/Pages/11252014_Doty.aspx.

[14] The PCAOB’s 2014-2018 strategic plan is available to the public on the PCAOB’s website. See Public Company Accounting Oversight Board Strategic Plan: Improving the Quality of the Audit for the Protection and Benefit of Investors, 2014 — 2018 (Nov 26, 2014), available at http://pcaobus.org/About/Ops/Documents/Strategic%20Plans/2014-2018.pdf.

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