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Remarks at the PCAOB Investor Advisory Group Meeting

Chair Mary Jo White

Oct. 27, 2016

Thank you for the invitation and opportunity to be here.  And thank you Chairman Doty for your continuing strong leadership of the PCAOB and Steve Harris for your chairmanship of the Investor Advisory Group (IAG).  Thank you to Lewis Ferguson, Jay Hanson and Jeanette Franzel for your hard and productive work on the Board, and the entire PCAOB staff for your dedication and service to raising audit quality.  And thank you to the members of the IAG for all that you do for the same cause.  Having been fortunate to have attended your annual meeting in past years, I am always impressed by the thoughtful dialogue that takes place here.  The behind the scenes effort from each member in preparation for this meeting is always evident as well.

You know better than anyone that the credibility and reliability of financial reporting depends on thorough audits performed by independent, skeptical and skilled auditors.  Investors rely heavily on auditors, and I am pleased by the PCAOB’s outreach efforts to investors, including through forums the IAG provides.

Once again, you have planned a full day of discussion on a range of important topics.  Since I can only be here for part of your first topic today – non-GAAP measures – let me just offer very brief remarks on all three areas on your agenda.

Non-GAAP Measures

The topic of non-GAAP measures is one that has and continues to receive a lot of attention at the Commission.  We have taken a number of steps in response to growing concerns that I and others have had about the appropriateness of certain reporting practices in this area.  As I know many of you are aware, earlier this year, SEC staff updated its non-GAAP reporting guidance to further assist issuers in understanding and complying with their disclosure obligations in this area.  Wes Bricker, our Interim Chief Accountant and Mark Kronforst, the Chief Accountant in the Division of Corporation Finance, have also been very active in speaking out on the subject to provide guidance and views about what works and what does not, what is permissible and not.  We, at the SEC, will continue to devote attention to this area to promote improvement in the usefulness and reliability of the information being provided to investors.  I very much look forward to hearing your perspectives on potential continued developments on this topic.

ACAP Recommendations

Your agenda also includes a status report about the important recommendations from the ACAP committee from 2008 and I look forward to hearing your perspectives on which matters continue to be of most importance and priority to undertake or continue, including by the Commission.

A number of the recommendations have been implemented or partially implemented and the report and its recommendations have also been an important resource for the SEC and PCAOB over the years.  They have informed major standard setting initiatives, including the auditor’s reporting model work, as well as the PCAOB’s audit quality indicator project.  The report and its recommendations have also informed the PCAOB’s strategic planning efforts over the years.  Since these recommendations were included in the report to the Treasury in 2008, much has obviously occurred.  It is important for all of us, as part of our analysis, to consider the changes that have taken place since then and in the context of today’s regulatory knowledge and experience.  For example, the PCAOB now has over a decade of inspection experience to draw upon in helping to inform its strategic planning and standard-setting efforts.  I am sure the discussion this afternoon will be a very interesting and informative one.

Auditor’s Reporting Model

The Auditor’s Reporting Model is another of your agenda topics that is critically important and has received substantial attention over the past few years.  As you know, the PCAOB exposed its initial concept release in 2011 and more recently issued a re-proposal in May 2016.  Throughout the process, there has been active involvement and feedback received from a number of stakeholders, including through roundtable discussions, input from your advisory group, and a large number of comment letters received.  I know that the PCAOB staff are working very diligently to consider the feedback received and to develop final rules.  We at the SEC look forward to continued progress on the PCAOB’s efforts to improve the content of the auditor’s report for the benefit of investors.

Other Regulatory Efforts

Let me also take this opportunity to add a few words on the excellent cooperation between the Commission and the PCAOB in overseeing the public company auditing profession and auditors.  I believe that cooperation and the hard work by the staff at both organizations have directly contributed to significant improvements in audit quality.

Take for example, the SEC Division of Enforcement’s Financial Reporting and Auditing (FRAud) Group focuses on financial reporting and audit failures, and the Division also has its “Operation Broken Gate” initiative to identify auditors who neglect their duties and the auditing standards.  Recent examples of SEC auditor enforcement cases, done in close coordination with the PCAOB, include charges against three national firms and associated partners for deficient audits,[1] and numerous sanctions of other firms stemming from Operation Broken Gate.[2]  In addition, our Enforcement staff has been active in bringing cases against auditors who violate independence rules.  The Commission also recently brought two cases against a large firm and three former partners for auditor independence failures due to inappropriately close personal relationships – pointing once again to the importance of independence and enforcing it when it is lacking.[3]

But there are other examples apart from enforcement where you can see the clear impact of the PCAOB’s work on audit quality.  The design of the PCAOB’s inspections program, the focus on the importance of the audit committee’s oversight role, and the improvement in the transparency of drivers of audit quality have all contributed to improvements in audit quality and deserve praise and continued focus.

It is important for the positive momentum of the PCAOB to continue to keep pace with investor expectations as well as the new and emerging financial reporting risks that always lie ahead.  It is incumbent upon all of us to continue to monitor the current environment to identify and understand the issues to be addressed as well as the range of potential approaches to best address them.

We at the Commission will continue to work hard and collaboratively with the PCAOB and other stakeholders to do just that.  Let me stop and let you get on with your discussion.

I look forward to a full briefing from Wes Bricker and Brian Croteau, Deputy Chief Accountant in OCA, on your full discussions and feedback from the remainder of the day.

Thank you again for your commitment to assisting the PCAOB in its vital mission to protect investors.  Thank you again for inviting me to your meeting.


[1] See, e.g., Press Release No. 2015-184, “SEC Charges BDO and Five Partners in Connection With False and Misleading Audit Opinions” (Sep. 9, 2015), available at https://www.sec.gov/news/pressrelease/2015-184.html,Press Release No. 2015-272, “SEC: Grant Thornton Ignored Red Flags in Audits” (Dec 2, 2015), available at https://www.sec.gov/news/pressrelease/2015-272.html, and Press Release No. 2016-219, “Ernst & Young to Pay $11.8 Million for Audit Failures” (Oct. 18, 2016), available at https://www.sec.gov/news/pressrelease/2016-219.html.

[2] See, e.g., Press Release No. 2014-239, “SEC Sanctions Florida-Based Auditor for Circumventing Rules” (Oct. 24, 2014), available at https://www.sec.gov/News/PressRelease/Detail/PressRelease/1370543281121.

[3] See Press Release No. 2016-187, “Ernst & Young, Former Partners Charged With Violating Auditor Independence Rules” (Sep. 19, 2016), available at https://www.sec.gov/news/pressrelease/2016-187.html.