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Statement on the Commission’s Consideration of the Public Company Accounting Oversight Board’s Proposed 2017 Budget and Accounting Support Fee

Commissioner Kara M. Stein

U.S. Securities and Exchange Commission

Dec. 14, 2016

I want to extend my thanks to the team in the Office of the Chief Accountant that works every day with the Public Company Accounting Oversight Board (“PCAOB”). This includes Wes Bricker, Mark Panucci, Giles Cohen, Kevin Stout, Mark Jacoby, Khalid Shah, and Matt Hodder. I also want to thank the team in our Office of Financial Management, Ken Johnson and Richard Taylor. In addition, I would like to recognize the important contributions of Brian Croteau, who recently left the Office of the Chief Accountant. 

We are here this morning to fulfill the Commission’s statutory duty to review and consider the PCAOB’s 2017 budget, and the related fees that will fund its operations.  Today’s meeting brings the public into the oversight process. This is important for both the Commission’s and the PCAOB’s accountability to the American people.[1]

The PCAOB is vital to ensuring the integrity and fairness of our capital markets. It ensures this integrity through strong oversight of public company and broker-dealer auditors. The need for additional oversight was made clear after a series of sensational accounting scandals that exposed weaknesses in our accounting and financial reporting systems. The collapse of several large companies following revelations of fictitious accounting shook public confidence in financial reports, and the auditors that served as gatekeepers. [2] This loss of confidence threatened to undermine America’s role as home to the best capital markets in the world.

The formation of the PCAOB was intended to keep American capital markets strong and reliable. Since the enactment of the Sarbanes-Oxley Act and the formation of the PCAOB over a decade ago, the PCAOB and the accounting profession have worked hard to bolster public confidence in the audit process. Investors want to know that when they put their capital in a company, they’re really getting what they bargained for. That means we need to have trustworthy financial reports. We also need to have confidence in our auditors in order to support the capital investment that leads to job growth and innovation.[3]

The PCAOB inspects the quality of audits, and over the years, they have found a declining number of audit deficiencies.[4] It appears that audit firms are improving their quality control systems and, at times, changing the way they execute their audit procedures. These inspection reports and findings help provide important information to audit committees, other auditors, investors, and market participants.

Not only do these reports provide meaningful information, but the PCAOB and the audit profession continue to work to work with audit committees, preparers, and others to understand challenges in financial reporting.

For example, the PCAOB has been working on a project to provide investors more information about audits. This grew out of weaknesses in the audit report that were noted by then-Treasury Secretary Paulson’s Advisory Committee in 2008.[5] Today, if investors want to know about a public company audit, all they can see is a one-page report that gives a pass/fail grade. This hasn’t changed in over 80 years. A modernized report could tell investors more about the amount of work and auditor performed or judgments the auditor made. This could take us from a simple pass/fail grade to a more nuanced presentation of information. I’m looking forward to hearing about the progress that the PCAOB is making on this project.

This project also relates to how the audit reports are consumed by investors and other market participants. Here, technology is an important factor. How is technology affecting how investors get information from companies and from auditors? What is the PCAOB doing to facilitate innovation in how firms communicate with investors about their audit?

To be sure, the PCAOB and the audit profession have both come a long way since the enactment of the Sarbanes-Oxley Act. Audit quality has improved. And the role of relevant and reliable information continues to be central to the healthy functioning of our markets. Today, the speed and volume of that data continues to grow and astound us all. Clearly, the financial reporting process is evolving as well, with new opportunities and challenges. How is the auditor’s role changing in response to these opportunities and challenges? How is the role of assurance changing?  How is role of the PCAOB changing?

I look forward to hearing from Chair Doty on the current state of the PCAOB and how it is thinking about these challenging issues. 

Thank you.


[1] See Pub.L. 107–204, 116 Stat. 745.  Congress has also passed laws that address the funding of PCAOB 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. See 17 CFR 202.190 and SEC Release No. 33-8724 (July 18, 2006) [71 FR 41998]. 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. 

[2] Nine months after Enron’s financial misdeeds were first reported, and weeks after the WorldCom scandal became public, Congress passed the Sarbanes-Oxley Act of 2002.  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); President Bush signed it into law on July 30, 2002.

[3] See Barth, Mary E. and Landsman, Wayne R. and Taylor, Daniel J., The JOBS Act and Information Uncertainty in IPO Firms (July 1, 2014). Stanford University Graduate School of Business Research Paper No. 14-26. Available at SSRN: https://ssrn.com/abstract=2465927 or http://dx.doi.org/10.2139/ssrn.2465927; see also Brüggemann, Ulf and Kaul, Aditya and Leuz, Christian and Werner, Ingrid M., The Twilight Zone: OTC Regulatory Regimes and Market Quality (November 1, 2016). IGM Working Paper #95; Fisher College of Business Working Paper No. 2013-03-09; Charles A. Dice Center Working Paper No. 2013-09; ECGI - Law Working Paper No. 224/2013. Available at SSRN: https://ssrn.com/abstract=2290492 or http://dx.doi.org/10.2139/ssrn.2290492

[4] Michael Rappaport, Big Four Accounting Firms Show Fewer Problem Audits, WALL ST J.,  December 12, 2016,  available at http://www.wsj.com/articles/big-four-accounting-firms-show-fewer-problem-audits-1481553252?tesla=y

[5] See Advisory Committee on the Auditing Profession, Final Report, October 6, 2008, available at https://www.treasury.gov/about/organizational-structure/offices/Documents/final-report.pdf