Statement on the PCAOB 2017 Budget and Related Strategic Plan

Date Nov. 17, 2016
Speaker Steven B. Harris, Board Member
Event PCAOB Open Board Meeting
Location Washington

Thank you, Mr. Chairman. I support the Board's 2017 Budget and its 2016-2020 Strategic Plan ("Strategic Plan").

The Budget of $268.5 million assumes no new positions for the coming year. It reflects thoughtful and careful analysis by our division and office leaders of their program requirements so that they can carry out the PCAOB's mission without additional staff in 2017.

Most acknowledge that audit quality has improved since the adoption of the Sarbanes-Oxley Act.[1] This is important because improved audit quality fosters capital formation and efficient allocation of capital. More needs to be done, however, and this budget request allows us to continue to build upon the progress we have made.

Under the Sarbanes-Oxley Act, the Board's primary responsibilities include inspections, standard setting, and enforcement.[2] The Board also has major responsibilities in the international arena, and the activities of our various divisions and offices are supported by the Office of Research and Analysis and the Center for Economic Analysis.

Given that the Chairman and staff have outlined the details and rationale for the Budget and Strategic Plan, I would like to highlight a few of the activities and accomplishments that underpin the Board's budget request and note certain related initiatives discussed in the Strategic Plan.


The Division of Registration and Inspections ("DRI") is on track this year to inspect over 210 firms and portions of over 825 issuer audits. Of the 210 firms, 62 are located in 28 jurisdictions outside the United States.

In addition, DRI is inspecting in 2016 75 audit firms that performed broker-dealer audit and attestation engagements under the Board's interim inspection program. As noted in the Strategic Plan, the Board is planning to develop an approach to inspect broker-dealer auditors pursuant to the authority granted by Congress following the Bernie Madoff Ponzi scheme and the criminal proceeding against Madoff's auditor.[3]

Inspections staff continues to provide greater transparency about our inspection program by publishing staff briefs that include timely and helpful information, such as previews of 2015 inspection findings[4] as well as information about the scope and objectives of 2016 inspections of issuer and broker and dealer audits.[5]

Through our oversight activities, the Board has noted vast differences in the quality of audit work among firms within a global network. For this reason, I support the Board's continued emphasis of the need for strong quality control in the global network firms as noted in the Strategic Plan. I also believe it is important that the Board continue, through our inspection program, to advance robust root-cause analysis and timely and effective remediation across all global network firms.

As noted in the Strategic Plan, the Board will continue focusing on strengthening independence, objectivity, professional skepticism, and accountability in audit firm culture for the benefit of investors through our inspections program and, where warranted, enforcement authority. Independence and accountability are the tenets of the Sarbanes-Oxley Act. I believe holding firms and individual partners responsible for audit deficiencies or independence matters identified during an inspection is essential and will improve audit quality.


In April, we issued a proposal concerning supervision of other auditors[6] and in May we reproposed standards related to the auditor's report.[7] As I stated at the May meeting,[8] I hope that the Board adopts a final standard on the auditor's report by the end of 2016 so that the Board has a standard in place which is similar to those adopted by international standard setters.

Following the Board's adoption last December of the rule requiring identification of the engagement partner and other participants in an audit, staff in the Office of Chief Auditor has issued guidance[9] and taken other steps to assist firms in implementing the new rule.[10]

And, in April 2016, the PCAOB staff issued an audit practice alert regarding improper alterations of audit documentation, reflecting a heightened concern about such misconduct.[11]

Going forward, as noted in the Strategic Plan, PCAOB staff will continue to research the role of auditors with respect to fraud and potential emerging audit risk areas, such as cybersecurity. Further, I believe the Board heard compelling reasons for us to examine the auditor's role with respect to non-GAAP financial measures at this year's Investor Advisory Group ("IAG") meeting in October.[12]


As noted in the Strategic Plan, the Board exercises its enforcement authority strategically by focusing on serious audit deficiencies and other instances in which firms fail to comply with applicable laws and standards.

The Enforcement Division continues to hold auditors accountable for audit failures, including amongst others, independence violations. Its work is essential and appropriately complements the work of the Inspections Division.

A number of the 30 settled disciplinary orders that have been published in 2016 relate to independence violations involving prohibited non-audit services, financial interests in or prohibited relationships with clients, and failures to comply with engagement partner rotation requirements.

Other disciplinary orders have focused on audit failures related to audits of both U.S. and non-U.S. issuers and failure by auditors to comply with the Board's processes and rules. Our Enforcement staff is also following up on a number of potential violations at the global network's international affiliate firms.

I am also pleased to see the Board requiring admissions of wrongdoing in settlements of disciplinary actions, when warranted.[13]

International Affairs

Through the hard work of our Office of International Affairs, we are now able to inspect audits in most European countries. Further, the European Commission issued an Adequacy Decision for the PCAOB in 2016 for an extended duration of six years. This will allow the PCAOB to continue conducting joint inspections in twelve European jurisdictions at least through 2022 and paves the way for the PCAOB to finalize bilateral cooperation agreements with the remaining five EU member state regulators.

As noted in the Strategic Plan, the PCAOB will continue to engage with its international counterparts to emphasize the need for strong quality control systems within the global network firms as well as the importance of investor protection.

It is also important for the PCAOB to continue its active leadership role in the International Forum of Independent Audit Regulators ("IFIAR"), which provides an opportunity for significant interaction with international regulators. I further support our role in leading the task force that produces IFIAR's Global Survey of Inspection Findings, which provides important insights into audit deficiencies observed on a global scale.[14] This survey's results have demonstrated that the PCAOB is not alone in noting high rates of deficiencies in certain key audit areas.

I am also pleased with the Board's active involvement on IFIAR's Investor and Other Stakeholders Working Group.

Office of Research and Analysis

Most of the work that I have noted so far was supported by various offices within the PCAOB, including the Office of Research and Analysis ("ORA"). ORA's risk assessment activities support our inspection, enforcement, and standard setting programs. For example, since the Board issued the Audit Quality Indicators ("AQIs") concept release in July 2015,[15] ORA has worked with our Inspections Division to incorporate AQIs in our inspection activities.

I have said before that the expansion of consulting and advisory services coupled with somewhat stagnant growth in core audit revenue at the major audit firms raises potential independence and audit quality concerns.[16] ORA's examination of the business model of the audit firm provided deep insight into the potential effects of certain risks to audit quality and independence and I am pleased to see this initiative continue as noted in the Strategic Plan. Regulators around the world are examining the firms' business models with these concerns in mind.[17] The Board must continue to do likewise and develop appropriate responses.

Center for Economic Analysis

The Board's Center for Economic Analysis also serves a support role, especially in the standard setting area.

The Board's staff guidance on economic analysis[18] and the integration of economists into our standard-setting process have yielded positive results. Among these are better identification and discussion of the need for a proposed action, clarification of the nature of the problem to be addressed, and an evaluation of the baseline, alternative actions considered, and the economic impact, including the benefits and costs — both quantitative and qualitative — of any proposed action.

The Center has grown rapidly since its creation in 2014. Given the breadth of its potential activities as noted in the Strategic Plan, I believe that the Board should continue its efforts to monitor each of those activities closely to ensure that they are all carefully coordinated, efficiently administered, and, most important of all, directly related to the core mission of the PCAOB.

Along this line, the Strategic Plan references an integration of our economic analysis and risk analysis functions. I support this integration and look forward to further Board discussions regarding its implementation.

I also encourage the Board to comprehensively evaluate the scope, quality and accessibility of data with particular emphasis on addressing data gaps as part of its initiative to support and enhance an integrated data collection platform. We must seriously examine whether to provide the academic community with greater accessibility to PCAOB data to foster research on topics relevant to our mission.

Strategic Plan

I would now like to take this opportunity to note my support for some additional priorities and initiatives in the Strategic Plan. These include:

While not specifically discussed in the Strategic Plan, the Board must continue to carefully monitor and consider the role of the auditor regarding sustainability and integrated reporting. Such reporting initiatives have gained global acceptance and investor attention in recent years.[19] Assuming such reporting is of value to investors for their investment decisions, the role of the auditors in verifying such information is a topic deserving of close examination.[20]

Lastly, at this year's Investor Advisory Group meeting, the IAG members recommended that the Board continue its work on certain recommendations made by the U.S. Treasury Department's Advisory Committee on the Accounting Profession.[21] Certain of the Advisory Group's recommendations are already included in our Strategic Plan, which I discussed earlier, such as AQIs and improving the audit report. Other recommendations, such as an enhanced focus on fraud detection, audit firm transparency, and governance are areas that I believe warrant additional attention by the Board in the coming year.

Mr. Chairman, I hope that the Board and staff will be able to provide updates of significant progress in those endeavors to the Investor Advisory Group in the coming year.

In conclusion, I support both the Budget and Strategic Plan we are considering this morning and believe that they advance the Board's efforts to fulfill the mandate of the Sarbanes-Oxley Act "to protect the interest of investors and further the public interest in the preparation of informative, accurate, and independent audit reports."[22]

I join you, Mr. Chairman, and my fellow Board members in acknowledging and thanking the staff for all their incredibly hard work on the Budget and the Strategic Plan. This year was especially challenging due to the timing of today's meeting. I want to particularly thank: Suzanne Kinzer, our Chief Administrative Officer, Bill Wiggins and Jim Hearn, as well as Bobbie Rose, Alfredo Azocar, and Yoss Missaghian. I also want to thank Phoebe Brown, our Corporate Secretary, for her work on the Strategic Plan.

[1]See Securities and Exchange Commission Chair Mary Jo White, Keynote Address at the 2015 AICPA National Conference: "Maintaining High-Quality, Reliable Financial Reporting: A Shared and Weighty Responsibility" (Dec. 9, 2015). See also Ernst & Young, The Sarbanes-Oxley Act at 10: Enhancing the reliability of financial reporting and audit quality (2012) andCAQ Press Release, Post-SOX Audit Quality Has Improved, Say Nation's Audit Committee Members (March. 18, 2008).

[2]See Sections 103, 104, and 105 of the Sarbanes-Oxley Act of 2002, respectively.

[3]See Section 104(a)(2) of the Sarbanes-Oxley Act of 2002.

[4]See Staff Inspection Brief, Preview of Observations from 2015 Inspections of Auditors of Issuers,Vol. 2016/1 (April 2016) and Staff Inspection Brief, Preview of Observations from 2015 Inspections of Auditors of Brokers and Dealers, Vol. 2016/2 (April 2016).

[5]See Staff Inspection Brief, Information about 2016 Inspections, Vol. 2016/3 (July 2016) andStaff Inspection Brief, Information about 2016 Inspections of Auditors of Brokers and Dealers, Vol. 2016/4 (July 2016).

[6]See PCAOB Release No. 2016-002, Proposed Amendments Relating to the Supervision of Audits Involving Other Auditors and Proposed Auditing Standard – Dividing Responsibility for the Audit with Another Accounting Firm (April 12, 2016).

[7]See PCAOB Release No. 2016-003, Proposed Auditing Standard – The Auditor's Report on an Audit of Financial Statements when the Auditor Expresses an Unqualified Opinion and Related Amendments to PCAOB Standards (May 11, 2016).

[8]See Board Member Steven B. Harris, Statement on Reproposed Auditing Standard on the Auditor's Report (May 11, 2016).

[9]See Staff Guidance – Form AP, Auditor Reporting of Certain Audit Participants, and Related Voluntary Audit Report Disclosure Under AS 3101, Reports on Audited Financial Statements (June 28, 2016).

[10]See PCAOB News Release, PCAOB Schedules Teleconference Calls to Answer Questions from Firms about the Technology Implementation of Form AP (Aug. 2, 2016).

[11]See Staff Audit Practice Alert No. 14: Improper Alteration of Audit Documentation (April 21, 2016).

[12]See Report of the Investor Advisory Group Working Group on Non-GAAP Measures (Oct. 27, 2016).

[13]See News Release "PCAOB Sanctions Five Firms and Seven Individuals for Audit Failures, Violations of Engagement Quality Review Rules, or Noncooperation with an Investigation; PCAOB also obtains admissions to some or all of the facts, findings, and violations from four of the firms and six of the individuals" (June 15, 2016).

[14]See International Forum of Independent Audit Regulators Report on 2015 Survey of Inspection Findings (March 3, 2016).

[15]See PCAOB Release 2015-005, Concept Release on Audit Quality Indicators (July 1, 2015).

[16]See Board Member Steven B. Harris, Auditor Independence and Current Issues (June 28, 2016).

[17]See 2014 IFIAR Plenary Meeting Breakout Session Overviews: Economic Model of the Audit firms, located at:

[18]See Staff Guidance on Economic Analysis in PCAOB Standard Setting (Feb. 14, 2014).

[19]As of 2014, approximately 31 countries and 18 stock exchanges require or encourage some form of ESG reporting. Further, according to a recent report, 89 percent of global investors state that non-financial performance factors, such as Environmental, social, and governance matters, are integral to their investment decision making. See "Corporate Social Responsibility Disclosure Efforts by National Governments and Stock Exchanges", by Initiative for Responsible Investment, Harvard Kennedy School, The Hauser Institute for Civil Society at the Center for Public Leadership, citing "RI ESG Briefing, April 3: New EU Audit Rules OK'd by European Parliament", Responsible-Investor (April 3, 2014).

[20]According to a recent CFA Institute survey, 69 percent of respondents think such information should be verified independently. See Environmental Social and Governance (ESG) Survey Report, CFA Institute (June 2015) (CFA Institute ESG Survey Report).

[21]See Report of the Investor Advisory Group Working Group on ACAP Recommendations (Oct. 27, 2016). See also U. S. Department of the Treasury, Final Report of the Advisory Committee on the Auditing Profession to the U.S. Department of the Treasury (October 6, 2008).

[22] Section 101(a) of the Sarbanes-Oxley Act of 2002.