Statement on the PCAOB 2017 Budget and Related Strategic Plan

Date Nov. 17, 2016
Speaker Jay D. Hanson, Board Member
Event PCAOB Open Board Meeting
Location Washington

Good morning.

Today, the Board is being asked to approve a proposed budget for 2017 and a revised Strategic Plan for 2016-2020.

I would like to start by thanking the staff for their work on developing the budget and Strategic Plan, and, in particular, for the new and improved, streamlined documents supporting the budget proposal. I believe these documents substantially reduce unnecessary repetition and allow the Board to more clearly focus on the most significant drivers for the budget and our most important activities.

I support the Strategic Plan, which includes many of the same goals and objectives as in the last several years. Our primary focus, as always, will be on conducting rigorous inspections of audit firms in the U.S. and around the world, timely and credible enforcement proceedings and thoughtful standard setting guided by significant public outreach.

In addition, we have several new or revised goals to reflect our ongoing work to improve the PCAOB's standard setting process. For example, we will work on formalizing and implementing a process to analyze current events and emerging trends to identify increased audit risk that may indicate a need for standard setting. We also plan to do more outreach and research before deciding to add a project to our standard setting agenda, in order to better define the problems to be addressed and identify possible solutions. This, in turn, should better focus our standard setting resources on agreed upon priorities.

Our emphasis on economic analysis continues under this Plan, with a primary objective of conducting rigorous economic analysis to support our standard setting efforts. Our ongoing work to enhance our communications and outreach to investors, audit committees and others also will continue. Finally, we have added a new goal reflecting the need to enhance our business continuity planning in the event our operations are disrupted by a natural disaster or other events beyond our control.

With regard to the budget recommendation, however, I have several concerns.

I did not support the preliminary budget sent to the Securities and Exchange Commission in July, in large part because the total proposed resources were too high. I am pleased that the budget being presented today is slightly lower than that preliminary budget, by approximately $1.8 million. Nevertheless, the proposed 2017 budget represents an increase of more than 6.3 percent over the amount we anticipate spending in 2016 and more than 4 percent over the 2016 budget, setting a new high water mark with an accounting support fee of over $267 million.

Headcount under the proposed budget is being held steady at the 2016 budgeted headcount of 876, but we have actually operated throughout 2016 with an average of only 845 employees, and we anticipate ending the year with 9 or 10 fewer employees than the budgeted 876. Compared to the end of 2010 – when we had 600 employees – the proposed 2017 headcount of 876 will represent a 46 percent increase. Programmatically, the most significant changes in our work during this time were the addition of an interim inspection program for auditors of brokers and dealers, which operates with a modest number of inspectors, and our access to a number of new countries for inspections. Before we support further growth in headcount, we should take a close look at our current staffing levels, staff utilization and mix of activities. For that reason, I would have preferred that the 2017 budget not include an increase of the existing headcount at the end of 2016, and I question whether an increase of 30 staff above our average level in 2016 is necessary.

I also continue to have some concern about the level of resources designated in the 2017 budget for the Economic and Risk Analysis program area, which is increasing by more than 17 percent over the 2016 estimate. I highlighted the need for stronger economic analysis in support of standard setting when the Board considered the 2013 PCAOB budget in November 2012, and I continue to support that important work today. However, the Board has not reached consensus about the appropriate scope of other aspects of the work of the Center for Economic Analysis, including the extent to which the Board should fund independent economic research that is not tied directly to our statutory activities. We also have not fully considered whether there are potential efficiencies to be gained, particularly in the area of data management and analysis. In light of limited resources, I believe we should have taken a closer look at whether the return on investment on some of these activities – particularly in the area of academic research – is appropriate, including whether there are other, less resource-intensive ways to foster the research.

In light of these concerns, I cannot support the proposed budget at this level of spending.

In 2017, the PCAOB will begin its 15th year of operations. We have grown steadily since we opened our doors in 2003, and, for the last several years, we have talked about when we will reach a steady state in terms of headcount and activities. Of course, we cannot ignore the effects of inflation; we need to evolve our programs over time; and we need to continue to hire the best people and compensate them based on market rates, as required by the Sarbanes-Oxley Act. And, like most organizations operating in the 21st Century, we will have an ongoing need for improvements in information technology and security. But these circumstances cannot mean that we continue to grow indefinitely, particularly in terms of headcount. We need to consider carefully the mix of our work and any requests for staffing increases to determine whether any new activities should be accomplished through a shift in our existing staff's responsibilities rather than an increase in headcount. We also need to consider periodically whether all of our ongoing activities continue to be necessary, and whether the way our work is carried out is most efficient and effective.

To that end, I believe the PCAOB, led by the Board, should take a fundamental look at the organization's overall hiring and compensation philosophy and conduct a review of its staffing levels, staff utilization and mix of activities. Currently, our budget process is largely bottom-up, meaning that our offices and divisions tell the Board what resources they believe are needed, and the Board reacts to those requests by asking questions or making suggestions for changes. While this has the advantage of requiring the staff to consider and articulate the building blocks that make up their budget requests, I believe the Board should do more going forward to provide its top-down perspective early in the development of the budget. In order to do this, the Board has to take a more active role in overseeing the budget process, including by establishing and adhering to a schedule for the development of the budget and by increased monitoring of actual spending throughout the year.

Let me wrap up by thanking the staff for all of their hard work. Though I believe there is room for improvement in our budget process, I know that many of you worked long hours under tight deadlines to prepare the Board for today's meeting. In addition to members of our Budget Office, including Jim Hearn, Alfredo Azucar and Bobbie Rose, and members of the Office of Administration, including Suzanne Kinzer, Jeannie Boehne, Bill Wiggins, and Yoss Missaghian, we benefitted from the views and experience of staff members from every PCAOB Office and Division. I would also like to thank the staff of the SEC for their questions, comments and feedback during this process. In particular, I would like to thank Brian Croteau for his hard work and dedication to the PCAOB during his many years of service at the Commission, and I wish him the best in his future endeavors. Interim Chief Accountant Wes Bricker has plunged into his challenging role with great energy and insight. And Chief Accountant Jim Schnurr is on my mind every day and a good reminder of all we have to be thankful for. Finally, I would like to express my appreciation for the support that Chair White has shown us in her years at the Commission.

Last but not least, I would like to wish everyone a Happy Thanksgiving.