Thank you, Chairman Doty, for calling this second public meeting to discuss ways to improve auditor independence, objectivity, and professional skepticism.
I am pleased that so many distinguished panelists representing a wide range of stakeholders have accepted our invitation to discuss the questions raised in the Board's August 16, 2011 Concept Release on Auditor Independence and Audit Firm Rotation and to continue the dialogue that we opened at our first public meeting. The challenge before us is to find the appropriate path forward to achieve needed improvements in audit independence and audit quality.
The panelists joining us today will provide valuable input to the public record and will help the Board gain additional insights into the various issues and the options available to address them.
I want to thank all of the panelists, their staff, and their constituencies, for taking the time and effort to assist us in exploring these very important issues.
An independent, high quality, and reliable audit function is fundamental to investor protection and the public interest. Auditors have been given an important role in the capital markets — to provide assurance to investors, owners, lenders and others that the audited company's financial statements and related disclosures fairly present the institution's financial results in conformity with applicable accounting and disclosure standards and rules.
Through extensive input and feedback we've received to date, a wide variety of stakeholders have expressed support for the Board's efforts to focus on enhancing auditor independence, objectivity, and professional skepticism. We've also heard through our auditor's reporting model project consistent support for the existing "pass/fail" audit reporting model and the assurance provided by auditor reporting. Finally, through several of the Board's projects, we've seen a strong endorsement of the important role of the audit committee in overseeing the independence and quality of the audit. Clearly, stakeholders continue to see the relevance and importance of a strong audit function.
It is troubling that PCAOB inspections continue to find serious audit deficiencies where auditors do not conduct basic auditing procedures required by the standards; or where they simply use management's explanations as their own conclusions, without adequate audit scrutiny, about material issues that have importance for investors.
The Board is concerned by the number of serious deficiencies found in our 2010 and 2011 inspections. Our inspection findings spiked in the 2010 inspections for the annually and triennially inspected firms. Those inspections generally looked at audits of 2009 financial statements. Inspection findings have remained at a relatively high level for the 2011 inspections.
In the next few months, the Board will issue a series of periodic reports (under the Board's Rule 4010) that describe some of the common PCAOB inspection findings and share some of the insights that the Board is gaining from those findings.
The methods for improving auditor independence and audit quality won't be easy or simple. There will not be one, single "silver bullet" and, as such, the Board has set a broad agenda looking at a variety of issues that could help improve auditor independence and audit quality.
The bottom line is that we must come up with a package of solutions that will be solid and effective in protecting investors and the public interest through high quality, independent audits. We also need to carefully consider and analyze the potential costs and benefits of various actions, as well as the risks associated with unintended consequences, so that we are effective in protecting the interests of investors and furthering the public interest.
It was gratifying to hear the viewpoint at the March public meeting that audit quality has improved since the passage of the Sarbanes-Oxley Act, but it was striking to hear from so many that improvements are still needed in order to make the audits more credible and relevant for investor protection. One recurring theme was the critical role that audit committees play in overseeing the auditor and the audit process.
The feedback regarding audit committees is that when they work properly, audit committees have a tremendous, positive impact on the independence and quality of the financial audit. However, we have also heard that "not all audit committees are created equal" and that there appears to be significant variability in practice. This is troubling, because of the key role that audit committees were given in the Sarbanes-Oxley Act to help oversee financial reporting and auditing for the benefit of investors.
Achieving audit committee effectiveness on a broad and consistent basis will involve others beyond the PCAOB. The Board has authority to set standards and regulate the auditor side of the relationship with audit committees. However, the overall effectiveness of audit committees in carrying out the full scope of their oversight responsibilities will have a significant impact on whether PCAOB's efforts to facilitate independent high quality audits. This situation calls for constructive engagement and dialogue among the involved parties to achieve the common goal of consistent audit committee effectiveness in reinforcing auditor independence, audit quality, and reliable financial reporting.
I welcome the input of the panelists today on these, and the many other issues that can help to improve auditor independence, audit quality and investor protection now, and for the long term.