Date: Nov. 25, 2014
Speaker: Jeanette M. Franzel, Board Member
Event: PCAOB Open Board Meeting
Location: Washington, DC
I support the proposed 2015 budget and the 2014-2018 strategic plan being presented to the Board today.
I commend the staff for its rigorous review of programs and activities in developing a more conservative approach to estimating the budget for PCAOB.
This more conservative approach to our budget improves our ability to be careful stewards of the funds we rely upon, while fulfilling our mission to protect investors and further the public interest in the preparation of informative, accurate and independent audit reports.
The proposed 2015 budget of $250.9 million represents a 7.9 percent increase ($18.5 million) over PCAOB's 2014 estimated spending of $232.4 million. This expected growth is more realistic than that of the 2014 budget, which represented an increase of 15.1 percent over what was then the projected spending for 2013.
The proposed 2015 budget is 2.9 percent ($7.5 million) less than the approved 2014 budget. This is the first year since 2006 that the Board's budget is less than the budget for the prior year.
However, the PCAOB was subject to the President's April 2013 sequestration order, which had the effect of reducing planned spending in 2014 by $6 million (from $258.4 million to $252.4 million). The proposed 2015 budget is slightly less than this 2014 revised plan.
The current projected growth levels reflect the Board's remaining needs in furthering certain programs and initiatives that are underway, and in making improvements to our programs and operations.
During 2015, we will continue our interim broker-dealer inspection program, build on our relationships with foreign regulators to expand our coverage of overseas inspections, integrate economic analyses into programs and activities, further develop a plan for the Center for Economic Analysis (CEA), and implement operational improvements to our administrative functions.
In addition, we will continue to build on our existing programs and activities through execution of recent initiatives. Programmatic improvements begun in 2012 as Board "near-term priorities" have been integrated into the Board's strategic plan and budget this year, but some of those priorities continue to need additional work.
As I noted at last year's budget meeting, and it still remains true today, much work remains to be done for PCAOB to mature as a nimble and agile organization under a relatively stable size and structure.
I would like to comment on several of the Board's key initiatives.
First, I cannot overemphasize the importance of the planning and budgeting processes, which cover many months and involve the combined efforts of all PCAOB offices and divisions, the Board, and the Securities and Exchange Commission staff. I commend all involved for the effort they made again this year and the thoughtfulness and dedication they contributed.
The PCAOB continues to make improvements to the planning and budgeting processes that have strengthened our controls and the outcome of our planning. In addition, the staff has begun the process of considering budget assumptions in a more stable and lower-growth state for the organization.
This is an area that we will continue to refine and enhance to better integrate the strategic planning, policy-decision making, and budgeting processes, and the scheduling of these activities. In addition, as I noted at last year's budget meeting, the Board needs to further develop and adopt strategic performance measures and benchmarks. The staff has begun to consider programmatic performance metrics and process efficiencies with the assistance of the CEA. I look forward to additional progress in the area of measuring PCAOB's progress and effectiveness in achieving its mission, including the goals and objectives articulated in the strategic plan.
Last year, the PCAOB established the CEA. I continue to support the functions of the CEA including (1) rendering advice on how economic theory and analysis can be used to enhance the effectiveness of PCAOB programs, (2) specifically dedicating resources to support economic analysis in standard setting and other rulemaking, (3) fostering economic research on audit related topics, including the role and relevance of the audit in capital markets, and (4) developing empirical tools for use in the PCAOB's oversight programs.
We still have work to do to finalize plans for these initiatives and fully realize their potential across PCAOB programs and activities. Of urgency, in my mind, is the need to clearly delineate and define how the various activities within the CEA support the Board's mission and programs, including how the economists in the CEA will work with economists placed in the Office of Research and Analysis and the Office of Chief Auditor.
We need to ensure that the research projects being supported by the CEA through its annual conference and the work of its fellows will provide benefits in the areas of (1) advancing research on the role of the audit in capital formation and investor protection and (2) the effect of potential PCAOB actions intended to enhance the relevance and reliability of audits.
We also need to find ways to leverage the extensive body of research conducted by accounting and auditing researchers and continue our coordination with the American Accounting Association.
The budget request includes a total of $2.3 million to fund the activities of the CEA. This amount is almost triple the amount that we anticipate spending for the CEA and its activities in 2014. The staff currently plans to prepare, for the Board's approval, an activity plan and mission statement for the CEA that prioritize supporting the Board's primary functions. In my view, the Board should hold the CEA's spending to a level below the requested budget amount until these planning activities are complete and the Board has approved the mission and activities of the center.
As I noted earlier, in 2012, the Board established six near-term initiatives that focused on improvements in the effectiveness of PCAOB's core mission activities. As noted in the proposed 2014-2018 Strategic Plan, we have made notable progress on some of these priorities, and have used the progress to expand our goals in some areas. For some of the initiatives, we still have significant work to accomplish, and I am pleased that the staff continues to work diligently not only on these areas, but on the expanded goals as well.
1. Improving the timeliness, content and readability of inspection reports.
The staff has cleared the backlog of older inspection reports and has set goals for the timely issuance of more current inspection reports. In addition, the staff has begun to make some changes to inspection reports and is considering ways to improve the content and readability of inspection reports and general reports going forward.
To expand upon the original goal, we have significant opportunities in the area of providing timely and useful information to investors and our stakeholders regarding insights and results from our oversight activities. We need to develop new approaches for disseminating summary information on inspection results as soon as possible during or after completion of an inspection cycle so that stakeholders have information about emerging risks and trends prior to the start of the next audit cycle.
In addition, PCAOB staff develops rich analyses related to specific risks related to auditing and general risks potentially impacting the audit profession. Providing some of this information to the public on a summary basis would be helpful in promoting audit quality and protecting investors.
I look forward to continuing to work with the staff to on these important issues.
2. Improving the timeliness of remediation determinations and providing additional information about the PCAOB's remediation process.
The staff has cleared the backlog of older remediation determinations and related recommendations to the Board, and has set goals for the timely completion of current audit firm remediation submissions. In addition, in 2013 the staff developed and published information about the quality control remediation process, including the criteria used to assess a firm's remedial actions.
Expanding on this original goal, the Board is planning to publish additional information about the remediation process, including information based on the staff's experiences with remediation activities across firms. In addition, information about the staff's root cause analysis initiative and lessons learned in the application of economic analysis in PCAOB inspections activities should contribute to improved audit quality and stronger protection for investors.
3. Initiating a project to identify audit quality measures, with a longer term goal of tracking the application of such measures to global network firms and reporting on the results over time.
As I noted in last year's budget meeting and have articulated elsewhere, I fully support the development of a Board concept release on audit quality indicators. The concept release will provide the public and all interested parties an opportunity to provide input into further analysis and future steps in the project. This project should provide an insightful and valuable result, and I look forward to seeing the concept release issued in the near future.
4. Enhancing the PCAOB's processes and systems to improve the analysis and usefulness of PCAOB inspection findings, including a comparative analysis across firms and over time, in order to better understand audit quality in firms and better inform the PCAOB's standard-setting and other regulatory activities.
This project continues with a broad array of activities that include a number of enhancements to our information technology and operational processes. These include enhancements to information systems in divisions and offices. The Board has a remarkable opportunity to leverage the development and refinement of empirical tools and data analysis techniques of the CEA, Office of Research and Analysis, the Division of Enforcement and Investigations, and other offices to further enhance analysis to support our regulatory effectiveness. The CEA has also made significant contributions to these efforts through its work to organize data for internal research purposes.
5. Enhancing the framework for the PCAOB's standard-setting process in order to improve the effectiveness of the process as well as the standard-setting project-tracking information provided to investors and the public.
Developing and finalizing a standard-setting framework will be important as we further integrate economic analysis into our standard-setting process. Implementing a framework with analytical enhancements while moving forward on a significant standard-setting agenda represents a significant undertaking.
In that regard, I appreciate the interest and support of the SEC staff in addressing that challenge, and I note the interest in progress on PCAOB standard-setting expressed by the SEC Chair and Commissioners at the SEC's February 5, 2014 open meeting on the PCAOB's 2014 budget.
The Board plans to conduct a review of PCAOB's standard-setting function. In my view, this review should be comprehensive, including the overall approach to standard-setting, identification of projects for the agenda, prioritization of projects, the process used for managing and monitoring projects, and potential performance measures.
6. Enhancing the PCAOB's outreach to, and interaction with, audit committees to constructively engage in areas of mutual interest, including auditor independence and audit quality.
The Board has taken a number of steps to reach out to audit committees to explore audit oversight issues and share information about PCAOB activities and inspection results. These activities will continue in 2015 to extend our outreach to constructively engage in areas of common interest.
I have found my interactions with audit committees to be constructive and impactful. I believe that ongoing interactions between PCAOB and audit committees is important, as the PCAOB and audit committees have mutual and complementary interests in advancing auditor independence and audit quality in promoting high quality, independent audits that protect investors and the public interest.
The proposed strategic plan and budget address a range of initiatives and activities intended to achieve three broad goals: effective oversight; constructive impact; and dedicated people.
I am pleased that our Chief Administrative Officer has consolidated a number of long-standing administrative needs into a comprehensive "transformation plan." I have commented on many of these needs in the past two years, but I believe important elements include, in addition to those I mentioned earlier, the development of a strategic human capital plan, a regular periodic employee engagement survey, an enhanced diversity program, policies for flexible work arrangements, and additional non-monetary compensation incentives.
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I believe that the budget we are voting on today appropriately reflects the Board's strategic priorities and resource needs for 2015 to fulfill our obligation to improve audit quality to protect investors and the public interest, while continuing the organization's evolution as a mature regulator.
In closing, I would like to join my fellow Board members in thanking the staff for their efforts in connection with the strategic plan and budget we are adopting today. I would also like to thank SEC staff for their questions, comments, and feedback during the process of developing the strategic plan and budget.
 I previously expressed my interest in leveraging the skills and resources of the academic community to contribute to PCAOB's oversight. See my remarks at the 2013 PCAOB Academic Conference at http://pcaobus.org/News/Speech/Pages/04252013_Franzel.aspx.
 Any criticisms of a firm's system of quality control in a PCAOB inspection report are nonpublic when the report is issued, and will remain nonpublic only if the firm addresses the criticism to the Board's satisfaction no later than 12 months from the date of the report. The Board makes such determinations based on an evaluation and recommendation by PCAOB staff of firm remediation submissions. Additional information on this process is available at http://pcaobus.org/Inspections/Pages/default.aspx.