Earlier this week, the Board heard a presentation from Marty
Baumann and his team on the staff's outreach efforts to investors,
preparers, audit committee members, auditors, academics and others
on possible changes to the auditor's report. At that meeting,
Chairman Doty instructed the Office of the Chief Auditor to move
forward on development of a concept release for the Board's
consideration on or about June 30, a roundtable discussion in the
fall and a proposed standard in the first quarter of 2012.
Today, you will hear an overview of the staff's findings and have
an opportunity to discuss some possible changes to the auditor's
As I said at Tuesday's open meeting, the Board's mandate from the
Sarbanes-Oxley Act of 2002 is "… to protect the interests of
investors … in the preparation of informative,
[accurate and independent] audit reports," and I believe that
this project is an important step for the Board to take in
fulfilling that directive.
The usefulness of the auditor's report has been studied by
various groups and organizations for decades — both domestically and
internationally — resulting in virtually no change. The fact that
questions about the usefulness of the audit report have resurfaced
around the world is not surprising. Given recent events — and I am
referring to the financial crisis as well as the increasing
complexity of business and financial reporting standards — and,
the fact that, as former SEC Chairman Manuel Cohen said as far back
as 1978, "… the standard [auditor's] report compresses …
considerable expenditure of skilled effort into relatively few words
and paragraphs," it is no wonder investors are asking for more
Last week, at a meeting of the PCAOB Investor Advisory Group,
Professor Joseph Carcello, [who is also a member of that Advisory
Group in addition to this one], made a compelling presentation
regarding investors' key views on improving the auditor's report.
Gus Sauter of Vanguard, Norman Harrison (formerly) of Breeden
Capital, and Ann Yerger of the Council of Institutional Investors
joined Professor Carcello in making this presentation. Also
participating in the research and preparation of the presentation
were Brandon Becker of TIAA-CREF, Michael Head of TD Ameritrade,
Bonnie Hill of Icon Blue, Peter Nachtwey of Legg Mason, Anne Simpson
of CalPERS, and Eric Vincent of Ospraie Management.
Under Professor Carcello's leadership, the group surveyed leaders
from investment banks, hedge funds, private equity funds, mutual
funds, endowments, and pension funds on the usefulness of the
current auditor's report and their suggestions for improvement.
Responses to that survey represented well over eight
trillion dollars under management and it was clear
that investors want more from auditors. In particular, the survey
results indicate that investors want auditors to discuss their
assessment of management's estimates and judgments, and how the
auditors arrived at that assessment. They also want auditors to
discuss areas of high financial statement and audit risk, unusual
transactions, and the quality of an issuer's accounting practices
Investors have indicated a need for this type of information to
better anticipate certain events or issues having an impact upon the
financial statements. They cite the recent financial crisis as an
example of where expanded auditor reporting in advance of the crisis
may have been helpful in assessing the quality of the financial
statements underlying their investments.
The auditor's reporting model has been discussed several times
over the past few years by both this group and the Board's Investor
Advisory Group. Investors have long indicated that they are the
auditor's customer and, therefore, the auditor's responsibility is
to report in a manner that meets their needs. It is clear that
investors are seeking more useful and relevant information
from the auditor beyond the current pass/fail auditor's report. And
investors are looking to the auditor, not
management or the audit committee, for this additional information.
Before turning the discussion over to Jennifer, I would like to
commend you and your team, Marty, for your dedication to advancing
this project. And I will leave you with one last quote from Michel
Barnier, the Commissioner for Internal Market and Services at the
European Commission, who said at a recent EC conference on its Green
Paper, "The status quo is not an option for the auditing world.
It's not about changing for the sake of change, but to reply to very
real needs which we can no longer ignore."
Jennifer, I look forward to a robust discussion.