Thank you for inviting me to this symposium. It is an honor and a 
            pleasure to be here. The Public Company Accounting Oversight Board 
            is engaged in several endeavors that I hope will be of interest to 
            you. 
            Some would say that any Texan lucky enough to escape the Beltway 
            and find himself in Dallas on a day the Rangers contend for the ALCS 
            must be insane to go back to Washington. After all, the town made it 
            through OU weekend, which some still consider the supreme threat to 
            domestic tranquility. Why leave now? 
            On the other hand, as an audience of lawyers, you may be 
            thinking, "This guy is fascinated by auditing? The wonder 
            is that he is registering a pulse!" 
            Yes, I am riveted by auditing, by the challenges auditing faces 
            in a rapidly transforming global economy, and by the fundamental 
            role auditing has played, and I believe will play, in the global 
            economy. 
            The rules and reference points for auditors are changing. I want 
            to try to explain to you how my new commitment, the PCAOB, fits into 
            that picture, and how it may intersect with the legal judgments you 
            make on behalf of your firms and clients. 
            The PCAOB's mission is to protect the investing public's interest 
            in informative, accurate and reliable audit reports for public 
            companies, and since the Dodd-Frank amendments, brokers and dealers 
            too. As corporate counsel, you too play an important role in 
            protecting the investing public. I hope this information about the 
            PCAOB's work will be useful to your own, and that it will help you 
            find ways in your companies and at your clients to foster an 
            appropriate culture for supporting reliable independent audits. 
            I will start by providing some background on the PCAOB's work, 
            and then turn to focus on international matters. And finally I will 
            touch on our current policy and legislative initiatives. Before I go 
            further, though, I must say that the views I express are my own and 
            should not be attributed to the PCAOB as a whole or any other 
            members or staff. 
            I.  Overview of the PCAOB's Work 
            When I left law practice earlier this year, many of my law 
            colleagues knew little about what I was going to do. They asked me 
            if it would be a part-time job. (No!) They asked me if I was going 
            back to government service. (No.) The PCAOB was indeed established 
            by Congress, but as a non-profit. It has a full-time board, or shall 
            I say over-time? The other night I was at the office at 9:00 and 
            noticed three of five board members were also working late. (The 
            other two were starting their day, in Asia, for meetings with 
            foreign audit regulators.) 
            For those of you who, like my law partners, aren't as familiar 
            with the work of the PCAOB, let me give you a brief overview. Prior 
            to the creation of the PCAOB, public company auditors were subject 
            to oversight by their professional association and to peer reviews 
            conducted by other auditing firms. 
            After the revelation of the numerous high profile scandals 
            earlier this decade that we all remember, the Sarbanes-Oxley Act of 
            2002 profoundly changed the environment in which public company 
            auditors operate by providing for ongoing accountability to the 
            PCAOB, for the benefit of investors. The Board exercises that 
            oversight through four basic functions. 
            First, to establish the foundation for PCAOB oversight, the Act 
            requires the PCAOB to maintain a registration system for auditors of 
            securities issuers, as that term is defined in the Act, as well as 
            (under the Dodd-Frank amendments) auditors of broker-dealers. No 
            accounting firm may prepare, or substantially contribute to, an 
            audit report for a public company that files financial statements 
            with the SEC, or for a broker-dealer, without first registering with 
            the PCAOB. 
            There are currently 2,411 accounting firms registered with the 
            Board. This includes 907 non-U.S. firms and 507 firms that are 
            registered only because they have broker-dealer audit clients. 
            Registered firms must file annual and other reports that provide the 
            Board and the public with updated information about the firm and its 
            audit practice. 
            Contrary to what some believe, mere registration with the PCAOB 
            does not reflect an examination of the firm's audit quality, which 
            does not happen until we inspect the firm's audits. If a firm plays 
            by the rules, it may easily register, and easily withdraw, if its 
            business plans change and it hasn't violated the rules in the 
            meantime. 
            That leads to our second basic function — inspection of firms and 
            their public company audits. The PCAOB's inspection program is the 
            core of its oversight of registered firms' public company audit 
            work. The PCAOB's inspection staff accounts for approximately 400 of 
            our 700 staff. 
            Since 2003, the PCAOB has conducted more than 1,700 inspections 
            of firms' quality controls and reviewed aspects of more than 7,500 
            public company audits. 
            As required by the Act, the PCAOB conducts annual inspections of 
            each of the firms that regularly audit the financial statements of 
            more than 100 public companies. In 2011, the PCAOB will have 
            inspected ten such firms in the course of the year. 
            Each firm that regularly audit the financial statements of 100 or 
            fewer public companies must be inspected at least once every three 
            years. The PCAOB plans to inspect approximately 211 such firms in 
            2011, including 44 non-U.S. firms located in 16 foreign 
            jurisdictions. 
            After completion of the inspections field work, PCAOB inspectors 
            engage in a dialogue with firms, through written comments, and in 
            certain cases, in-person meetings, about audit deficiencies they 
            have identified. The PCAOB then issues a report after each 
            inspection. The inspection report is not a complete report card on 
            the firm's entire audit practice, but rather focuses on areas where 
            inspectors found audit deficiencies. 
            The public portion of an inspection report describes matters that 
            inspectors have identified as significant audit deficiencies. 
            Counsel to corporate boards that engage auditors should understand 
            what this means. These findings, presented in what we call Part I of 
            the report, generally involve situations in which PCAOB inspectors 
            believe that the auditor failed to obtain sufficient evidence to 
            support the audit opinion or failed to identify a material departure 
            from generally accepted accounting principles. 
            Consistent with restrictions in the Sarbanes-Oxley Act, the PCAOB 
            does not publicly disclose the identity of the companies that are 
            the subject of audits discussed in an inspection report. 
            Nevertheless, you may find the general discussion of audit 
            challenges useful if you're involved in counseling an audit 
            committee or board. 
            Inspection reports also include discussion of any criticisms of 
            or potential defects in a firm's system of quality control in Part 
            II of its inspection reports. This portion of the report is 
            non-public. The Act affords inspected firms one year within which to 
            remediate Board criticisms or potential defects concerning firm 
            quality controls. If the Board is not satisfied with a firm's 
            remediation efforts, the portion of the report containing the 
            discussion of the quality control deficiencies becomes public.[1] 
            A word of advice to counsel who represent firms, or companies 
            that use firms, that need to remediate quality concerns. The PCAOB 
            staff are available to work with firms on evaluating remediation 
            plans, but our help is most effective when the firm engages with us 
            early in the process. Warn your clients of the perils of "going 
            dark" on us for much of the remediation year. 
            Since 2003, PCAOB inspections have identified hundreds of audit 
            failures, including failures by the largest U.S. and non-U.S. firms. 
            These findings have led to changes in firm auditing processes, and, 
            in some cases, more audit work performed after the fact or 
            corrections of client financial statements. 
            The PCAOB also conducts investigations and disciplinary 
            proceedings. The Board has broad authority to impose sanctions on 
            registered firms and associated persons that have violated 
            applicable laws and standards. 
            The PCAOB has publicly announced the resolution of 41 enforcement 
            proceedings. Sanctions in these proceedings have included 
            revocations of firms' registrations, bars on individuals' ability to 
            participate in public company audits, monetary penalties, and 
            appointment of an independent monitor. 
            One of the Board's more significant settled disciplinary orders 
            relates to the PW India audit firms that audited the U.S.-listed, 
            Indian-domiciled company, Satyam. The Board's order included a $1.5 
            million penalty for violations of PCAOB rules and standards in 
            relation to an audit that failed to identity Satyam's billion-dollar 
            overstatement of assets. 
            The announced decisions do not, however, reflect the full extent 
            of PCAOB enforcement activity. Under the Sarbanes-Oxley Act, all 
            Board investigations and all contested proceedings 
            (i.e., cases in which the Board files charges and the 
            respondent elects to litigate, rather than settle) are non-public. 
            
            The Board closely coordinates its enforcement efforts with the 
            SEC. In certain instances, the PCAOB investigates the auditor's 
            conduct and the SEC focuses its investigation on the public company, 
            its management, and other parties. In other cases, the SEC's 
            Division of Enforcement takes responsibility for an auditor 
            investigation and requests that PCAOB defer to that investigation. 
            
            Finally, as I alluded, the PCAOB is responsible for establishing 
            the auditing and related professional practice standards under which 
            public company audits are performed. 
            The PCAOB has an active standard-setting agenda, which it pursues 
            through extensive outreach in the form of public solicitation of 
            comment at various stages of a project, public roundtable 
            discussions, and regular discussions with the PCAOB's Standing 
            Advisory and Investor Advisory Groups. 
            The groups are comprised of experts from diverse backgrounds as 
            investor representatives, financial statement preparers, auditors, 
            academics. They have also included several securities lawyers. 
            All of the Board's responsibilities are discharged under the 
            oversight of the SEC, which among other things appoints PCAOB board 
            members and approves PCAOB budgets, standards and rules, and hears 
            appeals of PCAOB disciplinary proceedings. 
            Chairman Mary Schapiro, the SEC Commissioners, and Chief 
            Accountant James Kroeker have taken a deep interest in the PCAOB's 
            development and work. To their credit, they have carefully crafted a 
            board of diverse and complementary expertise that functions with 
            collegiality and technical excellence. I am grateful to them for 
            their support and for the strong working relationship they have 
            fostered between our organizations. 
            This is a very high level overview. It would not be complete 
            without mentioning that one of the jewels in the PCAOB's crown is 
            right here in Dallas. The PCAOB has a Dallas office that is led by 
            one of the leaders in the inspection division, John Fiebig. 
            John also leads the team that inspects one of the four largest 
            accounting firms. Based in Dallas, he supervises a team that circles 
            the globe. Our inspectors need not be in Washington to inspect even 
            the most challenging and complex audits for the largest companies in 
            the world. 
            I've seen Dallas grow from a Texas financial center to a national 
            center, and now a global center. The PCAOB staff in Dallas are every 
            bit a part of the globalization Dallas has seen. 
            II.  Audits Without Borders 
            Let me tell you about some of the things we've seen in those 
            global audits. Since we began inspecting, we have observed that the 
            U.S.-based firms that we oversee — both large and small — are 
            increasingly engaged in audits with an international component. 
            Moreover, as I mentioned, the PCAOB has registered a significant 
            number of non-U.S. firms that audit or wish to participate in audits 
            of issuers. Many of these non-U.S. firms are affiliated with one or 
            another of the large U.S. firms through a global network. 
            These affiliates can be quite large, measured by number of 
            professionals as well as by market capitalization of audit clients. 
            Substantial portions of the audits of many of the largest U.S. 
            companies are performed by such affiliated firms. 
            You may think of these firms as merely local offices of one of 
            the large accounting firms. But because of their legal structure, 
            they are separately registered and subject to their own inspection. 
            To date, we have conducted 296 inspections of non-U.S. registered 
            firms located in 36 jurisdictions. 
            To best protect investors, inspections of cross-border audits 
            need to be as seamless as the audits are supposed to be. At the 
            PCAOB, we have seen first hand the benefits of evaluating the 
            various pieces of audits performed by different registered firms in 
            multiple jurisdictions. 
            Our inspectors often see more than the principal auditor — or 
            signing firm — does. In many cases principal auditors rely on 
            high-level reports from affiliated auditors. They don't in every 
            case review the work papers of the other auditors. When our 
            inspectors have done so, in many cases they have found problems in 
            that work and focused the firms involved on the need to address 
            them. 
            As has been widely reported, the PCAOB remains unable to inspect 
            registered firms that perform or participate in U.S. audits but 
            reside in China or some parts of Europe. I remain hopeful that we 
            will be able to resolve concerns raised by authorities in these 
            countries. 
            This is not to say that we haven't made progress: we are recently 
            back in the U.K.; we have begun inspections in Switzerland; and we 
            will soon begin inspections in Norway. In each of these inspections, 
            we will not only review audit work for foreign private issuers, but 
            we will also look at audit work performed on subsidiaries of U.S. 
            companies. 
            We also hope to make progress on a joint inspection arrangement 
            with Chinese authorities, but there the progress is slower. 
            Unfortunately, the risks to investors are every bit as great. For 
            example there have been numerous reports of auditors for Chinese and 
            other emerging-market issuers resigning because of concerns about 
            management misrepresentations. 
            Earlier this month, the PCAOB staff issued an Audit Practice 
            Alert that provided auditors guidance on a number of audit questions 
            related to risks in emerging markets.[2] The alert is based on observations 
            from PCAOB inspections and other oversight activities, as well as 
            other situations that have come to light in recent corporate filings 
            with the SEC and SEC orders suspending trading in certain emerging 
            market companies. 
            It highlights conditions that indicate heightened fraud risk, 
            such as fraud in bank confirmations, including through forgery or 
            collusion. It also discusses risks involved in auditing variable 
            interest entities. 
            While the alert is intended for auditors, it is a general guide 
            to the fraud risks that anyone in international business might face, 
            including audit committees and corporate counsel. Indeed, the role 
            of audit committees and their counsel in combating fraud is 
            particularly important given the PCAOB's inability to protect 
            investors through inspections in other countries. 
            While we work toward accords in China and elsewhere, it's going 
            to be important to do what we can to protect investors in companies 
            that have operations in countries where we can't inspect. The PCAOB 
            is looking harder at how U.S. firms get comfortable that they can 
            rely on the work of affiliates in countries that have resisted 
            inspection. Through the audit committee, your corporate clients too 
            should take pains to understand how their auditor is handling 
            foreign audit work. 
            III.  The PCAOB's Policy Agenda to Enhance the Relevance, 
            Credibility and Transparency of Audits 
            Let me turn now to the PCAOB's policy initiatives. We have an 
            active standards-setting agenda that aims to improve auditing and 
            related professional practice standards as we find the need to do so 
            in our inspections. Arching over this work, though, the Board is 
            engaged in several high profile initiatives to address lessons 
            learned in the financial crisis. 
            These initiatives relate to (i) the relevance and value of 
            audits, (ii) the relationship of the auditor to the audit client, 
            and (iii) the role of various participants in the audit. These 
            projects are founded on the principle that audit regulation should 
            foster conduct and a culture consistent with the franchise that the 
            securities regulatory regime accords the audit profession. I'll 
            briefly describe them, but I encourage you to read the recent papers 
            and proposals that the Board has published on our website. 
            A.  The Auditor's Reporting Model 
            First, the PCAOB has initiated a broad debate on the form and 
            content of the standard auditor's report. In June, the PCAOB 
            released a concept release on potential changes to the auditor's 
            reporting model. 
            We issued this paper to seek broad public input on whether the 
            auditor's report could better serve investor needs. Given the effort 
            involved in an audit of a large company, and the complexity of many 
            financial statements, investors have called for deeper insight from 
            the auditor. 
            The concept release invited discussion on four, broad 
            alternatives, ranging from expanding use of emphasis paragraphs and 
            clarifying terms in the current standard audit report, to providing 
            for a narrative discussion of the auditor's views on significant 
            matters relating to the audit or the financial statements, to 
            requiring auditor assurance on certain information outside the 
            financial statements, such as Management's Discussion and Analysis 
            and earnings releases. 
            We have received more than 150 comment letters to date. In 
            addition, in September we held a public roundtable to foster further 
            discussion. 
            From the PCAOB's recent roundtable, one takes away an emerging 
            consensus shared by the profession and stakeholders that the audit 
            report can and should provide more than simply the pass-fail 
            opinion. Differences develop over whether auditor communications 
            should include non-financial statement information, how to assure 
            consistency and yet avoid boilerplate, whether broader auditor 
            communication will chill the nuances of auditor-audit committee 
            communication, and (conversely) why if auditors are now 
            required to form judgments about accounting practices and 
            policies, the stakeholders cannot have that knowledge. 
            One point I have emphasized throughout is that, if we make 
            changes, they will be focused on enhancing the relevance of the 
            auditor's communication to investors. They may require auditors to 
            communicate more, or different, things, such as the auditor's 
            assessment of management's estimates and judgments, of significant 
            unusual transactions, or accounting changes. They might require the 
            auditor to discuss the quality of a company's accounting practices 
            and policies. 
            Such new communications might, or might not, require new audit 
            procedures. But they would not change the fundamental role of the 
            auditor to perform an audit and attest to management's assertions as 
            embodied in management's financial statements. 
            This initiative will be of particular interest to disclosure 
            counsel, but others as well. I encourage you to follow. 
            B.  Auditor Independence 
            The PCAOB is also focused on auditor independence. Our inspectors 
            have conducted annual inspections of the largest U.S. audit firms 
            for eight years. They have reviewed more than 2,800 engagements of 
            such firms and discovered and analyzed hundreds of cases involving 
            what they determined to be audit failures.[3] 
            Every now and then, inspectors can trace an audit failure to a 
            competence issue, such as in the design of the audit methodology or 
            in its execution. But on the whole, these firms are highly 
            competent. And yet the failures continue to occur, in spite of 
            firms' remediation efforts. I am left with the inescapable question 
            whether the root of the problem is auditor skepticism, coming to 
            ground in the bedrock of independence. The loss of independence 
            destroys skepticism. 
            Inspections by other audit regulators have also given rise to 
            concerns about auditor skepticism, as reported by the U.K.'s Audit 
            Inspection Unit, the Dutch AFM, the Australian Securities and 
            Investments Commission, the Canadian Public Accountability Board, 
            the Swiss Federal Audit Oversight Authority and the German Auditor 
            Oversight Commission.[4] Based on such concerns, the 
            European Commission is also reportedly considering reforms to 
            enhance auditor independence. I understand a draft of proposals from 
            the EC is expected in November. 
            In August, the PCAOB issued a concept release to seek public 
            comment on how to enhance auditor independence, including whether 
            audit firms should be subject to term limits. 
            Under existing U.S. rules, all but the smallest audit firms are 
            required to rotate engagement and quality review partners. This 
            requirement dates back to the profession's self-imposed quality 
            control requirements. But it was imposed and strengthened by law as 
            part of the Sarbanes-Oxley Act's independence reforms. My 
            understanding is that it is now widely accepted globally as a best 
            practice. 
            Partner rotation allows a firm to become aware of a partner's 
            decisions in the audit. But a new partner may feel the need to live 
            with those decisions and agreements; he may have little motivation 
            to reopen them. What is lost is the true "fresh pair of eyes." 
            I recognize that audit firm rotation presents considerable 
            operational challenges. I am interested in hearing about them in 
            specific terms. 
            Like any professional service firm, audit firms invest 
            considerable resources in pitching new clients. And in the early 
            years of an engagement, they may even take in less in fees than it 
            costs them to do the audit. Alright, law firms wouldn't do that 
            unless they had to. But why would they? Because they hope to make up 
            these costs and more in a long stream of future fees. 
            That future stream of fees may be cut off if the company is 
            displeased. That, some would say, is the risk inherent in the 
            client's payment of the fee. The auditor may perceive that 
            displeasing management on a substantive accounting or auditing issue 
            — one of those so-called "close calls" — may increase the risk of 
            losing those future fees. 
            For the record, I do not by these voiced concerns impugn the 
            ethics, integrity and good faith of the entire profession. To 
            recognize the complexity of transactions, the velocity of financial 
            reporting schedules and the pressures of competition does not, 
            cannot, blind us to the risks and the "predictable surprises" — in 
            this case unpleasant predictable surprises. 
            Skepticism can fail in spite of high ethical standards, when the 
            cited pressures, for example, result in the audit team skipping over 
            disconfirming evidence. In short, we are not talking about the 
            ethics, integrity and good faith of the profession. We are talking 
            about causalities of judgment in the heat of the moment. As 
            standard-setters, the PCAOB should try to find ways to counter the 
            pressures, and fortify the judgment. 
            If the audit firm were seeking a finite engagement, say ten 
            years, would they feel the same incentives? Would audits be more 
            objective, in early years and all years, if the auditor knew within 
            the reasonably foreseeable future another firm would take over the 
            audit? 
            We have a long comment period, extending to December 14. We will 
            then hold a public roundtable to further discuss the subject in 
            March of 2012. 
            C.  Audit Transparency 
            The third policy initiative I want to talk about is audit 
            transparency. Earlier this week, the Board proposed amendments to 
            its auditing standards to improve audit transparency by enhancing 
            disclosure about the participants in audits, including disclosure 
            about the partner in charge of the audit as well as other firms 
            involved in the audit. 
            This proposal stems from a concept release that the Board issued 
            in July 2009 to obtain comment on whether the Board should require 
            engagement partners to sign audit reports. 
            The names of key management executives, not to mention corporate 
            board members, have long been disclosed. The names of audit 
            engagement partners are also disclosed in many countries, but to 
            this point not in the United States. 
            As I said at the PCAOB's open meeting on Tuesday, I fail to see 
            why shareholders in large European banks and other companies should 
            be able to see the name of the engagement partner in the audit 
            report, but shareholders in U.S. banks and companies should not. 
            Indeed, the names of engagement partners for some European 
            companies that are listed on the NYSE are disclosed in U.S. filings. 
            Why are their shareholders to be favored over shareholders in U.S. 
            companies? 
            At the concept release stage, the Board received certain 
            objections to requiring engagement partner signature, most notably 
            that the change could unintentionally imply a reduction in the 
            firm's overall responsibility for the audit and the audit opinion. 
            The proposal is intended to address those concerns. 
            Our audit standards set forth the responsibilities of the 
            auditor. The proposal does not change the responsibilities of the 
            audit firm or the engagement partner. 
            The proposal would also provide investors disclosure about other 
            accounting firms and certain other participants in the audit, given 
            the nature of cross-border audits today. Enhanced transparency into 
            the composition of cross-border audits should help investors gain a 
            better understanding of how an audit was conducted and make more 
            informed decisions about how to use the audit report. Investors will 
            see, for example, the significant participation of audit firms from 
            jurisdictions where we cannot inspect. 
            Our comment period for this proposal extends through January 9. 
            
            IV.  Secrecy of Enforcement Proceedings 
            Before I close, I would like to touch on one more initiative that 
            I believe will be of interest to you as counsel to companies and 
            boards that engage auditors. 
            As I mentioned at the outset, both PCAOB investigations and any 
            contested disciplinary proceedings we bring are by law under 
            Sarbanes-Oxley non-public unless the respondents consent to 
            publication of our complaints and decisions. We have asked Congress 
            to change this. 
            In the years since Sarbanes-Oxley passed, the PCAOB has built an 
            active enforcement program, but unfortunately for investors, audit 
            committees, the bar, and the audit profession itself, it takes place 
            largely behind the scenes. 
            The Board's Division of Enforcement and Investigation conducts 
            rigorous investigations before recommending that the Board file any 
            complaint. But when the Board does determine that the facts merit 
            the filing of a complaint, it will not be public. Nor will any 
            decision by the Hearing Officer or the Board to impose a sanction, 
            until any appeal to the SEC is exhausted. 
            Litigation postpones — often for several years — the day on which 
            the public learns that the Board has charged the auditor or firm and 
            the nature of those charges. This secrecy has a variety of 
            unfortunate consequences. Interested parties, including investors, 
            audit committees, issuers and other auditors, are kept in the dark 
            about alleged misconduct. 
            Audit committees may be unaware for years that their auditor has 
            been charged by the Board. Counsel representing other auditors are 
            deprived access to the Board's precedents. And auditors don't learn 
            important information about conduct or actions that draw the Board's 
            reproach, denying the public any benefit from the deterrent effect 
            that the filing of public complaints would have on other auditors. 
            
            A case that recently became public only after the completion of 
            SEC review of the Board's decision provides a good example. In 
            Gately & Associates, a Florida firm issued 29 additional audit 
            reports on public company financial statements between the 
            commencement of the Board's proceeding and the public disclosure of 
            the Board's charges, which did not occur until the SEC affirmed the 
            Board's decision to expel the Gately firm from public company 
            auditing and allowed the Board's sanction to take effect. That 
            information, had it been available, could have made a difference to 
            client and investor decisions regarding the firm or the companies it 
            audits. 
            *    *    * 
            It's been a pleasure to be back in Texas and to have this chance 
            to talk with you. Thank you for your time and interest in the PCAOB.