Statement on Proposed 2015 Budget and Strategic Plan

Date: Nov. 25, 2014

Speaker: Jay D. Hanson, Board Member

Event: PCAOB Open Board Meeting

Location: Washington, DC

Good Afternoon,

Consistent with the goals and objectives set forth in the 2014-2018 Strategic Plan, the Board today is approving the PCAOB's budget for 2015.

The 2015 budget will be the most conservative during my tenure on the Board to date, because it reflects very little headcount or spending growth. At just under $251 Million, it is less than the 2014 budget of $258 Million, and the $252.5 Million reflected in the 2014 Revised Spending Plan, which was established to satisfy the sequestration requirements of federal law. Because we expect to spend significantly less in 2014 than our budget contemplated, however, the 2015 budget will be an increase of just under 8% over the current estimate of 2014 spending. The total Accounting Support Fee for 2015 will be approximately 10% less than it was for 2014.

As is the case every year, the vast majority of the budget (approximately 3/4 of the total) is attributable to personnel costs. Of the remaining non-personnel costs, approximately 1/3 pays for our offices and facilities, close to 1/4 is allocated to business travel, primarily for inspections, and the remainder is related to a variety of administrative expenses, consulting and professional fees, and information technology.

We have slight increases in personnel costs — due to the full-year effect of new employees brought on board during 2014 and in anticipation of hiring a limited number of new employees in 2015 — as well as a slight increase in the costs of employee benefits. At the same time, we will have decreases in 2015 in expenses related to Travel, Training and Facilities projects, resulting in the lower budget overall.

In some respects, I think of this year's budget as being the result of a "reset" by the Board. We have continued to learn from experience and are trying to refine not only the Board's needs to achieve its statutory mission, but are also taking into account the reality of what we can accomplish, including in terms of hiring and access to international firms. As we did at the end of 2013, we find ourselves in a situation in 2014 of having spent less than our approved budget. My personal goal is for the 2015 budget to reflect as closely as possible what we can reasonably expect to spend.

Hiring, in particular, has been a challenge for the Board throughout its existence, but particularly in 2014. (So if any listeners today are experienced auditors interested in joining our inspection or enforcement teams to contribute to the profession's continued improvement, please get in touch!). Along with the economic recovery following the financial crisis, competition for qualified accountants has increased. We have taken a very close look at our headcount projections for 2015 and are proposing modest increases for next year in our most important mission-related areas, including Inspections and Enforcement, along with replacing staff in any positions that become vacant due to routine turn-over. Ultimately, our goal for total headcount at the end of 2015 represents an increase of 36 staff members over our estimated year-end headcount, but the total number of 851 staff planned for 2015 is actually lower than the goal we set last year for 2014, which was 864.

I am also cognizant of the fact that we are spending other people's money. As we do every year, we have scrutinized all aspects of the budget to make sure that our projections are reasonable in light of our needs and ability to perform. In addition to headcount, estimating the appropriate level of certain types of consulting and professional fees — such as for translation services, legal services, and expert witnesses — can be a challenge. This year's budget reflects reductions in several of these areas, compared to the 2014 budget, to better reflect our spending in these areas over the last few years.

Compared to the 2014 revised spending plan and 2014 budget, we also have made significant reductions (over $2 Million compared to the revised spending plan and over $3 Million compared to the budget) in travel costs, such that the 2015 travel budget is almost even with (but slightly lower than) what we expect to be our actual costs in 2014. The decrease in these expenses is due in large part to lower headcount numbers in our Inspections Division and fewer planned trips to conduct inspections abroad, where we continue to face challenges accessing firms in certain jurisdictions.

Finally, along with adjusting our budget to better reflect past spending, it is my hope that we are slowly nearing what would be an appropriate "steady state" budget for the PCAOB. I do anticipate modest staff increases to continue for the next few years, in order to ensure that we have sufficient staff to further enhance the analysis of our data and the timeliness of some of our activities, including issuing reports, completing investigations and enforcement actions, and establishing standards. We will also make some decisions in the near future about the scope of our permanent broker-dealer inspection program, which may have an impact on our headcount. But beyond modest growth, and barring any significant legislative changes that require us to take on new activities, I do not expect any dramatic increase in our resource needs during the remainder of my term as a PCAOB Board member.

One adverse impact of keeping our 2015 budget flat and our hiring goals modest, of course, is that our staff will face challenges in accomplishing everything that we ask of them. Many of our divisions have ambitious goals for next year, not just in terms of their routine activities involving inspections, investigations and standard setting, but also in terms of addressing Board priorities such as enhanced reporting about our activities and findings, outreach, process improvements and data aggregation and analysis. While I understand that some difficult choices may be ahead, I am confident that our staff will continue to be resourceful and diligent as they go about their work.

Before I close, let me turn just briefly to the Strategic Plan and some of the Board's goals in 2015 and beyond.

Like last year, the Strategic Plan is anchored in three goals: Effective Oversight; Constructive Impact; and Dedicated People. Many of our strategies remain consistent with those in last year's Plan, though some have been refined and updated to reflect progress and current perspectives. Overall, the plan reflects what we believe will be a holistic approach to enhancing audit quality, including a focus on root cause analysis and remediation of inspection findings, work on quality control and audit performance standards, continuing development of audit quality indicators to help measure improvements in quality, and an analysis of firm business models and their potential relevance to audit quality. I would also like to see the Board increase its focus on identifying and communicating what auditors are doing well, that is, the best examples of effective execution of our auditing standards.

We also continue to focus on the Board priorities first announced in late 2012. We have made some progress on every front — inspection reports, remediation, audit quality indicators, data aggregation and analysis, audit committee outreach, and standard setting — and I would like to thank the staff for their efforts. However, more remains to be done, so I will also ask the staff to continue their creative thinking and good work. Among other things, I believe the Board should take a look at its standard setting process, to determine whether steps could be taken to enhance its effectiveness and timeliness. I would also like to see the Board provide more timely information to the public about our inspection findings and our experiences in root cause analysis and remediation. I am hopeful that our Office of Research and Analysis can soon begin to seek input on its most promising audit quality indicators and their possible uses. And, finally, in the area of audit committee outreach, I — along with several of my fellow Board members — continue to seek opportunities to interact with our stakeholders, including audit committees, investors, financial statement preparers and others.

We also continue to focus on the challenge of conducting economic analysis on proposed new auditing standards. I believe this is a very important and substantive undertaking that should not be limited to just new auditing standards but also should be applied to other types of new rule proposals. We also should constantly challenge whether we are basing our analyses on an appropriate "baseline." The staff in our Office of the Chief Auditor and Office of Research and Analysis have diligently dedicated themselves to learning about this important area and educating the rest of us on economic principles. We are all learning to incorporate more rigorous consideration of costs and benefits into our thinking, and our economists have enhanced their understanding of the audit process, potential benefits of enhancements to auditing standards, and the potential impact of our activities on accounting firms, issuers, and broker-dealers. The coming year should present us with new opportunities to incorporate our learning into the standard setting process, and I expect our analysis will continue to improve.

Finally, l would like to comment on a new PCAOB effort, our Center for Economic Analysis, formally established at the beginning of this year. The Center was established with the goal of applying economic theory to improve the effectiveness of the PCAOB, including by analyzing our programs from an economic perspective, facilitating economic research on the role and relevance of the audit in the capital markets, and to help us develop empirical tools to use in our oversight programs. We have hired experienced economists to run the Center; our first economic research fellows have joined the PCAOB; and the Center hosted an academic conference in late October.

Now that the Center has commenced operations, the Board needs to further define the Center's role within the PCAOB, ensuring that the Center's activities complement the Board's mission and the work of its other offices and divisions, without creating duplication. This is particularly important now that three different PCAOB offices have their own economists on staff, each with a slightly different purpose. The Board will need to review and evaluate the Center's mission statement and activities plan and establish specific performance metrics to ensure that the Center's activities prioritize supporting the Board's primary functions. While the 2015 budget includes funds to more than double the Center's staff, I join my fellow Board members in requiring that we be satisfied, before these new positions are filled, that we have the systems in place to monitor the Center's efforts and results.

The Board also needs to take a look at its staff of economists holistically and determine the most appropriate structure and reporting relationships for its economists to best serve the interests of the Board.

Let me wrap up by joining my fellow Board members in thanking the staff of the PCAOB for their efforts in connection with the Strategic Plan and Budget we are adopting today. In addition to members of our Budget Office, including Jim Hearn, Yoss Missaghian and Bobbie Rose, whose heroic efforts over the last few weeks were key to getting us here today, we benefitted from the views and experience of staff members from every PCAOB Office and Division as we considered how best to achieve the Board's mission effectively and efficiently. I would also like to thank the staff of the Securities and Exchange Commission for their considered questions, comments and feedback during this process.

I would also like to wish everyone a Happy Thanksgiving. I hope that you all get some well-deserved time with family and friends over the next few days.