Statement on Proposed 2016 Budget and 2015-2019 Strategic Plan

Date Nov. 24, 2015
Speaker Steven B. Harris, Board Member
Event PCAOB Open Board Meeting
Location Washington

Thank you, Mr. Chairman. I support the Board's 2015-2019 Strategic Plan and the accompanying Budget.

The Board's proposed budget is $257.7 million and funds a total of 876 positions. This represents an approximately 2.7% increase from the budget approved for 2015, which is the smallest increase since I have been on the Board with the exception of last year, which saw a decrease.

The minimal increase in the 2016 Budget over the 2015 Budget is largely a result of increased personnel, mainly for Inspections and Information Technology.

As in the past, the 2016 budget will enable the Board to meet its priorities and efficiently allocate its resources. I also believe this budget will enable us to meet the goals spelled out in the 2015-2019 Strategic Plan and fulfill our mandate "to protect the interest of investors and further the public interest in the preparation of informative, accurate and independent audit reports." It also approaches the steady state budget I believe is an appropriate, reasonable goal, while demonstrating careful stewardship of our resources.

The Strategic Plan for 2015-2019 sets out in considerable detail a number of the Board's past accomplishments and major goals so I will indicate just a few of my own priorities. They include:

Maintaining a Focus on Auditor Independence — I believe, as emphasized throughout the Strategic Plan, that investor protection, improving audit quality and ensuring auditor independence must remain top priorities as the larger firms grow their consulting and advisory services which includes, by way of example, management consulting and investment banking.

As in prior years, in 2014 revenues from consulting and advisory services for these firms increased at a higher rate than audit. Revenue from consulting and advisory services now represents 41% of total revenues across the four major U.S. firms, exceeding audit's 35% share. For this reason, I support the initiative in the Strategic Plan to examine the evolution and structure of audit and non-audit services offered by the largest accounting firms and the implications of their multi-practice business model on independence and audit quality.

As part of this endeavor, the Board should consider any potential policy options that could mitigate risks to ensure that investor protection, audit quality, and auditor independence are not compromised as audit firms expand or add additional lines of business. This includes, for example, monitoring firm business practices, such as possible cross-marketing or tying arrangements, which could give rise to conflicts of interest that may impair auditor independence.

I am not convinced that the appropriate safeguards are currently in place to protect the independence and integrity of the assurance functions of these firms.

I also believe that the Board should examine whether certain kinds of tax consulting services create conflicts of interests that may impair auditor independence.

The Strategic Plan makes clear that we will continue to hold auditors accountable for violations of our auditing standards and independence rules during inspections and as part of our enforcement oversight.

Global Firm Quality -- I have concerns over how the global network firms ensure consistent audit quality when performing multi-national audits or group audits. Our inspections continue to highlight mixed results across various network affiliate firms. The Board's activities, as indicated in the Strategic Plan, will include an ongoing focus on the level of supervision and interaction among member firms in the performance of group audits.

Timely Remediation -- I continue to believe that timely remediation determinations should be a priority for the PCAOB. As a result, I strongly support the initiatives included in the Strategic Plan to promote timely remediation and early engagement of firms in the remediation process in order to improve audit quality.

Standard Setting -- With respect to standard setting, in 2015 the Board undertook a review of the performance and management of its standard setting process. The Board is considering the development and implementation of a process improvement plan that is designed to advance its standard-setting process in the coming year.

I believe that the Board should continue to focus on the need and the problem any new proposed standard is seeking to solve as well as the feasibility of achieving a timely solution to any proposed initiative.

I also support the Board's Center of Economic Analysis' early review of the costs and benefits of any proposed standard as well as a prospective post-implementation review of standards the Board has adopted.

With respect to advancing our standard-setting agenda to further protect investors, I expect the Board to adopt a final rule related to disclosure of the audit partner and other accounting firms participating in the audit in the very near future.

In addition, investors have been asking for an expanded auditor's report for a number of years now and I would note that the Strategic Plan makes this a Board priority.

I support the other standard setting projects mentioned in the Plan including those relating to clarifying auditors' responsibilities relating to going concern as well as our initiatives to improve the Board's quality control standards. In this regard, I continue to believe the Board should focus on the Failure to Supervise provision of the Sarbanes-Oxley Act.

I would also note that the Board took a significant step towards promoting competition based on audit quality among the firms by issuing its concept release on audit quality indicators (AQIs) in June 2015.

I believe AQIs will be of considerable value not only to the PCAOB, but to audit committees, auditors, investors, and companies alike. This effort is of importance to regulators around the world, with several countries already instituting disclosure of AQIs by firms.

Improving Data Analysis -- The PCAOB gathers considerable amounts of data to achieve its various policy objectives. For this reason, I believe it is essential that the data needs of each of our offices and divisions are clearly understood and met and, in this regard, I think the Board can do a better job.

As a result, I support the initiative contained in the Strategic Plan to establish a process to review and analyze PCAOB data needs so that all the offices and divisions at the Board receive the information they need to best do their jobs. In addition, I recommend that a cross-divisional committee should be formed to identify, track and resolve the data collection needs of each of the various PCAOB offices and divisions.

Firm Transparency -- While not included as an initiative in the Strategic Plan, I continue to believe, as I have mentioned a number of times before, that the larger auditing firms should submit to the PCAOB, and make publicly available, audited financial statements.

This was a recommendation of the co-chairs of the 2008 Bush Administration's bipartisan Treasury Department Advisory Committee on the Auditing Profession. They wrote that the "[i]ssuance of audited financial statements provides greater transparency and increases discipline and helps sharpen focus, accountability and trust."[1]

As the larger firms continue to grow their lines of business, I believe that the sunlight of a transparent audited financial statement will help the investing public monitor the firms' focus on audit quality, independence, investor protection and potential long term viability. I see no apparent reason that the auditing firms that act as gatekeepers in our securities markets should not be as transparent to investors as the companies they audit.

Budgetary Considerations -- In conclusion, in considering and finalizing the Board's 2016 budget – which now must be approved by the Securities and Exchange Commission – I believe the Board has carefully assessed, and continues to assess, the growth of the PCAOB with an eye towards reaching a steady-state level in its budget.

The Board understands the need to budget responsibly, to provide justification of its spending, and to carefully oversee its divisions and offices. I believe this budget represents that effort.

Before closing, I join you, Mr. Chairman, and the other Board members in acknowledging and thanking the staff for all their hard work on the Budget and Strategic Plan. Most people are unaware of how many people contribute to the final product that is before us today. I want to particularly thank Suzanne Kinzer, our Chief Administrative Officer, and Bill Wiggins, Jim Hearn, Jeannie Boehne, Yoss Missaghian, and Bobbie Rose. I also want to thank Phoebe Brown, our Corporate Secretary, for her work on the Strategic Plan.

[1] U.S. Department of the Treasury, Final Report of the Advisory Committee on the Auditing Profession to the U.S. Department of the Treasury (Oct. 6, 2008), II:9.