I want to begin by thanking the PCAOB budget staff whose long hours, late nights and dedication have produced the budget and the voluminous supporting materials that accompany it. Preparing a comprehensive budget and strategic plan is always a challenge, and our staff's task has been made more difficult by board oversight processes that too often left important programmatic and policy matters affecting the budget either undecided or decided only in the late stages of the process. Despite these handicaps, the staff has always been helpful and has attempted to be responsive to the many questions and requests for information that board members have had in the process of analyzing the budget. And I thank the SEC staff for their cooperation and always helpful suggestions.
I am voting in favor of the PCAOB's 2017 budget and strategic plan but I do so with misgivings which are discussed below. I strongly believe that it is important that the PCAOB be adequately funded to carry out its important work and that a vote to reject this budget or even to delay a decision would put at risk our ability to do that work.
This budget proposes total expenditures of $268.5 million and represents an increase of $10.8 million or 4.2 percent over the 2016 budget of $257.7 million. It also represents an increase of $15.8 million or about 6.2 percent over the PCAOB's actual projected expenditures for 2016. While the 2017 budget holds headcount constant at 876 when compared to the 2016 budget, it represents an increase of 12 employees over the number of employees who are expected to be employed by the PCAOB at the end of 2016 and 19 employees over the number on the PCAOB payroll today.
This budget continues an unbroken trend of growth in both expenditure and headcount at the PCAOB. Rapid growth in both headcount and expenditure was inevitable in the PCAOB's early years when the organization was ramping up to perform its mandate under the Sarbanes-Oxley Act. In recent years, however, in my view, the PCAOB has reached maturity and is, in general, adequately staffed to carry out its important work. This does not mean that our budgets and head count must remain constant, particularly as new risks arise or new tasks are assigned to the organization. For example, the Dodd Frank Act of 2010 gave the PCAOB jurisdiction over auditors of broker-dealers and imposed obligations on us to do economic analysis of the effects of our standards on emerging growth companies. These additional responsibilities could be expected to require additional resources and I support budget increases when they are based on demonstrated need and an evidence-based conviction that our existing resources are being deployed as effectively as possible.
The need for additional resources is best demonstrated when it is supported by periodic baseline analysis to determine the efficiency and effectiveness of existing operations, including an examination of staffing levels and resources allocation. Before seeking additional resources, the Board needs to be confident that its existing resources are fully and efficiently utilized and that needed tasks cannot be accomplished without greater resources. The analysis I am suggesting would include several elements. First, there should be an analysis of staffing levels and employee allocation within and among divisions and offices. There also needs to be a clear and coherent compensation philosophy including consideration of the labor market in which we operate and sensitivity to the unique public/private nature of the PCAOB. Since operational efficiency and effectiveness are affected by employee engagement and morale, management responses to information learned from employee surveys may also result in changes that could impact the budget. Potential operating efficiencies involving information systems, facilities management, outsourcing of certain functions and similar items may affect that baseline analysis. Only with an understanding of current PCAOB operations based on such analysis can the Board adequately assess a proposed budget and whether additional resources are needed to carry out the PCAOB's statutory mission.
The type of baseline analysis discussed above is not required every year, but needs to be undertaken periodically and to be brought current annually as part of the budget process. To my knowledge, such a comprehensive, foundational baseline analysis has never been undertaken by the PCAOB though several board members have requested it for several years. The PCAOB has commenced a compensation survey with an outside consultant, but the study is not complete and the results were unfortunately not available to inform this budget. The PCAOB also undertook employee surveys in 2015 and 2016 and the Board has been briefed in general terms on management's thoughts in response to information learned from our staff in these surveys, but not in sufficient detail to provide much insight into their budgetary implications.
The absence of comprehensive baseline analysis explains in part the reason that Board oversight of the budget process has been difficult and, at times, contentious. Without such analysis, budgeting becomes an exercise in projecting past practice into the future, adjusting for cost increases, with additions for any new undertakings that may be required or desirable. The information about possible operational cost savings that baseline analysis might provide has simply not been available for Board consideration during this budgeting process.
A particular area of concern for me in this budget is the increase in resources for the economic analysis function at the PCAOB. From my student days as an undergraduate and graduate student in economics, I have always believed in the value of economic analysis for most activities. In particular, good economic analysis should underpin all regulatory processes relating to the financial markets. At the PCAOB, economic and risk analysis is currently divided into two offices, with three areas of activity: an Office of Research and Analysis which performs risk analysis and research for use primarily in our inspection program and a Center for Economic Analysis with two functions: economic analysis of our standard setting projects and more general economic research related to auditing. The Board has been informed that there is consideration being given to integrating these offices into one office in 2017. The proposed aggregate budget amount for all of the PCAOB's economic research and risk analysis activities for 2017 is $14.855 million, representing a 17.5 percent increase over the actual expenditure for of $12.639 million for 2016. This level of increase may be entirely justifiable, but in the absence of a systematic examination of staffing levels, of possible overlaps or duplications among the offices conducting economic and risk analysis and whether the proposed integration in 2017 will yield efficiencies, which has not been done, it is hard to know. In this area, in particular, I believe that close Board oversight is required.
Once a budget has been set, it is vitally important that the board have the ability and the information, provided on a timely basis, to monitor the expenditures in real time and to be able to measure budgeted expenditures against actual expenditures. Currently, the Board is not provided with monthly financial reports or basic comparisons of spending against budgets, but only receives financial information on a quarterly basis, despite board member requests for more frequent information. These quarterly reports are not in a format designed for board oversight purposes. This might be appropriate for a traditional, part time board, but PCAOB board members are full time employees of the PCAOB and the Sarbanes-Oxley Act clearly contemplates active board oversight of PCAOB operations. Current practice makes it difficult or impossible for the Board to exercise the degree of board oversight of the PCAOB's operations that in my view the statute clearly contemplates. It also means that the Board may not be informed in a timely manner of pending budget pressures so that appropriate decisions and guidance can be given to the staff. As an example, this year, the PCAOB's actual expenditures for travel in one division exceeded budgeted expenditures by an amount that has required a supplemental request to the Securities and Exchange Commission under the Commission's PCAOB budget rule to reallocate amounts within the PCAOB budget. Adjustments affecting planned inspections and activities were made before the Board was informed of the issue, illustrating to me the problems with the present practice of limiting the board members' knowledge and oversight of the financial operations of the PCAOB.
Despite these concerns about board governance and oversight processes, I am proud of the work that the PCAOB and its talented staff are doing. I have no doubt that our inspections process has substantially raised audit quality in this country and investor confidence in our capital markets. The decline in the number of reported financial restatements in recent years is only one of many evidences of that impact. The PCAOB's non-US inspection program, along with our ever closer cooperation with non-US audit regulators, is also raising audit quality throughout the world. Our enforcement efforts have raised audit quality by removing from public company auditing a number of practitioners who have demonstrated through their actions that they do not possess the skills or character to be auditors of public companies or broker dealers. Our effort to underpin our standard setting efforts with deeper levels of economic analysis is already allowing us to focus more clearly on whether an identified problem is most appropriately addressed by standard setting or by some other approach. All of these activities are the result of the work of our talented staff and I am deeply grateful for their efforts.
In conclusion, despite my concerns, I support this budget. I believe it will enable us to carry out the PCAOB's important work and I hope that some of the process improvements I have suggested may be implemented to carry out our work even more effectively and efficiently.