SEC Chair on PCAOB Oversight and 2016 Budget Approval

Good morning. This is an open meeting of the U.S. Securities and Exchange Commission on March 14, 2016 under the Government in the Sunshine Act. Today, the Commission will consider the staff’s recommendation to approve the proposed FY 2016 budget and accounting support fee for the Public Company Accounting Oversight Board. The Commission has the authority and responsibility, under the Sarbanes-Oxley Act, for overseeing the PCAOB and approving the PCAOB’s annual budget and accounting support fee. I am pleased that we have Chairman Jim Doty, as well as other Board members and staff of the PCAOB, here with us today as we take up these matters.

In exercising our oversight responsibility, the Commission must satisfy itself that the PCAOB is appropriately funded to fulfill its mission and that its funds are used for maximum impact. The importance of the work of the PCAOB cannot be overstated. High quality, independent audits are a critical element of the SEC’s investor protection regime and are especially important to the U.S. capital markets where millions of Americans invest their savings and retirement assets. The PCAOB is responsible for overseeing the audits and auditors of the financial statements of U.S. public companies and SEC-registered broker-dealers. The work that it performs in carrying out its responsibilities is thus vital to investor protection and our capital markets.

One of the most impactful accomplishments of the PCAOB since inception has been the development and continued improvements of its inspection program. That program has played an integral role in strengthening and maintaining the integrity of the audit function and enhancing audit quality.

It is essential that the PCAOB’s inspection program remain on top of changes in financial reporting and audit practice in order to timely identify and consider new and emerging risks to audit quality wherever those risks may arise. Approximately 2,100 accounting firms are registered with the PCAOB and about 900 of those are located in 85 non-U.S. jurisdictions. The Commission has strongly supported the Board’s efforts to expand its inspections access in foreign jurisdictions where inspections are required.

It is also important for the Board to make meaningful and timely progress in its rulemaking efforts to establish a permanent program for inspections of audits of broker-dealers. The reports from broker-dealer inspections published by the Board to date generally indicate the need for substantial improvements in the quality of these audits and having a permanent inspection program in place should help to drive improvements in this area. I look forward to the Board advancing a proposal for a permanent program in 2016 and would ask Chairman Doty to address that subject in his remarks.

While the inspection program is an essential element of the Board’s oversight work, inspections alone cannot fully achieve the objective of ensuring high-quality audits. They must be complemented by rigorous, high-quality auditing standards that keep pace with the evolution in financial reporting. That is why it is imperative for the PCAOB to have and maintain an active standard-setting agenda and for timely progress to be made on its standard-setting projects. I commend the PCAOB for the efforts it has undertaken over the past year to move projects forward. I note that in December the PCAOB approved rules to improve the transparency of those who participate in audits and has undertaken significant efforts to evaluate the effectiveness of its standard setting processes. I look forward to learning more about the Board’s plan to finalize and implement changes to improve the pace and quality of its standard setting activities, including on projects for auditing standards in the areas of accounting estimates, auditors’ use of the work of specialists, and the use of other auditors.

I also commend the Board for its efforts over the past year to publish a concept release on audit quality indicators. This important initiative demonstrates the leadership role the Board has taken in the global discussion about how to define audit quality, how to measure it over time, and how to provide additional insights into audit quality. Through its outreach activities, the Board has engaged with other stakeholders in the financial reporting process, including investors and audit committees.

Audit quality is a critical safeguard and a key metric for investors who rely on audited financial information and for audit committees when they consider whether to select or retain an auditor. As part of this work, the PCAOB must continue to focus on identifying and addressing the implications to audit quality of new and emerging risks. I look forward to continued progress on this initiative as the PCAOB continues to seek to improve audit quality and the integrity of financial reporting.

The Board regularly informs the Commission and our staff of developments in a variety of areas, including its standard-setting, inspection, and information technology programs, as well as on the status of its progress on the Center for Economic Analysis. The Commission expects and I know that the Board and its staff will continue to keep us informed of developments in these and on other programs and will continue to work closely and productively with the SEC staff. I am particularly interested in updates from the Board on its progress on its standard setting process and projects and its assessment of how the Center for Economic Analysis is progressing and being integrated into the PCAOB’s overall mission.

An important aspect of the Commission’s oversight function is to ensure that the PCAOB has adequate funds to fulfill its vital mission. It is also incumbent upon the PCAOB to be good stewards of those funds and to use them for maximum impact. I encourage the Board to take a hard look at their funding and expenses in the coming year, including with respect to compensation, and identify, if possible, savings and efficiencies that will allow the PCAOB to fully perform its mission, but also have due regard for the reasonableness of the level of the accounting support fee that is levied to support it.

I would again like to thank Chairman Doty for being here today and for his leadership of the Board. I would also like to thank each of the Board members and the staff for their hard work and dedication to the critical mission of the PCAOB. I want to specifically recognize and thank Board members Lew Ferguson, Steve Harris, and Jeanette Franzel who are here today. Thank you for coming and for your service. Jay Hanson was unable to join us today due to travel, but I also want to commend his work on the Board. I remain strongly committed to working with the Board and the PCAOB staff as they work to protect investors and further the public interest in informative, accurate, and independent audit reports.

I want to thank the staff at the SEC, including our Chief Accountant Jim Schnurr, Brian Croteau, Jeff Minton, Kevin Stout, Mark Jacoby, Khalid Shah, and Matt Hodder, all in OCA, as well as Ken Johnson, Caryn Kauffman, Rick Taylor, Nicole Puccio, Crystal Willis, and Yolanda Dews from the Office of Financial Management, who all worked very hard and constructively to the review of the PCAOB’s 2016 budget. You all did an extraordinary job. Thank you.

I will now turn to Jim Schnurr, the SEC’s Chief Accountant, for his remarks, to be followed by remarks from Ken Johnson, the SEC’s Chief Financial Officer, and then we will hear from Chairman Doty. After Chairman Doty’s remarks, we will proceed to questions from me and questions and comments from my fellow Commissioners.