As you know, over the past couple of years, together with the board members and staff of the Public Company Accounting Oversight Board, I have been working to enhance the reliability of the external audit function and its usefulness to U.S. capital markets.

I will start off with an overview of some of the more significant issues confronting the audit profession. And then I’d like to open a more interactive discussion.

I. Corporate Governance Has Evolved to Suit the Needs of Capital Markets.

I have known many of you for years. I have watched and admired how you have navigated the many changes we have seen in both the energy industry and corporate governance.

Many of us have gained significantly more experience than we expected in identifying, addressing and preventing future threats to corporate success, such as differences in cultural expectations and business practices around the world and at home. Enron had a profound effect on Houston.

As this morning’s discussion demonstrated, you recognize that your work is never done. There is no perfect governance regime for all time.

…continue reading: Challenges Facing the Audit Profession and PCAOB Initiatives

I. High Quality, Independent Auditing is Critical to Our Economic Success.

As I have learned in this job, getting the accounting right is indeed not the same thing as getting the auditing right. My sense from accountants I talk to is that auditing is receiving well-deserved attention in its own right.

Our economic success depends on the confidence of the users of capital and the providers of capital alike. Corporate managers hire internal accountants — many of you here today — to ensure they have accurate and detailed information on which to base management decisions. Managers ignore opportunities to glean trends and insights from this data at their peril.

Mistakes in this information can send a company into a business line or market that squanders resources. We now know that the true cost of financial misstatement is much greater than stock market fallout, concomitant lawsuits and insurance claims.

…continue reading: Enhancing the Relevance, Credibility and Transparency of Audits

I am here to talk about the regulatory initiatives of the Public Company Accounting Oversight Board. The PCAOB is deeply engaged in examining ways to enhance the relevance, credibility and transparency of the audit to better serve investors.

The auditing profession has developed a highly skilled body of experts capable of analyzing accounts in a way that draws out truths and insights and sheds light on confused or misleading claims. It plays an indispensable role in making our capital markets fair and strong.

But I believe we are in a high risk period that merits more attention to the audit, not less. When companies make lay-offs, as we’ve seen recently, they often affect the internal audit and compliance staff — the first line of defense for fraud and other corporate malfeasance. This should be a concern to the legal community.

Although we have never needed it more, the audit too has, in the minds of some, become a commodity to be contained with other compliance costs.

In the United States, large audit firms’ revenues from consulting are growing 15 percent a year. Audit fees have stagnated at, basically, the inflation rate. Thus audit practices have shrunk in comparison to audit firms’ other client service lines.

This can weaken the strength of the audit practice in the firm overall. The problem is compounded when audit firms turn their talents to other endeavors that may further damage public views on the relevance and value of audit.

To be relevant, the auditor must speak to and for investors. Fair or not, that is in question today.

…continue reading: PCAOB Regulatory Initiatives

I want to commend the NACD on its mission to “advance exemplary board leadership” and on the extensive training and resources devoted to leading practices for board members, including audit committees and other specialized board committees.

The principal elements of the Sarbanes-Oxley Act — strengthening the role of audit committees, establishing the PCAOB to oversee auditors, and enhancing auditor independence and corporate accountability — aligned the interests of the PCAOB and audit committees. We both focus on auditor oversight to help ensure independent, high quality, and reliable audits to protect investors.

Recent questions about financial reporting and auditing, as well as related regulatory initiatives in the U.S. and around the world, highlight the benefits of and need for greater communications between regulators and audit committees.

Today, following the recent financial crisis, we find ourselves once again evaluating how best to protect investors through high quality financial reporting and reliable audits.

As you know, in pursuing our core mission of protecting investors through audit oversight, the Board has a number of initiatives to consider improvements in major areas of audit practice. I’d like to provide an update on several of the Board’s key initiatives that have a direct impact on audit committees, including our concept release on auditor independence and audit firm rotation, the new auditing standard on communications with audit committees, and our recent informational release that deals with communications with audit committees about PCAOB inspection results.

…continue reading: Protecting Investors through Independent, High Quality Audits

Anyone involved in the financial reporting process deals daily with the hard realities of complexity and rapid change — whether you are a preparer of financial statements, a board or audit committee member, an investor, an independent or internal auditor, a counselor, or a regulator.

Commercial activity is increasingly global. Some financial instruments and transactions are bafflingly complex with values that can only be estimated. Standard setters in the United States and abroad are moving away from historical cost accounting toward fair value accounting, requiring difficult estimates. There is a plethora of new rules and requirements growing out of the Dodd-Frank and JOBS acts in the United States, and all of this is happening in what since 2008 has been the most difficult global economic environment since the Great Depression of the 1930s.

Much as we struggle with these rapid changes and their complexity, regulators also struggle to see around the curve, to be prepared for what is coming tomorrow, and to have tools in their toolbox that will be appropriate for those challenges. In the next session of today’s conference, I will discuss a number of specific initiatives the PCAOB is undertaking to deal with some of these challenges, but in this address I want to focus on one specific area, the challenge of globalization and cross-border financial reporting, auditing and audit oversight.

…continue reading: Investor Protection through Audit Oversight

Since the Public Company Accounting Oversight Board was created 10 years ago by the Sarbanes-Oxley Act, the U.S. system of auditor oversight has been fundamentally reformed to better protect investors and the public interest.

In addition to creating the PCAOB, the Act also vested audit committees with expanded oversight of financial reporting and audit processes.

Initially, the Act was seen as an effort to address problems that appeared to be unique to the U.S., but after numerous financial reporting scandals erupted around the world, the U.S. model of audit regulation was adopted in varying forms in many other countries.

Following the recent financial crisis, we find ourselves in an era with new stresses on financial reporting and auditing around the world, and we are once again evaluating how best to protect investors in this environment.

…continue reading: PCAOB: Protecting Investors and the Public Interest

At an open meeting held on August 15, 2012, the Public Company Accounting Oversight Board (“PCAOB”) voted to approve new Auditing Standard No. 16, Communications with Audit Committees. Although the new standard retains most of the preexisting communication requirements, there are a number of new areas that the auditor must discuss with the audit committee, and there are some areas where the auditor must seek specific responses from the audit committee. The new standard, available at http://pcaobus.org/Rules/Rulemaking/Docket030/Release_2012-004.pdf, is intended to benefit investors by enhancing the relevance and quality of communications between the auditor and audit committee, facilitating audit committee oversight of financial reporting and fostering improved financial reporting.

Background and Effective Dates

The PCAOB initially proposed Auditing Standard No. 16 for comment in March 2010 and issued a revised proposal in December 2011 following an initial comment period and feedback received at a September 2010 roundtable. Auditing Standard No. 16 expands on and supersedes existing standards on communications with audit committees (interim standards AU sec. 380, Communication With Audit Committees, and AU sec. 310, Appointment of the Independent Auditor), and makes conforming changes to related standards. The new standard requires SEC approval and, if approved, will apply to audits of public company financial statements for fiscal years beginning on or after December 15, 2012.

Auditing Standard No. 16 is the first standard that the PCAOB has adopted following enactment of the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, a new PCAOB standard will not apply to audits of “emerging growth companies” (“EGCs”) unless the SEC determines that the application of the standard is “necessary or appropriate in the public interest, after considering the protection of investors and whether the action will promote efficiency, competition, and capital formation.” At its August 15 meeting, the PCAOB expressed its view that the SEC should approve the application of the new standard to EGCs.

…continue reading: PCAOB Adopts New Audit Standard on Communications with Audit Committees

This is a special year in many respects. We have our own concerns at home. But those of us who find our work on financial terrain have our sights trained east, toward Europe, and west, toward China, more than in past years.

In the broader population, there is new apprehension for effects we don’t know but must nevertheless judge. Will European states muster a defense to the behavioral contagion of financial panic? Will they find a way to use their inter-dependence to make Europe financially stronger? Or will they find that too many divergent interests must agree to save the European experiment? How will the U.S. be affected?

Looking toward China, many say that that nation’s economic growth cannot continue without structural changes. Can China instill its new, investing middle-class with confidence that financial markets will provide for its future? From our larger companies to our smaller entrepreneurs, we are doing business in China. Can we have confidence that China isn’t the latest iteration of — pick your era — the Tulip Scandal, the silver-mine frauds of the Old West, the S&L bust? And how should we deal with these risks in a global economy?

These are questions that require that admirable quality we often call vision. When we speak of vision, we speak of visionaries. That is, people who have stepped out from the crowd and revealed something that the rest of us could not see. There are false visionaries, who inspire us to act based on what we or they wish might be. But the true ones give us honesty, and invaluable leadership.

…continue reading: The Relevance of Audits and the Needs of Investors

In March, the Public Company Accounting Oversight Board held hearings about whether to require public companies to change — or “rotate” — their external auditor periodically. Meanwhile, the European Union is proposing to require mandatory rotation every six or 12 years, and the lower house of the Dutch Parliament recently voted to require auditor rotation every eight years.

At the PCAOB hearings, various investor advocates and pension funds argued in favor of mandatory rotation. They found fault with the lengthy relationships between many auditors and the companies they audit — the auditors of almost 36% of all companies in the Russell 1000 have held that position for 21 years or more. According to the supporters of auditor rotation, this coziness creates a potential conflict of interest: an auditor’s desire to maintain a good relationship with its client could conflict with its duty to rigorously question the client’s financial statements.

Mandatory auditor rotation could reduce this conflict. Since auditors would know that their engagement would come to an end after a fixed period, they would have less incentive to curry favor with management. At the same time, mandatory rotation could encourage existing auditors to perform more thorough audits, because the firm would fear that a new auditor would expose any previous errors or omissions.

…continue reading: Search for Auditors; Don’t Rotate

The Public Company Accounting Oversight Board is proposing a new auditing standard that relates to the auditor’s evaluation of a company’s relationships and transactions with related parties, and amendments to existing auditing standards that relate to significant unusual transactions and financial relationships and transactions by a company with its executive officers (including incentive compensation arrangements). The new and amended standards are intended to focus auditors’ efforts on areas that may pose an increased risk of material misstatement to a company’s financial statements.

The PCAOB’s proposals largely build upon and enhance existing requirements in these areas, primarily by providing greater specificity around the procedures that must be employed and inquiries that must be made. While the proposals would not directly impact the non-financial-statement disclosure (such as proxy disclosure) relating to related party transactions and executive compensation under SEC rules, companies should anticipate greater auditor focus and additional audit procedures on the financial statement impact of these areas if these proposals are adopted.

Subject to SEC approval, the new and amended standards would be effective for audits of financial statements for fiscal years beginning on or after December 15, 2012. The deadline for public comment is May 15, 2012.

…continue reading: New PCAOB Auditing Standards