Thursday, January 12, 2012

SEC Approves PCAOB’s 2012 Budget, Engages in Q&A with PCAOB Chair Doty

The SEC unanimously approved the PCAOB’s 2012 budget of $227.7 million. Board Chair James Doty appeared at the open meeting to answer the commissioners’ questions. SEC Chief Accountant James Kroeker said that information technology and its governance continue to pose challenges to the Board. The Board was instructed to report to the SEC on its progress on those initiatives. The Board also must continue to report to the SEC on the timing of the issuance of its inspections and on developments in gaining access to certain foreign jurisdictions to conduct inspections.

Most of the Board’s budget is covered by the accounting support fee which is assessed on issuers and broker-dealers. The budget represents an increase of 11% over the 2011 budget which is primarily attributable to the Board’s inspection program. The Board will increase staff to perform inspections of the audits of SEC-registered broker-dealers and to increase the number of international inspections in 2012.

In opening remarks, SEC Chair Mary Schapiro referred to the unprecedented change that was brought about by the PCAOB’s oversight of the audit profession. The former system of peer reviews, where one auditor reviewed the work of another, has been replaced by the PCAOB’s inspection reports. Chairman Schapiro said it is striking to compare an old peer review with a PCAOB inspection report.

Chairman Doty believes the 2012 budget will place the Board in a strong position to fulfill its investor protection mandate. One of the main drivers of the budget are personnel costs, which account for 75% of the budget, 58% of which is for inspection personnel. IT costs make up 10% of the budget, rent and facility make up 8%, and travel 7%. The travel expenses are mainly inspection-related trips, including foreign travel.

Commissioner Elisse Walter asked Doty to address the Board’s enforcement efforts. He said that inspections and enforcement go hand-in-hand. Chairman Doty would like to see inspections and mediation work, with enforcement as a last resort. He added that it would also help if Congress agrees to lift the prohibition on making public the Board’s filed enforcement actions. Litigation proceedings can stretch out for years, he said, and the lack of transparency creates a tremendous roadblock to settling actions.

Commissioner Walter also asked about whether the Board plans to accelerate the issuance of its inspection reports. The PCAOB Chair said that he is optimistic about that and would like to see final reports issued within six months after the inspectors leave the field.

Commissioner Luis Aguilar addressed the serious challenges the Board faces in gaining access to foreign accounting firms to perform inspections. In his opinion, firms should not be able to participate in an issuer’s audit if they are beyond the Board’s oversight. Chairman Doty reported progress in a number of jurisdictions. The Board is working through all of the data protection issues in Europe, he said. The agreement with Japan was a big step forward, in his view. However, Doty said the 36 Chinese firms that are registered have not made information available to the Board. In Comm. Aguilar’s view, the situation cannot continue ad infinitum.

Commissioner Troy Paredes also asked about the timing of the inspection reports and how to close the gap to achieve the goal of issuance six months after inspectors leave the field. Chairman Doty said the Board had developed a backlog, which has substantially been cleared. He also pointed out that it is a retrospective process, looking back at a year of completed audits. With firms’ cooperation, he sees no reason why the Board should not be able to get the reports out within that time frame.

The Chair also noted that the inspection reports are not a report card on a firm. The purpose of the report is to direct the firm and the public to the questions they should be asking. He added that the staff’s audit practice alerts should be read by everyone, including audit committees and management, as should the Board’s 4010 reports.

Commissioner Paredes asked about the Board’s use of cooperation credit in enforcement proceedings. The PCAOB chief said that the Board applies credit, but it is not always evident. The Board has less to offer when a firm cooperates, but when it does, Doty said the Board fully acknowledges that cooperation.

When Comm. Paredes asked about the expectations for the Board’s Office of Research and Analysis, Mr. Doty said that ORA produces over 500 reports a year. It is the data management function of the Board. The Chair expects ORA to show enhancements each year in its ability to deliver refined information to help the Board make accurate decisions about rulemaking, enforcement and investigatory steps, adding that he wants to see increasing relevance in the data ORA produces.

Responding to a question about the role of economic analysis in the Board’s standard setting activities, Chairman Doty acknowledged the increased interest in economic analysis in connection with the SEC’s rulemaking and said the Board pays attention to those instructions.

Commissioner Paredes also asked how the Board determines whether it is efficiently using its resources. Mr. Doty said that firms have admitted that audit quality has improved through the inspection process. The Board can see improvements with the triennially inspected firms. Conduct is changing, in his view, and audit practices are improving, as is conduct in the boardroom.

Chairman Schapiro addressed the problem with access to foreign firms and said both the SEC and the PCAOB have a real sense of urgency on the matter. It is very easy to register and to deregister, said the PCAOB Chair, who added that the Board pushes back when a firm seeks to register in a jurisdiction where the Board has no access. The Board has denied registration, he said. Some registered firms have gone dark and the PCAOB head acknowledged that the Board has been slow to pull the plug on their deregistration.

Finally, responding to a query from Chairman Schapiro if the Board has the necessary depth of expertise in connection with international financial reporting standards, Mr. Doty said the Board has IFRS experts and expects to hire more.

This post was contributed by my colleague, Jacquelyn Lumb