Opening Statement on Auditing Standards and Rules

Good morning. I want to welcome members of the public to this open meeting of the U.S. Securities and Exchange Commission (SEC).

Today, the Commission will consider three matters geared to enhance the practice of auditing.

Well-functioning financial markets are built on trust. Critical to such trust are disclosures—including financial statement disclosures that issuers and broker-dealers make to the investing public.

Long before the SEC was established, in 1889, the first U.S. Commissioner of Labor, Carroll D. Wright, who happened to also be a statistician, spoke to a convention of labor statistics commissioners in Hartford, Connecticut.[1]

He warned about the erosion of trust and the abuse of numbers for personal gain. “Figures will not lie,” he said, but “liars will figure.”[2]

My grandfather Ellis Tilles, an immigrant from Lithuania who ran a corner grocery store, so not a statistician, often said the same thing: “Figures don’t lie, but liars sure can figure.”

Having watched the run-up and aftermath of the calamitous 1929 stock market crash, Congress and President Roosevelt understood the wise words of Commissioner Wright and my grandpa. In response, they worked to restore trust among the investing public by enacting the first federal securities laws.

Nearly 70 years later, however, our system was once again breaking down. Fraud in financial reporting and accounting eventually led to historic bankruptcies, such as Enron and WorldCom.[3]

Investors needed facts and figures they could trust — figures without the liars.

Congress responded by passing the Sarbanes-Oxley Act of 2002.[4] Having had a ringside seat advising my home state senator, Paul Sarbanes, on this historic legislation, I saw how both Congressman Mike Oxley and he understood all too well the importance of figures.

Their vision led to reforms establishing the Public Company Accounting Oversight Board (PCAOB) as an independent watchdog over the audits of public companies and registered broker-dealers and their auditors.

The Enron crisis revealed a key problem: the quality of auditing standards.

Candidly, the relationships between issuers and auditors, between standard-setters and auditing firms, were too clubby.

Auditing standards were set by the American Institute of Certified Public Accountants (AICPA), a professional association. The profession was writing its own rules. That’s an inherent conflict.

To correct course, the PCAOB was tasked with setting enhanced auditing standards. For practical purposes, Congress permitted the newly established PCAOB to carry over existing AICPA standards on an interim basis. The expectation was that the Board would produce a more appropriate set of standards going forward.

It’s worth noting that many of these standards were already decades-old when the Board adopted them in 2003.[5] Many contained inherent flaws that the Board was created to solve.

Since then, the AICPA itself has updated numerous standards in the private company audit space.[6] The PCAOB, however, has not done likewise. In fact, 42 of these 49 so-called “interim standards” remained in public company audit practice when I came to the SEC. Without pre-judging any one of them, adhering to 20^th-century standards is not a faithful effort towards instilling greater trust among today’s investors.

Twenty-two years after Sarbanes-Oxley, I have the honor of serving as Chair of this great agency. I’m proud to support the PCAOB’s proposed changes to instill greater trust among investors and issuers in our markets.

I would like to thank the staff and Board members of the PCAOB for their diligent work on these matters. I also want to thank the staff at the SEC for their work in preparing today’s recommendations.

I look forward to discussing these recommendations from the staff.