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PCAOB Approves 2007 Budget

The PCAOB members yesterday unanimously approved a 2007 budget which will be submitted to the SEC for consideration at an open meeting on Monday, December 4. PCAOB member Daniel Goelzer observed that the communications between the Board and the SEC were much more timely and cooperative this year, given that the PCAOB was still responding to budget questions well into the new year after the submission of its 2006 budget. The PCAOB is on a calendar fiscal year, but its 2006 budget was not approved until April. The 2007 budget was approved by the PCAOB at $136.4 million compared to $130.9 million in 2006, 71% of which pays for personnel.

PCAOB Chairman Mark Olson said the 2007 budget reflects the Board's continuing transition from a start-up organization. Its domestic inspections are becoming more efficient as its international inspections are expanding. Olson reported that the PCAOB did not meet its hiring goal for experienced accountants in 2006. Goelzer noted that there is a tremendous competition for talent and it takes significant resources to attract, compensate and retain experienced auditors.

Goelzer characterized the 2007 budget as the most thoughtful and sophisticated of the five the PCAOB has prepared since its conception. He cited the addition of a budget officer as one reason, along with the hiring of Bill Wiggins from the SEC staff to fill that position. The PCAOB also hired a chief of staff, Angela Desmond, who previously worked at the Federal Reserve Board. The PCAOB this year began to integrate its annual budgeting with multi-year strategic planning, according to Goelzer, which continues to be a work in progress. He believes the two processes will be even more closely aligned next year.

The SEC amended the PCAOB's budget process in July to improve its timeliness and transparency. The more formal budget process includes a timetable for each step and a process for communicating with the SEC about each year's budget.

Issuers will see an 11% increase in the support fee they pay to fund the PCAOB's operations. The invoices will be sent out in mid-March. The PCAOB reduced the overall accounting support fee by $10 million by tapping into its capital reserve.

Goelzer asked whether the additional resources contemplated by the budget would speed up the issuance of inspection reports. George Diacont, the director of the Division of Registration and Inspection, replied that there is nothing specific in the budget, but the inspection staff is expected to increase by net 20 if the hiring goals are met. Diacont said there are enough resources now to get the reports out more quickly, which his staff intends to do, regardless of the budget.

Board member Charles Niemeier believes the PCAOB inspections have had an "immensely important" effect on auditing firms. Auditors' attitudes regarding their accountability have changed significantly, in his view. He cited reports that auditors are auditing better than before, partly because they know their work may be reviewed.

After the meeting, Olson was asked about his view on the report by the Committee on Capital Markets Regulation, which recommends ways to improve the competitive position of the U.S. capital markets. Olson said he found the report timely and perceptive. When asked whether the report's conclusions would influence the Board's consideration of revisions to Auditing Standard No. 2, he said he would consider the findings in the report but could not speak for his fellow Board members. The authors of the report suggested a number of changes related to section 404, including a revision to the materiality standards of AS2. Olson said the Board will consider revisions to AS2 sometime before Christmas.

Jacquelyn Lumb