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Olsen Discusses Internal Controls and U.S. Competitiveness

In remarks to Financial Executives International, Public Company Accounting Oversight Board Chairman Mark Olson said that ensuring investor confidence in public company financial reports is at the core of the board's mission. He said the Sarbanes-Oxley Act codified some of the best practices that had already begun to be implemented after numerous financial scandals, but also ensured that boards of public companies and their auditors would reassess the roles of audit committees and the integrity of financial reporting. The act also assigned responsibility for assuring that internal control over financial reporting would be discharged in a meaningful way, according to Mr. Olson.

Mr. Olson discussed the PCAOB's plans for revising Auditing Standard No. 2 in order to focus auditors on the areas of greatest importance. The PCAOB is coordinating its release of amendments to Auditing Standard No. 2 with the SEC's proposed guidance for management in implementing Section 404. That way, the comment periods will overlap, he explained. The SEC and the board believe it is important that the two initiatives be available concurrently for public consideration.

Mr. Olson said that the problems that have been identified by accelerated filers in the first two years of internal controls reporting reflect the progress that has been made. The number of opinions describing material weaknesses declined in the second year, he said, and the opinions relating to restatements in the second year reference current year errors. Mr. Olson said this shift may imply that errors are being identified earlier.

The most commonly reported weaknesses involved staffing, training or competence, according to Mr. Olson. The most frequently reported errors in accounting related to revenue recognition, tax accounting and inventory accounting.

Mr. Olson described the PCAOB's inspections and supervisory model as a dialogue between the PCAOB and the supervised firm. He said this interaction helps firms of all sizes to better understand what is required of them in the current auditing environment. Mr. Olson believes the inspections help firms coordinate their specialities with the needs of public companies and have led some firms to realize that public company auditing is not the right focus for their business model in the current environment.

Mr. Olson acknowledged criticisms of the timeliness of the release of the inspection reports, but said that, due to the complexity of the process, particularly for the largest firms, it takes longer than the board and the firms would like. The PCAOB is looking for ways to improve the process, he added.

Mr. Olson encouraged directors, and particularly audit committee members, chief financial officers and other senior officers, to discuss the PCAOB's inspection results with their auditors. These discussions can aid such individuals' understanding of the audit firm's quality controls, he explained. If the quality controls are criticized, Mr. Olson said the audit committee should ask the firm whether it has remedied the problem or what the firm is doing to address the problem. 

Mr. Olson provided his view on the debate over whether the Sarbanes-Oxley Act has adversely affected the U.S. capital markets. He observed that studies of costs and the overall impact of the Act can be difficult to conduct and can result in misleading or contradictory conclusions. One must consider all of the factors that have an impact on the competitiveness of the U.S. capital markets, he said, including private litigation, which many believe is the most significant force working against U.S. competitiveness. He acknowledged the importance of achieving the right regulatory balance in protecting the U.S. capital markets in order to continue to attract investors and issuers worldwide.

Mr. Olson said that the PCAOB is aware that initial public offering volume is a sign of the overall strength of a market. He said the downward trend in domestic initial public offerings should be looked at, but added that the trend began in 1996, prior to the adoption of the Sarbanes-Oxley Act and the events of 2001. The evolution of the IPO markets in other countries must also be studied, he said.

Listings on the U.S. markets continue to command a valuation premium, Mr. Olson noted, which is attributed to high governance standards. In the two years that companies have been reporting and obtaining audits on their internal controls, the amount of capital raised by non-U.S. companies on U.S. exchanges has grown, he said. Mr. Olson said he expects the U.S. capital markets to retain their dominance.