The PCAOB had a public meeting on November 30th where it approved its 2011-2015 strategic plan and 2012 fiscal-year budget. The budget now moves to the SEC for its consideration.
The total PCAOB budget is proposed to increase by 11.4% to $227.7 million. Two major drivers of the increased budget are new examinations related to broker dealers that were required by the Dodd-Frank Act and increased international inspection activity.
The PCAOB plans to increase the number of international inspections from 43 in 2011 to 90 in 2012. Of those 90 international inspections, 65 will be of foreign offices of the large global network firms such as the Big Four, and 25 will be of smaller firms.
The Board is hopeful that it will be able to begin inspections in China and Hong Kong during 2012. These inspections have been held up by China's argument that they would infringe on China's sovereignty. If an agreement can be reached for inspections to begin, the PCAOB has budgeted for two inspections to be done on the mainland in 2012 and for the completion of five inspections in Hong Kong that were suspended after China asserted sovereignty.
I would expect that the first two mainland firms to be inspected will be Big Four firms. PwC has the most fees from U.S. listed companies and Deloitte has the most clients, so I would expect those firms will be high on the PCAOB's list.
Recently released inspection reports indicate that the PCAOB is getting tougher. The PCAOB found flaws in 28 of 75 reviewed audits by PwC and 12 of 54 by KPMG. Many of these inspections focused on audits of companies that failed in the financial crisis. If the PCAOB is able to come to China, I expect they will focus on the many frauds that have taken place among U.S. listed Chinese companies.
Of course, these inspections will not happen unless China and the United States find a way to agree on the PCAOB coming to China to do inspections either by themselves or together with Chinese regulators. Recent reports in the Chinese press are not encouraging.