Auditing Research with the SEC in Mind Andrew D. Bailey, Jr. Past Academic Accounting Fellow (2000/01) Past Deputy Chief Accounting ( ) U.S. Securities & Exchange Commission AAA Audit Section Doctoral Consortium January 2006

Outline SEC Organization SEC Organization Research FundingResearch Funding The SECs goals and Attitudes condition its interest The SECs goals and Attitudes condition its interest Investor protectionInvestor protection Market effectiveness and efficiencyMarket effectiveness and efficiency Disclosure focusDisclosure focus Academic Research most likely to appeal Academic Research most likely to appeal Capturing the SECs Attention Capturing the SECs Attention Summary Summary

Structure of SEC Divisions Divisions Division of Corporation FinanceDivision of Corporation Finance Division of EnforcementDivision of Enforcement Division of Market RegulationDivision of Market Regulation Division of Investment ManagementDivision of Investment Management

Structure of SEC Offices Offices Administrative Law Judges Administrative and Personnel Management Chief Accountant Compliance Inspections and Examinations Financial Management Economic Analysis Equal Opportunity Employment Executive Director Filings and Information Services General Counsel Information Technology Inspector General International Affairs Investor Education and Assistance Legislative Affairs Municipal Securities Public Affairs, Policy Evaluations and Research Secretary

OCA and DCF Focus on Financial Reporting and Disclosure Goal-Investor Protection Goal-Investor Protection Provision of relevant, reliable, complete understandable information to the investorProvision of relevant, reliable, complete understandable information to the investor Assure that investors receive quality information from management (broadly defined)Assure that investors receive quality information from management (broadly defined) High Quality Audited Financial StatementsHigh Quality Audited Financial Statements

Inputs needed for Quality Information: Researchable Issues Preparation of Information by ManagementPreparation of Information by Management Governance roles of management, audit and compensation committees, internal audit, etc. Governance roles of management, audit and compensation committees, internal audit, etc. Accounting Standards Setting and Application Accounting Standards Setting and Application Regulation, Oversight, Sanctions and Enforcement Regulation, Oversight, Sanctions and Enforcement Education of preparers, audit committees, internal auditors Education of preparers, audit committees, internal auditors

Inputs needed for Quality Information: Researchable Issues Audits of Management InformationAudits of Management Information Auditing Standards Setting and Application Auditing Standards Setting and Application Independence Rules Creation and Enforcement Independence Rules Creation and Enforcement Audit Process (e.g., risk model, fraud focus) Audit Process (e.g., risk model, fraud focus) Oversight, Enforcement, Sanctions Oversight, Enforcement, Sanctions Education of auditors (university and continuing education) Education of auditors (university and continuing education)

The Carnegie Research Model: Value to the SEC Discovery Research – Interested, but Opportunistic Use Discovery Research – Interested, but Opportunistic Use Integration Research – Interested more Systematic Use, but somewhat Unpredictable Integration Research – Interested more Systematic Use, but somewhat Unpredictable Application – Interested, even more Systematic, but still somewhat Unpredictable Application – Interested, even more Systematic, but still somewhat Unpredictable Teaching – General concern and specific concern for Investor Education Teaching – General concern and specific concern for Investor Education

Capturing the SECs Attention Academic Accounting Fellows Program as a port-of-entry Academic Accounting Fellows Program as a port-of-entry Send papers of interest in as official commentary on pending concept releases, rules, etc. Send papers of interest in as official commentary on pending concept releases, rules, etc. Get to know the staff – How? Get to know the staff – How? Consider evolving PCAOB interactions (Research links, academic fellow program, etc.) Consider evolving PCAOB interactions (Research links, academic fellow program, etc.)

Summary SEC values research that will help it achieve its investor-related goals SEC values research that will help it achieve its investor-related goals Integration and Application Research, but particularly Integration Integration and Application Research, but particularly Integration Teaching Research and Application with particular emphasis on life-time competence and renewal Teaching Research and Application with particular emphasis on life-time competence and renewal