mentioned earlier the pcaob. the pcaob was created through the sarbanes - oxley act to oversee the auditors of public companies. the pcaob has recently approved auditing standard no. 2, an audit of internal control over financial reporting conducted in conjunction with an audit of financial statements. the new standard highlights the benefits of strong internal controls over financial reporting and furthers the objectives of sarbanes - oxley. this standard requires external auditors of public companies to evaluate the process that management uses to prepare the company's financial statements. external auditors must gather evidence regarding the design and operations effectiveness of the company's internal controls and determine whether the evidence supports management's assessment of the effectiveness of the company's internal controls. while the new standard allows external auditors to use the work of others, including work performed by internal auditors, it emphasizes that external auditors must perform enough of the testing themselves so that their own work provides the principal evidence for making a determination regarding the company's controls. based on the work performed, the external auditor must render an opinion as to whether the company's internal control process is effective, which is a relatively high standard. in addition, as part of its overall assessment of internal controls, the external auditor is expected to evaluate the effectiveness of the audit committee. if the audit committee is deemed to be ineffective, the external auditor is required to report that assessment to the company's board of directors. this new standard will certainly put more demands on external auditors and public companies alike. but in the world of business and financial innovation and growing complexity of firms, these standards should encourage greater reliability of corporate financial statements and therefore, regain the confidence of the public and the trust of financial markets. conclusion in conclusion, i hope my views will give you an opportunity to think about some of the challenges both accountants and auditors face in today's business environment. the accounting industry should be cautious and prudent as it debates the merits of fair value accounting. accountants and auditors alike must be knowledgeable of the models and assumptions used in determining the fair value of products and services. a models - based approach to valuations must produce results that accountants, auditors, and market participants feel are objective. standardsetters have the daunting task of balancing the need to provide accounting principles that keep pace with financial innovation with the need to promulgate standards that produce accurate, reliable and verifiable results

of its various lines of business. traditional accounting standards have not kept pace with the risk - management tools employed by sophisticated corporations. thus, more meaningful disclosures of firms'risk - management positions and strategies are crucial for improving corporate transparency for market participants. the improvements in technology, the quick pace of financial innovation, and the evolving risk - management techniques enable businesses to use almost limitless configurations of products and services and sophisticated financial structures. accordingly, outsiders will have ever more difficulty understanding the risk positions of many large, complex organizations. these developments represent significant challenges to standard setters and to accounting firms. for market discipline to be effective, accounting standards and disclosures must evolve to accurately capture these developments. challenges for auditors auditing firms are facing the growing challenge to build and pass along the knowledge possessed by their professionals who truly understand the audit and accounting issues around particular business lines. as companies broaden the range of products, services, and delivery channels they offer, clients require more specialized knowledge for each operation. as we are all aware, there are fewer large accounting firms competing in the marketplace today. i understand that many of the larger accounting firms are no longer accepting audit engagements of some smaller or medium - sized companies. this opens an opportunity for small to medium - sized auditing firms to become specialists - so - called “ niche players. ” in this way, smaller auditing firms can develop the expertise of their auditing staff around the accounting and business practices of the specialized industries or particular types of clients, as knowledge - sharing can be more successful when it is naturally more targeted. perhaps a broader question facing the auditing industry today is how to maintain and instill the appropriate professional judgment required of auditors as accounting theory moves towards a more principles - based approach. one impact that the sarbanes - oxley act is having on preparers and auditors of financial statements is the quest for more “ bright line ” rules so they can more readily know when an interpretation comes close to the acceptable limit. but the changing business world, especially around financial instruments, is making it impossible to write an accounting rule for each potential nuance of innovation, and so we are turning to more principles - based accounting. thus, sound judgment is becoming a more valuable talent to businesses and their auditors. as cpas, one of your most important missions is to reinvigorate the profession to successfully address these conflicting goals. other challenges let me also mention an area that places increased responsibility on auditors. i