Carmichael: Accountability at Heart of PCAOB’s Work

Carmichael: Accountability at Heart of PCAOB’s Work

To best ensure that financial reporting is complete, accurate and transparent and adheres to generally accepted accounting principles, Douglas Carmichael, chief auditor for the Public Company Accounting Oversight Board, suggested last month that a company’s CFO should be a certified public accountant.

“If you need someone who is great in dealing with bankers, put him in a spot that is not a CFO,” Carmichael said. “The CFO should be a competent accountant.”

Carmichael’s comments came during a brief question and answer session that followed his March 29 luncheon presentation to the Accountant’s Club, which met in Manhattan. But, this is not the first time that a regulator has publicly made such a remark.

In his 2002 testimony before the U.S. Senate Banking, Housing and Urban Affairs Committee, former Securities and Exchange Commission Chief Accountant Lynn Turner noted that there is a disincentive for CFOs and controllers to hold a CPA license given that censure proceedings permissible under Rule 102(e) principally concern individuals who are currently licensed CPAs acting in a reckless manner. At the time of his testimony, Turner suggested that the SEC’s scope of authority with respect to this rule as well its high standard of “recklessness,” as opposed to negligence, for example, may need to be evaluated.

“Today, many of the CFOs, controllers and key financial reporting people do not have, or have not maintained a current CPA license. In essence, the lack of current SEC actions pursuant to Rule 102(e) against non-licensed accountants sends a strong message,” Turner said. “I think it is the wrong message that CFOs and controllers are better off without their licenses than they are with them.”

In light of Turner’s apprehension with CFOs and controllers who seem to find it advantageous not to be CPAs in the belief that their exposure to the SEC’s scope of authority is mitigated, Carmichael’s comments were especially interesting to note in the context of his broader speech to the Accountant’s Club. The thrust of the speech from the former director of the Center for Financial Integrity at Baruch College dealt with the principle of increased accountability across board rooms, company management and the auditing profession and also as the overriding objective of the PCAOB’s standards.

This objective, Carmichael said, was the basic rationale for the PCAOB’s decision to replace the American Institute of CPAs as the chief audit standard setter.

“I believe that the process at the AICPA lost sight of the fact that auditing standards have two important purposes.

Communicating the requirements of auditing and evaluating the performance of auditors,” Carmichael said. “The second aspect…means holding auditors accountable. Too often, the auditing standards avoided accountability or invited the auditor to do so.”

Citing the PCAOB’s efforts to raise the threshold of accountability, Carmichael discussed how the board, in approving the final rule on internal control attestations, determined that the independent auditor can, under certain criteria, rely on the work of others in forming an opinion on management’s assessment of internal controls. But, he noted, the independent auditor remains responsible to his or her opinion regardless of whether the work of others was used.

In hoping to prevent any maneuvering around standards, the PCAOB has proposed a “must/should” rule that would utilize more grammatical imperatives to make standards clearer as to whether certain obligations are unconditional or presumptively mandatory, Carmichael said.

“The quality of auditing standards must be judged by whether they hold the auditor accountable just as auditors in the future will be judged by whether they are willing to be held accountable for the quality of their work,” Carmichael said.

Given this position, he also took issue with indemnification agreements.

“Indemnification for auditor negligence amounts to nothing more than a license to do a bad audit,” Carmichael said, adding that even indemnification agreements for matters attributable to management misrepresentation can compromise the auditor’s sense of accountability to detect material misstatements.