SEC Appoints Director, Chief Auditor to PCAOB
Former Reserve Bank President, N.Y. Professor Join Nascent Board

By Simon Eskow

The U.S. Securities and Exchange Commission in April appointed the outgoing president of the New York Federal Reserve Bank to head the Public Company Accounting Oversight Board, and a Baruch College professor to lead the board’s self-appointed effort to rewrite accounting standards.

The five SEC commissioners unanimously appointed William McDonough, retiring president of the reserve bank, to be chairman of the incipient watchdog group, which the SEC declared fit for business by the April 26 deadline established by the Sarbanes-Oxley Act.

The SEC named Douglas Carmichael, professor of accounting and director of the Center for Financial Integrity at Baruch College of the City University of New York, chief auditor, giving him the duty of putting together a consulting body to help revamp accounting regulations traditionally under the purview of the American Institute of CPAs.

Carmichael’s and Donaldson’s appointments, though not formalized as of the writing of this story, allowed the PCAOB to progress toward operating status after some earlier fits and starts. For example, previous PCAOB chair appointee William Webster stepped down after he revealed his connection to a company accused of fraud.

These appointments, and SEC approval of the board’s status, cheered PCAOB Acting Chairman Charles D. Niemeier, who said he was pleased the commission gave its blessing to the board on April 25.

“Today’s action by the SEC is an important milestone,” Niemeier said in a statement released by the commission. “With this determination, the PCAOB can move forward.”

Who They Are

Incoming PCAOB Chair William McDonough—who also will be given the title president and CEO of the board—has served as the eighth president and CEO of the Federal Reserve Bank of New York since 1993, acting as a permanent member of the Federal Open Market Committee. McDonough joined the bank in 1992 as executive vice president following his retirement from First Chicago Corp. after a 22-year career there.

McDonough, who declined to be interviewed, served in the U.S. State Department, spending two years in Uruguay as part of his six-year tour of duty, according to a New York Fed spokesman. McDonough also served in the Navy, and earned a master’s degree in economics from Georgetown University and a bachelor’s degree in economics from Holy Cross College in Massachusetts.

A former editor of The CPA Journal, Chief Auditor Carmichael is a noted author and a professor of accounting at Baruch College, where he also is the director of the Center for Financial Integrity. Carmichael participated in hearings in the months following the Enron-style scandals, and strongly urged reform in his testimony before the New York State Board for Public Accountancy. Carmichael once said there was an automatic taint in CPAs providing advice to their audit clients. With 30 books and many more articles on accounting and ethics, Carmichael has a reputation as an ethics expert, suitable to the job of revising the rules.

“My wife has been quoted before on this, saying that when she saw the job description for chief auditor, it was the job I’ve been training for my whole career,” Carmichael said. “Everything I’ve done to this point, points to doing this job. I’m happy they thought so too.”

The SEC at the end of April announced it would recognize the statements issued by the Financial Accounting Oversight Board on accounting matters. At the same time, it would be up to Carmichael and an ad hoc advisory group to review and possibly revamp 900 pages worth of auditing standards.

Carmichael said the review probably will not take that long, and that there are other priorities, such as establishing internal control reporting standards, as required by Sarbanes-Oxley. Otherwise, audit standards as they exist now are written from the perspective of the audit team, and that is only part of the picture, Carmichael said. By bringing together the inspection, standard-setting and investigations under the PCAOB, the board will be able effect change in the accounting profession, he said.

“I think all those things have to work together and that’s the key arrangement,” Carmichael said.

A main thing the board will do is work with its investigators to figure out exactly what needs to be documented during an audit by determining what inspectors and investigators of public companies have to see to ensure that an audit conforms to standards.

“There should be enough in the documentation that those people don’t need to rely on the oral explanations to figure out what happened,” Carmichael said.

Carmichael said the SEC approached him to serve on the board through an executive search. He participated in a number of interviews with the full board and individual members. He said he hopes to begin working in the first half of May, splitting his time between New York and Washington, D.C.