PCAOB Chief Forecasts Hard-Nosed but Hopeful Future

PCAOB Chief Forecasts Hard-Nosed but Hopeful Future
Makes Public Debut at FAE Conference

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Opening the Sept. 9 SEC Practice Under the Sarbanes-Oxley Act Conference, McDonough made clear that the PCAOB is an “ally” to the profession, but one that should not be taken for granted.

“I expect that you as members of a regulated profession know what the rules are, and I expect you to follow those rules both in their letter and in their spirit,” McDonough told nearly 250 CPAs and a large gathering of the press. “If in the unlikely event that you would depart from those expectations…well then we will have a less pleasant relationship...”

While discussing the relationship between firms and the PCAOB, which he noted would comprise neither “zealots” nor “pussycats” but “balanced people,” McDonough indicated that through cooperation and compliance the nonprofit, private-sector overseer can help the profession overcome the sting of highly publicized financial scandals and the mistaken impression that accountants cannot be trusted.

“Now you and I know that that impression is wrong. Are there bad accountants? You bet…Is the profession bad? Absolutely not,” McDonough said. “(But) it frankly doesn’t make any difference whether you think that the profession got a bum rap…You have to restore the faith of the American people in you.”

Though McDonough believes this responsibility ultimately rests with the firms, he commended the New York State Society of CPAs for its leadership role and longstanding commitment to improving the profession.

“…The New York State Society has stepped up to the plate, proving time and again that it is not afraid to take positions contrary to the norm,” he said. “In fact, the New York State Society was reform-minded well before it was popular to be so.”

For its part, the PCAOB is committed to fulfilling its professional mandate under the Sarbanes-Oxley Act of registration, inspection, enforcement and standard setting, the former head of the New York Federal Reserve Bank said.

According to Sarbanes-Oxley, firms that audit more than 100 public companies will undergo inspections once a year, while those with 100 or fewer audit clients will have them once every three years, though, if circumstances warrant, a special inspection can be ordered at any time. The inspections, an office for which has opened in New York City, will focus on compliance with rules and standards, audits, the reasons for compensation and promotion, and the “tone at the top.”

While inspectors will talk to firm managers and audit team leaders to assess their understanding of new regulations and standards, they will also talk to the least-experienced audit team member.

“The board and our inspectors want to know if the message of doing the right thing is reaching the rank and file at your firm,” McDonough said. “We will look at how often and how well that message is delivered.”

Though it can delegate standard-setting authority to any professional group of accountants, McDonough left no doubt who would assume this responsibility.

“Make no mistake, the board itself will be setting the standards,” he said.

The first standards to come from the board will be those relating to auditors’ attestation to management’s assessment of internal controls, with final rules to be in place by early 2004. The PCAOB currently is reviewing other standards.

The deadline for registration is Oct. 22, but the 45-day application review period means that firms should have already registered. PCAOB rules for investigations will become final when approved by the Securities and Exchange Commission.

Comprised of a five-member board, the PCAOB hopes to have a staff of 200 by year’s end.

FASB

Following McDonough, a number of well-known accounting experts took the podium, including Robert H. Herz, chairman of the Financial Accounting Standards Board.

Herz noted that the PCAOB’s inspections would provided “invaluable feedback” to the FASB to ensure that, as the designated setter of U.S. generally accepted accounting principles, its standards are understood by firms and their clients.

As a direct result of Sarbanes-Oxley, the FASB now receives mandatory funding from publicly traded companies. Additionally, the SEC recognized the FASB as the official accounting standard setter.

Other key FASB initiatives that stem from the creation of Sarbanes-Oxley include: improving timeliness; international convergence of standards; greater independence for the FASB; the establishment of working protocols between the SEC and the FASB; improvement of U.S. GAAP; the realignment of accounting standard setting bodies; and principles-based standards. The SEC issued a report on the development of these standards in July.

Near the conclusion of his speech, Herz helped put the day’s conference and the underlying reasons for the creation of Sarbanes-Oxley into proper perspective.

“Everything that happened in the last two years reinforces the idea that accounting and financial reporting really matter…because our capital market system is based on good information.”