Reaffirms Commitment to Professional Involvement and Standards Setting

By Jay Dismukes

NEW YORK—As audit firms and corporate America begin to digest the Sarbanes-Oxley Act of 2002 and various proposals by the Securities and Exchange Commission, questions and concerns abound, but the call for the CPA profession to shape its own future remains loud and clear, a recent New York State Society of CPAs conference revealed.

To help guide and inform a profession that has been scrutinized in the wake of myriad financial reporting scandals, the NYSSCPA’s Foundation for Accounting Education hosted the Future of SEC Practice After Enron Conference on Aug. 19 in midtown Manhattan. Sponsored by the Society’s SEC Practice Committee and led by the committee’s chair, Helen Bachman, of Grant Thornton LLP, the event covered a wide range of issues, casting light on a number of unanswered questions concerning disclosure, objectivity, standards setting and the status of New York state accounting reform legislation.

Taking a Stand

“You need to ask yourself, ‘Where do you want to be?’ Do we want to take back our profession, or do we want others to control our profession?”

James L. Curry, national audit partner with Deloitte & Touche LLP and chair of the American Institute of CPAs Professional Ethics Executive Committee (PEEC), posed this question to the conference’s 120 CPAs and corporate officers in attendance during his presentation on independence issues in SEC practice. Curry spoke about the ability of the Public Company Accounting Oversight Board (PCAOB), created under the act, to function independently, establishing its own ethics and independence standards, or to work in cooperation with the Institute and state societies and the standards they set. For its part, Curry said the Institute is committed to playing an integral role in the standards-setting process, helping firms to determine threats and safeguards, and realizing a system in which work is challenged by other parties such as through peer review or the PCAOB.

“We (PEEC) are working on a best practices document that will be applicable at all levels,” Curry said during a follow-up interview. “…It will focus on threats and safeguards to make sure that the partner is not biased and the office is not biased.”

The document, which PEEC hopes to have issued by the end of the year, is not the first time the committee has looked into independence issues when an audit partner—as well as a firm—could be economically dependent on a single client, but “the focus on Enron and fees put it back on the front burner,” Curry said.

With respect to best practice guidance for achieving objectivity, conference speaker Arthur Siegel, former executive director of the Independence Standards Board, added that the onus is on firms to evaluate each situation as it arises and reexamine the results of the work afterward.

Like their ability to set ethics and independence standards, the PCAOB also has the power to establish auditing standards or it can choose to rely on those already in place, which puts the future of the Institute’s Auditing Standards Board (ASB) into question, according to ASB Chair James S. Gerson, of Pricewaterhouse-Coopers LLP.

“We don’t know what will happen to the ASB, but we believe very strongly that setting standards should be left to the profession,” Gerson said. “We expect (the ASB) to be in business for a long time.”

Bearing in Mind

“My fear is that we are going to be practicing under two sets of legislation: federal legislation and more austere state legislation. And that is not a good thing,” said former NYSSCPA President Nancy Newman-Limata.

During separate sessions, Newman-Limata and NYSSCPA Executive Director Louis Grumet both encouraged the attendees to contact their New York state legislators to urge them to draft legislation that supports the improvements in transparency and objectivity embodied in Sarbanes-Oxley rather than restricting auditors by requiring rotation and by banning consulting services beyond the scope of the act.

“We are insisting that any rules and regulations at the state level not be inconsistent with the federal level,” Grumet said.

In particular, Grumet noted that the PCAOB will look to share investigative proceedings and disciplinary measures with state accountancy boards, which grant CPA licenses. However, New York state’s resources to effectively act on this information, unlike other states that have independent accountancy boards, are in doubt, according to Grumet. Not only are industry CPAs not required to register with the state, but the New York State Board for Public Accountancy currently serves as an advisory body to the state’s Board of Regents.

In addition to calling for a restructuring of the state accountancy board to give it more teeth, the Society also supports mandatory peer review of CPA firms, the registration of all CPAs, and a code of ethics for all professional services performed by CPAs. The Society opposes mandatory “cooling-off” periods for an auditor to be employed by an audit client, the prohibition of all nonaudit services to audit clients, and mandatory rotation of audit firms. On this last provision, which is part of Sarbanes-Oxley, NYSSCPA President Jo Ann Golden noted in her presentation on the act that the requirement could result in the hiring of secondary accounting firms—“a case of auditing the auditor.”

The Ancient Art of Accounting

“Transparency is a key objective of the SEC these days,” said speaker Wayne A. Kolins, of BDO Seidman, LLP. “(But) accounting is not an exact science. There are certain aspects of accounting that are like alchemy.”

During the emerging issues in SEC practice session of the conference, Kolins and co-speaker Scott Herlihy, of law firm Latham & Watkins, focused on the SEC’s proposed three-tiered disclosure system, which includes enhanced periodic disclosure, current disclosure and regulation FD. In particular, Kolins addressed critical accounting policies in which companies would be expected to make assumptions about “highly uncertain” matters that are company specific, not industry specific. The end result of the proposal, which Kolins said probably would be adopted in some form by the SEC, could mean more forward-looking information, more second-guessing, more litigation, more complex scenarios and wider-ranging discussions with audit committees.

With respect to the SEC’s published guidance on Management’s Discussion and Analysis (MD&A), Herlihy noted that the statement provides issuers with a template to follow, resulting in an MD&A that will look dramatically different in the future from in the past.
“The MD&A will be more complex, longer to draft, more expensive, longer to review by accountants and may involve getting more information not readily available to issuers,” Herlihy said.