The newest member of the Public Company Accounting Oversight Board, Jeanette Franzel, is only the second female board member in the PCAOB's nearly 10-year history.
Like what you see? Click here to sign up for Accounting Today's daily newsletter to get the latest news and behind the scenes commentary you won't find anywhere else.
She joined the board in February, replacing founding member Daniel Goelzer, after serving as managing director of the Government Accountability Office. She had worked at the GAO for 22 years, including a decade overseeing and regularly updating the Government Auditing Standards Yellow Book. She is the first woman on the board since founding member Kayla Gillan stepped down in January 2008.
Franzel was quickly thrust into the middle of the debate over mandatory audit firm rotation when the PCAOB convened a two-day roundtable meeting in Washington in late March to hear from panels of experts describing the pros and cons of the controversial proposal. In our exclusive interview, Franzel talked about her impressions of those hearings, along with her priorities and how she views some of the other proposals coming out of the PCAOB.
What will be your priorities at the board?
Franzel: Some of my priorities really fall into three categories that we have to work on, all at the same time. First, we need to increase auditor performance under the current standards and the current models. For instance, our inspections are finding some pretty serious deficiencies, and we are working very constructively with the firms on the root-cause analyses for determining the cause of any deficiencies, and then their remediation plans.
That's some of the important immediate work that needs to be done in improving audit quality and investor protection in the short term under the current model. But at the same time that leads me to the next category. We're looking at the current model and whether it is sufficient. We've got a very ambitious standard-setting agenda, and we're exploring a number of things through concept releases and so on to really determine how to strengthen the audit model going forward.
Then finally the third bucket is taking a look at all those other factors out there that impact auditors and the profession and public company reporting -- for instance, the global business environment, changing technology, changes in financial markets, etc. -- and really monitoring that to see if there are any emerging risks.
How does your experience at the PCAOB so far compare to the GAO?
Franzel: I think the experience has translated very well. The GAO is an independent oversight organization. So is the PCAOB. At the GAO, I headed up a whole lot of difficult financial audits. I am an auditor, so I know the profession and I know the difficulties involved with financial auditing. ... One thing that's very different is PCAOB is a very young organization and I think it is transitioning now, moving from a startup regulator to a highly established regulator with mature processes. Going forward, we're really entering a new phase here, and that is different for me, but I'm very happy to be part of that.
While you were at the GAO, one of the reports you were involved with was about auditor rotation, and a lot of people are citing that report now in looking at the question of whether companies should be required to rotate their audit firms every so often.
Franzel: Let me put that report in context a little bit. It was mandated by the Sarbanes-Oxley Act [of 2002]. Mandatory audit firm rotation was actually considered when that act was being written. Rather than anything being put in the law about that, there was a requirement for a GAO study. So the GAO study came out in November of 2003, which was very early on in the life of the PCAOB and pretty shortly after Sarbanes-Oxley Act. ... In effect, the report stated that once a number of years of experience are gained, this should be looked at again, so it's kind of ironic that here I am at the PCAOB as it's being examined again. I would say we're in a completely different time period right now, and what we're doing is we're right in the middle of evaluating it. In terms of my views, I'm going to have to look at the body of evidence that comes in. Of course, the overall objective here is to improve auditor independence. The feedback that we got during the two-day meeting and from the comment letters has given us a rich array of items to consider in terms of improving and enhancing auditor independence.
What impressed you about the different viewpoints during the roundtable?
Franzel: I was impressed that people really came in with thoughtful and very constructive suggestions. I think everybody was interested in helping the PCAOB look at the issue of auditor independence and professional skepticism. One of the things that really came through was the role of the audit committee and the importance of the audit committee in auditor independence and auditor oversight.
Shortly after the hearings, there were legislative proposals to stop the PCAOB from coming out with a requirement about auditor rotation. How do you feel about Congress getting involved with that?
Franzel: I think we would request that Congress respect the independent standard-setting process that was, in fact, established with Sarbanes-Oxley. We've seen examples in other areas in the past when certain controversial issues have come up in both accounting and auditing where Congress wants to get involved, but the independent standard-setting process really does need to take place.
There was a confrontation during the meeting between the Chamber of Commerce spokesman and PCAOB Chair James Doty. What's your reaction to that?
Franzel: Well, I've worked for the government and I've worked for the Congress for 23 years, so certainly I've witnessed our democracy up front and firsthand, and you know, that's part of the process.
What about some of the other proposals out there from the PCAOB? For instance, how do you feel about whether the proceedings against auditing firms should be revealed to the public before a decision has been made?
Franzel: By not having this information available to the public, companies and their investors won't know that their auditor in fact is under disciplinary proceedings with the PCAOB. Now the Securities and Exchange Commission is able to release that information and PCAOB is not. If we were allowed to release the information, it would put us on par with the SEC.
There's also a concept release out about changing the auditor's reporting model. Do you think there are specific things that should be included with the model?
Franzel: Right now, the auditor's report is just a couple of paragraphs, and investors and others have been calling for more information. So the concept release looked at things like an increased use of emphasis paragraphs and some other auditor discussion and analysis. We're hoping to come out with a proposal here soon, probably in the third quarter, to really distill those comments down and come out with a specific proposal. If we can figure out what additional types of information are needed by investors and are appropriate in an audit situation, that's what we are aiming for.
There's also a proposal out there for a sign-off by the lead audit engagement partner. Do you think auditors need to take more responsibility for their work?
Franzel: I think this proposal is to give transparency to investors and others about who is doing the work. Between the concept release and the proposal, it was changed, so instead of having the audit partner sign the report, I think the proposal called for disclosure of who the partner would be, but also disclosure of other firms involved in doing the work. Oftentimes that was not transparent, and if a firm overseas is doing 95 percent of the work, but the audit opinion is being signed by a U.S. firm, that's important information for investors.
How do you feel about some of the suggestions that have come out in Europe about the audit firms? They seem to be going beyond just audit firm rotation and suggesting other kinds of changes, like dividing the firm's responsibilities.