The Public Company Accounting Oversight Board is currently in the midst of disciplinary proceedings against 19 auditing firms and individual auditors, and the PCAOB is considering ending the registrations of up to 870 firms that have not been auditing public companies or broker-dealers, according to a PCAOB official.

Jeanette Franzel

In a speech Friday at the University of Tennessee Corporate Governance Center, PCAOB board member Jeanette Franzel discussed current trends and issues in public auditing. She noted that approximately 2,400 firms are currently registered with the PCAOB, of which about 1,500 are U.S. firms and about 900 are non-U.S. firms located in 84 countries. Of those, 853 PCAOB-registered firms report that they audit issuers or play a substantial role in auditing issuers, and another 518 firms report that they audit brokers and dealers, but no issuers. In total, about 1,371 registered firms report that they currently audit issuers or broker-dealers.

However, another 870 firms, including approximately 525 foreign firms and 345 U.S. firms, report that they do not audit issuers or broker-dealers, nor do they play a substantial role in such audits.

“What about them? Registration alone does not subject an accounting firm’s activities to board oversight and in no way serves as an endorsement of the quality of services a firm is delivering to its clients,” said Franzel. “Some of these firms registered in the hope of acquiring public company or broker-dealer audit clients. It is reasonable for the board to consider whether continued registration is appropriate for a firm that has no interest in providing services that are within the scope of the board’s mandate. I expect that the board may soon explore mechanisms to address firms that may fall into this category.”

In the same speech, Franzel revealed that disciplinary proceedings are underway against 19 auditing firms, although she was not at liberty to provide the names of the firms. The Sarbanes-Oxley Act does not allow the PCAOB to publicly reveal its disciplinary proceedings against firms throughout the whole process of charging, hearings, initial decision, and appeal, enabling firms that engage in misconduct to drag out the proceedings for years. While legislation has been introduced in both chambers of Congress to make the disciplinary proceedings public, the bill has failed to make much headway.

“In each enforcement case in which litigation is initiated, unlike many other regulators including the SEC, the PCAOB is prohibited by the Sarbanes-Oxley Act from publicly disclosing the allegations and the proceedings,” said Franzel. “This situation results in a variety of unfortunate consequences for investor protection and the public interest. Disciplinary proceedings involving formal allegations of misconduct against 19 firms and individual auditors are currently pending, but cannot be publicly disclosed. During the most recent Congress, legislation was introduced (HR 3503 and S 1907) that would amend the Sarbanes-Oxley Act to make PCAOB disciplinary proceedings open to the public, but it has not moved forward.”

Franzel noted that the PCAOB is continuing to find problems during its inspections of auditors. “The inspection of issuer audits began in 2004,” she said. “Unfortunately, PCAOB inspections continue to find serious audit deficiencies in public company audits on a regular basis. Among areas of specific concern are problems related to professional skepticism, tone at the top, and supervision.”

She noted that the PCAOB sought public comment on a variety of possible approaches to improving auditor independence, objectivity and professional skepticism, including mandatory audit firm rotation. “The discussion of potential measures that could enhance auditor independence included whether a rotation requirement would risk significant cost and disruption and how it might serve the board's goals of protecting investors and enhancing audit quality,” she said. “The board held three public meetings in various regions of the country in March, June and just last week to obtain further input. The board will consider next steps and priorities related to this project during 2013.”

Among the problematic areas are the supervision of auditors and review of their work. “Our inspection results identified a number of significant audit deficiencies in more complex or subjective areas where a greater degree of supervision and review would be expected, such as the auditing of management estimates, goodwill and indefinite-lived intangible assets, and income taxes,” said Franzel. “The inspection observations suggested the possibility that more attention needed to be devoted to supervision and review activities in connection with audits of areas involving a high degree of judgment, management estimation and the application of complex accounting literature.”