A group of high-ranking officials in accounting and auditing standard-setting organizations discussed the changing standards for mandatory audit firm rotation, private company accounting and other controversial issues at the American Institute of CPAs’ Spring Meeting of Council.

The conference marked the 125th anniversary of the Institute (see AICPA Celebrates 125th Anniversary). Public Company Accounting Oversight Board chairman James Doty spoke Thursday about the history of the accounting profession in the United States and paid tribute to the Institute, which its predecessor organization, the American Association of Public Accountants, established in 1887.

“In the ensuing 125 years of leading the accounting profession, the AICPA has achieved an enormous amount,” he said. “I have the utmost respect for what you have put forth for the public interest in those years and I have high expectations for the years to come.”

Doty discussed the PCAOB’s concept release proposing mandatory audit firm rotation, which has provoked opposition from the AICPA and many auditing firms, along with other proposals such as changes in the audit reporting model and communications with audit committees. He pointed out that the profession has never adopted term limits, even after high-profile audit failures such as with Enron and WorldCom, when “the sheer number of accounting failures was hidden in plain sight.”

He noted that the PCAOB was the product of the nation’s resolve to champion wide-scale investment, with protections from an objective, independent auditor who is “the foe of deceit and the champion of honesty.”

Doty pointed out that audits and audit reports should reflect the needs of dispersed owners, but he noted that auditors face pressures in producing audit reports for mass consumption within a short time period. The concept release asked about the pressures of maintaining a long-term relationship with a client while making tough decisions and maintaining objectivity, independence and professional skepticism.

“I have concerns about the relatively new audit that the auditor hopes to turn into a long-term engagement as well as the very long engagement that no partner wants to be the one to lose,” he said. The concept release asks for comments about auditor relationship terms with companies lasting over 10 years and the suitability of audit firm rotation for the largest issuers.

“It’s a matter of human nature that once one attains a new client, one is not interested in losing the client,” said Doty. “Human psychology takes over. It’s the rare case when an auditor knowingly compromises their integrity. Documentary evidence of a lack of skepticism rarely exists, but so long as the client pays the bills it’s natural to want to maintain the relationship. We’re dealing with the subtle effects of bias. What motivates the auditor to exercise skepticism, what pulls them back, constantly provides a counterweight to adverse influences. Term limits may not be the answer, but I believe we must explore the possibility.”

Doty later clarified that statement, telling Accounting Today, “A concept release, by definition, asks questions and solicits thinking about all issues. We plan to continue to discuss term limits as a possible mechanism to enhance audit independence, professional skepticism and objectivity. Nothing is off the table. I’ve said from the beginning that I don’t have a predetermined idea as to whether the PCAOB ultimately should adopt term limits.”

SEC commissioner Troy Paredes also emphasized the need for feedback from the accounting profession and other constituents after Doty addressed the audience. “The SEC is better equipped to make informed judgments on its options when we receive input from those on the ground like you who are impacted,” he said.

Paredes discussed the JOBS Act that President Obama signed into law last month, which the AICPA has objected to on several grounds. Among other things, the law establishes exemptions from a number of auditing regulations for a new class of “emerging growth companies,” including Sarbanes-Oxley audits of internal controls for five years. It also exempts such companies from the need to immediately comply with new or revised accounting standards until the standards have beeen established for private companies as well. The law also facilitates so-called “crowdfunding” to allow investors to finance promising startup companies.

Paredes defended the new law, pointing out that it will assist small companies in raising capital. He acknowledged that investors need protections, but he pointed out that investors primarily invest so they can earn wealth and are better served when they are offered more choices.

Standard-Setters Balance Challenges
In a panel discussion of standard-setters that followed the speeches of the two regulators, International Auditing and Assurance Standards Board chairman Arnold Schilder thanked the AICPA for its help in completing the Clarity Project, revising the AICPA’s suite of standards for auditing and assurance engagements with private entities. He said the IAASB’s similar standards have now been adopted and would soon be used in 87 countries around the world. Schilder hopes to build on those standards to do risk assurance for greenhouse gas reporting.

He noted that his organization has also been working closely with the PCAOB on issues such as changes in the audit reporting model, and the two boards often receive similar comment letters on their proposals. “Let’s go full force on the auditing report of the future,” he said.

Financial Accounting Standards Board chair Leslie Seidman praised the AICPA as an American institution and likened it to baseball, hot dogs and TV. She discussed the challenges of the standard-setting process and noted that the original Committee on Accounting Procedures had estimated it would take only five years to do its work.

FASB and the AICPA have clashed over the question of control of standard setting for private companies. Seidman avoided discussing the disagreement between the two organizations, noting, “This is a celebration, so we want to be positive and happy.” She later acknowledged that FASB’s parent organization, the Financial Accounting Foundation, is expected to make a decision at a meeting next Wednesday on the proposed Private Company Standards Improvement Council, over which the AICPA has sought to limit FASB’s control. She noted that the FAF has gone through a “robust process” of eliciting comments and feedback on the proposed council. The foundation’s trustees will receive a packet that goes through all of the commentary, how to proceed and how to change any element of the proposal going forward. The FASB staff has also been working on developing a decision-making framework for allowing differences in private accounting standards that it discussed with the Private Company Financial Reporting Committee, which the PCSIC will eventually replace.

Earlier in the day, AICPA president and CEO Barry Melancon also referred to the pending decision, noting, “It is our hope that FAF’s outcome will be something that we can look you and the members in the eye and say that we really think it’s a process that gives a good chance of producing differential standards and we hope that’s the outcome. But we’ll know more thoroughly next week.”

Seidman also discussed the problem of disclosure overload facing accountants and corporations. “FASB has been working for a couple of years to establish a disclosure framework,” she said. “We know people would really like to take out a red pen and start slashing through the footnotes.”

She said financial statements should spend the most ink on the things that are most relevant. The most newsworthy items in a financial statement should come first, she suggested. FASB has found that the footnotes in most companies’ financial statements are organized in the order in which FASB required them, she pointed out. Once a mandated footnote goes in, it just stays there over time.

International Accounting Standards Board vice chairman Ian Mackintosh told the audience that the IASB received a very large response when it did an agenda consultation, asking which items it should add to its future agenda. Many of the comments came from the United States, he noted.

The IASB and FASB have been working for over a decade to converge International Financial Reporting Standards with U.S. GAAP, but Mackintosh acknowledged that the most prevalent request was for the board to stop changing so many standards.“The first thing people said they wanted was a period of calm,” he said. However, he warned that the period of calm probably would not happen for another three or four years at least. He added that the IASB has also heard requests that it get back to developing its conceptual framework and complete its work on that.

Mackintosh also talked about IASB chairman Hans Hoogervorst, who started his term at the same time as he did. While Mackintosh is an accountant, Hoogervorst’s career has been as a politician and regulator, including Minister of Finance in the Netherlands. “I’ve been in standard setting for a long time,” said Mackintosh. “The things Hans found surprising I didn’t find surprising, such as how much more difficult it is to do standard-setting internationally rather than nationally.”

The IASB is currently working on standards for business combinations under common control and what should go into other comprehensive income. “It’s kind of like the meaning of life, the meaning of profit and loss,” he said.

While more than 100 countries currently apply the IASB’s standards, Mackintosh noted that it is inevitable to get different interpretations in various countries. To counteract that trend, the IASB has been urged to set up regional groupings of standard-setters and is currently in the process of working out how to do that internationally. “FASB will be an important part of what we do in that regard,” he added.

International Integrated Reporting Council CEO Paul Druckman described his group’s work, which seeks to bring together financial reporting with reporting on strategy, governance and the social, environmental and economic context within which a company operates. He noted that 72 companies, including Coca Cola, are currently pilot testing the framework that his group is developing.

“What we are talking about is very much in line with business reporting,” he said. “We will be putting out various papers to help you understand what the framework will contain. We are going to keep the accounting community and business community aware of where we’re going and how we’re going to get there.”

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