Fear that the U.S. economic meltdown will encourage corporations to cut accounting corners has helped spur the Public Company Accounting Oversight Board to approve a 9 percent budget increase for itself during 2009, to $157.6 million."Current market conditions suggest that our inspectors may be dealing with even more complex issues next year when they review 2008 audits," PCAOB Chairman Mark W. Olson said in announcing the new budget.
Board member Steven B. Harris put it more bluntly: "In view of the current market crisis, I believe the PCAOB must be especially mindful of an increase in pressure on auditors from companies to stretch accounting and auditing principles that can amount to financial reporting fraud."
According to officials at the board, the new budget represents a hike of $26.6 million over projected 2008 spending. Most of the additional operating funds will be earmarked for "hiring and retaining the experienced accountants needed to conduct inspections of registered public accounting firms."
Under the new budget - which must be approved by the Securities and Exchange Commission - the PCAOB plans to increase its nearly 500-member staff by 46 new hires - mostly accountants assigned to the division responsible for inspecting CPA firms.
The oversight organization will need that extra CPA muscle next year to handle what is shaping up to be the PCAOB's most active year ever.
In 2009, the board intends to conduct inspections of each of the 11 largest public accounting firms, as well as 200 smaller firms that are on a three-year inspection rotation, and another 100 foreign firms that audit U.S. public companies.
CHALLENGES ABROAD ...
Nearly 1,900 firms are currently registered with the PCAOB. But it is those foreign auditors that figure to put the biggest drain on the PCAOB inspection budget. In addition to the time and travel demands, PCAOB officials say foreign inspections drain the resources of the Office of International Affairs, which is responsible for maintaining relationships with the board's non-U.S. counterparts.
According to Olson, working with non-U.S. audit regulators to coordinate inspections of foreign firms and promote consistent, independent and effective oversight regimes is one of the most challenging tasks facing the agency.
But while Olson and other board members said that the increase proposed for 2009 would be adequate to cover the growing cost of inspecting foreign audit firms, other officials have concluded just the opposite.
In voicing concerns about the scope of inspections of non-U.S. firms, board member Charles Neimeier warned that the overseer's 2009 budget does not "adequately analyze and provide for work that I believe we need to do to protect investors in U.S. securities audited by foreign accountants."
Although Neimeier voted to approve the overall budget, he made it clear that he would press to divert funds from other areas in order to finance overseas inspections. "There are other areas of the budget that I believe provide for more funding than is required. ... The board has the discretion to re-allocate resources among program areas throughout the year," he said.
... AND AT HOME
Significantly, however, Olson noted that stepped-up foreign and domestic firm inspections were only one of the reasons for requesting stiffer fees on public companies to fund next year's budget increase.
"We expect that 2009 will be an exceptionally busy year for all our program areas," Olson said. "This budget also continues to fund a robust enforcement program to assure that when we find a serious violation of PCAOB standards or violations of the securities laws, we can pursue an action in an effective and efficient manner."
Another reason for the proposed increase is what PCAOB insiders described as "a significant increase in our standard-setting activities during 2009."
At the most recent meeting of the PCAOB's Standing Advisory Group, the Office of the Chief Auditor outlined an ambitious agenda to update and strengthen several key auditing standards. Additionally, the board hopes to make measurable progress during 2009 on its plan to review all of the existing interim auditing standards, with a view to deciding whether each standard should be made permanent or should be revised.
"Given these developments, and the stresses on financial reporting from the current economic environment, a question might be raised as to whether the 2009 budget will be adequate," said board member Daniel L. Goelzer. "It is certainly possible that factors that we do not fully anticipate today will cause the board to need more resources than this budget provides."
Underlining those uncertainties are the slings and arrows facing standard-setters as a result of the weakening economy.
"We know that 2009 will be a challenging year for the PCAOB, with issuers and auditors alike grappling with the impact of the economic downtown," Harris said. "Among the many complexities auditors are likely to be faced with are pension valuations, fair value measurements, accounting estimates, adequacy of disclosures, and consideration of a company's ability to continue as a going concern - to list just a few."
Arguing that these issues present increased reporting and audit risks, he urged the PCAOB to be especially watchful for the need to maintain strict compliance with independence rules on the part of auditors, and to crack down on accounting firm compensation plans that are not directly related to audit quality.
Harris also voiced support for fellow board member Bill Gradison's plan for the PCAOB staff to host a roundtable discussion that addresses "whether our schools are appropriately training and preparing accounting students, particularly given the SEC's recent effort toward adopting International Financial Reporting Standards."
