The Public Company Accounting Oversight Board has fallen behind in its plan to recruit a small army of veteran auditors for the coming year.

As a result, the oversight body is mulling raising salaries as it tries to compete in a tight market for auditing expertise, and has slashed its previously approved 2005 budget by roughly 11 percent.

PCAOB officials had projected to have a staff of 300 in place by the end of 2004, and were counting on hiring an additional 150 staffers in 2005, bringing its total headcount to 450. The majority of the new hires were expected to be the experienced auditors needed to conduct inspections of the firms registered with the PCAOB.

Instead, the PCAOB closed out 2004 with 262 employees - a 14 percent shortfall that has already prompted the board to readjust its budget plan for the coming year.

Since then, "hiring has occurred at a slower than forecast rate," the PCAOB said in acknowledging that it would fall short of its recruiting goals.

In a statement, the PCAOB said, "While the board has not yet considered salary adjustments for 2005, the revised budget anticipates that, in light of the tight job market for highly skilled accounting professionals, the board may need to re-evaluate compensation in order to retain, and continue to attract, the talented and experienced professionals necessary for the board to accomplish its mission."

In trimming its already-approved $152.8 million budget down to $136.1 million, the PCAOB explained that the lower figure reflects "a reduction in anticipated salary expense, and corresponding reductions in related benefits and payroll tax expenses."

The slimmer budget included reductions in such line items as employee training and recruiting, travel expenses, consulting and professional fees, and information technology capital expenditures.

It was unclear how much of a crimp will be placed in the board's Sarbanes-Oxley-mandated inspection activities of the more than 1,400 accounting firms registered with the board thus far.

But some PCAOB officials were anticipating that the audit firm inspection staff could be undermanned during 2005 even if the original hiring goals were achieved.

The audit board maintained that, even with a reduced budget and a lower par level of auditors, it would be able to meet the SOX requirements.

However, during an October meeting in Washington at which the original 2005 budget was approved, PCAOB chief financial officer Thomas Hohman suggested that even with a 70 percent boost in manpower, the inspection staff could be stretched thin next year.

"We would like more [experienced auditors on the team], but we recognize this is a very tight employment market," Hohman said in outlining the budget plan to board members.

A failure to adequately staff the board's inspection division would represent a significant blow to the PCAOB's ability to perform its duties under SOX. "Given the technical nature of the board's statutory mandates, the board believes that an experienced and highly skilled staff is essential to protect the interests of investors," the PCAOB said.

One solution to the board's recruiting problems would be to sweeten the pot with additional incentives for new hires. Under SOX, the PCAOB is specifically required to set staff salaries "at a level that is comparable to private sector self-regulatory, accounting, technical, supervisory, or other staff or management positions," an obligation that officials said the board "has and will continue to" comply with.

But at the same time, the PCAOB raised the prospect that compensation packages may well be increased during 2005, at least for auditors sought by the board's inspection team.

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