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.

She joined the board in February, replacing founding member Daniel Goelzer, after serving as managing director of the Government Accountability Office (see SEC Appoints GAO’s Jeanette Franzel to PCAOB). 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 said that one of her priorities at the PCAOB would be increasing auditor performance. “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,” she told Accounting Today in an interview Friday. “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.”

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 last month to hear from panels of experts describing the pros and cons of the controversial proposal. 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 during the interview.

What will be your priorities at the PCAOB now that you’ve come to the board from the GAO?

It’s been a great transition, and it’s really a great honor to work here because I am an auditor and I have been working in the profession for a long time, on the government side, of course. To have the opportunity to help increase audit quality and work in the public interest on the PCAOB side is really an honor. Some of my priorities—and I’m kind of new on the job, but they’re kind of formulating here for me—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 under 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 that we all need to respond to.

How does your experience at the PCAOB so far compare to the GAO?

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. I know the standards, so I come here with a very deep audit background. At GAO, of course, we were working in the public interest as we are here at PCAOB. Also, at GAO, I was very involved in GAO’s oversight and liaison with the accounting profession over the years. In that work we were looking at the integrity of financial reporting and auditing, cost benefit and investor protection, all things that of course we spend an awful lot of time worrying about here at PCAOB. So it’s been a very nice transition. My GAO experience is translating very well. One thing that’s very different is PCAOB is a very young organization and I think PCAOB 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 at the PCAOB, and that is different for me, but I’m very happy to be part of that.

I understand 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 the GAO report now in looking at the question of whether companies should be required to rotate their audit firms every so often. Have your views changed since that report came out, or are they pretty much in line with the views that were given in the GAO report?

Let me put that report in context a little bit. That report was mandated by the Sarbanes-Oxley Act. 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 the Sarbanes-Oxley Act [of 2002]. We concluded that it really would not be efficient or cost effective at that time to impose mandatory rotation, but rather that some time should be taken to evaluate the impact of the Sarbanes-Oxley Act and the PCAOB in terms of audit quality. Many of those conclusions were also based on where we were along the timeline. 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 meeting (see Lawmakers Hear Pros and Cons of Audit Firm Rotation)? Were there any that stood out for you?

First, 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. We are certainly looking at a number of those suggestions, as well as some of the other alternatives that were suggested as well. Right now the staff is currently analyzing all of that.

It seemed like shortly after those hearings, there were legislative proposals introduced by lawmakers on Capitol Hill to stop the PCAOB from coming out with a requirement about auditor rotation (see Lawmakers Aim to Stop PCAOB from Imposing Audit Firm Rotation). How do you feel about Congress getting involved with that and amending Sarbanes-Oxley?

I don’t think it was actually introduced, but there was certainly talk on the Hill of a proposal. Certainly for both accounting and auditing, the independent standard-setting process is fairly well established as an appropriate way to set professional standards. Part of that process involves research and consultation with stakeholders—due process, meaning issuance of concept releases and exposure drafts and proposals, and obtaining comments throughout that entire process. That’s really what PCAOB is doing right now. 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 as well 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. We certainly hear what they’re saying and value their opinion and input. That’s really part of the process as well.

What about when some of these outside groups get involved in lobbying Congress, as when the Chamber of Commerce sent in a letter accusing the PCAOB of overreach and “mission creep” (see Big Four Audit Firms Accused of ‘Duopoly’ and ‘Mission Creep’)? There was a confrontation during the roundtable between the Chamber spokesman who was testifying and PCAOB Chairman James Doty. What’s your reaction to what happened there?

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.

Do you think we’ll see a lot of that kind of thing with outside groups getting involved and trying to do an end run around the PCAOB to get something passed in Congress instead?

Again, I don’t think this is unique to PCAOB. I think this is part of the debate and part of the process.

What about some of the other proposals out there from the PCAOB, such as making the disciplinary proceedings public against auditing firms? I know the AICPA has come out against that, but there’s also been legislation introduced in Congress to allow that to happen. How do you feel about whether the proceedings against the auditing firms should be revealed to the public before a decision has been made?

Well, again, we are looking at this from the perspective of investor protection and public interest. 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 SEC 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. What kinds of things do you favor with changes to that? Do you think there are specific things that should be included with the auditor’s reporting model that aren’t currently in the audit reports we see?

Well, the concept release that we put out last year had several ideas that we received input back on, and really we were trying to look for what additional information would assist investors and others when looking at the auditor’s report. 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 of this year, to really distill those comments down and come out with a specific proposal. If we can figure out what additional type of information is needed by investors and appropriate in an audit situation, that’s what we are aiming for.

There’s also a proposal out there for a signoff by the lead audit engagement partner, though I think it’s been modified a bit. Do you think the auditors need to take more responsibility for the audit work that they’ve done?

Again, 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.

I know the PCAOB has been trying to get its inspections into more jurisdictions, more countries, when the audit firms are relying on some of these outside firms to do the work, such as in China. You just announced a deal with Germany to allow the inspections. How are things looking now? Are you making progress in China and some of the other countries where you’ve been having trouble getting your inspectors in?

We’re continuing to negotiate and continuing to make progress there.

How about having foreign inspectors looking at firms here in the U.S. as well? Chairman Doty said that had recently started happening on a pilot basis.

I believe they have that right, just as we do.

There had been some talk when you were a candidate for the board slot saying that auditors should follow AICPA standards and international groups when you were commenting on one of the PCAOB proposals. Could you explain how you feel about following international standards or some of these earlier auditing standards?

Actually the way you phrased that was not exactly accurate. There were some specific proposals where the PCAOB was considering auditing standards in similar areas that the other standard-setters were considering. I believe confirmations may have been one. In that letter, I think we suggested that they take a look at what the other standard-setters were doing. That was a GAO position, but it was a very specific circumstance.

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, so it wouldn’t be the same firm doing audits and consulting work. Do you think anything like that should be required in the U.S.?

We certainly are going to watch what those other countries are doing with interest, and perhaps we can learn, but we also have a very different set of circumstances here and we have a very different business environment, so it doesn’t necessarily translate. But we’re certainly going to be watching with interest.

When you were up for appointment to the board, SEC commissioner Luis Aguilar voted against your confirmation and said you hadn’t demonstrated a “commitment to the interests of investors?” How did you feel about his comments and do you think you will be able to address the misgivings that he expressed in those statements?

I have no doubt that I can certainly represent investors and the public interest. I was working in the public interest for years at GAO. You know, it’s a mindset to be working for someone other than the person sitting across the table from you. I’ve been a public servant for many years working in the public interest. And it has just translated very well over here, and I have a deep knowledge of the subject matter. There is no doubt in my mind that I can very effectively serve investors and the public interest here.

What do you think are going to be your main goals at the PCAOB now that you’re on the board?

I think, going back to what I said earlier, to really work on those three areas of immediately working with the firms to increase audit quality and independence under the current standards, looking at the future model, and monitoring for any unanticipated big risks that are happening there. But I guess I would add a fourth based on what you and I discussed, and that is really helping to usher PCAOB into the next phase here, really moving out of the startup phase and into the established regulator that’s really looked to as a leader worldwide for technical excellence and regulation.

Do you have any comment on the role of women in the auditing profession?

The 2008 Treasury Advisory Committee on the Auditing Profession devoted an entire section of its report to “human capital,” including the need for firms to do a better job of recruiting and retaining women and minority professionals in order to ensure a rich pool of talent. Diversity remains an area of challenge in the auditing profession, especially at the top leadership levels. In my career, I have been highly dedicated to inspiring and mentoring women and individuals from diverse backgrounds at all levels in the profession— from students through executives. In my position as a PCAOB board member, I will continue my personal efforts in this regard and also pay special attention to these issues across the profession.

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