by Bill Carlino

Washington - Memo to the accounting profession: Welcome to the world of government-mandated oversight.

As the Securities and Exchange Commission and the Senate Banking Committee recently put forth their versions of accounting reform legislation, the profession has begun a death watch of the century-old process of self-regulation.

Those measures follow reform legislation from the House Financial Services Committee, which was approved by the body in April.

Following the guilty verdict of Big Five firm Andersen on obstruction charges stemming from admitted destruction of emails and documents related to its audit of Enron, coupled with recent accounting scandals at WorldCom, Adelphia, ImClone Systems, Tyco International and the Rite-Aid drug store chain, regulators and lawmakers are busy drafting the epitaph on self-regulation.

The SEC proposal, which is currently open for a 60-day public comment period, would create a "Public Accountability Board," a nine-person body, of which no more than three members would hail from the accounting profession.

The PAB would be imbued with disciplinary powers with the authority to sanction both firms and individuals, including fines, censures and removal from audit engagements.

SEC chairman Harvey Pitt said the agency intends to have the PAB in place by the end of the year.

The SEC plan would supplant the profession’s current system of peer review, whereby a firm’s auditing procedures are examined by a competitor firm.

That system has come under fire from critics who allege that no large accounting firm has ever failed a peer review and, as evidence, pointed out that Big Five firm Deloitte & Touche passed rival Andersen in 2001.

However, Democrats and consumer groups have assailed the SEC measure as being too soft, preferring instead the more stringent measures proposed by the SBC. The SEC proposal, according to critics of the measure, leaves the door open for the possibility of the American Institute of CPAs retaining a standard-setting role.

It would also be funded through fees from companies and accounting firms as determined by the SEC, a measure that could trigger litigation, according to Lynn Turner, the former chief accountant at the SEC and now a professor of accounting at Colorado State University.

"The question is whether the SEC has the authority to establish a fee system," said Turner. "Congress has the statutory authority to do that. But if you go to litigation and lose that legal challenge, you’re back to square one."

The SEC’s measure follows a proposal from the SBC, chaired by Paul Sarbanes, D.-Md., which recently passed through committee via a comfortable 17-4 margin, with committee members Rick Santorum, R-Pa., Michael Crapo, R-Idaho, John Ensign, R.-Nev. and Phil Gramm, R.-Texas,

dissenting.

Like the SEC proposal, the SBC measure includes an oversight board - a five-member panel of which three would be from outside the accounting profession - and also prohibits public accounting firms from selling a variety of consulting services to its audit clients, and limits the time a firm partner could review the books on a particular company.

Michael Enzi, R.Wyo., the only accountant in the Senate, had worked to win some key GOP concessions in the Sarbanes bill, including having two accountants comprise the five-member oversight board and confidentiality for disciplinary actions until such time as the SEC deems it appropriate for the matter to be made public.

In a statement, Enzi said he was disappointed that the main news emphasis over the last six months "has been about accountants," and noted that lawyers have not drawn the same "scrutiny of change." He added that accountants "are to be commended for the changes they have already made before legislation."

The SBC oversight board would be funded via fees from audit companies but would come under review by the SEC.

The Senate bill is scheduled for a full floor vote at the end of July.

In a statement, the AICPA said, "Both the Senate bill, which we are reviewing in detail and reports we have seen concerning the SEC’s proposed rule raise uncertainties about whether auditing professionals will continue to remain actively engaged in setting auditing standards and that auditors will have sufficient latitude to respond to the needs of both investors and public companies."

In April, the House Financial Services Committee passed a reform bill that would encompass the creation of a five-member oversight board with three members being independent, and its disciplinary powers would be outlined by the SEC but the body would have no standard-setting authority.

And consulting services, which many feel are the crux of accounting reform, are impacted most by the SBC bill, which bars auditors from specific types of consulting work and also mandates that a client’s audit committee approve any tax-consulting services.

Turner said that, in terms of effectiveness, he would rank the Sarbanes bill first, the SEC proposal in the middle and Oxley’s bill last. "It’s almost a step back from where we were," Turner said of the Oxley Bill, the one favored by the Big Four and the AICPA. "It’s not well-written enough and it’s not where we need to get to give people back the confidence in the profession."

The nation’s consumer groups also leave little doubt regarding their stance on strong accounting reform.

"I don’t know how many more examples of accounting fraud it would take to show that the present system doesn’t work," said Barbara Roper, director of investor protection at the Consumer Federation of America, a Washington D.C.-based watchdog concern. "The current system works only when corporate managers are above board and honest. That’s not when you need reform. There’s a disproportionate financial incentive to do the wrong thing."

Roper said that she prefers the higher proportion of non-accounting members of the PAB (six of nine) as opposed to the SBC bill (three of five) but has concerns about standard-setting authority.

"To date, the chairman’s [Pitt] statements denied any need to enhance auditor independence," Roper said. "There’s little doubt that lack of investor confidence has been holding back the recovery of the economy."

Provisions of the House and Senate bill request additional funding for the SEC budget by 50 percent and 66 percent,

respectively.

"What you have with the House and SEC legislation is more moderate reform," explained Charles Bowsher, the former chairman of the Public Oversight Board and an advisor to the Sarbanes bill. "Those were drafted when you just had the issue of Andersen and Enron, but now the situation is so much more pervasive that you need more comprehensive reform. I’ve never seen such a push for reform since the S&L crises."

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