William McDonough, chairman of the Public Company Accounting Oversight Board, made his first speech as PCAOB chair at the New York State Society of CPAs SEC Conference. He expressed his belief that the accounting profession has to go the extra mile to restore the trust that it has lost and that accounting firms auditing public companies must follow the letter and spirit of Sarbanes-Oxley.
As the legislation requires, he says that the seven firms with more than 100 audit clients will get the most intense scrutiny from the PCAOB. Interestingly, he adds the other firms can expect "benign supervision." He did note that it was "unfortunate" some smaller accounting firms were giving up the auditing of public companies but he didn't address, and I expect it was on purpose, any impact that the audit partner rotation requirement might have had on the decisions of those firms.
With regard to inspections of firms, he states, "We’re going to look for the 'tone at the top' of the firm. Do you as a managing partner, do you as an audit team leader, understand what is demanded of the accounting firm in this new era of regulation and oversight? Do you understand the standards for audits and just as important, do you understand why those standards are in place? Do you lead your firms and your teams by example, demonstrating every day the value of those standards?"
What Mr. McDonough left out was the following statement that appeared in the prepared text of the speech: "We will look at compensation and promotion. Are the best auditors rewarded for being the best auditors, or are they rewarded for something else? We will look at how clients are selected and how they are let go." There were other departures from the prepared text, which didn't appear as conciliatory as his actual comments. That doesn't mean he didn't miss specifically placing blame on those accountants who, along with some bankers and lawyers, assisted in the preparation of those "creative" reported earnings. He did give assurances there wouldn't be a witch-hunt stating as the PCAOB hire staff he isn't looking to hire "zealots." Of course, he added that he isn't looking for "pussycats," either. His wants staff that buy in to the PCAOB's mission to help restore the accounting profession.
Okay, so what have I learned from the speech? The seven firms that conduct the bulk of the audits of public companies can expect very tight scrutiny. The PCAOB will impose sanctions, but will do its utmost not to have any of these firms exit from the auditing of public companies. However, smaller accounting firms will continue to be forced out of public auditing. To gain back both the public and investors' confidence, compliance with Sarbanes-Oxley will have an all important public relations edge to it.
It was interesting to have the prepared text as McDonough spoke because it appeared that he was toning down his oral remarks. What he said indicated an invitation for the profession to step-up and work with the PCAOB to help restore trust in the profession. Contrast that to my reading of the prepared text, which indicates to me more of a warning to sinners that they have a chance at either redemption or eternal damnation. Bottom line: The message that I ultimately take away is the following: Sinners beware!
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