James Doty, the newly appointed chairman of the Public Company Accounting Oversight Board, believes auditors need to be doing a better job of detecting suspicious patterns and practices at the companies they audit, and to do a better job of communicating their concerns.

Doty, a former SEC official and a lawyer at Baker Botts who argued on behalf of the PCAOB’s constitutionality before the U.S. Supreme Court, noted that audit committees were sometimes surprised when confronted with problems at the companies on whose boards they sit.

“As a lawyer who advised boards, the most serious situations that I saw were where the audit committee or the board was surprised,” he said in an interview with Accounting Today. “It is probably the central governance issue of our time: the extent to which auditors are understanding what they are bringing to audit committees and audit committees are understanding what they’ve been told. There have been issues as to whether auditors are communicating what they should, whether those communications ought to remain in the bosom of the audit committee or to have broader dissemination beyond the board. These are vey difficult issues. They are under focus here.”

Doty noted that the PCAOB has a Standing Advisory Group and an Investor Advisory Group that are looking at those issues. “They are not simple [issues], but our overall view is that we have to improve audit quality,” he said. “We are like the forest ranger in the tower who sees 360 degrees with a wide range around the tops of the trees, but we have to get down and walk on the floor of the forest and see what’s down there, so we have to look at practices. Our inspection process brings us data. We have to look at the data that comes from our inspection process, discern patterns and conduct and practices which we regard as being either helpful to audit quality or unhelpful, and we have to respond to that. We’ve got to be attempting to be pressing on the firms the qualities and the patterns that we see are helpful to good audit quality and we’ve got to be attempting to deter patterns and conduct and practices that would undermine audit quality.”

Doty was unsure whether his experience defending the PCAOB before the Supreme Court might have led the SEC to choose him to lead the board, noting that he has known SEC Chairman Mary Schapiro for a long time.

“I don’t know, I have a very longstanding relationship with Chairman Schapiro,” he said. “We worked together while she was a commissioner and I was the general counsel. We worked together after, when she was at FINRA. Certainly I wanted us to take the case. I wanted our firm to be litigating the case for the board because I believe in the mission of the board. I thought that it was very important that the distractions of litigation be minimized and gotten over as quickly as they could be, and successfully, and I had confidence we would win, but I wanted us to be involved in that because I believed in the importance of this board and of this organization getting on with its business, which it did during the pendency of the litigation.”

One major problem the PCAOB has been contending with is inspecting firms in foreign countries such as China. However, the PCAOB recently struck an agreement with the United Kingdom’s Professional Oversight Board that would allow for the resumption of PCAOB inspections of registered accounting firms located in the U.K. that audit companies whose securities trade in the U.S., and vice versa (see PCAOB Strikes Inspection Deal with U.K. Regulator).

“It’s a very encouraging development,” said Doty. “We will be meeting with our counterparts in the United Kingdom and our counterparts in Canada and in different parts of the world. The efforts that bore fruit in the U.K. will go forward with the E.U. and we will continue to work on China. I think whenever you’ve had a development such as we’ve had in the U.K., it’s a breakthrough. It won’t be the same in every jurisdiction, and there’s going to be continual fine-tuning, revisiting, revision of the methods here. But it is a process that is now well commenced and it will not stop. It will be accelerated and we will keep working at it.”

China has been a thorny area for the PCAOB inspectors, however. “Speaking from the vantage point of one who has been here for two and a half weeks, my reading of this coming from the outside is I think China perceives of this as a sovereignty issue in the mix of many other issues that are diplomatic in nature," said Doty. "And I believe that the challenge will be to engage the people in China who are interested in this process, to do that shoulder to shoulder together with the SEC, and to bring them around to the view, which is that it’s not a sovereignty issue at all. It relates to their role in the international economy and their importance in that role, and there are advantages to their being deeply involved in this joint process without regard to any of the other issues. This is not currency valuation. This is not military policy in the Korean peninsula. This is about something that we can all agree on, I think, which is audit quality. There is no doubt there are challenges in having that accepted in China, and they are challenges that are not surprising given China’s history in the global economy. It’s a rapidly evolving, growing economy, and it hasn’t been there as long as the SEC and the E.U. as a major participant.”

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