Accountants and banking industry officials hoping for looser financial reporting standards in response to the economic downturn received a reality check from the keynote speakers at the American Institute of CPAs’ National Conference on Current SEC/PCAOB Developments.
In his address to the meeting, Public Company Accounting Oversight Board Chairman Mark Olson told the nation’s CPAs the risk of financial fraud tends to increase during tough economic times, and that if anything, auditors need to exert more “professional skepticism” when auditing corporate financial statements during the current economic downswing.
For his part, Securities and Exchange Commission Chairman Christopher Cox made it clear that his agency is in no mood to soften accounting rules in an effort to firm up financial reports. In his address to the AICPA conference, Cox (pictured) maintained that accounting standards are not merely a “financial rudder to be pulled” in response to shifting economic currents.
The SEC has been under pressure from financial institutions to suspend so-called “mark-to-market” accounting rules that require banks to value the assets at current market prices – a change that would significantly improve the appearance of banking industry balance sheets.
Although Cox told the accounting meeting that some tweaking of those fair market accounting rules may be advanced to “keep pace with the real world,” he offered no indication that the SEC will exercise its authority to suspend mark-to-market.
Indeed, the SEC chairman told accountants that the greater the financial stress on the market, the more important it is to maintain neutral accounting standards.
Olson, meanwhile, identified fair value accounting rules as one of several “challenges” facing auditors during the present economic crisis.
“We know that the year-end audits for 2008 will present these and a number of other audit challenges that I expect will not be limited to the audits of large financial institutions,” he said. “With the spread of the crisis, auditors need to be alert to risks in other sectors and plan their audits accordingly.”
The PCAOB chairman predicted that the current economic climate would likely require auditors to take a hard look at a number of areas, including the collectibility of receivables, potential inventory obsolescence, and the impairment of other assets, such as deferred taxes and goodwill.
At the same time, Olson used his address to the AICPA conference to remind auditors that they must always act with the “due care and professional skepticism required by PCAOB standards - particularly when faced with a client’s interests in avoiding correction of earnings announcements and in meeting filing deadlines.”
Significantly, Olson found one silver lining in the current financial crisis, noting that today’s tough market conditions provide “a historic opportunity for Congress and the incoming administration to strengthen our financial system and rethink the U.S. financial regulatory framework.”
The nation’s present system for regulating financial markets “is more a succession of policy responses to past crises than a model of efficiency,” he told the conference. Olson said he is compiling a list of legislative changes that would improve the PCAOB’s operations, and he won’t be bashful about sharing his recommendations with President-elect Barack Obama and the more heavily Democratic Congress.
One change that Olson said he would not support, however, would be a retreat from the PCAOB’s current “supervisory approach” to financial institution and auditor oversight.
The board has rejected a purely regulatory approach or one that is solely based on enforcement tools, he explained. Instead, under the supervisory approach, the PCAOB relies on its inspection teams to identify deficiencies at audit firms and track remediation efforts by those firms.
“Because of my bank regulatory background, I am comfortable with the supervisory model and believe that it can be highly effective,” he said.
