Good judgment and thorough disclosure -- from both auditors and issuers -- are the keys to restoring investor confidence in the capital markets as well as the accounting profession, Public Company Accounting Oversight Board Chairman William McDonough told a gathering of financial executives here.

Stating that the implosions at Enron and WorldCom were the result of failures of private sector leadership, McDonough said that despite some companies and groups saying and doing the right things toward the restoration process, "vastly more needs to be done."

"Disclosure, disclosure, disclosure," emphasized McDonough, who said that in the event of a problem in financial reporting or during the course of an audit, both clients and auditors have specific roles in the disclosure process.

"From an issuer's standpoint, it should be, 'Here's what the problem is, here's what we're doing to fix it, and here's how long we think it will take to fix it.' From the auditor's perspective, it should be, 'Here's what we found,' and here's what you need to do to fix it.'"

McDonough's remarks came during the annual conference of Financial Executives International, a 15,000-member trade group comprised of chief financial officers, treasurers, controllers and similar C-level financial officials.

The chairman also emphasized that the trio of standards recent adopted by the PCAOB -- on references to standards in audit reports, on auditing internal control over financial reporting, and on audit documentation -- were not meant to "create a detailed checklist," when performing an audit.

"They should not replace the use of good judgment," said McDonough. "Our goal is to help practitioners better understand the principles underlying the standards and appreciate why it's important that they use judgment in applying them. We expect auditors and issuers alike to exercise judgment."

He also said that the standards do not require a "one-size-fits-all audit program," but rather provide auditors "flexibility to tailor their audit programs to suit the size and complexity of the company undergoing the audit."

He also revealed that in the board's mandated inspections of audit firms, the PCAOB examiners not only comb through compliance with auditing and accounting standards, but they also look at the culture of an auditing firm and the relationship of a firm's audit practice to its other divisions.

McDonough said that strategy could help bring about "constructive changes."

Currently, 1,378 auditing firms are registered with the oversight body, including 500 non-U.S. firms.

"Two years ago, the PCAOB existed only on paper," McDonough said. From those modest origins, the oversight body has now grown to a staff of more than 240 and is expected to kick off 2005 with a staff of roughly 300. By the end of 2005, McDonough estimated that PCAOB staffing levels would hover at about 450.

And with the current effort toward global convergence on accounting standards, McDonough opined that a convergence of auditing standards would actually be easier to achieve: "Auditing standards are more workday stuff, and therefore we should be able to get international bodies together on this issue. They lack the emotion attached to such issues as stock option compensation and IAS 39 for derivatives."

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