In addition to its ongoing work on the implementation of Auditing Standard No. 2, the Public Company Accounting Oversight Board will focus on rules related to auditor independence and tax services and strengthening its enforcement staff during the second half of the year, according to its chairman.

PCAOB Chairman William McDonough said that the board will soon consider adopting rules on auditor independence and tax services, based on a proposal that the PCAOB issued for comment last December.

"The public comments have helped us see certain specific areas in which the proposal could be improved and we are working now to fashion those improvements," McDonough said during June 2 remarks to attendees at the SEC and Financial Reporting Institute, sponsored by the Leventhal School of Accounting at the University of Southern California, Pasadena.

In addition, the board will look to hire 80 or more additional inspectors to help nearly 300 registered public accounting firms, McDonough said. The board, which began operations in January 2003 with four board members and a handful of staff, currently numbers 333 employees, including auditors, analysts, attorneys and others.

He said that by the end of 2005, the PCAOB expects to have roughly 450 staff, with most of the growth in the ranks of accountants who serve as inspectors, as well as enforcement investigators.

Continuing its task of inspecting registered public accounting firms, McDonough said that the board will inspect the largest eight U.S. firms again this year, as well as the single non-U.S. firm that has more than 100 public company audit clients, KPMG's affiliate in Canada. To date, 1,515 firms have registered with the board, among which 580 are non-U.S. based.

The board will also continue to monitor and assist in the implementation of Auditing Standard No. 2., which set out the steps that auditors must take to support their attestation on management's assessment of their internal control over financial reporting, as required under Section 404 of Sarbanes-Oxley.

The board recently issued additional guidance on implementing AS 2, and will meet with its Standing Advisory Group this month in a session focused entirely on that topic. In addition to the SAG, McDonough said that the board has "numerous channels" for feedback about how issuers, auditors and others feel Section 404 implementation is going, including informal working groups and other ad hoc meetings.

This year will be the second year of internal control audits for accelerated filers, but the first year for small public companies and foreign private issuers.

During his speech, McDonough noted that PCAOB oversight has "triggered a profound shift in the overall character of public company auditing. Most important, our oversight has changed auditors' attitudes toward their accountability."

"Under the old system, which relied primarily on the enforcement tools of federal and state regulators after a problem had already occurred, the risk was relatively low that an auditor's failure to identify and address a financial reporting error would come to the attention of regulators," McDonough said. "If such a problem did come to a regulator's attention, the consequences were grave -- often ending the careers of auditors involved, if not the practice of the firm itself."

He continued, "Under the new system, auditors understand that their work is much more likely to be reviewed within months or even weeks by the PCAOB's well-experienced, full-time inspectors."

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