New York (Sept. 9, 2003) -- Accounting firms must live up to the letter - and the spirit - of the Sarbanes-Oxley Act if they don't want the new accounting oversight board breathing down their necks, William McDonough told a group of New York CPAs in his first public speech as chairman of the Public Company Accounting Oversight Board.

In a wide-ranging speech before the New York State Society of CPAs, McDonough said the PCAOB intends to be tough, but fair, in its work overseeing the profession and setting audit standards, but said the profession itself must exceed the board’s and the public’s expectations in order to restore the trust that has been lost.

“You can’t be getting back to where you used to be; you have to go to a higher level,” McDonough told the group. “Frankly, it doesn’t make any difference if you think you got a bum rap. Life is unfair. You, the members of the accounting profession, are going to have to prove that you have earned the people’s trust.”

McDonough, the former New York Federal Reserve chairman, said he comes into the job expecting that as members of a regulatory profession, accountants know what the rules are and will follow them.

“If in the unlikely event you depart from those expectations, well then, we’ll have a less pleasant relationship,” he said. “But I’m sure that will not be necessary.”

Starting next year, the PCAOB will launch regular inspections of accounting firms that audit public companies as mandated by the law.

Inspections for the seven firms that audit more than 100 public clients will take place every year and all other firms will be inspected once every three years.

What McDonough said the board is especially looking for is the “tone at the top” of each firm when performing these inspections.

“The board wants to know if the message of doing the right thing is reaching the rank and file in your firms,” he said. “Do you as a managing partner, as an audit team leader, understand what is demanded of the accounting firm in this new era of regulation and oversight? Do you lead your firms and your team by example, demonstrating everyday the value of those standards?”

He also made it clear that the board will retain control over setting audit standards, even though the law left open the possibility it could delegate standards-setting to a professional group like the American Institute of CPAs.

When asked about audit standards of private companies, McDonough said the board’s mandate is only to set standards for public companies, although he acknowledged that different sets of standards could be confusing in the marketplace.

“There will have to be a lot of cooperation between [the PCAOB and the profession] or there will be a lot of confusion,” he added.

McDonough said he looked forward to the day when the public answers “accountant,” when asked, “Who do you really trust?”

But he made it clear that the PCAOB will play only a small role in the restoration process. “You are the people that will really, really make this happen—so do it,” he said.

-- Melissa Klein & Tracey Miller-Segarra

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