The Public Company Accounting Oversight Board is falling behind in its plan to recruit a small army of veteran auditors for the coming year -- a development that led it to trim its budget for the year and that could lead to frustrating delays in the Sarbanes-Oxley-mandated inspections of the more than 1,400 public accounting firms that have registered to audit the financial statements of publicly traded U.S. corporations.

As recently as Oct. 26, 2004, PCAOB officials had expected to have a staff of 300 in place by the end of 2004, and were counting on hiring an additional 150 staffers during the coming year. The majority of those new hires were expected to be the experienced auditors needed to conduct inspections of the accounting firms registered with the PCAOB. However, in the nine weeks since then, "hiring has occurred at a slower than forecast rate," the PCAOB said, in acknowledging that it will fall far short of its recruitment goals.

Instead of a staff of 300, the oversight board closed out 2004 with only 262 employees -- a 14 percent shortfall that has already prompted it to readjust its budget plan for the coming year. In trimming more than $15 million from the $153 million budget that it approved in October, the PCAOB said that the lower figure reflects "a reduction in anticipated salary expense, and corresponding reductions in related benefits and payroll tax expenses."

It's unclear how much of a crimp will be placed in the board's inspection activities by the disappointing recruiting results. But some PCAOB officials were anticipating that the audit firm inspection staff could be undermanned during 2005 even if the original hiring goals were achieved. During an October meeting at which the original budget was approved, PCAOB chief financial officer Thomas Hohman had suggested that even with a 70 percent boost in manpower, the inspection staff could be stretched thin. "We would like more [experienced auditors on the team], but we recognize this is a very tight employment market," Hohman said in outlining the budget plan to board members.

A failure to adequately staff the board's inspection division would represent a significant blow to the PCAOB's ability to perform its duties under SOX. "Given the technical nature of the board's statutory mandates, the board believes that an experienced and highly skilled staff is essential to protect the interests of investors," the PCAOB said.

One solution to the board's auditor recruiting problems may be to sweeten the pot with additional compensation incentives for new hires. Under SOX, the PCAOB is specifically required to set staff salaries "at a level that is comparable to private sector self-regulatory, accounting, technical, supervisory, or other staff or management positions," an obligation that officials said the board "has and will continue to" comply with.

At the same time, the board raised the prospect that compensation packages may well be increased during 2005, at least for auditors sought by the inspection team. "While the board has not yet considered salary adjustments for 2005, the revised budget anticipates that, in light of the tight job market for highly skilled accounting professionals, the board may need to reevaluate compensation in order to retain, and continue to attract, the talented and experienced professionals necessary for the board to accomplish its mission," the PCAOB said.

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