by Bill Carlino

Washington - Can a former top banker successfully regulate the accounting profession?

Reactions from CPAs, former regulators and investor protection groups indicated that the appointment of Federal Reserve Bank official William J. McDonough as chairman of the Public Company Accounting Oversight Board sends a clear signal to the profession that the 69-year-old will be a tough cop on the audit beat.

“I can’t think of anyone better equipped to do the job,” said Arthur Levitt, former chairman of the SEC. “He has government experience, has dealt with contentious issues, and has international experience. He also knows all the participants. His statements suggests that he will put investor interests and restoration of public confidence at the top of his agenda.”

On April 15, the Securities and Exchange Commission voted unanimously to approve McDonough, former president of the Federal Reserve Bank of New York, to chair the fledgling board.

Immediately following the appointment, the PCAOB put an abrupt end to the era of self-regulation by announcing its decision to develop auditing and other professional standards for SEC accounting firms, in essence stripping that responsibility away from the Auditing Standards Board of the American Institute of CPAs.

Toward that end, the board named Douglas R. Carmichael, Ph.D., CPA, and director of the Center for Financial Integrity and Wollman Distinguished Professor of Accounting at New York’s Baruch College, as chief auditor and director of professional standards for the board. He will function as a primary advisor to the board on audit standards and other accounting-related issues.

“I’m passionate about auditing standards and this was a great opportunity,” said Carmichael. “There’s quite a bit of work to be done.”

Although Sarbanes-Oxley authorizes the board to “designate or recognize any professional group of accountants to propose new standards,” officials have determined not to exercise that authority.

The accounting profession will not be frozen out of the standard-setting process altogether, however. New procedures approved by the board call for the creation of an advisory committee to formulate standards, and the board said that the profession would be part of that process.

But, according to board member Charles Niemeier, who had served as interim chairman of the oversight body prior to the appointment of McDonough, accountants will be only one of several voices advising the PCAOB on the development of professional standards. Representatives from finance and the investment community will also be appointed to the 15-to-30-member advisory panel, and accountants will be limited to no more than one-third of the membership of the new group.

Board members said that they would temporarily leave in place the current audit standards while forming the committee of outside experts to help draft new guidelines.

The move was seen as a bitter defeat for the AICPA, which lobbied furiously to maintain authority over auditing standards after Sarbanes-Oxley voided its self-regulatory authority.

In a statement, James O’Malley, senior vice president of public affairs for the institute, said, “The PCAOB proposal requires compliance on an interim basis with generally accepted auditing standards as set by the Auditing Standards Board. ... We are encouraged that the proposed process will continue to involve participation, dialogue and open observation by a large and diverse group of participants.”

Also at the meeting, the board officially voted to fund itself through annual fees on companies and mutual funds.

Under the plan, companies with more than $25 million of average monthly market capitalization will pay fees to fund the board’s operations. Meanwhile, mutual funds exceeding $250 million in net asset value also will be charged, however, at rates lower than corporations. The plan will go to the SEC for final approval. If approved, billing could begin in May or early June.

Separately, the board approved an ethics code for its members and professional staff. The measure would prohibit them from receiving payments from, or having financial stakes in, public accounting firms.

At the press conference announcing his appointment, McDonough said, “I see the job of the PCAOB as providing guidance in a constructive manner and, when necessary, to be a tough overseer to protect the public’s interests and assure that any inappropriate behavior is ended. I have spent more than half my professional life in public service and this is one of the more interesting challenges I can imagine.”

McDonough, a Democrat, has been an outspoken critic of issues such as excessive executive compensation and abuse of stock options. He will serve a five-year term with an annual salary of $556,000.

McDonough fills a void that had been vacant since the November resignation of former FBI and CIA chief William Webster, who stepped down after it was disclosed that he had served as the head of an audit committee for a tech concern under investigation for accounting irregularities.

“What we know of him seems positive,” said Barbara Roper, director of investor protection at the Consumer Federation of America. “Clearly he has the qualities necessary when you create a regulatory structure from scratch. But what we don’t know are his positions with regard to top-to-bottom reform of the audit profession.”

“He’s proven to be a good negotiator in bringing disparate parties to a consensus,” said Barbara Ley Toffler, adjunct associate professor of management at Columbia Business School and author of “Final Accounting: Ambition, Greed and the Fall of Arthur Andersen.” “Maybe they are really serious this time and we’re going to see some change.”

McDonough’s unanimous appointment also gave SEC Chairman William Donaldson a major coup over his detractors, by delivering on one of his early promises upon assuming the SEC chair’s post in the post-Pitt era - that of quickly naming a chairman to head the PCAOB.

McDonough revealed that Donaldson approached him about the accounting board in early April after he had already accepted an offer from the New York Stock Exchange to become a member of its board. He hopes to begin with the PCAOB in late May. He already had announced his retirement from the Federal Reserve, which was to have begun July 21.

McDonough joined the Fed in 1992. Prior to that he spent an aggregate 22 years in banking with First Chicago Corp.

-- Washington bureau chief Ken Rankin contributed to this report.

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