Daniel Goelzer has been a member of the Public Company Accounting Oversight Board since the board was first established under the Sarbanes-Oxley Act of 2002, and he is completing his second and final term this Friday.

Goelzer was not only a board member, but also its acting chairman from August 2009 through January 2011. During that time, he saw the board through what may have been its greatest crisis, a Supreme Court case challenging its constitutionality.

He talked with Accounting Today on Thursday about his nine years at the board since its first meeting in January 2003, its major accomplishments, the board’s unfinished business, and his own plans for the future.

Could you tell me how it feels to be retiring from the PCAOB after 10 years?

It’s going to be a big change in my life. I’ve really devoted a lot of my time and energy over the years to the PCAOB. I’m not sure that I’ve fully adjusted yet to what it’s going to mean to me to not be here any longer. When I think back to what things were like nine years ago, on the first day we started out here, there were maybe five or six people working here, and all we really had was the statute [the Sarbanes-Oxley Act] as a blueprint of what we were supposed to do, so we’ve come a long way.

What would you say are the main accomplishments of the board over the past decade?

Really the biggest accomplishment, I think, is the obvious one. We’ve taken that blueprint of running an inspection program, issuing inspection reports to focus on deficiencies and how firms should remediate them, and turned that into a real functioning, working program. There was really no plan, no manual we could look at for how inspections should be conducted and how we should be encouraging the firms to improve their quality controls, and I think we’ve done a great job in getting that program up and running.

The same, really, for standard-setting. The Sarbanes-Oxley Act kind of gave us a choice as to whether we would set auditing standards directly or rely on the profession for that, and not simply use their standards. I think we’ve really done a terrific job of getting our standard-setting program going, and it touches a lot of aspects of auditing today. Enforcement was our other challenge, and I think we have a very effective enforcement program. It still labors or suffers in my opinion from the fact that the proceedings are non-public, but hopefully that will change in the near future.

I know you and the other board members have been pushing to make the disciplinary proceedings public. How is that effort going? There have been some bills introduced in Congress to amend the Sarbanes-Oxley Act to allow public proceedings.

Well, I think this is something we have been working on for a year and a half, almost two years now. I think it was a milestone when the legislation was introduced. My impression is, as we go around talking to people in Congress, there’s probably a good level of support for making this change, so I think that it will happen. Everything in Congress depends on having the right legislative vehicle and the stars kind of aligning to get something done, so I’m not exactly sure when it will happen. But I think we will get this change made.

Did you ever expect to be inspecting over 2,000 firms?

That’s a good point. When the board members first met nine years ago and thought about what the board would be like, we thought we might have 400 or 500 firms registered with us. We’ve got over 2,500 registered now, I guess close to 2,600 registered firms. We’ve announced recently that we’ve inspected 2,650 public company audit engagements in the years that we’ve been running the program, which again is probably not a number that I would have predicted nine years ago. It’s by coincidence that it’s roughly the same number of registered firms, although there’s no connection between those two numbers.

I know you’ve been pushing to get more inspections in other countries too, and you’ve been signing some agreements recently for mutual inspections with other countries, though China is still the main sticking point. Do you see progress there?

Well, yes, you touch on something I would identify as a big challenge for the board going forward. We have an active foreign inspection program. We’re inspecting in 38 countries. We do a lot of foreign inspections, but there are some important gaps. We are filling in Europe, as you suggested, but there are still some important parts of Europe where we don’t have inspection agreements yet. Of course, the big elephant in the room is China, and our ability to get into China, because there are a number of Chinese issuers trading over here. There have been some issues with the financial reporting of some of those Chinese companies, and I think it’s very important to U.S. investors that we open that door. We’re still talking with our Chinese counterparts and colleagues, but there’s no breakthrough there yet.

The Supreme Court decision on the PCAOB’s constitutionality came through while you were acting chairman. Was that a big accomplishment in getting past that?

Absolutely, I kind of see what I would call the victory in that case as marking the end of the PCAOB’s adolescence or growth period, our ability to turn a corner and really be a mature functioning organization. Certainly, one of the things that I take a lot of pride in here is the fact that the staff did keep functioning so well while that cloud was hanging over our head. There certainly was a risk that the court would find that we were unconstitutional and we would have to rush back to Congress on sort of an emergency basis to try and cure whatever the defect was, but fortunately it didn’t turn out that way. The court in effect made a small change in our relationship with the SEC, but other than that upheld our constitutionality. If you look at PCAOB milestones over the last nine years, that’s certainly one of the biggest ones, if not the biggest one. Maybe we wouldn’t be here today if that had turned out in a different way.

What’s your sense of the image of the PCAOB among accountants?  Is it seen as something to be feared or something to be relied upon to set needed standards and do the work of inspecting the firms, keeping them honest?

I think the profession does have a lot of respect for us. I think that was one of the challenges in setting the board up and getting it going, whether we would be able to attract a high-quality inspection staff, that the people inspecting them, primarily the big firms now, would regard as peers and people they would take seriously, or whether they would be dismissive of us and not take our inspections seriously. I think we’ve succeeded spectacularly well in creating a staff that the profession does respect. You refer to the standard-setting process, and I think certainly the same thing on the standards. When you look at the kind of comments we get from the firms on our standards proposals and the engagement that we have with the profession, at our Standing Advisory Group and other forums, I do think they have respect for the standard-setting process.

What are some of the other unfinished business and proposals that you think are important as you look ahead? The PCAOB issued proposals this week on related-party transactions and significant unusual transactions and broker-dealers, and you have some proposals out there on mandatory audit firm rotation and lead audit partner signoff. What do you predict will happen with those?

To me the most important of those projects that the board currently has on its agenda is the one on the auditor’s reporting model, in other words, whether the information that the auditor communicates to investors, to users of financial statements, ought to expand beyond the standard auditor’s report, and the auditor ought to be given some additional insight into what the key issues are in the financial statements. Particularly coming out of the financial crisis, I think the investing public is expecting or demanding more from the auditor than they’re currently getting. So while the project on firm rotation maybe attracts a bit more attention because that’s so controversial, I really think the reporting model is the most important one the board’s dealing with. So while I’m not sure I can predict what the ultimate decision or outcome will be, I am quite confident that the board will be expanding the auditor’s obligation in terms of the information coming out of the audit.

As for the rotation project, whether there should be mandatory firm rotation, I guess I would say that I think that ought to be seen in a broader context, that is, whether we have to do things, and what things we have to do to increase auditor independence and professional skepticism. I’ve said this before, but I’m personally skeptical about whether mandatory rotation itself is the right answer. I think there’s a risk that it could end up hurting audit quality rather than improving it. To me, it kind of undermines the role of the audit committee, which is supposed to be the group considering on a day-to-day, year-to-year basis what the best firm to audit the company is. But at the same time I think the firm rotation concept release does address a very important issue in that we need to find ways to improve the level of professional skepticism. I suspect that when the board has its roundtable on rotation in a couple of weeks, that these broader issues will be very much a focus of what many people talk about.

There are a lot of other things too. One thing that I think is important is that the board improve the level of dialogue that it has with audit committees, and try to help audit committees better understand what the PCAOB is doing, what our inspection of their auditor ought to mean to an audit committee, what questions they ought to be asking their auditor. One area where we perhaps should have done more over the past nine years would be in terms of the relationship between the PCAOB and audit committees because Sarbanes-Oxley has two themes. One is to create the PCAOB and give it the auditor oversight role, and the other is to put the audit committee at the center of the relationship between the public company and its auditors. I think we could do a lot more to develop that relationship and help audit committees do their job.

What are your plans for the future post-PCAOB?

I’ve been working pretty much nonstop for 38 years now, nine years here. I hope to take a little time off, but I do want to stay involved with increasing investor confidence in financial reporting and the audit committee relationship, corporate governance, the kind of stuff that I’ve been dealing with here at the board, maybe as a board member, maybe as a consultant, maybe as a practicing lawyer again. One of the things that I’ve taken a lot of satisfaction from in the past year or so is being the vice chairman of the IFIAR [International Forum of Independent Audit Regulators], which is the international group of independent audit oversight bodies. I’ll have to step down from IFIAR when I leave the PCAOB, but that’s another world I’d like to stay involved with if I can.

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