Daniel Goelzer, one of the original members of the Public Company Accounting Oversight Board and a former acting chairman, told Accounting Today he is skeptical that the PCAOB will end up requiring mandatory audit firm rotation for public companies.
Goelzer retired from the PCAOB last year after serving for 10 years on the board in the wake of the passage of the Sarbanes-Oxley Act of 2002 (see PCAOB Founding Member Daniel Goelzer Reflects on Board’s History and Future). He was previously a partner at the law firm Baker & McKenzie following a seven-year term as general counsel of the Securities and Exchange Commission.
He has now returned to his old law firm’s Washington, D.C., offices and will be taking on a strategic role in Baker & McKenzie’s global corporate, securities and banking compliance practices.
“It’s back to the future for me,” he said in an interview last Friday. “I was a partner here from 1990 to the end of 2002, and then I was at the PCAOB, and now I’m back at Baker & McKenzie.”
Now that he is away from the PCAOB, Goelzer is free to offer his perspective on the prospects for some of the audit firm regulator’s initiatives, such as the concept release proposing that public companies might be required to change auditing firms on a periodic basis. Goelzer does not believe the PCAOB will end up imposing such a requirement anytime soon. He has kept a close eye on the roundtable discussions the PCAOB has held with industry stakeholders over the past year and the comment letters it has received.
“I would be surprised if we see a mandatory audit firm rotation proposal in the coming year or in the foreseeable future,” he said. “To me the record they developed at the roundtables and the comments just isn’t supportive. I think they would struggle—or they certainly would face challenges—in trying to do a cost benefit analysis that would pass muster with the SEC.”
Goelzer doubts the PCAOB would even go as far as requiring public companies to put the audit work out for bid periodically, whether or not the same auditing firm ends up being retained. “I would think that of the various kinds of alternatives that they heard about in their roundtables, maybe the most feasible one would simply be to have the audit committee report periodically on its evaluation of the auditor, and in effect why it doesn’t feel that there’s a need to change auditors,” he said. “But I’m not sure if the odds on even that are high in the short run.”
In Europe too, the decision on a proposal by the European Commission to impose mandatory audit firm rotation and other changes to auditing regulations also apparently has been delayed (see Europe Moves Slowly on Proposal for Audit-Consulting Split).
“If there were going to be rotation, it would certainly be easier for the profession and for public companies if the major regulators around the world could get together and agree on what firms it was going to apply to and what the rotation time period was going to be so that you didn’t have conflicting or differing rotation requirements in different countries,” said Goelzer. “But my own guess is that it’s not on the short-term agenda, at least not here in the United States.”
As an alternative, Goelzer pointed out that some of the other PCAOB board members have recently been mentioning in some of their speeches a project they have begun to develop on “audit quality indicators.”
“It’s some kind of input measures or output measures, ways of evaluating what the quality of an audit is,” he said. “That’s something that’s been kicked around for the last several years. I think the Treasury’s Advisory Committee on the Audit Profession talked about that. The IAASB [International Auditing and Assurance Standards Board] also has a project on audit quality indicators. I really think from a big picture policy standpoint, it will be changes in the auditor’s report and discussions or proposals on audit quality indicators that will be the two big things for the profession in the coming year, not mandatory audit firm rotation.”
Goelzer expects to see changes first in audit firm reports as a result of another PCAOB concept release. “I think something will definitely happen in terms of expanding the auditor’s report and changing what they call the auditor’s reporting model,” he said. “There is really a lot of investor interest in getting more insight from the auditor about the company’s financial reporting and the challenging issues in its financial reporting, and I’m really pretty confident that the board will propose something on that in the coming year,” he said. “At the other end of the spectrum, they’re going to remain concerned about improving professional skepticism and independence.”
Changes since Sarbanes-Oxley
Goelzer has seen many changes in the past decade since the passage of the Sarbanes-Oxley Act in both the regulatory and compliance arenas.
“Public companies and financial institutions have a much broader range of regulatory concerns and compliance issues, particularly Dodd-Frank for the financial institutions,” he said. “The other thing I think was certainly true before but has accelerated a lot in the last 10 years is the global nature of so much of business and also of regulation. Just thinking about it from the PCAOB perspective, when the board was created in 2002, it was really one of the few, maybe the only, independent audit regulator in the world. At the time, most countries relied on a peer review system, the way we were before the PCAOB. Today there are independent audit regulators in at least 40 countries around the world. They’ve formed their own organization, IFIAR, the International Forum of Independent Audit Regulators. I think companies are starting to spend more time and thought on compliance issues today with the global nature of compliance issues and regulation.”
At his new job at Baker & McKenzie, Goelzer is expected to handle matters such as corporate governance and best practice regulatory compliance matters for public companies, financial institutions, accounting firms and institutional funds; corporate, financial institution, and accounting firm representation in rule-making matters and enforcement actions, especially ones involving the SEC and PCAOB; public company accounting and financial reporting, internal controls, audit, investigations and restatement practices; and global custody, asset management and other financial services for institutional fund investors.
Goelzer believes he also will be advising public companies and their audit committees on their relationship with their auditor, how they should be reacting to PCAOB inspection findings, and what questions they should be asking the auditor.
“I will likely get involved in situations where companies have financial reporting issues or perhaps are considering the need for a restatement or are involved in a restatement process,” he said. “Certainly I would hope that I also have some knowledge from the PCAOB that I might be able to use to help the accounting firms.”
It is likely that the advice he will be giving companies in 2013 will be far different from what he might have said a decade ago. “There are so many things the firms have to consider today that just weren’t issues 10 years ago, things like how to react to PCAOB inspection findings, what kinds of procedural steps to put in place in order to strengthen their audit practices, what kind of remediation steps are likely to be acceptable to the PCAOB so that they can avoid the risk under Sarbanes-Oxley of having the nonpublic parts of their inspection reports be public,” Goelzer said. “What I’m interested in, at least in that aspect of the practice, is to be able to draw on the things that I learned at the PCAOB or that we put together at the PCAOB and use those to help firms.”
Goelzer will also be involved in the firm’s financial institution practice. “We have a long history of representing major banks that are asset custodians for mutual funds and other kinds of institutional funds,” he said. “There are lots of challenges in that area, and I’ll be involved in what’s called the global custody practice as well.”
Mary Jo White Nomination
Goelzer was the longest-serving SEC general counsel at the time he left, and I also asked him about his reaction to Mary Jo White’s nomination as SEC chair (see Obama Nominates Mary Jo White as SEC Chair). “She certainly has a fine reputation as a tough prosecutor,” he responded. “But I think the SEC has always had a pretty active enforcement program, and I don’t think people really can fairly say that Rob Khuzami and Mary Schapiro have de-emphasized enforcement. I think in a lot of ways the questions that Mary Jo White is going to have to answer are how she wants to deal with some of the big regulatory issues facing the commission, like how money fund regulation ought to change, questions about how the JOBS Act should be implemented, things of that nature. I’ve just been amused that there’s been so much discussion about her maybe changing the tone of the enforcement program, and I think people really ought to be wondering about what her position is going to be on regulatory questions.”
As for the question of whether or not White would be any more likely than her predecessors to give the green light to allowing U.S. companies to use International Financial Reporting Standards, Goelzer doubts she has given it much thought yet. “I suspect it’s just an issue she really hasn’t had to deal with in her practice to date,” he said. “I don’t say that in a critical way. Really anybody that comes in as SEC chairman is likely to have a background in some things that the commission does, and not in others. I think the important thing is that people be willing to let the staff educate them on the issues that they’re not familiar with and then bring their judgment to bear. It will be interesting to find out what she does think about some of these regulatory issues like IFRS.”