The successor to the old POB, the Public Company Accounting Oversight Board will be funded by mandatory fees from public companies and will operate under the oversight of the SEC. It is charged with establishing audit, independence, and ethical standards for auditors; investigating auditor conduct; and imposing penalties.
Formerly, auditors under investigation by the AICPA oversight board could simply refuse to participate. The new board will have the same subpoena powers as the SEC to bring auditors to the table. But its effectiveness will depend largely on the aggressiveness of the members chosen by the SEC to serve on it. Of the five members, only two can be current or former accountants.
While the industry begrudgingly accepts that an oversight panel with teeth is now a political reality, there are reservations about its role in setting standards for audit processes. Up until now, the job has been performed by the Audit Standards Board of the AICPA. The industry trade group, which declined requests for an interview, has argued that this task should remain in the hands of industry practitioners. “We firmly believe that standard-setting is better done by individuals who have an in-depth, current, and comprehensive understanding of auditing,” wrote James Castellano and Barry Melancon, the two senior executives at the AICPA. This sentiment is echoed by others in the profession. “Auditing standards should be established by accountants, not by regulators and lawyers,” says Nussbaum. “When standard-setting becomes a political event, it changes depending on what’s popular, and that’s not good for standards.”
The reforms being imposed on the accounting profession by politicians and regulators may have auditors gnashing their teeth, but the long-term results may not be entirely negative from their point of view. “Enron and WorldCom have done a lot to strengthen auditors’ hands,” says Mulford. Corporate executives are now realizing that the credibility of their financial disclosures can be more important than the financials themselves. That should result in less pressure on auditors from executives trying to make their numbers. It also may improve the compensation auditors receive to conduct their work.
Nussbaum has already noticed the difference. In an effort to improve its ability to detect fraud, Grant Thornton has been increasing the number of procedures it performs to confirm receivables with customers and verify liabilities with vendors and other outside parties. And despite the weak economy, companies are accepting the increased expense from the added work. “I think our clients understand that if they want strong audits from reputable firms, the costs are going to go up,” says Nussbaum. “It’s one of the silver linings to this situation.”
Of the parade of participants in the Enron hearings, none generated more outrage than the document-shredding Andersen auditors. Greed and corruption may be no more acceptable in corporate executives than in anyone else, but the auditors have borne a particularly large share of the public opprobrium from Enron and other corporate accounting scandals.