The New Rules of Engagement

With the passing of Sarbanes-Oxley -- and the advent of the PCAOB -- audits may never be the same again.

Douglas Carmichael can be a hard man to track down these days.

Shuttling between New York and Washington, the newly named chief auditor of the Public Company Accounting Oversight Board (PCAOB) has been busy making the switch from the academic world to the regulatory one.

Carmichael, who’s taking a leave of absence from his Baruch College accounting professorship, has been occupied with moving into a new apartment, getting onto the PCAOB payroll, and dealing with a controversy about his role as an expert witness in cases involving auditors.

But if the move to Washington is causing changes in Carmichael’s personal life, it’s producing equal upset in other circles. In fact, some Washington watchers say Carmichael’s hiring is a clear signal that the accounting industry oversight board is actually committed to overseeing the accounting industry. And a rigorous PCAOB, experts say, will likely lead to a real toughening up of external corporate audits.

The changes PCAOB plans to enact are indeed formidable. Among them: the replacement of peer review with government inspection. By year’s end, the board plans to hire a cadre of at least 100 accountants to do the inspections.

An even more dramatic power shift has already happened in Carmichael’s own area, that of audit standards. For a while, it looked as if the PCAOB might delegate standards development to the American Institute of Certified Public Accountants (AICPA), the lobbying group/trade association that’s long been a supporter of accounting industry self-rule.

In a move that could be seen as a regime change, however, the board voted in April not “to designate or recognize any professional group of accountants to propose standards.”

Translation: Auditors won’t be the only ones calling the shots about audit standards. Instead, the PCAOB, a non-profit organization set up under the Sarbanes-Oxley Act to oversee the audit industry, intends to name an advisory group consisting of finance executives, investors, auditors, and other folks.

No one group will represent more than a third of the advisory group. What’s more, the PCAOB says any group — or individual, for that matter — will be allowed to propose new accounting standards and treatments.

How drastically audit standards may change under the PCAOB is unclear. For the moment, the standards-setting group has adopted AICPA’s generally accepted auditing standards (GAAS) while board members deliberate on what the final rules will be.

Whatever happens, Carmichael is likely to have a strong say in the matter. And given his reputation as a stern critic of the accounting industry, that likely means more stringent audit standards.

Ironically, Carmichael actually spent a good deal of time working for the association representing the profession he now helps oversee. From 1969 through 1982, Carmichael worked in various AICPA staff posts, including auditing vice president. In those positions, and afterward as a hired consultant, he helped write many standards for the AICPA. Considering Carmichael’s earlier AICPA connection, Bruce Rosen, an executive committee member for the trade association, doesn’t expect drastic changes in the nature of corporate audits.

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