The Enforcer

If audit firms don't voluntarily improve their processes, PCAOB chairman William McDonough promises he'll make them.

The board had an inauspicious start. The first designated chairman, William Webster, withdrew because of alleged conflicts of interest, and that ultimately led to the resignation of then-Securities and Exchange Commission chairman Harvey Pitt. Did that upheaval handicap you?

No. There’s an external view that the board got off to a rough start, [because certain things] happened and therefore the board did not have a permanent chairman until I arrived. But I’m not sure that’s true. When I arrived, I felt that the board had not made a single decision with which I disagreed — and I looked at all of them. I was also extremely happy with the people they had hired. So while you might think it was high risk to enter an institution and immediately become its most visible face, it turned out that everything had been done so well that I had nothing but admiration for [their] work.

You’ve described your role as imparting “tough love” on auditing. In this situation, how do you define tough love?

My background is that of a banking supervisor in the largest financial institutions in the United States. If the managers ran a safe and sound institution in the public interest, as well as that of the shareholders, I, as their supervisor, would be supportive and helpful. If, on the other hand, they did something that was not in the public interest, I would be an extraordinarily difficult supervisor. Since the PCAOB represents the public interest, we cannot be only supportive of the accounting profession; that would make us just cheerleaders. The best way for accountants to win back the confidence of the American people is to do it voluntarily. But if they won’t do it voluntarily, we will make them do it. That’s the tough part of tough love.

Have you seen evidence that auditors are taking the initiative?

I tell accounting firms that the American people have lost confidence in the profession. That’s why we inspect them. It’s irrelevant if they think that’s a bum rap; we represent the public interest. If they are caught, say, giving tax-shelter advice — and there’s a whole new series of stories about XYZ firm giving tax-shelter advice — the American people will decide those firms do not have the judgment to be trusted. So my very strong advice is, don’t do the stuff that will lead to that conclusion. Are we seeing progress? Yes. Was Rome built in a day? No. But the trend is right.

You’re now conducting full-scale inspections of the auditing firms. What do they entail?

Last year, the PCAOB did limited inspections. The statute requires annual inspections of any firm that does more than 100 public audits. So this year, we will be doing much more thorough inspections of the Big Four, plus the other four American accounting firms that audit more than 100 public companies. Once every three years, we are also required to inspect all other auditors of public companies.

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