The Enforcer

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

Audits: How Bad Is Bad?

This month, the Public Company Accounting Oversight Board will publish edited findings of its 2003 limited number of inspections of accounting firms. Those inspections unearthed “significant audit and accounting issues,” said PCAOB chairman William J. McDonough, testifying before the House Capital Markets Subcommittee in late June. “We found some situations where their issuing clients…did not appear to follow generally accepted accounting principles.”

The Big Four received draft reports outlining the PCAOB’s charges and were given 30 days to respond. Any appeals, however, must be made to the Securities and Exchange Commission, “because the SEC is in charge of accounting policy, not the PCAOB,” says McDonough. At the same time, the firms are under no obligation to make the infractions public as long as they clean them up during the next 12 months.

Because of that confidentiality factor, it’s unclear just how serious the disputed issues really are. Still, there seems little danger that the audit weaknesses are going to reconfigure the accounting hierarchy anytime soon. For one thing, McDonough believes that the Big Four are actually “paying attention to doing audits better.” The problems that were observed, he says, mainly reflect the lack of time to improve their processes before the initial PCAOB inspections. Moreover, while McDonough “cannot say that it is absolutely essential to the American people that each of the Big Four survive,” he believes there is only a “remote” chance that one of the firms will be found to be as poorly managed as Arthur Andersen — and thus deserve to be put out of business.

But, he says, “we have to make sure.” —L.C.

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