Will Audit Firms Go Public with Financial Results?

A Treasury advisory committee recommends that audit firms should file GAAP financial reports with the PCAOB.

Privately-held audit firms could be reporting annual financial results under generally accepted accounting principles, and releasing those financial statements to the public, if the wishes of a Treasury Department advisory board are taken to heart. The Advisory Committee on the Auditing Profession, set up by Treasury Secretary Henry Paulson a year ago, approved its final report on Friday by a 14-to-1 vote.

The report, which includes about 30 recommendations separated into three topic areas, cited a controversial issued raised during deliberations regarding whether large audit firms should report their financial results using GAAP and then make those results public. Stopping short of a full recommendation, the advisory committee said it would leave that decision up to the Public Company Accounting Oversight Board, which regulates audit firms that have public companies as clients.

Big Four audit firms, and most smaller ones, are not public companies and do not have to comply with U.S. GAAP or report their financial results. While all of the Big Four firms do historically announce their annual revenues, they do so in part to try to establish bragging rights over their rivals, and they openly admit their numbers are pro forma and not GAAP-compliant.

While the call to go public with financial statements was not one of the committee’s official recommendations, committee co-chairs Arthur Levitt and Donald Nicolaisen included an addendum to the report in which they “voice strong support” for the auditing profession to present audited financials to the public, Levitt told CFO.com at a press conference following the vote. Levitt is a former Securities and Exchange Commission chairman and is now senior adviser at the Carlyle Group. Nicolaisen is a former chief accountant with the SEC and a senior adviser at Kroll Zolfo Cooper.

The single dissenting voice came from Lynn Turner, a former SEC chief accountant under Levitt. Turner said his dissent was rooted in the audit firm reporting issue, and that he believed that “in light of what is transpiring in the market today, and the critical role that audit firms play in the capital markets, audited financial statements should be made public.”

Turner continued that the final report contains many solid recommendations, but the committee members were asked to vote on the entire package rather than on each recommendation separately. Faced with that choice, he said, he voted down the entire final report.

Other committee members held similar opinions to Turner about the audit firm reporting issue, but elected to vote in favor of the package. For example, Gaylen Hansen, a partner with regional audit firm Ehrhardt Keefe Steiner & Hottman, said he too favors public disclosure and said if the recommendations were voted on separately, he too would have voted against leaving the issue in the hands of the PCAOB. “The goal is more transparency,” remarked Hansen.

Asked whether a separate vote on the auditor reporting question would have yielded a thumbs-down from her, Ann Yerger, executive director of the Council of Institutional Investors, noted that “the Council doesn’t have a policy either way on this issue. We are supportive. It was a consensus document. I really do commend the Treasury Department for establishing such a diverse panel, and I think the document reflects that diversity.”

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