Audit Regulation

Beast or Burden?
Alix StuartAugust 1, 2002

Who’s going to stop auditors from pussyfooting around aggressive accounting tactics? If the Securities and Exchange Commission has its way, a new nine-member board will be in place by the end of the year to do just that. The proposed new Public Accountability Board would replace the now-defunct Public Oversight Board and conduct annual, rather than triennial, probes of large audit firms.

In announcing the new board, which will include at least six nonaccountants, SEC chairman Harvey Pitt claimed it “will help restore investor faith by ensuring strong and effective regulation.” Subject to any changes made during the proposal’s comment period, the board would also have the power to levy fines and bar accountants from the profession.

While the American Institute of Certified Public Accountants carps that the SEC “may have gone too far,” most CFOs view the proposal as good news. “Anything that helps restore investor confidence is a good thing,” says Kevin Thompson, CFO of Red Hat Inc., a Raleigh, N.C.-based Linux provider. Thompson is a former partner with, and current audit client of, PricewaterhouseCoopers.

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Others fear, however, that it may be too much of a good thing. Although the SEC promises that the board “would not conduct any roving investigations of public companies,” it would probe audit firms’ procedures for selecting clients, rotating audit personnel, and allowing partners to accept employment from clients. “We have to be very careful that it doesn’t reach too far,” says former Deloitte & Touche partner Stephen Giusto, now CFO of Deloitte spin-out Resources Connection Inc. “If there’s no indication that we’re doing something inappropriate, I don’t think they have any right or reason to look at our records.”

Like so many reforms, though, the move has turned into a political battle. Calling the SEC’s proposal a “toothless tiger,” Senate Democrats are promoting their own legislation, which would create a similar though smaller board, and would also restrict audit firms from practicing certain types of consulting.

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