PCAOB Chair Signals Expansion of SOX to "Other Contexts"

Catalyst (Dublin, Ohio), July-August, 2004

The head of the Public Company Accounting Oversight Board (PCAOB) is looking for PCAOB standards to apply beyond public company audits.

PCAOB Chair William McDonough also called on Ohio CPAs to help restore confidence in American business during his speech at The Ohio Society's Members Summit and Annual Meeting.

"We hope that like FASB's accounting standards, (the PCAOB's auditing standards) will provide appropriate guidance in other contexts," said McDonough. "We hope to develop a set of auditing standards that may be adopted and applied uniformly in a variety of contexts. Public company standards should set the standard."

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McDonough pledged to work with professionals, academics and government officials from a variety of backgrounds--including preparers from small and medium-sized firms--to develop a workable set of audit standards. He acknowledged that while many CPAs may "chafe" at what the PCAOB will ask them to do, he hopes they accept the challenge for the sake of restoring confidence in the business community.

"You are the embodiment of the reforms that have occupied all of us over the past two years," McDonough said. "The true test of reforms that Congress legislated--and the hope for restoration of confidence in the accounting profession--will depend neither on the organized profession nor on the new regulators, but rather on each of you."

As of mid June, 977 firms nationwide, including 25 in Ohio, have registered with the PCAOB, McDonough said.

McDonough also predicted that executive compensation is another issue the business community will need to address soon.

"Sarbanes-Oxley was passed because the American people were furious," McDonough says. "The public has turned their attention to CEO pay. If compensation committees don't get their act together, there could be a law passed to control compensation."

McDonough noted that while he would be against a law regulating compensation, many members of Congress tell him this is becoming a hot issue with their constituents.

David Simko, CPA, a partner at Ernst & Young LLP in Cleveland, says it was good to have direct access to McDonough. He agrees with McDonough's notion that the PCAOB and the CPA profession should work together to restore confidence in the marketplace, and says he is pleased that the relationship can be cooperative as opposed to adversarial.

When asked by a Society member whether Sarbanes-Oxley and the PCAOB could have prevented corporate abuses such as the ones that occurred at Enron and Arthur Andersen, McDonough said he hoped so, but could not say for sure.

"I hope what would have happened is we could have blown the whistle earlier," McDonough said. "We believe a good audit most of the time will find fraud."

McDonough added during the question and answer period following his speech that he disagrees with the notion that auditors should not be responsible for detecting fraud.

David Brockman, CPA, director of business and assurance services at Brockman, Coats Gedelian & Co. in Akron and former Society chair, said while the tone of McDonough's speech was "right on," he's concerned about the expectation gap surrounding an auditor's ability to detect fraud.

"There is no guarantee that all fraud will be caught," Brockman said. "To get that kind of assurance is going to increase the costs and resources businesses allocate to audits."

Brockman said another concern is that states might try to adopt further regulations that restrict small businesses.

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"Trying to put public and private companies at the same standards is going to put a huge burden on small businesses."

Other Ohio Society members echo Brockman's concerns.

"I appreciate (McDonough's) position and the role he is fulfilling, but I remain concerned about the effects of federal legislation on auditing private companies and how state regulations may also be affected," said Brad Ridge, CPA, partner and president of Holbrook & Manter in Marion and Marysville.

Full audits, Ridge pointed out, may be cost prohibitive for many private companies. He said a better strategy might be for companies to take funds available for audits and target them to areas that make the most sense for individual businesses.