PCAOB's Primary Mission: Improving Confidence in Financial Reporting, The

CPA Journal, The, Jan 2008 by Kranacher, Mary-Jo

Gradison: A study is underway now by the Government Accountability Office (GAO) on that very subject. The GAO was mandated to do a similar study when Sarbanes-Oxley was passed in 2002, and the report came out in 2003. So the GAO is working on an update. The preliminary data I've seen indicate that there is still a high degree of concentration.

I don't want to get ahead of whatever the GAO report will say with regard to the degree of competition, but a deeply held view among larger issuers is that a Big Four is barely enough. Five would be better, and three is unthinkable. Many larger issuers will use one firm for their audit, another for their taxes, and so forth. Beyond that, in some instances there is a high degree of industry concentration within individual audit firms-for example, international petrochemical companies. Among the smaller audit firms, however, there is evidence of a very vibrant, competitive market. There has been a fair amount of client switching from firm to firm. We had more than 200 audit firms register with the PCAOB and then deregister. But at the same time, even more firms have registered for the first time. So the overall number of auditors, domestic and foreign, has been going up.

We have about 1,800 registered audit firms now, about 1,000 in the United States and about 800 in more than 80 foreign countries. However, not all of those 1,800 are actually the principal auditor of a public company. A fair number of registrants don't audit any issuers, but I suppose they hope to do so someday. Or maybe they think it's a good thing to have on their stationery.

CPAJ: Years ago, there was the Big Eight, then Six, then Five, and now Four. When they filed their merger requests with the SEC, they claimed that it would not affect competition. Yet now, they are the loudest voices saying, "You have to protect us because there's a lack of competition." So it makes one wonder if growing too big to fail was their strategy all along.

Gradison: I look to the Justice Department or the GAO or the Federal Trade Commission for expertise in that area. It certainly is an ongoing concern, and we are monitoring it. I have not run into anybody who, with the benefit of hindsight, thinks that going after Arthur Andersen with criminal charges rather than the individuals directly involved was a sound public policy decision, but that's water under the bridge.

International Convergence

CPAJ: You've talked elsewhere about the convergence of U.S. GAAP and International Financial Reporting Standards (IFRS). Has the PCAOB been involved with discussions with its international counterpart, the International Accounting Standards Board (IASB)?

Gradison: Yes. Most directly, we are involved and active in the International Forum of Independent Audit Regulators, a relatively new organization made up of organizations like the PCAOB, which are independent from the profession and who in general register and inspect auditors. A number of countries are following the lead of the United States in creating organizations with objectives similar to those of the PCAOB. The European Union has passed its Eighth Company Law directive requiring each of its 27 countries to create such oversight entities. Not that they have or will have 27 varieties, but we're working very closely with them. We had a meeting in Washington, D.C., earlier this year where we invited the PCAOB's international counterparts that wished to share experiences. Canada, the U.K., and other countries are well along in this area.