What does your firm’s ‘tone at the top’ say about you? That is the question Irish accounting firms with clients that trade in the US markets will be asking themselves in the coming year. By now, those firms should have registered with the Public Companies Accountancy Oversight Board (PCAOB), the private-sector, non-profit corporation, created in the US by the Sarbanes-Oxley Act of 2002, to oversee the auditors of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audit reports.
Since July 2004, no non-US accounting firm can audit a company listed on the US markets unless that firm is registered with the PCAOB.
So far, seven Irish firms have registered: the Big 4, BDO Simpson Xavier, Grant Thornton and Mazars. Asked by Accountancy Ireland when these firms are likely to have their first inspections, Mr William J. McDonough, PCAOB Chairman, said staff from his office are currently discussing protocols with the Irish authorities and that once those protocols are in place, the first inspections will take place - probably during 2006.
“The tone at the top” is how Mr McDonough characterises what his inspectors will focus on. He says the PCAOB has told accountants they must restore the faith of the investing public in their profession. Firms should be asking themselves whether the tone at the top of their organisations reflects a recognition of their role in promoting the greater good.
Measuring the ‘tone at the top’ won’t be confined to conversations with partners. The PCAOB will want to know whether the message is reaching the rank and file in firms so their inspectors will be talking not just to the managers, but also “to the least experienced members of the audit teams”.
Last August, the PCAOB issued reports on its limited inspections of the four largest public accounting firms in the United States. The limited inspections were conducted between June and December 2003 to provide the PCAOB with a foundation for its full-scale inspections and to obtain a baseline understanding of the firms’ internal systems of quality control over auditing.
In the inspections, the PCAOB identified significant audit and accounting issues that were missed by the firms and identified concerns about significant aspects of each firm’s quality controls systems. The inspection reports describe those issues.
With the reports, the Board issued a statement concerning the issuance of inspection reports, describing in detail the nature of the inspections, statutory limitations on public disclosure of parts of the reports and other matters related to the reports.
The statement and the reports are in the public domain under ‘Inspections’ at
www.pcaob.org.
Mr McDonough confirmed to Accountancy Ireland that reports on inspections of Irish firms will be published in a similar manner.
In the two years that it has been operating in the US, Mr McDonough says PCAOB has seen changes in the tone at the top - “except in one very disappointing way - executive compensation excesses” - where there are still issues to be addressed although some companies have now put in a better methodology than that used in the past.
On audit committees, Mr McDonough told Accountancy Ireland that “they are taking on more responsibility and the situation there is improving” and on ethics, the outlook is also promising with the Ivy League business schools in the US now putting increased emphasis on the teaching of business ethics.
Asked by Accountancy Ireland about the impact the establishment of PCAOB has had on the American Institute of Certified Public Accountants (AICPA) and whether, long term, the role and influence of professional bodies like AICPA will be diminished - particularly in view of PCAOB’s activities in standard-setting for the audit of public companies - which, until now, has been another traditional bastion of bodies like the AICPA, Mr McDonough said that AICPA and the PCAOB are working well together and argued that since PCAOB is only concerned with public company audits, there is “a large amount of turf” which will continue to be regulated by AICPA.
While it has been suggested that international developments over the last couple of years spell the end for self-regulation, representatives of the profession, with a pragmatic eye on the costs of regulation, are slow to concede that the end of the traditional role of professional bodies in this area is on the cards.
(Abridged version of article. For full text see print edition).
Accountancy Ireland, Vol 36,No 6, December 2004.