New Regs Dominate SEC/FASB Conference
Guest Speaker Implores CPAs to Embrace New Rules, Oversight Board

By Simon Eskow

The Security and Exchange Commission’s rules on auditor independence, auditor rotation and a slew of other regulations mandated by Congress last year will help restore confidence in the accounting profession, an SEC official told attendees of the Foundation for Accounting Education’s SEC/FASB Conference in January.

“The scope of the act is very broad. The act requires significant reform of all aspects of our financial reporting system,” SEC Acting Chief Accountant Jackson Day said.

Day said the changes “are extremely positive…and I hope you will embrace (them). They will restore honor to the profession. Respect can’t be restored until they’re under way.”

Day’s speech came after what he called the SEC’s busiest rule-making period ever. Over the course of two weeks, the agency set regulations and final rules required by the Sarbanes-Oxley Act, the bill passed in Congress last summer in response to a groundswell of accounting and financial reporting scandals. The rules cover everything from the role and structure of audit committees to cooling-off periods and the responsibilities of the new, pivotal Public Company Accounting Oversight Board (PCAOB), including regular inspection of all auditing firms.

The changes stemming from the Sarbanes-Oxley Act pervaded one of FAE’s most important annual conferences. More than 150 CPAs attended panel discussions, lectures and updates on details of the Act, the lessons of Enron and WorldCom, the SEC and the Financial Accounting Standards Board’s emerging issues task force initiatives.

Indeed, the conference opened with a panel discussion of the Act, its objectives and its implications, moderated by Jeffrey M. Brinn, the conference chair.

“The corporate scandals provided the environment to bring about reform that’s really been developing for two decades,” panelist and consultant Robert Richter said. Richter pointed to past reform efforts like the SEC Improvement Act of 1981 and the O’Malley Commission. Richter said there was enough pressure after Enron to prod the SEC to recommend major changes in regulation, regardless of what Congress did.

Richter walked through the provisions of Sarbanes-Oxley, the sweeping legislation that centers on the PCAOB, the new private, nonprofit arm of the SEC.

Richter described in detail the makeup and responsibilities of the PCAOB, the ongoing development of the PCAOB’s enforcement and inspection procedures, mandates to ensure independence of the audit (including prohibition of nonaudit services and requirements for auditor rotation), work-paper retention requirements and rules for financial reporting.

The Difference a Day Makes

Day reduced the measures to general initiatives—including the establishment of the PCAOB and the forging of new independence standards for auditors—that work under overarching themes of personal responsibility, the quality of the independent audit, certain punishment for violators, and an oversight board with investigative and enforcement powers under the Sarbanes-Oxley Act.

The PCAOB, which must be operational by April 26, already is hiring staff and forging an operation plan, Day said. The PCAOB also is studying the pre-Sarbanes-Oxley self-regulatory system, for “strengths and weaknesses.”

But the biggest question facing the PCAOB is inspection of its registrants, he said. Under the new rules, all auditors of publicly traded companies must be inspected at least once every three years (once a year for auditors of 100 or more companies).

“Implementation may be the board’s biggest and most important challenge,” Day said. The PCAOB, he said, must decide what will be reviewed; when the reviews will be conducted; how the work will be accomplished and if any should be contracted out; what disciplinary action should be taken when necessary, and how the board will interplay with state regulators.

The PCAOB faces other challenges, too, such as how it will deal with Congress and the media, and how it will interpret some rules. Along those lines, Day said the PCAOB is defining a member of the engagement team as any member of the firm who has worked at least 10 hours on an engagement, a revelation that elicited some surprise from conference attendees.

“I guess people are trying to guess how a lot of things are going to be interpreted,” Bruce Fisher, of Friedman Alpren & Green in New York, said. “Rotation is their concern. But we’re just waiting for interpretations.”