Chief of Accounting Oversight Board Takes ‘Tough Love’ Stance
The chairman of the board created by Congress last year to ride herd on the accounting industry said Monday that he isn’t afraid of putting wayward accounting firms out of business -- but would prefer to help them save themselves first.
“You are more likely to save more souls if you can convince the souls of the need to be saved, rather than ... burn a few at the stake to get everybody’s attention,” William J. McDonough said on the sidelines of a conference in New York.
In only his second speech since taking over the reins of the Public Company Accounting Oversight Board in June, McDonough once again warned of grave consequences for auditors breaking the rules.
The stiffest punishment the board can impose is to deregister an accounting firm, which would prevent it from auditing public companies, he said.
“I’d be willing to do it to anyone who deserves it,” McDonough said when asked if he were willing to deregister a Big Four accounting firm. He cited a “tough love” approach as a good start to setting the tone for oversight of the accounting profession.
Accounting firm Andersen’s collapse after the Justice Department indicted the firm last year for its role in the Enron Corp. scandal has left only four major accounting firms capable of auditing large multinational companies -- Ernst & Young, KPMG, PricewaterhouseCoopers and Deloitte & Touche. Among them, Ernst already faces the threat of a six-month ban on accepting new clients.
In another speech Monday, oversight board member Charles D. Niemeier said companies that fire their auditors can expect to be scrutinized by the board.
“Whenever you see a change in auditor, the Public Company Accounting Oversight Board is going to look into it,” Niemeier said.
He urged board audit committees to ask tough questions when management moves to change auditors.
At issue are situations in which companies dump auditors because they are reluctant to go along with management when the company wants to improperly push the accounting envelope.
In the past, audit committees were too willing to go along with such midstream auditor switches, Niemeier said.
Although it’s true that sometimes there is a disagreement over technical issues, “there are plenty of times [companies] wanted to change auditors because they weren’t being given the answer they wanted,” he said.
The sweeping 2002 Sarbanes-Oxley Act gave birth to the oversight board, which is just beginning inspections of Big Four accounting firms.
The Sarbanes-Oxley Act also requires audit committees to have direct responsibility for the appointment, compensation and oversight of the independent auditors who must report directly to the audit committee.
In his speech, McDonough said he did not want to recruit “zealots” or “pussycats” to the board, which has 85 people on staff but is looking to boost that number to 200 by the end of the year.
