The accounting industry's oversight board in USA yesterday proposed new rules for investigating and punishing auditors, and some members of the board urged corporate directors to insist on reviewing their audit firms' inspection reports.
The Public Company Accounting Oversight Board was attempting to address one of the more controversial aspects of the Sarbanes-Oxley law, which was passed a year ago to toughen oversight of the accounting profession. The new law prohibits the board from telling the public about problems it uncovers at accounting firms — such as sloppy auditing practices or a lack of independence from clients — if the accounting firm fixes the problem within 12 months. Investor groups have objected that the ban leaves shareholders in the dark about shoddy audit work.
Two board members, Kayla J. Gillan and Willis D. Gradison Jr., yesterday offered a way around the restrictions, urging corporate directors to force accounting firms to turn over their inspection reports in order to win or keep the companies' business.
Charles M. Elson, a corporate governance expert at the University of Delaware, said corporate directors could easily do that. But he said corporations should understand that auditors and regulators can get into minor disputes that do not reflect on the firm's competencies as an auditor. “The general question you would want to ask is, are there issues between your firm and the audit board that may affect your ability to audit my company?” Elson said.
William J. McDonough, the board's new chairman, did not comment on Gillan and Gradison's proposal, except to say that he had talked to many people about the ban and understood that Congress was trying to create an incentive for the accounting firms to quickly address their deficiencies.
The board's inspectors said at the hour-long meeting yesterday that they intend to perform annual reviews of firms that audit more than 100 public companies. They have already started inspecting the nation's four largest accounting firms. Smaller firms that audit public companies will face a review every three years.
The panel also said special emergency teams will be in place to conduct quick investigations when an audit blowup or corporate scandal emerges.
Chris Mandaleris, the deputy director of inspections, said he did not want to detail what inspectors would look for because he did not want to tip off the accounting firms.
Under yesterday's proposals, firms and accountants who are registered with the oversight board could be punished for breaking securities laws, failing to reasonably supervise other accountants, and refusing to cooperate with an investigation.
Disciplinary proceedings would be private unless both sides consented to the proceedings being open to the public. Auditors and their firms could be suspended or barred from auditing public companies, hit with monetary penalties, forced to submit to independent monitoring, or required to undergo more training.
The rules will be open for public comment until Aug. 18. The board must then submit them to the Securities and Exchange Commission for approval.
McDonough also said that the board is negotiating with regulators in the European Union, Canada and Japan over how to handle inspections and discipline of accounting firms with overseas operations. Representatives from those countries have argued they have systems already in place to police audit firms.