Board's job: Make sure accountants tell truth

Trust: A panel created by Congress to oversee a scandal-tarnished industry has formidable foes in cynicism and greed.

November 07, 2003|By Bill Atkinson | Bill Atkinson,SUN STAFF

William J. McDonough might face the toughest job in the country - convincing investors that corporate accountants won't lie.

McDonough, 69, is chairman of a new board created by Congress to oversee the accounting profession, which over the past two years has been co-conspirator in some of the biggest financial frauds and bankruptcies in history.

At stake are the future of the stock market and the credibility of corporate America. Whether the board, known as the Public Company Accounting Oversight Board, can restore order and faith is not certain.

"I view the PCAOB as being fundamental to the process of restoring public confidence," said Arthur Levitt, former chairman of the Securities and Exchange Commission and a senior adviser to the Carlyle Group, a Washington, D.C.-based private equity firm. "The restoration in confidence and the reliability of the numbers ... is essential to the primacy of America's capital markets."

But the early signs are not encouraging.

"I am pretty cynical about that entity," said Eric Sussman, a lecturer at the Anderson School at UCLA and a former manager at then-Price Waterhouse. "The reality is they may promulgate a few relative standards ... but I have no expectations. At the end of the day, what are they going to do that is really going to make a difference?"

"The PCAOB can do a lot; it just remains to be seen how firmly they are going to take control of things," said Jack T. Ciesielski, an accounting expert and publisher of The Analyst's Accounting Observer. "My concern is their becoming another mushrooming bureaucracy that becomes fat and loses its mission."

This is not the first time Congress has created an organization to regulate and oversee an industry that has gone bad. The stock market crash of 1929 ruined many investors and wiped out trust in the market.

Congress subsequently created the SEC to protect investors, monitor investment houses and restore confidence.

This time, scandals at Enron Corp., WorldCom Inc., Tyco International and Rite Aid Corp. forced Congress to act. The scandals not only shook investors' confidence, but awakened them to the reality that numbers can lie, even after they have been audited.

Congress responded with the Sarbanes-Oxley Act designed to crack down on bad accountants, auditors and corporate executives with new, tough guidelines and stiff penalties.

The legislation also created the oversight board, which has been in operation for 11 months. Under McDonough, a highly respected regulator who headed the Federal Reserve Bank of New York for 10 years, the operation will have about 300 employees, half of them inspectors. To date, it has hired about 94 people, but it has yet to bring aboard a general counsel and someone to head its enforcement group.

McDonough hopes the board can ultimately restore faith in the system. Already, he says, its having an impact.

"I think that the fear level is getting higher and therefore it is encouraging people to be more virtuous," said McDonough, in an interview in his sparsely furnished downtown Washington office, which was previously occupied by Arthur Andersen LLP, the collapsed accounting firm.

"My impression from talking to lots of corporate managers is that they have gotten the lesson of Sarbanes-Oxley, that the numbers are supposed to be real, that the auditors are supposed to have a far more questioning attitude as they audit the financial statements of companies. I think it is a process that has begun, that the numbers are more believable."

McDonough sees other positive signs. More than 85 percent, or 618 accounting firms that inspect the books of publicly traded companies, have registered with the oversight board so far.

Leading the way

The country's four largest accounting firms - PricewaterhouseCoopers, Deloitte & Touche, Ernst & Young, and KPMG - voluntarily agreed to be inspected by the PCAOB before they registered. The inspections are under way now.

"I think that is a very positive signal," McDonough said. "They did not have to be inspected by PCAOB under the Sarbanes-Oxley Act. Our inspections so far are going well."

Next year, the oversight board is scheduled to inspect the eight accounting firms that audit more than 100 public companies. The board will conduct inspections of those firms once a year. It also will inspect small accounting firms that have public companies as clients once every three years.

"These inspections are very intrusive, demanding, and we want to really find out if the firms are doing what they say they are doing and what they should be doing under the statute," McDonough said.

He believes the board has plenty of muscle to make a difference. If accounting firms or executives don't comply with its rules, the board can launch investigations, fine firms up to $15 million and bar individuals and companies from the industry.

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