PCAOB starts getting the job done.

Wonder what actually is the job of the Public Company Accounting Oversight Board (PCAOB) that was formed as a result of The Sarbanes-Oxley Act of 2002? At a recent session in New York, PCAOB Special Counsel Mary M. Sjoquist presented an overview of the board's mission, goals and current activities.

The American Stock Exchange (AMEX) was host to "After Sarbanes-Oxley: Communicating Transparency," a briefing that was jointly sponsored by the Corporate Communication Institute at Fairleigh Dickinson University and FEI. Following the main event--the PCAOB overview--was a panel discussion with FEI Chairman H. Stephen Grace, Jr. (also president of H.S. Grace & Co. and Grace & Co. Consultancy Inc.) and Steven T. Sabatini, senior vice president and CFO of USB Holding Inc. and Union State Bank, and a director of the company.

The speakers were introduced by AMEX Vice President Bruce Poignant and Michael B. Goodman, Director, Corporate Communications Institute of Fairleigh Dickinson.

Sjoquist described her organization as the "new auditing watchdog" that was given a big bark by Congress--although, she added, many say its powers also give it a "big bite." Its broad purpose is to "protect investors by improving the accuracy and reliability of audited financial statements," and the goal of accurate and reliable financial statements is, of course, to improve the transparency of financial disclosures.

Targeting her introductory comments to the session's focus--communicating transparency--she said two primary aspects of transparency include good disclosure and a significantly improved corporate culture. She posed several questions: Could Enron have occurred if the post-Sarbanes-Oxley requirements regarding audit committees had been in place? Could HealthSouth have happened if there had been board-mandated separation of the chairman and CEO positions, and whistle-blower provisions and protections? Would Waste Management have been as devastating if Arthur Andersen and management had not been so closely intertwined?

"I would like to think that the answers to these questions would be in the negative," said Sjoquist. Sarbanes-Oxley has concentrated the minds in the executive suite and the boardroom on greater and more transparent financial disclosure, on better corporate governance throughout the organization and on new relationships with accounting firms.

Also, she argued that while Sarbanes-Oxley provided the impetus for these initiatives, the pressure to do a better job has also come from several other sources, among them:

* Lawyers and auditors (both with more clout with clients) are taking much tougher stances.

* Investors are using their clout to devalue company stock where the accounting does not appear to be transparent.

* Regulators. With increased funding, the Securities and Exchange Commission has ramped up its expectations, and the PCAOB is up and running and has its registration system operational.

* Insurance costs (particularly for directors and officers coverage) are proving to be a strong motivator for governance improvements.

* Auditors are carefully screening current and prospective clients.

* More accurate corporate reporting. In the five months after Sarbanes-Oxley's enactment, the 185 companies submitting financial restatements was disproportionately higher than the 145 during the seven months prior to passage, and significantly higher than in similar periods in 2000 and 2001.

She mentioned certain momentous changes coming from corporate America--some going beyond the requirements of Sarbanes-Oxley and the SEC rules. For example, Microsoft Corp.'s move to expense options, a move some say will make financial statements clearer. In addition, there's Grant Thornton LLP's announcement that it will not enter engagements to document internal controls, "notwithstanding the fact that there currently is no out-and-out prohibition on an auditor providing such services." Also, MCI's (former WorldCom Inc.) board of directors announced that it had adopted the provisions of the so-called Breeden report that went way beyond Sarbanes-Oxley's rules and requirements.

ROLE OF PCAOB

"The PCAOB has been given rather significant powers that are subject to SEC oversight," said Sjoquist. Overall, the board's mission is overseeing the audit of public companies that are subject to securities laws and related matters, in order to protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit reports for companies whose securities are sold to and held by and for public investors.

PCAOB will accomplish its mission, she said, by "replacing, superceding and supplanting 60 years of self-regulation and standard-setting by public accounting firms." Needless to say, she added, this is both a major change and an awesome responsibility. To do its job, PCAOB expects to have 200 employees by year-end and eventually 300--most of whom will be inspectors, Now, it has about 80 full time and 30 temporary employees,

The board's responsibilities fall into four categories: register, inspect, investigate and set standards. Some expansion of each category follows:

1. Register public accounting firms. This is a new, federal requirement necessary for any accounting firm to audit a public company. In essence, Sarbanes-Oxley replaces the term "public" accounting firm in the U.S. securities laws with the term "registered" accounting firm. Firms apply for registration and supply certain information; the PCAOB has 45 days to determine a firm's qualifications for registration. The firms must pay fees based on the number of public company clients they prepare audits for; the fees range from $250 for the smallest to $390,000 for the largest firms.

Foreign firms also must register, and have been given some "slack," such as a six-month delay to apply (until April 2004) and exclusion from providing certain information that would violate their home country laws.

2. Conduct inspections of registered firms. This practice of basically auditing the auditors replaces the old peer-review system, which Sjoquist said "never flunked a single auditor, and which even respected auditors considered a sham." The new system, she argued, is "more potent, if for no other reason than it is independent of the profession." And, she added, it is stronger in other ways also. For example, PCAOB will be able to examine audits under litigation, something that was not possible under the former peer-review system. Peer review will continue, however, as many states still require this process for their CPAs.

The frequency of inspections is based on the size of the firm (annually for those that audit over 100 public companies; one every three years for firms auditing fewer than 100 public companies), and special inspections will be conducted based on risk assessments and other information, such as by request from the SEC or Department of Justice.

Attention will be given to the culture of the firms, including "tone at/from the top," compensation policies (what are the incentives for finding problems?), independence/non-audit services, client acceptance and retention policies and firms' internal inspection programs.

PCAOB inspectors are CPAs with recent experience auditing public companies. PCAOB is to prepare a report on each inspection that will be released to the public 12 months after completion, giving firms time to fix deficiencies that are uncovered.

But, Sjoquist said, "this does not mean that during the 12-month period that others--such as the firm itself--cannot make the report public." A public company may want to know whether or not its auditor has been inspected, and the results.

3. Conduct investigations, enforcement and sanctions. This area, said Sjoquist, is "where the gloves come off--when the board uncovers what appears to be a violation of the rules (or securities laws, SEC rules or professional standards)." In such cases, PCAOB is authorized to conduct thorough investigations, the results of which are the basis for formal disciplinary proceedings.

If a violation is established, a range of sanctions may be imposed on firms and those individuals involved--the biggest sanction of all being revoking a firm's registration. Individuals can be banned from participating in audits of public companies, and lesser sanctions include such disciplinary action as monetary fines, requirements to retain consultants and attain additional professional education.

4. Professional standards and standard setting. The board's "unambiguous authority" extends to setting auditing (not accounting) standards, plus standards related to auditor independence, ethics and quality control, explained Sjoquist.

Another change stemming from Sarbanes-Oxley is that the auditing profession--through the AICPA, its professional trade association--will no longer issue authoritative standards for audits of public companies. This task will be the responsibility of PCAOB, which intends to seek help from advisory groups and its own staff.

Sjoquist said Sarbanes-Oxley has attempted to draw the line on corporate governance and the auditing of financial reports of public companies. But the only way it will achieve its goal is if "public companies and accounting firms change their cultures and remember to act in the public interest."