Reader calls for alternatives to POB report.

Several months ago, the American Institute of Certified Public Accountants' Public Oversight Board published a report on important issues facing the accounting profession. The POB report advocates tort reform, mandatory management reports on internal controls, mandatory audits of management's report and expanded roles for boards of directors' audit committees. The report also calls for additional requirements for regulatory and law-enforcement agencies and expanded requirements for peer review and quality control in external-auditor functions.

In June, the AICPA formally endorsed the proposed reforms, and as we go to press, the Senate Banking Committee is conducting hearings to address some of the issues raised in the POB report. Financial Executives Institute is particularly concerned about the POB's recommendation to broaden the public accountant's scope to include a separate report on internal controls. FEI President Norm Roy believes this measure would impose undue burdens and unnecessary costs on companies and stated the Institute's position in a recent Alert, calling for comments to be directed to FEI's Committee on Corporate Reporting.

One thought-provoking response to the invitation came from William W. Weber, audit supervisor at Diamond Shamrock in San Antonio and an AICPA member, who voiced his support for FEI's position. Here Weber shares some of his suggestions (edited for clarity) for alternatives to the POB recommendation.

The AICPA recommendation has very little merit. If made into law, this procedure would provide minimal additional comfort to the investing public, increase the litigation exposure to the public accountant in future fraud cases and increase a company's audit expense, with little added benefit. The public would be better served if the requirements of Statement of Auditing Standards 65 were expanded or made into law.

SAS 65 requires the public accountant to become familiar with the scope and expertise of an entity's internal-audit function as part of the evaluation on internal control. Since evaluating and recommending improvements in the entity's system of internal control is the primary purpose of internal auditing, the reporting responsibility should be placed there. The public accountant could then fulfill his obligation to the public by attesting to the independent reporting relationship, adequacy of the audit work, training and certification of the internal audit staff, and accuracy of the internal control report produced. I believe this is a better proposal for the following reasons:

* The internal-audit staff has a deeper understanding of the entity's internal-control structure and business environment since it focuses strictly on one company. This means the people reporting on the system are those who know it best.

* Internal auditors are more sensitive to fraud issues and signals. Most members of professional organizations, such as the Association for Certified Fraud Examiners, who have accounting backgrounds are internal auditors rather than public accountants, unless their firm's specialty is litigation support or forensic accounting.

* Generating the report through the internal-auditing department, with the public accountant's endorsement, requires little, if any, additional audit work on the part of the public accountants. This helps control audit costs and allows the entity to be more competitive in today's fast-paced global economy.

* If internal audit produces the internal-control report, it still maintains an independent reporting relationship. All professional governing bodies, such as the Institute of Internal Auditors and the Association for Certified Fraud Examiners, have well-developed "whistle-blowing" requirements in their professional standards. If necessary, legislate the requirement for an internal-audit department and these whistle-blowing standards.

The public accounting profession must be protected from excessive litigation, and the investing public should be able to rely on published audited financial statements. However, the current AICPA proposal does little but increase the public accountant's opportunities for additional revenue.