Auditing Advisory Committee Approves Recommendations

The Department of the Treasury’s Advisory Committee on the Auditing Profession voted to approve a slate of more than 30 recommendations for enhancing the profession’s sustainability. The committee’s work marked the first major study of the public company auditing profession since the passage of the Sarbanes-Oxley Act in 2002. AICPA President and CEO Barry Melancon was a member of the advisory committee, along with 20 other business and academic thought leaders.

The recommendations were contained in three sections. The human capital recommendations include:

n Implement market-driven curricula and content for accounting students.

n Improve the representation and retention of minorities in the auditing profession by, among other things, recruiting minorities from other disciplines and careers, and emphasizing the role of community colleges as a career starting point.

n Ensure a supply of qualified financial accounting, audit and tax faculty to meet demand for the future.

n Develop and maintain consistent demographic and higher education program profile data.

n Encourage the AICPA and the American Accounting Association to form a commission to provide a study of the possible future structure of higher education for the accounting profession.

The recommendations on firm structure and finances include:

n Urge the PCAOB and the SEC, in conjunction with other stakeholders, to explore the feasibility of firms appointing independent members with full voting power to firm boards and/or advisory boards to improve governance and transparency at public company auditing firms.

n Urge the SEC and Congress to provide for the PCAOB’s creation of a national center focused on fraud prevention and detection experiences, practices, methodologies and technologies and commissioning research and other fact-finding.

n Encourage greater regulatory cooperation and oversight of the public company auditing profession to improve the quality of the audit process and enhance confidence in the profession and financial reporting.That includes encouraging states to substantially adopt the mobility provisions of the Uniform Accountancy Act by stating that if states have failed to adopt the mobility provisions of the UAA by Dec. 31, 2010, Congress should pass a federal provision requiring those states to adopt these provisions.

n Urge the SEC to amend Form 8-K disclosure requirements to characterize appropriately and report every public company auditor change and to require auditing firms to notify the PCAOB of any premature engagement partner changes on public company audit clients.

n Urge the PCAOB to undertake a standard-setting initiative to consider improvements to the auditor’s standard reporting model.

n Urge the PCAOB to undertake a standard-setting initiative to consider mandating the engagement partner’s signature on the auditor’s report.

n Urge the PCAOB to require that, beginning in 2010, larger auditing firms produce a public annual report incorporating information required by the EU’s Eighth Directive, Article 40 Transparency Report deemed appropriate by the PCAOB and key indicators of audit quality and effectiveness as determined by the PCAOB. Further, urge the PCAOB to require that, beginning in 2011, the larger auditing firms file with the PCAOB on a confidential basis audited financial statements.

Recommendation on firm concentration and competition include:

n Promote the growth of smaller auditing firms. The recommendation includes requiring disclosure by public companies in proxy reports of any provisions in material agreements with third parties limiting auditor choice.

n Monitor potential sources of catastrophic risk faced by public company auditing firms and create a mechanism for the preservation and rehabilitation of troubled larger public company auditing firms.

n Recommend the PCAOB, in consultation with other stakeholders, determine the feasibility of developing key indicators of audit quality and effectiveness and requiring auditing firms to publicly disclose these indicators. Assuming development and disclosure of indicators of audit quality are feasible; require the PCAOB to monitor these indicators.

n Promote compliance with auditor independence requirements by, among other steps, compiling the SEC and PCAOB independence requirements into one document and making it accessible online.

n Adopt annual shareholder ratification of public company auditors by all public companies.

n Enhance regulatory collaboration and coordination between the PCAOB and its foreign counterparts.

More information about the recommendationsis available at www.treas.gov/offices/domestic-finance/acap/.