(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

SEC Acting Chief Accountant Sees Major Issues for PCAOB

Noting that the Public Company Accounting Oversight Board has undertaken the task of restoring confidence in the independent audit, the SEC's acting chief accountant, Jackson Day, detailed a number of critical issues the board will have to deal with in the coming months. In remarks at the Baruch College Conference on Financial Reporting, Mr. Day said that the board will have to resolve the gap between investors' expectations and auditors' professional requirements. In addition, the PCAOB must determine the "who, what, when, where and how" of inspecting registered accounting firms. He also emphasized that the PCAOB is challenged to resolve the issues related to foreign audit firms and the foreign affiliates of U.S. audit firms.

The chief accountant pledged that the SEC will work with the PCAOB to ensure it carries out its mission effectively and efficiently so that these critical issues can be addressed in a meaningful manner. The oversight board has a distinct advantage over the infrastructure that previously existed, he noted, in that it is independent in fact and appearance and that inspection, discipline and audit standard setting all reside in one place.

With regard to the implementation of the Sarbanes-Oxley Act, the chief accountant said that the staff is actively working on the final rule implementing Section 404 on internal control reporting and hopes to make a recommendation to the Commission soon. After that, he noted, the SEC will essentially be done with rulemaking, which Mr. Day described as phase one. Implementation will then have to be monitored and, if necessary, interpretative guidance provided. Further, he believes that the process is iterative and may require a review in two or three years to see how everything is working. Noting that adjustments may have to be made, Mr. Day declared that regulatory vigilance and flexibility are key to the success of all of these reforms.

Finally, Mr. Day remarked that international convergence is occurring, citing the intention of the European Union to require the use of international accounting standards by 2005. But in his view the standard-setting process now underway may be the easiest element of international convergence to make happen. It is the other elements of the global financial reporting infrastructure that need at least equal focus, he continued, including high quality auditing and auditing standards, effective oversight of standard setters and auditors, independence of auditors, and ethics and competence on the part of auditors.