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PCAOB Member Discusses Board Agenda

The Public Company Accounting Oversight Board will probably "take a couple of years to get fully up to speed." The board is currently working on dealing with registration standards, foreign issuer registration and concerns for prior criminal activity, according to board member Daniel L. Goelzer. Mr. Goelzer, a former SEC general counsel, made his remarks at a recent panel sponsored by American Law Institute-American Bar Association.

Mr. Goelzer noted that the PCAOB has four main tasks, including 1) the registration of public accounting firms, 2) inspections of registered firms, 3) the establishment of auditor standards for public companies and 4) enforcement. He likened the PCAOB to a "subsidiary" of the SEC. While the PCAOB is an independent body, its rulemaking must be approved by the SEC. Furthermore, its disciplinary actions can be appealed to the SEC and SEC decisions can also be appealed to the federal court system.

When authorizing the PCAOB in the Sarbanes-Oxley Act, Congress did not provide clear registration standards and left the details of registration to the PCAOB. The board has decided not to have provisional registration, where it would provide temporary registration to a firm that it has questions about and that it does not want to fully register. Instead, he expects that it will be very rare for the PCAOB to deny a registration.

The board will address concerns through the inspection process rather than through registration. Firms with more than 100 public company clients must have annual inspections and all other PCAOB-registered firms must have inspections every three years. Reports on the concerns that the board has are made private for a year, to give the auditor a chance to address them, and then can be made public if the firm has failed to address the concern.

U.S. firms must be registered by October 22, 2003, with foreign firms six months later. The PCAOB has 45 days to respond to a registration, so Mr. Goelzer said firms should get their registrations in as soon as possible.

With regard to auditing standards, the PCAOB approved a proposal in April 2003 but is still waiting for the SEC to approve the matter as well. These standards are based on existing standards and will be reviewed over time, Mr. Goelzer said.

As for the inspection process, he said the staff will conduct both informal and formal inspections, with the latter being authorized by the full board. The PCAOB has the authority to subpoena audit firms, and while it does not have the authority to demand documents from audit firm clients it can request that the SEC subpoena them. Mr. Goelzer said he believes that most firms will prefer to voluntarily share information with the PCAOB than to have to deal with a potential SEC request.

The PCAOB is funded primarily by fees based on the market capitalization of public companies. Of the $68 million for this year's budget, $2 million to $3 million will come from audit registration fees, with the rest from public companies. A small number of audit firms will likely choose not to register with the PCAOB, Mr. Goelzer said, which would prohibit them from auditing public companies. In addition, many foreign firms will not have to register, but they will still be treated as an "affiliated person."

Registration forms can be very lengthy, with thousands of pages, he noted. Four companies will pay more than $1 million annually to the PCAOB, but about 4,000 firms, approximately half of PCAOB-registered firms, will pay less than $1,000 eachyear. He noted that one out of eight will only pay the $100 minimum. While a company with a delinquent PCAOB bill cannot get a qualified audit opinion, the SEC has granted one-time relief from on this requirement.

The PCAOB is still working on how to deal with criminal proceedings that have been made against auditors and associated persons of auditors. The PCAOB has decided that minor criminal matters such as traffic offenses do not have an impact on auditing work, and that other non-financial crimes also have no effect, but deciding how to treat crimes is still a work-in-progress by the board. The SEC has dealt with broker-dealer applications from prisoners, and Mr. Goelzer expects the board to seek guidance by studying how the SEC has handled the issue in the past.