A growing number of accounting firms register with the Public
Company Accounting Oversight Board, the U.S. body that polices
auditors, but are never actually inspected, PCAOB member Jeanette
Franzel said in a recent interview.
Some of these firms tout their PCAOB registration on their websites
to drum up business.
This raises concerns for investors, Franzel said, because
registration with the board may give customers a false impression
that every audit firm is subject to strict supervision.
The PCAOB has limited jurisdiction over the kinds of audits it can
regulate, but any firm can pay a fee to register with the board.
Annual fees are as low as $500.
"There are legitimate reasons for firms to be registered with the
PCAOB even if they are not currently performing work that is subject
to our oversight," Franzel said.
"But I become concerned when I see firms using their PCAOB
registration as a marketing tool to tout their audit quality when
their only interaction with the PCAOB has been to file registration
forms and pay annual fees."
Auditors are important gatekeepers who work to keep financial
statements accurate and fair.
While auditors are not specifically charged with rooting out fraud,
their independent reviews can help ensure that shareholders are not
misled by company management or that unscrupulous brokers are not
misappropriating customers' money.
Lawmakers and regulators have put a number of measures in place to
try to root out bad auditing practices after accountants failed to
detect major problems at public companies such as Enron and Worldcom
and at broker-dealers run by swindlers like Bernard Madoff.
But federal law only permits the PCAOB to inspect and regulate
auditors that handle public companies and securities brokers.
It does not give the board the power to review firms that audit the
books in other areas, such as futures brokers, pension funds,
healthcare plan accounts, hedge funds or private companies in
At the end of 2012, a total of 853 accounting firms out of 2,363
registered with the PCAOB had not performed audits for a public
company or a broker-dealer.
Some of these firms still point to registration as proof of their
One Texas-based firm's website, for instance, tells clients they can
trust the quality of its audits because it is PCAOB-registered.
Another firm in Australia makes similar claims, saying such
registration serves as a "measure of the strength" of its audit
"The fact that a firm may be registered is meaningless," said Susan
Coffey, a senior vice president with the American Institute of
Certified Public Accountants, an association that sets standards and
operates an industry peer review program that strives to fill the
gaps in the PCAOB's oversight regime.
"If you are going to be registered, you should be inspected," Coffey
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LOOKING FOR A FIX
Franzel said she was not yet pushing a specific remedy. For now, she
is raising awareness of the issue by giving speeches and speaking
with interested stakeholders.
But the problems have increased in recent years as federal and state
regulators adopted a variety of rules that require PCAOB-registered
auditors to review the financial statements for entities they
regulate even though those audits are not subject to the PCAOB's
These rules all aim to bolster audit quality, with the idea being
that if one area of an audit firm's business is sound, other parts
probably are, too.
The rules adopted so far vary. On one end of the spectrum is a
measure by the Office of Personnel Management which merely requires
audits of federal employee healthcare benefit plan accounts to be
performed by registered firms.
A Securities and Exchange Commission rule goes a step further,
requiring auditors of investment advisers to be registered and
subject to regular PCAOB inspection.
Most recently, the Commodity Futures Trading Commission adopted the
toughest rule to date as a response to audit failures by a one-woman
shop to detect a 20-year fraud perpetrated by Peregrine Financial
The CFTC's new rule requires auditors of futures brokers not only to
be PCAOB-registered, but also to have undergone an inspection. In
addition, the audits must be done using PCAOB standards, and
inspection results must be shared with a futures broker's governing
The CFTC's rule is "better" than some of the others, said Daniel
Goelzer, a former acting chairman of the PCAOB who now works at
Baker McKenzie LLP.
"If you are talking about a one-man firm, that is one thing. But if
you are talking about a larger firm, you would have a whole
different ... group of people working on public company audits" than
those working on futures broker audits.
The PCAOB's Franzel said that while the various rules were an
"interesting experiment," the public still needed to know what
"Regulators, the public and investors should keep in mind ... that
our inspections and enforcement programs represent critical
components of PCAOB oversight," she said. "These other regulators
and their constituencies do not have the full protections offered by
our oversight program."
(Reporting by Sarah N. Lynch; editing by Karey Van Hall and Lisa Von
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