Preliminary Recommendations Of Treasury ACAP Subcommittees

March 13, 2008

FEI Summary

On March 13, 2009, the U.S. Treasury Department’s Advisory Committee on the Auditing Profession (ACAP) met to discuss the preliminary recommendations developed by its 3 subcommittees on human capital, firm structure and finances, and concentration and competition. The objective of the meeting was to get input from the full committee on the recommendations of its subcommittees.

Summarized below are the preliminary recommendations presented to the full committee, detailed further in ACAPs report:  http://www.treas.gov/offices/domestic-finance/acap/agendas/03132008Agenda-MeetingMaterials.pdf .

Subcommittee on Human Capital

The Subcommittee on Human Capital submits the following preliminary recommendations to the

Advisory Committee on the Auditing Profession for its consideration:

1. Implement market-driven, dynamic curricula and content for accounting students that continuously evolve to meet the needs of the auditing profession and help prepare new entrants to the profession to perform high quality audits.
1. Regularly update the accounting certification exams to reflect changes in the accountancy profession, its relevant standards, and the skills and knowledge required to serve increasingly global capital markets.
2. Reflect real world changes in the business environment more rapidly in teaching materials.
3. Require that schools build into accounting curricula current market developments.

2. Ensure a sufficiently robust supply of qualified financial accounting, audit, and tax faculty to meet demand for the future and help prepare new entrants to the profession to perform high quality audits.
1. Increase the supply of accounting faculty through public and private funding as well as through raising the number of professionally qualified faculty that teach on campuses.
2. Emphasize the utility and effectiveness of cross-sabbaticals.
3. Create tax incentives for private sector institutions to fund both accounting faculty and faculty research, to provide practice materials for academic research and for participation of professionals in behavioral and field study projects, and to encourage practicing accountants to pursue careers as academically and professionally qualified faculty.

3. Improve the representation and retention of minorities in the auditing profession so as to enrich the pool of human capital in the profession.
1. Recruit minorities into the auditing profession from other disciplines and careers.
2. Emphasize the role of community colleges in the recruitment of minorities into the auditing profession.
3. Emphasize the utility and effectiveness of cross-sabbaticals with Historically Black Colleges and Universities [HBCU’s].
4. Increase the numbers of minority accounting doctorates through focused efforts.

4. Develop and maintain consistent demographic and higher education program profile data sets.

Subcommittee on Firm Structure and Finances

The Subcommittee on Firm Structure and Finances submits the following preliminary recommendations to the Advisory Committee on the Auditing Profession for its consideration:

1. Urge the creation of a center (preferably under the sponsorship of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and/or the Center for Audit Quality (CAQ)) for auditing firms and other market participants to share fraud prevention and detection experiences, and further, encourage the auditing firms and other market participants to develop best practices regarding fraud prevention and detection and clarify communications with the public regarding auditor responsibility relating to fraud detection, all in order to strengthen the audit process and improve the likelihood of preventing and detecting fraud.
1. Urge the creation of a center (preferably under the sponsorship of COSO and/or CAQ) to facilitate auditing firms’ and other market participants’ sharing of fraud prevention and detection experiences, practices, and data and innovation in fraud prevention and detection methodologies and technologies, commission research and other fact-finding regarding fraud prevention and detection, and further, have the auditing firms, investors, other financial statement users, public companies, and academics develop, in consultation with the PCAOB, the Securities and Exchange Commission (SEC), international regulators, and the National Association of State Boards of Accountancy (NASBA), best practices regarding fraud prevention and detection.
2. Urge that the PCAOB and the SEC clarify in the auditor’s report the auditor’s role in detecting fraud under current auditing standards and further that the PCAOB review these standards.

2. 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 auditing profession and financial reporting.
1. Institute the following incentive mechanism to encourage the states to substantially adopt the mobility provisions of the Uniform Accountancy Act, Fifth Edition (UAA): Congress should pass a federal provision requiring the adoption of the mobility provisions of the UAA for those states failing to adopt these provisions of the UAA by December 31, 2010.
2. Require regular and formal roundtable meetings of the PCAOB, the SEC, the Department of Justice, state boards of accountancy, and state attorneys general, in a cooperative effort to improve regulatory effectiveness and reduce the incidence of duplicative and potentially inconsistent enforcement regimes.
3. Urge the states to create greater financial and operational independence of their state boards of accountancy.

3. Urge the PCAOB and the SEC, in consultation with other federal and state regulators, auditing firms, investors, other financial statement users, and public companies, to analyze, explore, and enable, as appropriate, the possibility and feasibility of firms appointing independent members with full voting power to firm boards and/or advisory boards with meaningful governance responsibilities to improve governance and transparency at auditing firms.

4. 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.

[The report added:]

“Observation: Further Subcommittee consideration of transparency and liability issues.

Subcommittee on Concentration and Competition

The Subcommittee on Concentration and Competition submits the following preliminary recommendations to the Advisory Committee on the Auditing Profession for its consideration:

1. Promote the growth of smaller auditing firms consistent with the overall policy goal of promoting audit quality. Because smaller firms are likely to become significant competitors in the market for large company audits only in the long term, the Subcommittee recognizes that Recommendation 2 will be a higher priority in the near term.
1. Require disclosure by public companies in their proxy reports of any provisions in material agreements with third parties limiting auditor choice.

2. Create a mechanism for the preservation and rehabilitation of troubled larger public company auditing firms.
1. Broadly monitor, through the Public Company Accounting Oversight Board (PCAOB) authority over registered firms, potential sources of catastrophic risk, which would threaten audit quality.
2. Establish a mechanism to assist in the preservation and rehabilitation of a troubled larger auditing firm. A first step would encourage larger auditing firms to adopt voluntarily a contingent streamlined internal governance mechanism that could be triggered in the event of threatening circumstances. If the governance mechanism failed to stabilize the firm, a second step would permit the Securities and Exchange Commission (SEC) to appoint a court-approved trustee to seek to preserve and rehabilitate the firm by addressing the threatening situation, or if such a step were unsuccessful, to pursue a reorganization.

3. Promote the understanding of and compliance with auditor independence requirements among auditors, investors, public companies, audit committees, and boards of directors, in order to maintain investor confidence in the quality of audit processes and audits.
1. Compile the SEC and PCAOB independence requirements into a single document and make this document website accessible. The American Institute of Certified Public Accountants (AICPA) and states should clarify and prominently note that differences exist between their standards and those of the SEC and the PCAOB and indicate, at each place in their standards where differences exist, that additional SEC and PCAOB independence requirements applicable to public company auditors may supersede or supplement the stated requirements. This compilation should not require rulemaking by either the SEC or the PCAOB because it assembles existing rules.
2. Develop training materials to help foster and maintain the application of healthy professional skepticism with respect to issues of independence among public company auditors, and inspect auditing firms, through the PCAOB inspection process, for independence training of partners and mid-career professionals.

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

5. Enhance continuously regulatory collaboration and coordination between the PCAOB and its foreign counterparts, consistent with the PCAOB mission of promoting quality audits of public companies in the United States.

Prepared March 13, 2008 by Edith Orenstein, Director, Technical Policy Analysis, Financial Executives International (FEI) as excerpted from Treasury ACAP’s March 13, 2008 report of preliminary recommendations of its subcommittees.