April 1999 Issue


The Public Oversight Board (POB), chaired by A.A. Sommer, Jr., recently issued its 1998 annual report. In many ways the report takes a "state of the profession" tone as part of the POB's role in upholding the integrity of the financial reporting process for public companies. Very evident in this year's report were SEC Chair Arthur Levitt's concerns as expressed in his September 28, 1998, speech, "The Numbers Game" (reprinted in full in the December 1998 CPA Journal).

Levitt spoke of an unhealthy trend in financial reporting toward more and more "earnings management," motivated in many cases by companies seeking to meet analysts' projections. Levitt urged private sector solutions, and the POB reports its part of the response.

Specifically, the SEC asked the POB to form a group toward its major constituents to review the way audits are performed and assess the impact of recent trends on the public interest. In particular, the SEC is concerned whether the "risk-based approach" has in any way eroded audit quality. In response, the POB formed the Panel on Audit Effectiveness, to be chaired by Shaun F. O'Malley, former chair of Price Waterhouse, and hired a three-person staff of retired partners, two of whom are former Auditing Standards Board members and the other a member of the SECPS Quality Control Inquiry Committee (QCIC). The panel itself is made up of lawyers, former securities regulators, and academics.

Other matters discussed in the POB report were--

  • the decision of an SEC proceeding, affirmed by the Eighth Circuit Court of Appeals, that would significantly expand the role of the concurring partner in SEC engagements. The POB does not agree with the decision and pointed to a task force that has been formed by SECPS to develop an appropriate set of guidelines for these reviews.

  • quality control issues arising from the practice of public accounting in alternative practice structures. The POB believes controls are needed to assure that independence standards are adhered to by the consolidator and the allied CPA firm.

  • the recent change to SEC rule 102(e) relating to disciplinary actions against accountants for negligence. The POB feels the rule is "excessively stringent," but did file a formal comment. It discussed its concerns with SEC officials.

  • the formation of the Independence Standards Board. The POB supports the work of the ISB and has informed the ISB that it will expend whatever energies are necessary to assist in its important undertaking to develop a conceptual framework.

    The POB also discussed comprehensively the work of the QCIC process in the report. The QCIC is charged with determining whether allegations of audit failure against SECPS firms involving SEC registrants indicate a need for those firms to take corrective actions to strengthen their internal quality control processes or to address personnel problems. During the past year, QCIC identified four issues in six cases where it believed the profession would benefit with additional guidance material. *

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