Regulation of the profession after Sarbanes-Oxley

By Carol W. Kirwan, CPA
MACPA Director of Technical Services and Regulatory Affairs

On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act, which significantly changes the regulation of the CPA profession. The new act establishes a Public Company Accounting Oversight Board made up of a majority of non-CPA members. The PCAOB will take over a number of functions that have traditionally been performed by the AICPA as part of the self-regulation of the profession.

As SEC Chairman Harvey Pitt said, the law "sends a loud and clear message that the era of self-regulation of the accounting profession is over."

However, three months after the bill was rushed into law, we do not know how it will be carried out. In fact, the members of the PCAOB have not been identified. In a recent presentation to state regulators, SEC Associate Chief Accountant Samuel Burke said there were more than 450 candidates submitted for the five-member board. The SEC had hoped to have the qualifications established by Oct. 28, 2002.

By mid-November, the SEC's rules for implementing the Sarbanes-Oxley Act will be released. Final rule-making is required 180 days after the law was enacted — by the end of January 2003. The PCAOB should be operational by April 2003. Larger firms that audit SEC clients will be expected to register promptly and be subject to reviews by the end of 2003.

The PCAOB will operate independent of the accounting profession with funding from registrants. It has the authority to establish by rule audit and attest, independence and quality control standards. It will assess the degree of compliance with standards of each firm and may conduct investigations and instigate proceedings or disciplinary actions.

It has not been determined how the PCAOB will carry out the quality monitoring process over CPA firms that audit SEC companies. At this point, the peer reviews for those firms continue to be administered by the SEC Practice Section of the AICPA and performed by their peers in public practice. It has not been determined if SEC staff will perform the inspections for the PCAOB or if that task will be outsourced. It is expected to be similar to the peer review process that exists today.

Similarly, the Professional Ethics Division of the AICPA currently investigates ethics violations and the Joint Trial Board, which is made up of volunteer members of the profession, makes decisions. It is unclear how the PCAOB will carry out their disciplinary functions.

Finally, the Sarbanes-Oxley Act grants the PCAOB the authority to develop auditing standards for publicly traded companies. The Auditing Standards Board, made up of volunteer members of the profession, currently develops auditing standards. How this public member-dominated oversight board will develop auditing standards for CPAs is of great concern to the profession.

Many other aspects of Sarbanes-Oxley remain to be clarified, including the definition of "legal or expert" services that auditors are prohibited from providing under the new act. There is concern that this definition may include providing tax planning services or representing clients before the IRS. In his address to state regulators, Mr. Burke did indicate that the guiding principles used to evaluate the impairment of independence will be if the firm:

has a mutual or conflicting interest with the audit client;
audits the firm's own work;
acts as management or an employee of the audit client;
acts as an advocate of the audit client.

These criteria will be used in determining what expert services cannot be provided.

The greatest uncertainty about the Sarbanes-Oxley Act that causes a great deal of concern to CPAs is the "cascade effect" the new act may have on non-SEC companies. We have already seen a rippling effect in many states that are adopting laws containing provisions similar to the Sarbanes-Oxley Act. In some cases, the state auditor or attorney general has issued policies that prohibit auditors of state agencies from performing non-audit services for those clients. The real danger is that anyone who regulates entities that CPAs audit may adopt restrictive provisions similar to the Sarbanes-Oxley Act. Section 209 of the act advises regulators to consider what provisions of the act would be appropriate for small businesses and the CPAs that audit them.

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