a

GAO

United States General Accounting Office

Report to the Ranking Minority Member, 

Committee on Energy and Commerce, 

House of Representatives

May 2002 THE ACCOUNTING 

PROFESSION

Status of Panel on 

Audit Effectiveness 

Recommendations to 

Enhance the 

Self-Regulatory 

System

GAO-02-411
Page i GAO-02-411 Accounting Profession

Contents

Letter 1

Results in Brief 4

Background 5

Objectives, Scope, and Methodology 10

POB’s Oversight Authority, Independence, and Leadership Role 12

Peer Review Program 18

Accounting Profession’s Disciplinary Process 22

Observations 28

Agency Comments and Our Evaluation 31

Appendixes

Appendix I: POB Charter Provisions Responding to the Panel on Audit 

Effectiveness’ Recommendations 36

Appendix II: Actions Responding to Panel on Audit Effectivesness’ 

Recommendations 39

Appendix III: Comments From the Public Oversight Board 63

Appendix IV: Comments From the American Institute of Certified Public 

Accountants 69

Appendix V: Comments From the National Association of State Boards of 

Accountancy 72

Appendix VI: Accounting Profession: Oversight, Auditor Independence, 

and Financial Reporting Issues 75
Contents

Page ii GAO-02-411 Accounting Profession

Abbreviations

AAER Accounting and Auditing Enforcement Release

AICPA American Institute of Certified Public Accountants

ASB Auditing Standards Board

CART Committee Appointed Review Team

CPA Certified Public Accountant

FAF Financial Accounting Foundation

FASB Financial Accounting Standards Board

GAAP generally accepted accounting principles

GAAS generally accepted auditing standards

ISB Independence Standards Board

NASBA National Association of State Boards of Accountancy

PEEC Professional Ethics Executive Committee

PITF Professional Issues Task Force

POB Public Oversight Board

PRC Peer Review Committee

QCIC Quality Control Inquiry Committee

SEC Securities and Exchange Commission

SECPS SEC Practice Section

SOM Summary Observation Memorandum

SQCS Statements on Quality Control Standards
Page 1 GAO-02-411 Accounting Profession

United States General Accounting Office

Washington, D.C. 20548

Comptroller General A of the United States

May 17, 2002 Letr

The Honorable John D. Dingell

Ranking Minority Member

Committee on Energy and Commerce

House of Representatives

Dear Mr. Dingell:

This report responds to your request concerning the status of 

recommendations made by the Panel on Audit Effectiveness1

 (Panel) to 

enhance the accounting profession’s self-regulatory system. The 

accounting profession maintains a voluntary, self-regulatory system 

through the American Institute of Certified Public Accountants (AICPA) 

that includes establishing professional standards, monitoring compliance 

with professional standards, disciplining members for improper acts and 

substandard performance, and conducting oversight of the system. You 

expressed concern about the effectiveness of the self-regulatory system 

and whether the Panel’s recommendations would be implemented fully. 

Specifically, you requested that we (1) determine the status of the Panel’s 

recommendations to address limitations of the self-regulatory system, and 

(2) identify any gaps in actions taken to implement the Panel’s 

recommendations and their likely impact on overcoming the limitations of 

the self-regulatory system identified by the Panel.

The sudden failure of Enron Corporation, one of the nation’s largest 

corporations, has, among other things, led to severe criticism of virtually all 

areas of the nation’s financial reporting and auditing systems, which are 

fundamental to maintaining investor confidence in our capital markets. 

These areas include corporate governance, accounting standards and 

financial reporting, auditing, and regulation of the accounting profession 

and were beyond the scope of the Panel’s study. Accordingly, proposals to 

overhaul or, in some cases, replace the current self-regulatory system will 

benefit by consideration of proposals to improve the effectiveness of 

controls in these other areas. These interrelated areas should be addressed 

in a comprehensive and integrated manner, and any actions taken should 

be guided by the fundamental principles of having the right incentives for 

the key parties to do the right thing, adequate transparency to provide 

reasonable assurance that the right thing will be done, and full 

1 The Panel on Audit Effectiveness Report and Recommendations, August 31, 2000.
Page 2 GAO-02-411 Accounting Profession

accountability if the right thing is not done. Further, the components in the 

regulatory and corporate governance systems must proactively assess risks 

within the system that inhibit effectively protecting the public interest.

It is important to recognize that the Panel’s study and recommendations 

were directed at enhancing the accounting profession’s then-current selfregulatory system and, therefore, did not address alternative models of 

governing the accounting profession, the current financial reporting model, 

or various corporate governance issues.

On January 17, 2002, the Chairman of the Securities and Exchange 

Commission (SEC) outlined a proposed new regulatory structure to 

oversee the accounting profession. The SEC’s proposal provided for 

creating an oversight body that would include monitoring and discipline 

functions, have a majority of public members, and be funded through 

private sources, although no further details were announced.2

 The existing 

oversight body, the Public Oversight Board (POB), was critical of the SEC’s 

proposal and stated that it was not consulted about the proposal that the 

SEC evidently developed in consultation with the AICPA and the five 

largest accounting firms. On January 20, 2002, the POB passed a resolution 

of intent to terminate its existence no later than March 31, 2002.3

 In that 

respect, the SEC announced on March 19, 2002, that a Transition Oversight 

Staff, led by the POB’s executive director, will carry out oversight functions 

of the POB, including monitoring the status of implementing the Panel’s 

recommendations.4

 However, on April 2, 2002, the POB members voted to 

extend the POB through April 30, 2002,5

 to provide additional time solely to 

finalize certain POB administrative matters, including preparing a letter 

2

 Subsequently, on March 21, 2002, the Chairman of the SEC in his statement before the 

Senate Committee on Banking, Housing, and Urban Affairs provided additional details in a 

working proposal for creating a new private-sector, independent body, subject to SEC 

oversight, to regulate the accounting profession in the areas of quality control reviews and 

disciplinary powers.

3

 While the SEC proposal, including the lack of consultation with the POB on the proposal, 

was the precipitating factor in the decision of the POB to terminate its existence, other 

considerations played a role, as discussed in the POB Chairman’s statement before the 

Senate Committee on Banking, Housing, and Urban Affairs on March 19, 2002.

4

 The Transition Oversight Staff will carry out the work of the former POB through a 

memorandum of understanding signed by Transition Oversight Staff, the SEC, the AICPA, 

and the AICPA’s SEC Practice Section.

5

 This date was subsequently extended by 1 day to May 1, 2002.
Page 3 GAO-02-411 Accounting Profession

concerning transitioning for monitoring the implementation of the Panel’s 

recommendations, and to facilitate a more orderly transition.

Although the POB has terminated its existence, the Panel’s findings 

regarding limitations of the self-regulatory system and the status of actions 

to address those limitations should be instructive in not only considering 

the SEC’s proposal, but other proposals that may result from the many 

Enron related inquires. Accordingly, as you requested, we are reporting on 

the status of the Panel’s recommendations related to the accounting 

profession’s current self-regulatory system.

Regarding the broad range of issues highlighted through the Enron failure, 

we have recently issued other products to assist the Congress. We held a 

forum on corporate governance, transparency, and accountability in 

February 2002 to discuss the effectiveness of the systems of regulatory 

control as well as other related areas such as pensions.6

 Also, we testified 

before the Congress to further elaborate on these issues, including 

considering alternatives to the current self-regulatory system of the 

accounting profession.7

 In addition, we issued significant changes to the 

auditor independence requirements under Government Auditing 

Standards, which apply to audits of federal entities and funds.8

 While the 

new standard deals with a range of auditor independence issues, the most 

significant change relates to the rules associated with nonaudit or 

consulting services provided to clients. These revisions were considered 

for several years, as auditor independence has been a longstanding 

concern, and were not a response specifically to address the various 

auditor independence issues raised by the Enron failure. On May 3, 2002, at 

the request of the Chairman of the Senate Committee on Banking, Housing, 

and Urban Affairs, we submitted for the record our views regarding what 

steps the Congress should consider taking to strengthen oversight of the 

accounting profession, auditor independence, and selected financial 

6 Highlights of GAO’s Forum on Corporate Governance, Transparency, and Accountability 

(GAO-02-494SP, March 5, 2002).

7 Protecting the Public Interest: Selected Governance, Regulatory Oversight, Auditing, 

Accounting, and Financial Reporting Issues (GAO-02-483T, March 5, 2002), and Protecting 

the Public’s Interest: Considerations for Addressing Selected Regulatory Oversight, 

Auditing, Corporate Governance, and Financial Reporting Issues (GAO-02-601T, April 9, 

2002).

8 Government Auditing Standards: Amendment No.3, Independence (GAO-02-388G, 

January 2002).
Page 4 GAO-02-411 Accounting Profession

reporting matters. The letter containing our views is included as appendix 

VI to this report.

Results in Brief The Panel’s recommendations were made within the context of the existing 

self-regulatory system of the accounting profession. Implementing actions 

taken or in process have addressed many of the Panel’s recommendations. 

However, the Panel’s recommendations did not fully address the limitations 

of the self-regulatory system which the Panel identified in its report. Also, 

some of the Panel’s recommendations were either not accepted or are still 

under study. Additional experience is needed to evaluate the effectiveness 

of actions taken or planned; however, the overarching issues of a system 

that is fragmented, is not well coordinated, and has a disciplinary function 

that is widely perceived to be ineffective continue to exist.

The POB’s authority was extended to oversight of auditing standards as 

recommended by the Panel, but gaps remained in the authority of the POB 

regarding oversight of setting auditor independence rules and disciplining 

members of the accounting profession. In addition, in contrast to the 

Panel’s recommendation that the POB have sole authority to determine its 

budget and financial and other resources, and that the accounting 

profession be obliged to provide those resources, the POB’s budget was 

capped at $5.2 million. Having a budget cap in the POB’s charter could be 

perceived as a limitation of the accounting profession’s support for 

effective oversight and could have delayed or otherwise hindered the 

operations of the POB. In response to the Panel’s recommendations to 

improve communications, the POB established a coordinating task force 

within the self-regulatory system. However, with regard to the public 

regulatory systems (the SEC and the state boards of accountancy), no 

substantial actions were taken to improve communications. The SEC’s 

January 17, 2002, announcement of a proposed new regulatory body 

without consulting with the POB demonstrates the continuing lack of 

effective communications as reported by the Panel, to jointly work 

together to protect the public interest.

Changes proposed by the Panel to the peer review program, which is the 

keystone of the present self-regulatory system, so that the program has a 

more risk-oriented approach for all firms and, in addition, continuous peer 

review and oversight of the large firms, have been tested by the AICPA. 

Implementation is planned for the 2002 peer review cycle. Further, the 

AICPA is considering other changes to the peer review standards, as 

recommended by the Panel. The AICPA, however, did not accept the 
Page 5 GAO-02-411 Accounting Profession

Panel’s recommendation to have the POB considered as the client of the 

peer reviews. Consistent with the Panel’s intentions, the POB’s successor 

needs to have early involvement with draft peer review reports to ensure 

that root causes of problems are identified and effectively addressed and 

reported.

The self-regulatory system lacks the power to protect the confidentiality of 

investigative information regarding alleged audit failures or other 

disciplinary matters concerning members of the accounting profession. As 

the Panel reported, the lack of such protective power hinders the timing of 

investigations, which affects the public’s perception of the self-regulatory 

system’s effectiveness. The Panel recognized the need for legislation to 

address this issue, but given the uncertainty of obtaining it, the Panel 

recommended other actions, which the AICPA has taken, to protect the 

public interest when public accounting firms or their members overseen by 

the POB are named in litigation alleging an audit failure.

The Panel also reported that the public’s perception of the self-regulatory 

system’s effectiveness is affected by the need for improved transparency of 

disciplinary actions that have been taken. In response to the Panel’s 

finding, a task force within the self-regulatory system has been formed to 

explore more informed reporting of disciplinary activities. The 

effectiveness of disciplinary actions, as reported by the Panel, remains an 

open issue.

We provided for comment a draft of this report to officials of the POB, the 

AICPA, the SEC, and the National Association of State Boards of 

Accountancy (NASBA), as well as to the Chair of the Panel on Audit 

Effectiveness. The comments we received were generally technical in 

nature and were considered as appropriate throughout the report.

Background The Panel on Audit Effectiveness, a “Blue Ribbon Panel,”9

 was formed by 

the POB in response to a September 28, 1998, request from the SEC for an 

evaluation of whether recent changes in the audit process serve to protect 

9

 The Panel on Audit Effectiveness was chaired by a former Chair of Price Waterhouse and 

included two former SEC Commissioners, a former Chairman and CEO of the American 

Stock Exchange, a former President of the American Stock Exchange, a Chair and CEO of 

CNA Insurance Companies, a professor of finance and law at Columbia University, and a 

professor of auditing at the University of Southern California.
Page 6 GAO-02-411 Accounting Profession

the interest of investors. The SEC stated that the combination of changes 

in the audit process and high profile financial frauds have raised questions 

about the efficacy of the audit process. Accordingly, the Panel was formed 

to conduct a comprehensive review and evaluation of the way independent 

audits are performed and to assess the effects of recent trends in auditing 

on the public interest. The Panel’s study included assessing the accounting 

profession’s self-regulatory system. The Panel’s study also addressed 

issues related to the interface of the accounting profession’s self-regulatory 

system with the SEC and the state boards of accountancy (the public 

regulatory systems). Our work, as requested by the Ranking Minority 

Member, House Committee on Energy and Commerce, was directed at the 

status of the Panel’s recommendations addressing the accounting 

profession’s current governance system (the self-regulatory system and the 

public regulatory system).

The Panel’s report stated that although the goals of self-regulation and 

public regulation are similar, that is, protecting the public interest, and that 

the two systems are intended to operate in concert with one another, there 

are important differences:

Public regulation is conducted with the full power of the state in support of established 

requirements. Self-regulation has no equivalent authority. At most, it can exclude 

noncomplying members from whatever benefits group membership confers or impose 

whatever sanctions members have voluntarily agreed to accept. Such powers as the ability 

to subpoena records and witnesses are not available in self-regulation.10

Self-Regulatory System At the time of the Panel’s study, the self-regulatory system included the 

AICPA’s SEC Practice Section (SECPS), principally devoted to monitoring 

the profession’s compliance with membership requirements and standards. 

The SECPS’s subcomponents included the SECPS Executive Committee, 

the Peer Review Committee (PRC), the Quality Control Inquiry Committee 

(QCIC), the SEC Regulations Committee, and the Professional Issues Task 

Force. The SECPS was overseen by the POB. In addition, the accounting 

profession’s self-regulatory system included standards-setting activities 

carried out by the Auditing Standards Board (ASB), the Independence 

Standards Board (ISB), and the AICPA’s Ethics Division’s Professional 

10 Robert K. Mautz, “Self-Regulation: Perils and Problems,” Journal of Accountancy (May 

1983) (initially presented as an address at the AICPA’s tenth national conference on current 

SEC developments [January 1983]).
Page 7 GAO-02-411 Accounting Profession

Ethics Executive Committee (PEEC), which also performed disciplinary 

activities.

The SECPS was administratively created by the AICPA in 1977, in 

consultation with the SEC, and required member public accounting firms 

to subject their professional practices to peer review and oversight by the 

POB and the SEC. AICPA membership requires that members who provide 

attest services to an SEC client be employed by or affiliated with a public 

accounting firm that is an SECPS member. Within the SECPS, the

• SECPS Executive Committee responsibilities include establishing 

membership requirements, budget and dues requirements, determining 

sanctions for noncompliance with membership requirements, and 

appointing persons to its other committees and task forces.

• PRC oversees all aspects of the peer review program (audit firms review 

other firms’ quality control systems for compliance with standards and 

membership requirements) and imposes corrective measures when 

deficiencies are found.

• QCIC conducts investigations of alleged audit failures involving SEC 

clients arising from litigation or regulatory investigations, including 

criminal indictments. The QCIC’s investigation is focused on whether 

the member firm has deficiencies in its system of quality control or its 

compliance with the system, or whether there are deficiencies in 

professional standards relevant to matters in the case. The QCIC does 

not determine guilt related to the litigation of the subject firm. It does 

impose corrective measures related to its objectives and, where 

members may have violated professional standards, refers the cases to 

the Ethics Division for investigation and possible disciplinary action.

• SEC Regulations Committee acts as the primary liaison between the 

accounting profession and the SEC on technical matters relating to SEC 

rules and regulations. 

• Professional Issues Task Force accumulates and considers practice 

issues that present potential audit concerns for practitioners and 

disseminates information addressing those concerns, including referrals 

to the profession’s standard-setting bodies.

The SECPS’s committees and task force are composed of volunteers, all of 

whom are certified public accountants and members of the AICPA. 
Page 8 GAO-02-411 Accounting Profession

The POB was formed simultaneously with the SECPS by the AICPA, in 

consultation with the SEC, to oversee the SECPS and represent the public 

interest on all matters that may affect public confidence in the integrity of 

the audit process. At the time of our study, the POB was comprised of five 

public members with a broad spectrum of business, professional, 

regulatory, and legislative experience that represents the public interest. 

SECPS member dues funded the POB and the SECPS. Based on the Panel’s 

recommendations, the POB received enhanced oversight authority within 

the self-regulatory system that will be discussed later in this report. As 

discussed earlier in the report, the POB terminated on May 1, 2002.

The AICPA established the ASB to promulgate generally accepted auditing 

standards (GAAS), that are followed by independent auditors of financial 

statements, and to promulgate related standards governing attest services. 

The ASB also issues quality control standards that must be followed by 

AICPA member firms for their internal quality control system. The ASB 

consists of 15 members, with representatives from audit firms, academia, 

and government, that are approved by the AICPA Board of Directors.

The ISB was created in 1997 through an agreement between the SEC and 

the AICPA to, among other activities, develop auditor independence rules 

for auditors of SEC registrants. The ISB consisted of four public members 

and four members from the auditing profession. The ISB was terminated in 

2001, which will be later discussed.

The AICPA’s Ethics Division, through its PEEC, is responsible for setting 

auditor independence rules for all members of the AICPA and determining 

compliance with the independence rules and auditing standards when 

allegations of noncompliance are reported or otherwise brought to the 

PEEC’s attention. The PEEC consists of 16 members from all areas of 

practice (public accounting, private industry, and government) and 5 public 

members (academia and the legal profession).
Page 9 GAO-02-411 Accounting Profession

Public Regulatory System The SEC, through its responsibilities for administering and enforcing the 

federal securities laws, is the primary federal agency involved in 

accounting and auditing requirements for publicly traded companies. The 

SEC has accepted accounting rules set by the Financial Accounting 

Standards Board11 (FASB)—generally accepted accounting principles 

(GAAP)—as the primary standards for preparation of financial statements. 

The SEC has accepted rules promulgated by the ASB—GAAS—as the 

standards for independent audits. The stock exchanges, which are selfregulatory organizations approved by the SEC under the Securities 

Exchange Act of 1934, establish accounting and auditing regulations for 

listed companies, including requiring published annual reports containing 

financial statements prepared in accordance with GAAP and audited by 

independent public accountants. The SEC reviews and comments on 

registrant filings and issues interpretive guidance and staff accounting 

bulletins on accounting and auditing matters. The SEC oversees the peer 

review program administered by the SECPS by reviewing the POB’s 

oversight of the program, selecting certain peer review workpapers for 

review, and reviewing the QCIC’s summaries of closed cases.

State boards of accountancy, established by statute, regulate the practice of 

public accountancy within their jurisdictions. State boards have adopted 

rules of professional conduct, including compliance with auditing 

standards, and can take disciplinary action against licensees who violate 

these rules or standards. The individual state boards grant CPA licenses to 

practice, and they are the only agencies that can revoke them. 

The Panel reported in August 2000 that the accounting profession’s selfregulatory system, while extensive, suffered from various limitations, 

including:

• lack of sufficient public representation on the various self-regulatory 

bodies,

• lack of unified leadership of the various self-regulatory bodies,

11 FASB, as part of the Financial Accounting Foundation (FAF), is a not-for-profit 

organization supported by proceeds from the sale of its publications and by contributions 

from accounting firms, corporations, and other entities that are interested in accounting 

issues. FASB consists of seven full-time members who are selected and approved by the 

FAF. 
Page 10 GAO-02-411 Accounting Profession

• constraints on effective communications with the SEC and among the 

various components of the self-regulatory system,

• differing interests and divergent views of the AICPA’s priorities on the 

part of its diverse membership, and 

• a disciplinary system that is perceived to be slow and ineffective.

The Panel believed that many of the limitations of the self-regulatory 

system could be mitigated by building on the POB’s experience and 

reputation and by giving it increased authority and resources. The Panel’s 

recommendations were directed at (1) enhancing the POB’s independence 

and expanding its oversight authority and resources, (2) improving 

communication within the self-regulatory system and with the SEC and the 

state boards of accountancy (the public regulatory systems) through POB 

leadership, (3) improving the accounting profession’s peer review program 

and the POB’s oversight of that program, and (4) providing more timely 

remedies to protect the public interest when legal or regulatory actions 

allege audit failures.

Objectives, Scope, and 

Methodology

Our objectives were to 

• determine the status of the actions taken in response to the 

recommendations to address the limitations of the accounting 

profession’s self-regulatory system contained in chapter 6, “Governance 

of the Auditing Profession,” of the Panel on Audit Effectiveness’ August 

31, 2000, report; and

• identify any gaps in actions taken to implement the Panel’s 

recommendations and their likely impact on overcoming the limitations 

of the current self-regulatory system as identified by the Panel.

To determine the status of the actions taken to address the Panel’s 

recommendations, we obtained an understanding of the various 

components of the accounting profession’s governance system, their 

functions and responsibilities, their resources, and the interfaces among 

components, both at the time the Panel issued its report and after actions 

had begun to implement the Panel’s recommendations. We arranged 

separate interviews with senior representatives from each system 

component to discuss their views regarding the Panel’s findings and the 

limitations identified in the Panel report, their agreement with 
Page 11 GAO-02-411 Accounting Profession

recommendations contained in the report, any limitations of the effective 

execution of actions taken or planned, and their opinions on the likely 

effectiveness of these actions in response to the recommendations. For 

actions in process, we discussed timeframes for implementation and any 

possible issues to be resolved to implement the recommendations.

We also met with the former SEC Chief Accountant serving at the time of 

the Panel’s report and NASBA representatives to discuss the Panel’s 

recommendations either addressed to them or related to their 

responsibilities.

We conducted our review from June 2001 through April 2002 in accordance 

with generally accepted government auditing standards. We provided for 

comment a draft of this report to officials of the POB, the AICPA, the SEC, 

and the NASBA, as well as to the Chair of the Panel on Audit Effectiveness. 

The comments we received were generally technical in nature and were 

considered as appropriate throughout the report.

We discussed our observations included in this report with senior 

representatives of the various entities and incorporated their comments in 

this report as appropriate.

The following sections discuss substantially all of the Panel’s findings and 

recommendations, identify those areas of the self-regulatory system where 

actions to address the Panel’s recommendations were either not taken, did 

not fully address the recommendations, or are incomplete, and provide our 

observations where further actions are needed to address the Panel’s 

recommendations. See appendix I for the complete status of the Panel’s 

recommendations affecting the provisions of the POB’s charter and 

appendix II for the complete status of the Panel’s other recommendations 

for improving the self-regulatory system. Appendixes III, IV, and V contain 

comment letters from the POB, the AICPA, and the NASBA, respectively. 

Appendix VI contains our May 3, 2002, letter to the Chairman of the Senate 

Committee on Banking, Housing, and Urban Affairs regarding what steps 

the Congress should consider taking to strengthen oversight of the 

accounting profession, auditor independence, and selected financial 

reporting matters.
Page 12 GAO-02-411 Accounting Profession

POB’s Oversight 

Authority, 

Independence, and 

Leadership Role

In the mid-1970s, reports of U.S. companies paying bribes to foreign 

officials and several highly publicized corporate bankruptcies resulted in 

congressional hearings over these matters and the role of independent 

auditors. A central focus of the hearings was whether additional regulation 

of public accountants was necessary or whether the system of selfregulation was sufficient. In response, in 1977 the AICPA, in consultation 

with the SEC, created the SECPS,12 mandatory peer review to check 

compliance with standards, and the POB to conduct oversight of the 

SECPS. The POB did not have a formal charter but instead operated under 

the SECPS’s Organization Document and its own bylaws.

A central focus of the Panel’s recommendations was for the POB, the 

AICPA, the SECPS, and the SEC to work together on a charter for the POB 

that would commit all parties to an expanded POB oversight role and 

system of self-regulation as recommended by the Panel. On February 9, 

2001, the AICPA Board of Directors approved a charter for the POB that, in 

all material respects, incorporated the POB’s Bylaws and the SECPS’s 

Organization Document provisions pertaining to the POB.

In addition to incorporating the previous oversight authority of the POB 

and its operating practices, the POB charter provided the POB with new 

authority related to overseeing the setting of auditing and independence 

standards, conducting special reviews of the profession, establishing 

activities to improve communication within the self-regulatory system and 

with the public regulatory systems through POB leadership, evaluating the 

effectiveness of the self-regulatory components overseen by the POB and 

the effectiveness of the POB, and strengthening POB membership 

requirements. 

While actions were taken to implement many of the Panel’s 

recommendations, the overarching problems of a system that is 

fragmented and not well coordinated continue to exist. Further, significant 

gaps remain in the POB’s oversight authority, funding limitations exist, and 

communications problems continue.

12 Initially membership in the SECPS was voluntary. In 1988, the AICPA changed its by-laws 

to mandate that members of the AICPA who provide attest services to SEC clients be 

affiliated with a CPA firm that is an SECPS member. There are about 1,300 member firms in 

the SECPS that collectively audit more than 99 percent of all U.S.-based SEC registrants.
Page 13 GAO-02-411 Accounting Profession

POB’s Oversight Authority Prior to the Panel’s report, the POB’s oversight authority was limited to the 

SECPS, including oversight of peer review of members of the SECPS and 

the QCIC’s activities. The Panel recommended extending the POB’s 

oversight authority to the ASB, the ISB, and the auditor independence 

standard-setting activities of the PEEC that relate to audits of public 

companies. The POB received oversight authority over the ASB and the 

ISB, but did not get oversight authority over the PEEC’s auditor 

independence standard-setting activities with respect to public companies. 

Notwithstanding the responsibilities of the ISB, in November 2000, the SEC 

issued auditor independence rules for auditors of SEC registrants. The 

former SEC Chief Accountant, who served in that position when the SEC’s 

auditor independence rules were issued, stated that the SEC was 

dissatisfied with the progress of the ISB and, therefore, issued the rules 

itself. Subsequently, on July 17, 2001, the SEC and the AICPA agreed that 

the ISB would be terminated and the SEC would resume responsibility for 

setting auditor independence rules for auditors of SEC registrants. With 

the SEC assuming auditor independence responsibilities and the POB not 

having received any oversight authority over the PEEC’s independence 

standard-setting activities, the POB was left with no oversight authority 

over the setting of auditor independence rules—exactly where it was 

before the Panel’s recommendations.

The PEEC Chairman stated that since the SEC sets auditor independence 

rules for auditors of SEC registrants, the independence rules set by the 

PEEC essentially govern those members of the AICPA who do not audit 

SEC registrants. Therefore, the PEEC Chairman believes the auditor 

independence standard-setting activities of the PEEC are outside the basic 

authority of the POB, which was limited to oversight of SECPS member 

firms. Further, the PEEC Chairman believes that POB oversight was 

unnecessary because the PEEC added five public members who can serve 

to protect the public interest. However, SEC officials told us it might 

consider independence standards established by the PEEC in reaching a 

decision on an issue that is not covered by the SEC’s rules.

As will be discussed later, the Panel identified significant limitations of the 

self-regulatory disciplinary function, recommended measures to protect 

the public interest following a legal or regulatory action alleging an audit 

failure, but did not address in its report whether the POB should have 

authority over the AICPA’s Ethics Division’s disciplinary activities. The 

Panel advised us that they viewed disciplinary actions against SECPS 

members as primarily a function of the SEC and the courts. The PEEC 

Chairman, whose committee is part of the AICPA’s Ethics Division and is 
Page 14 GAO-02-411 Accounting Profession

responsible for investigating and disciplining members of the AICPA 

concerning violations of standards, stated that its cases involving SECPS 

members are a relatively small percentage of its total cases and that having 

public members on the PEEC adequately protects the public interest 

without POB oversight.

The Panel recommended that the professional staff of the SECPS, the ASB, 

and the PEEC remain employees of the AICPA. The Panel advised us that 

consideration was given to whether the functions of these components of 

the self-regulatory system should be under the POB, which would be 

similar to the United Kingdom model for regulation of the auditing 

profession, but at that time the United Kingdom model was relatively new 

and not fully operational. Also, the Panel stated that concerns were raised 

about whether having these functions under the control of the POB would 

be in conflict with the POB’s oversight role. Therefore, the Panel 

recommended that no changes be made.

The Panel was concerned that the differing interests and divergent views of 

the AICPA’s priorities on the part of its diverse members could affect the 

resources of the components of the self-regulatory system. Therefore, the 

Panel recommended that the POB should oversee the AICPA’s evaluation, 

compensation, hiring, and promotion decisions with respect to its 

employees who constitute the ASB and SECPS staffs. The AICPA did not 

accept this recommendation, as it believed human resource decisions are 

management functions and would be in conflict with the POB’s oversight 

role. However, the POB under its charter is responsible for overseeing the 

adequacy of the ASB’s and SECPS’s resources. Further, the POB believed 

that if staffing issues were to arise, its oversight activities would have put it 

in a position to raise the problem for resolution.

The Panel recommended that (1) the POB approve appointments to the 

ASB, the SECPS Executive Committee, and the ISB, and that (2) the SECPS 

Executive Committee retain responsibility for approving appointments to 

the various SECPS committees that report to it, namely the PRC, the QCIC, 

the SEC Regulations Committee, and the Professional Issues Task Force. 

The AICPA accepted the latter recommendation but did not accept the 

former recommendation. The POB’s charter provides that the POB shall be 

consulted on appointments of members to the ASB and the SECPS 

Executive Committee, and that its concurrence on the chair of the ASB and 

the SECPS Executive Committee should not be unreasonably withheld. 

The POB believed that the consultative role in its charter with respect to 

the appointment of committee chairs and members would lead to the same 
Page 15 GAO-02-411 Accounting Profession

outcome as the approval role recommended by the Panel. The POB 

believed that if a problem were to arise, the AICPA would reasonably 

consider the POB’s views.

In addition to the gaps in the POB’s authority for oversight of the selfregulatory system highlighted in the Panel’s study, the POB’s oversight 

authority was limited to those firms that are members of the SECPS. 

Although the 1,300 firms that are members of the SECPS audit SEC 

registrants, which are the nation’s largest companies, there are thousands 

of other public accounting firms that are also members of the AICPA that 

provide audit and attest services that businesses, creditors, and investors 

rely on in making business and financial decisions. As members of the 

AICPA, these firms are subject to peer review through the AICPA’s peer 

review program for auditors of non-SEC clients, rather than the SECPS 

and, therefore, are outside the oversight authority of the POB.

Funding the POB and Its 

Activities

The POB was funded through the membership dues of the SECPS. The 

Panel recommended that the POB’s charter should provide the POB with 

sole authority to determine its budget and financial and other resources, 

and the accounting profession’s obligation to provide those resources. The 

Panel strongly believed that such “no-strings-attached” funding was 

absolutely essential if the POB was to be effective and independent of the 

accounting profession and if the self-regulatory system was to be viable. 

The Panel’s recommendation was not fully accepted. The POB charter 

provides for the POB to submit its budget to the SECPS Executive 

Committee, and, if the AICPA Board requests, to the AICPA Board, for 

consultation. The POB advised us that its charter essentially formalized 

and continued the budget process that it previously followed, except for a 

cap on its budget, which attaches an additional “string” on the POB’s 

funding.

The POB charter contains a new provision capping the POB’s annual 

budget at $5.2 million. The charter does contain provisions for 

supplemental requests subject to the above review process and adjusting 

the ceiling for inflation. Further, the POB charter provides that the SECPS 

Executive Committee and the AICPA Board may raise the budget ceiling 

based on consideration of all the circumstances and public interest at any 

time during the year.

The POB stated that the principal players who developed the concept of a 

budget ceiling were one or more of the five largest public accounting firms 
Page 16 GAO-02-411 Accounting Profession

and the AICPA, and the concept was then agreed to by the SEC Chairman. 

The SEC Chief Accountant at that time told us that the SEC was having 

difficulty getting the largest public accounting firms to agree on a charter 

for the POB, and at the same time, there was some reluctance by one or 

more of the firms to fund the POB to arrange for review of the largest 

public accounting firms’ internal systems for compliance with auditor 

independence rules. He stated that the SEC Chairman viewed the budget 

cap as a way to get the firms to agree on a charter for the POB. The POB 

Chairman told us he did not support the budget cap, and had initiated 

actions, including the additional provisions discussed above in the POB 

charter, to mitigate the impact of a ceiling provision on its operations and 

independence.

The POB believes it did not have sole authority to determine its budget, 

financial, and other resources in light of the ceiling in its charter. The POB 

believes that notwithstanding the restrictive budget provisions in the 

charter, the provisions should not have impeded its ability to operate. The 

POB and the Panel believe that because funding problems for the POB 

could be made public, there was a strong incentive for the SECPS to meet 

the funding needs of the POB and not have such issues aired in public.

In July 2001, the POB told us it believed it had the resources to conduct the 

enhanced oversight role as provided for in its charter. The POB’s budget 

data for its recurring expenditures show that the $5.2 million budget ceiling 

represents more than a 50 percent increase over its fiscal years 2000 and 

2001 budget and 2002 preliminary budget expenditures. However, the POB 

budget data for fiscal year 2000 show that when nonrecurring 

expenditures, such as special studies, are included, the budget total is 

within about $700,000 of the $5.2 million ceiling.13 In addition, it clearly did 

not have the funding autonomy called for by the Panel.

13 The POB charter provides that the $5.2 million limit does not include expenditures by the 

POB for the reviews of the Big 5 firms conducted pursuant to the “Term Sheet for 

Independence Look-Back Testing Program” entered into by the SEC and those firms in June 

2000.
Page 17 GAO-02-411 Accounting Profession

Communications Within the 

Self-Regulatory System and 

With the Public Regulatory 

Systems

Constraints on effective communication with the SEC and among the 

various entities in the self-regulatory system were among the overarching 

limitations of the accounting profession’s governance system identified by 

the Panel. Given the multiple components of the governance system, the 

Panel believed that the POB should serve as a strengthened, unifying 

oversight body to whom the SEC, the state boards of accountancy, the 

accounting profession, and the public should look to for leadership. The 

Panel intended for the POB to enhance communications among the 

components of the accounting profession’s governance system in order to 

facilitate the profession’s continuous improvement efforts and to identify 

and resolve important issues on a timely basis.

The Panel’s recommendations included that (1) the POB establish an 

advisory council to advise the POB on issues related to projects on its 

agenda, (2) the POB establish a coordinating task force of the chairs of 

each body within the POB’s oversight, (3) the POB and the SEC 

acknowledge the need to maintain a mutual respect and confidence, and 

increase the public’s respect for the profession and its role in the capital 

markets, and (4) the POB and state boards of accountancy, perhaps 

through the NASBA, determine how best to facilitate meaningful 

continuing dialogue between the POB and state boards. 

The POB charter provides for a coordinating task force as recommended 

by the Panel, but does not establish an advisory council. The POB charter 

instead provides for the POB to hold an annual outreach meeting to solicit 

views and recommendations about the accounting profession’s selfregulatory program and the POB’s oversight process. Further, the POB 

charter provides that the effectiveness of the annual outreach meeting and 

whether it alleviates the need for an advisory council be included in the 3-

year evaluation of the POB’s effectiveness required by its charter.

The POB advised us that it planned to have periodic meetings with the SEC. 

Also, the POB planned to begin a dialog with the NASBA and several state 

boards of accountancy to explore ways to improve communications. 

However, on January 20, 2002, the POB passed a resolution expressing its 

intent to terminate its existence. In the resolution, the POB Chairman was 

critical of the SEC for not consulting with the POB on the SEC’s plans for a 

new body to govern the accounting profession’s discipline and quality 

control functions. The POB’s resolution stated, in relevant part, 
Page 18 GAO-02-411 Accounting Profession

Be it resolved, after due consideration of the importance of effective self-regulation as one 

aspect of the oversight of the accounting profession, but with recognition of the obstacles to 

achieving this goal which have been encountered in recent years, and given the proposal of 

the SEC in consultation with the AICPA and the SECPS Executive Committee, without input 

from the POB, to reorganize the self-regulatory structure, the POB intends to terminate its 

existence pursuant to Section IX of the POB Charter no later than March 31, 2002.14

Peer Review Program The structure of the SECPS peer review program has evolved since its 

inception in response to many studies of the program over the years. The 

latest study of the peer review program, conducted in March 1999 by the 

Peer Review Process Task Force, identified areas of the peer review 

program that needed improvements.15 The formation of the Peer Review 

Process Task Force and the need to reexamine the peer review program 

was encouraged by the PRC, the POB, and the SEC, which were seeking 

enhancements in the reporting of the results of peer reviews; 

improvements in the effectiveness of peer reviews; comprehensive 

governance and oversight of the peer review process; and peer reviews 

performed by appropriately qualified and trained reviewers. A Panel staff 

member participated in the Peer Review Process Task Force’s 

deliberations. In its report, the Panel recommended that all of the Peer 

Review Process Task Force’s recommendations be implemented and made 

additional recommendations to the SECPS, the POB, the ASB, and the SEC 

to strengthen the peer review process and expand oversight of peer 

reviews. Both the work of the Peer Review Process Task Force and the 

Panel was limited to improving the peer review program within the existing 

self-regulatory system and therefore did not consider a different body for 

conducting or overseeing the program.

14As discussed previously, the POB ultimately extended its existence solely for 

administrative purposes through May 1, 2002.

15 The Peer Review Process Task Force’s report, which was issued in January 2000, is 

included in Exhibit 4 of the Panel’s report, The Panel on Audit Effectiveness Report and 

Recommendations, August 31, 2000.
Page 19 GAO-02-411 Accounting Profession

In January 2001, the SECPS Executive Committee approved a pilot test of a 

plan to modify the approach to conducting and reporting on peer reviews, 

including expanding the oversight of peer reviews. The pilot program 

incorporates almost all of the recommendations made by the Peer Review 

Process Task Force and the Panel. The peer review program currently 

being piloted places a greater emphasis on obtaining an understanding of 

the audit team’s approach to the audit, including the team’s thought 

processes and identification and testing of emerging issues and high-risk 

areas, as well as better insight into the knowledge, skills, training, and 

experience of the audit team. The pilot program separates SECPS member 

firms into two tiers primarily based on the firm’s size and requires the 

larger firms16 to undergo “continuous” peer reviews, that is, some level of 

review each year. The PRC has also approved new reporting standards for 

peer reviews, effective June 30, 2001, that require peer review reports to be 

more descriptive to enable users to better understand the peer review 

findings and peer review process. In addition, the POB’s oversight of the 

peer reviews of the largest firms was expanded to include more timely and 

extensive visits to the offices that are being reviewed.

Other than approving new reporting standards, the AICPA has not finalized 

these enhancements to the SECPS peer review program. Also, there are 

certain recommendations made by the Peer Review Process Task Force 

and the Panel to strengthen peer review that either were not addressed or 

were not fully implemented at the time of our study. These 

recommendations concern revisions to the standards governing peer 

review; the qualifications and training of peer reviewers; consideration of 

the POB as the primary client of peer review; and the development, 

analysis, and reporting of performance measures, performance indicators, 

and other data that may be useful to users of peer review reports.

Quality Control Standards The Peer Review Process Task Force believes that one of the root causes of 

some of the criticisms of the peer review process relates to the lack of 

specificity of the quality control standards.17 In the Panel’s view, the quality 

16 Large firms are defined as those firms with 30 or more SEC clients and at least 100 

accounting and auditing professionals.

17 The AICPA’s ASB issues quality control standards that provide that firms have a system of 

quality control for their accounting and auditing practice and broadly describes elements of 

quality control and other matters essential to the effective design, implementation, and 

maintenance of the system.
Page 20 GAO-02-411 Accounting Profession

control standards are broad and general, making it difficult to critique 

compliance against the standards; thus, the Panel believes that firms with 

weaker practices can still receive unqualified peer review opinions. The 

Panel recommended that the quality control standards be made more 

specific and definitive for firms with public clients, especially for the 

largest firms.

An AICPA task force (made up of the ASB, the PRC, the QCIC, and other 

AICPA groups), which was established to consider the Panel’s 

recommendation concerning the quality control standards, has tentatively 

concluded that given the variety of attest services covered by the standards 

and the various sizes of public accounting firms that follow the standards, 

the Panel’s recommendations can best be addressed by providing more 

specificity to a guide that accompanies the standards.18 Through its 

process of updating the guide, the AICPA task force plans to consider 

whether any guidance should be elevated from the guide to a standard. 

Qualifications and Training 

of Peer Reviewers

Peer reviews are performed by public accounting firms that have received 

an unqualified report on their own peer review. The PRC issues standards 

describing the qualifications and training requirements for peer reviewers19

and in each peer review, the PRC evaluates the peer reviewer’s competence 

and performance. The PRC has the authority to reject a firm that has been 

engaged to perform a peer review. The Peer Review Process Task Force 

believes the current training courses and approach to training peer review 

team captains and reviewers needs to be enhanced to meet the needs of the 

peer review program. The Peer Review Process Task Force also believes 

there are additional measures that should be taken to promote 

independence and objectivity of peer reviewers.

The Peer Review Process Task Force made several recommendations to 

improve the performance and independence of peer reviewers including 

recommending that the PRC (1) establish a standing task force that will 

oversee the peer review training programs, (2) develop a system for 

evaluating the performance of the team captains, and (3) limit the peer 

review team captains for the reviews of the largest firms to two 

18 Guide for Establishing and Maintaining a System of Quality Control for CPA Firm’s 

Accounting and Auditing Practice.

19 Standards for Performing and Reporting on Peer Reviews.
Page 21 GAO-02-411 Accounting Profession

consecutive triennial reviews of the same firm and a total of three 

consecutive reviews as an engagement team member. The Panel 

recommended that the POB should review the qualifications of the peer 

review firm and the peer review captain.

The PRC has acted on the recommendations concerning qualifications and 

training of peer reviewers; however, not all actions are finalized. For 

example, the PRC told us it plans to revise the peer review standards in the 

spring of 2002 to enhance peer reviewer independence and objectivity such 

as to limit the peer review team captains for the reviews of large firms to 

two consecutive reviews of the same firm and a total of three consecutive 

reviews as engagement team members. The AICPA told us that the large 

firms have already voluntarily complied with the related planned changes 

to the standards. Also, the POB indicated that it has always reviewed the 

qualifications of the peer reviewers and the peer review team captains, and 

when it believes appropriate, makes suggestions for changes.

Primary Client of Peer 

Review

Peer reviews are performed to enhance the public’s confidence in 

independent auditors. The Panel felt that the POB, as the public’s 

representative, should be viewed as the principal stakeholder in the peer 

review process and accordingly recommended that it should be made clear 

to peer reviewers that the POB, not the firm being reviewed, is the primary 

client. The Panel wanted the peer reviewers to have the “mind-set” that 

peer reviews are performed in the best interest of the public, and not solely 

for the benefit of the reviewed firm. By considering the POB as the primary 

client, the Panel hoped the peer reviewers would bring the POB more into 

the process up front and continue to keep them apprised of issues 

throughout the review. The POB could then be in a better position to 

monitor and oversee the reporting of peer review results.

The AICPA did not accept the Panel’s recommendation that the POB should 

be the primary client of the peer review because the PRC, not the POB, is 

responsible for maintaining and administering the peer review program. 

The AICPA did adopt a related Peer Review Process Task Force 

recommendation to address the peer review reports to both the PRC and 

the reviewed firm. The Peer Review Process Task Force made this 

recommendation because it felt that the PRC serves as an “audit 

committee” and that including the PRC as an addressee on the peer review 

report would emphasize to peer reviewers and reviewed firms that they 

should consider the PRC as the “audit committee.” However, the Panel told 

us that including the PRC as an addressee on the peer review report does 
Page 22 GAO-02-411 Accounting Profession

not satisfy the intent of its recommendation to have the POB be the primary 

client of peer review. The Panel acknowledged that the new pilot program 

now underway, which includes greater involvement by the POB on a 

continuous, real-time basis, should help the POB gain insight early on as to 

any quality control issues that should be reflected in the peer review report. 

However, the Panel cautioned that until the pilot procedures are made 

final, it is uncertain the POB would have continued with its real-time 

oversight of peer review.

Peer Review Reporting 

Model

The Peer Review Process Task Force believes that in order to best serve 

the public interest, the peer review reporting model, in addition to 

communicating matters identified during peer reviews, should also provide 

for the communication of best practices, constructive suggestions that go 

beyond the professional standards, and matters for the attention of 

standard setters. To address these points, the Peer Review Process Task 

Force recommended that the SECPS study whether there are key 

quantitative and qualitative performance indicators that would be useful to 

users of SECPS member firms’ annual reports or peer review reports. The 

Panel further recommended that the SECPS develop specific performance 

measures, to be included in the peer review report, that relate to the quality 

of the firm’s practice/effectiveness of audits. The AICPA has told us that it 

has not been able to identify indicators that are relevant, objective, or 

measurable; however, the PRC has established a standing task force to 

continuously consider ways of improving the peer review process including 

the identification of such quantitative matters.

Accounting 

Profession’s 

Disciplinary Process

The Panel found that the public perceives the self-regulatory system’s 

disciplinary process to be slow and ineffective and to suffer from a number 

of limitations. Specifically, the Panel reported that 

• the Ethics Division has limited investigative powers as it cannot issue 

subpoenas or compel testimony; therefore, it must rely on the 

cooperation of the individual being investigated but cannot talk to the 

plaintiff or the client company involved;

• investigative proceedings are not timely because the Ethics Division’s 

policy is, in the interest of fairness to the member, to defer its 

investigation until all litigation or regulatory actions are concluded; 
Page 23 GAO-02-411 Accounting Profession

• discipline proceedings are confidential and, therefore, the public cannot 

determine the reason why a sanction was imposed or, in some cases, 

whether a sanction was imposed at all; and

• the Ethics Division can impose only limited sanctions, such as requiring 

continuing professional education or suspending or revoking AICPA 

membership, because the Division’s authority extends only to 

membership rights. 

The Panel found that the QCIC process suffers from many of the same 

limitations, although its investigations are timely. QCIC corrective actions 

imposed on firms are not made public. In addition to lacking subpoena 

power, both the QCIC and the Ethics Division lack protective power for 

their investigative files.

The Panel found that some state boards of accountancy have not been 

effective in disciplining substandard conduct due to limited budgets and 

the lack of effective means to investigate allegations and impose 

disciplinary measures. Similarly, the Panel found that competing demands 

on the SEC’s resources and its own prosecutorial priorities limit its 

enforcement activities.

The Panel concluded that while the self-regulatory system is not totally 

satisfactory, the profession has made a significant effort to make it as 

workable as practicable given its inherent limitations. The Panel also 

concluded that the self-regulatory system needs protective power over its 

disciplinary activities if it is to resolve disciplinary matters on a timely 

basis, but that such protective powers are obtainable only through 

legislation. The Panel believed that there was little assurance that such 

legislation was attainable at the time of its study or in the foreseeable 

future. Therefore, the Panel made various recommendations to improve 

the disciplinary process to provide greater protection to the public without 

recommending legislative changes necessary to provide protective powers. 

The Panel’s recommendations, instead, were directed at protecting the 

public interest, the timing of investigations, the transparency of 

information reported on investigations and disciplinary actions, and 

leveraging the results of investigations.

The Panel’s recommendations were largely made to components of the selfregulatory system, although some recommendations were made to the SEC 

regarding resources and leveraging information from its investigations. The 

Panel did not recommend extending the POB’s authority to oversee 
Page 24 GAO-02-411 Accounting Profession

disciplinary functions other than to have the POB involved with the QCIC 

in reviewing certain firm’s actions when there is an allegation of audit 

failures as discussed below. In addition, the Panel did not make any 

recommendations to the state boards of accountancy in the area of the 

profession’s disciplinary process. The Panel recommended that the POB 

and the SECPS review the results of implementing its recommendations 

over a 2- to 3-year period to determine their effectiveness. The Panel 

recommended that if the POB and the SECPS subsequently find that 

actions taken in response to the Panel’s recommendations to improve the 

disciplinary process have not satisfactorily protected the public, the POB, 

in cooperation with the SEC, should seek legislation to achieve the 

protections necessary to make the disciplinary process more effective.

Immediate Disciplinary 

Actions When Members 

Named in Litigation

In accordance with the Panel’s recommendation, the SECPS membership 

requirements were revised as follows when civil litigation or a criminal or 

public regulatory investigation contains allegations of an audit failure:

• The firm is required to conduct an internal review of the subject 

engagement to evaluate the performance of the senior engagement 

personnel.

• The QCIC should conduct its usual inquiry. If the QCIC believes that 

standards may have been violated and, accordingly, refers the case to 

the Ethics Division, the firm would be notified that the Ethics Division is 

deferring its investigation pending the completion of the litigation.

• The firm is then required to take one of the following options to apply to 

the partner during the period of deferral, if the individual is still 

associated with the firm: (A) terminate or retire the individual from the 

member firm, (B) remove that individual from performing or supervising 

audits of public companies until the Ethics Division’s enforcement 

process is completed, or (C) subject that individual to additional 

oversight on all public company audit engagements in which that 

individual is involved. Additional oversight is defined to mean for at 

least 1 year, the individual will perform such audits subject to oversight 

by a senior technical partner appointed by the member firm’s Managing 

Partner/CEO. The senior technical partner oversight of such 

engagements, at a minimum, will meet the SECPS’s concurring partner 

review membership requirement and procedures prescribed for 

engagements defined as high risk. Thereafter, the individual must 

remain under the additional oversight that the firm’s Managing 
Page 25 GAO-02-411 Accounting Profession

Partner/CEO determines, in light of that person’s evaluation of the 

individual’s performance, is necessary to protect the public interest.

The member firm has the responsibility of deciding on the selection of one 

option A, B, or C above. The implementation of the option selected is 

subject to review in the member firm’s peer review and by the POB. In the 

event that the partner in question joins another SECPS member firm, the 

new firm must apply one of the above options to the partner until the 

Ethics Division completes its investigation. However, should the partner in 

question join a firm that is not a member of the SECPS, no such restrictions 

on the partner’s activities would apply during the course of the litigation or 

the Ethics Division’s investigation. The POB and the SECPS advised us that 

the above options are effectively “career ending actions” for the members.

Reducing the Time for 

Ethics Division and SEC 

Investigations

The Panel recommended that the Ethics Division devote more resources to 

its investigations in order to decrease the time it takes to conduct an 

investigation after a deferral is lifted. The Panel also recommended that 

the SEC allocate additional resources to its enforcement activities directed 

at allegations of failed audits.

Because the Ethics Division lacks protective power, the Ethics Division’s 

policy is to defer its investigation pending the outcome of litigation or 

regulatory enforcement actions in fairness to the AICPA members. 

Accordingly, the Ethics Division defers cases involving SEC registrants, 

generally for 2 to 3 years, until litigation or regulatory enforcement actions 

are completed. The Ethics Division stated that if it had protective power, 

deferral of the investigation would be unnecessary and the timeliness of the 

disciplinary process would be significantly enhanced because the legal or 

regulatory enforcement and ethics disciplinary processes could proceed 

simultaneously.

The lack of protective power not only contributes significantly to the length 

of time before the Ethics Division commences its investigations, but also 

results in other regulatory bodies not being willing to share investigative 

information, which also adds to the time required to complete the Ethics 

Division’s investigation. The Ethics Division believes that having subpoena 

power would allow its staff to investigate cases more effectively once it 

begins an investigation. However, the ability to issue subpoenas would not 

likely result in significant improvements to the timeliness of the process.
Page 26 GAO-02-411 Accounting Profession

The lack of protective power may also affect the Ethics Division’s ability to 

work cooperatively with the state boards of accountancy on investigations. 

The Ethics Division has entered into cooperative investigative agreements 

with four states that, with the member’s consent, allow it to conduct 

investigations and share the results with the four state boards of 

accountancy. The Ethics Division stated it will attempt to expand this type 

of cooperative agreement to other states, but states previously have 

expressed little interest in such an arrangement.

The Ethics Division told us that, in the past few years, it had difficulty 

recruiting qualified staff with expertise in SEC accounting and reporting 

matters, which resulted in excessive caseloads for existing staff. However, 

the Ethics Division currently believes it now has the necessary resources to 

complete investigations involving SEC registrants in an effective and timely 

manner as a result of the SECPS providing funding for three additional staff 

members. The Ethics Division told us that, in the past, its average time to 

complete an investigation was 18 months after a deferral was lifted; 

however, it now estimates that such cases will be completed in about 11 to 

14 months.

In response to the Panel’s recommendation that the SEC allocate additional 

resources to its enforcement activities directed at allegations of failed 

audits, the SEC believes that its recently created Financial Fraud Task 

Force will improve the timeliness of SEC enforcement actions, which 

usually take 2 to 3 years or longer to investigate. The SEC also believes 

that encouraging companies to engage in cooperative measures that are 

both preventive and remedial will allow the SEC to maximize the use of its 

enforcement staff.

Lack of Coordination Within 

the Disciplinary Process

NASBA officials told us that neither the SEC nor the AICPA share 

information involving disciplinary matters freely with the state boards, 

which delays the timing of disciplinary actions the state boards can take 

and therefore allows auditors to continue to practice at the potential risk to 

the public.20 NASBA officials believe the AICPA’s lack of protective powers 

has inhibited it from sharing information with the state boards of 

accountancy; however, the NASBA officials stated that even though the 

20 NASBA officials stated that in some cases where a violation is obvious, state boards are 

able to get the practitioner to surrender his/her license or to agree to a monitoring 

agreement while the AICPA or the SEC investigation proceeds.
Page 27 GAO-02-411 Accounting Profession

SEC has protective powers, it still does not share information freely. The 

SEC told us that both during and after an investigation, the SEC 

enforcement staff may discuss cases with state board investigators. The 

SEC also said it sends information pertaining to an enforcement case to the 

relevant state board along with a draft access request that the board may 

use to contact the SEC. Further, the SEC stated it had recently discussed 

with the representatives of the NASBA and of several state boards ways in 

which the state boards might gain access to the SEC’s investigative records 

while the investigation is still in process in order to improve the timeliness 

of the state boards’ access to SEC records. The Panel did not recommend 

any specific actions for the SEC, the AICPA, or the state boards of 

accountancy to better facilitate coordination of investigations and 

disciplinary actions between them. However, the Panel indicated it would 

support legislation giving the self-regulatory bodies protection through the 

right of privilege over their disciplinary activities if this would ensure more 

timely resolution of alleged audit failures.

Transparency of 

Disciplinary Actions

To improve the public’s perception of the effectiveness of the selfregulatory disciplinary system, the Panel recommended that the POB 

(1) summarize in its annual report the status of all Ethics Division 

investigations of AICPA members when civil litigation and public 

regulatory investigations related to audits of SEC registrants have been 

concluded, and (2) report in its annual report on an aggregate, no-name 

basis, including matters that are concluded through the retirement of the 

partner, Ethics Division decisions or settlement of litigation.

The AICPA advised us that the Ethics Division’s PEEC has appointed a 

Statistical Reporting Task Force and a Disciplinary Task Force with the 

objectives of improving statistical reporting and making the information 

more descriptive and informative. A representative of the POB attends the 

ongoing meetings of the Statistical Reporting Task Force aimed at 

addressing the Panel’s recommendations.

Leveraging the Results of 

Disciplinary Investigations

The Panel recommended that the POB leverage the knowledge it gains 

through oversight to determine whether changes in professional standards 

or further guidance is needed and communicate these findings to the 

appropriate standard setter or authoritative bodies. The POB has formed a 

coordinating task force, comprised of the heads of each of the components 

of the self-regulatory system, that will be used to share and leverage 

information. The staff director of the Transition Oversight Staff (see 
Page 28 GAO-02-411 Accounting Profession

footnote 4) informed us that the coordinating task force will continue to 

exist after the POB’s termination. 

The Panel recommended that the SEC should periodically undertake 

studies of its Accounting and Auditing Enforcement Releases (AAER) and 

disseminate the results. The Panel also recommended that the SEC 

document information on the auditors’ work in every enforcement 

investigation involving materially misstated financial statements, not just 

those in which the auditor is named in the enforcement action. However, 

the SEC did not accept these recommendations as it believes its 

enforcement actions are sufficiently analyzed and publicly discussed by the 

SEC and others and that the marginal benefits of additional study would 

not justify the use of limited staff resources and other costs. Also, the SEC 

stated it already reviews the conduct of auditors in virtually every 

enforcement investigation involving materially misstated financial 

statements. The SEC further stated that if it finds that the auditor’s work 

constitutes a violation of the securities laws or professional standards, the 

SEC documents its findings in public proceedings, AAERs, or press 

releases. The SEC staff question the advisability of discussing, in public 

enforcement releases, the conduct of accountants that is not deemed to 

violate the securities laws or professional standards, as such discussions 

may be viewed as tantamount to the SEC writing auditing standards.

Observations The Panel’s recommendations were made within the context of the existing 

self-regulatory system and the actions taken by the various parties 

enhanced the self-regulatory system that existed at that time. On balance 

though, the overarching problems of the self-regulatory system remain. 

The system continues to be fragmented, and communications and 

coordination problems continue. The disciplinary function has limited 

investigative powers and sanctions, lacks transparency, is not timely, and is 

widely perceived to be ineffective.

Significant gaps continued to exist in the authority of the POB to oversee 

the functions of setting auditor independence rules and disciplining 

members of the auditing profession. These functions are fundamental to 

the self-regulatory system and therefore should be included as part of the 

oversight function. Further, we believe such oversight authority should 

extend to ensuring that the standard-setting bodies of the self-regulatory 

system address areas of concern about the adequacy of the standards and 

that revisions to the standards effectively protect the public interest.
Page 29 GAO-02-411 Accounting Profession

Improvements recommended by the Panel for the accounting profession’s 

peer review program are being focused on an approach to more directly 

address the public accounting firms’ consideration of the audited entity’s 

risks and ensure the appropriate resources of the firm are involved with the 

audit work. Further, the continuous peer reviews of the large firms, 

together with real time oversight, have the potential to more timely identify 

and effectively address problems. However, the AICPA has not finalized 

these enhancements and experience will be needed to judge their 

effectiveness in enhancing the peer review program.

On a related issue, consistent with the Panel’s recommendation, the POB’s 

successor needs to ensure that the final peer review report reflects the 

problems identified by peer review and that the root cause is effectively 

addressed, which could be within the public accounting firm, accounting 

and auditing standards, or with quality control standards. Further, as the 

Panel recommended, the ASB needs to ensure that the quality control 

standards are sufficiently clear to provide for meaningful and consistent 

application and enforcement.

The independence of the POB’s successor needs to be assured. The POB 

did not receive sole authority to determine its budget and resources, and 

the accounting profession’s obligation to provide them, as recommended 

by the Panel. It is not unreasonable for the SECPS to expect that the POB 

would be accountable for funds received and expended. However, capping 

the POB’s budget in its charter could be perceived as a limitation of the 

accounting profession’s support for effective oversight to protect the public 

interest. Further, necessary work by the POB’s successor may be delayed if 

it needs to seek funds for special studies or other matters. If funding for 

the POB’s successor is to continue to come from the accounting profession, 

then as the Panel stated, the profession must not be able to control or cut 

off resources, which would potentially destroy the oversight body’s 

independence and others’ confidence in it. 

Experience with the SECPS’s new membership requirements that may 

“effectively bench” members named in litigation alleging an audit failure is 

needed to judge its ultimate effectiveness. However, as recognized by the 

Panel, the self-regulatory system must also have the necessary powers to 

timely and effectively address alleged noncompliance with professional 

standards. The Ethics Division’s investigations without protective powers 

will continue to take years to complete after an allegation of an audit 

failure is initially made through litigation and will perpetuate the Panel’s 
Page 30 GAO-02-411 Accounting Profession

findings that the public’s perception is that the disciplinary process of the 

self-regulatory system is not timely or effective.

Providing powers to the self-regulatory system to protect the 

confidentiality of investigation files raises difficult issues regarding the lack 

of a statutory basis of the self-regulatory system and whether fundamental 

changes to the self-regulatory system will be needed if the powers are 

provided. As the Panel reported, this issue needs to be resolved by the 

POB’s successor working cooperatively with the AICPA, the SEC, and other 

stakeholders. Further, the Panel recognized the limited disciplinary 

measures that exist within the self-regulatory system. The effectiveness of 

disciplinary actions taken by the self-regulatory system remains an open 

issue.

It is too early to evaluate whether the SEC’s task force approach to 

investigations will significantly reduce the time for investigations. 

Similarly, the SEC needs to gain experience with its efforts to encourage 

companies to engage in preventive and remedial measures. If resource 

limitations continue to affect the SEC’s timeliness for investigations, as 

well as the number of cases it can effectively process simultaneously, then 

the SEC, as recommended by the Panel, should pursue obtaining the 

necessary resources.

Although the SEC did not accept the Panel’s recommendations for 

leveraging the results of every disciplinary investigation, the successor to 

the POB’s coordinating task force could fill this void by ensuring that SEC 

enforcement actions are discussed by the task force, with the SEC 

participation, for consideration of whether changes in professional 

standards or further guidance is needed.

As the Panel recognized, the transparency and completeness of disciplinary 

actions could be enhanced by relating the AICPA’s disciplinary actions to 

disciplinary actions of regulators, so that the public has a more complete 

picture of the disciplinary actions of the self-regulatory and public 

regulatory systems. Further, transparency could be improved by providing 

more detailed information about the case, such as naming the firm, 

individuals involved by position, the standards violated, and the 

disciplinary action taken.

The action by the SEC and the AICPA, working with the largest public 

accounting firms to develop a proposed change to the self-regulatory 

system without involving the POB, demonstrates the seriousness of the 
Page 31 GAO-02-411 Accounting Profession

communication problems that exist within the self-regulatory system and 

the lack of effective relationships between the POB and the SEC. The SEC, 

as a public regulator under the Securities Act of 1933 and the Securities 

Exchange Act of 1934, has significant responsibilities related to accounting 

and auditing rules and the accounting profession’s self-regulatory system. 

The SEC needs to work cooperatively with the POB’s successor to support 

the self-regulatory system and leverage SEC activities to enhance the 

effectiveness of the self-regulatory system to support the public interest.

The POB’s successor, the AICPA’s Ethics Division, and the SEC also need to 

build effective working relationships with the state boards of accountancy. 

Although these parties have common interests, they generally work 

separately and information is not freely shared, which contributes to the 

public perception that the disciplinary function of the accounting 

profession is not timely or effective. As discussed above, this issue is 

complicated by jurisdictional issues as well as the lack of powers within 

the self-regulatory system to protect the confidentiality of investigative 

information, all of which limit actions that can be taken to improve the 

disciplinary process. Legislation will likely be necessary to effectively 

resolve this problem since the self-regulatory system lacks a statutory 

foundation.

Agency Comments and 

Our Evaluation

We provided the POB, the AICPA, the NASBA, the SEC, and the former 

Chair of the Panel on Audit Effectiveness, with a draft of our report for 

review and comment. 

The POB commented that the draft report provided useful information 

concerning the status of the Panel’s recommendations. The POB also 

stated that it would be helpful to readers of the report to include not only 

any differences between the Panel's recommendations and the actions, 

taken or proposed, to implement those recommendations, but also (1) an 

explanation for the differences, and (2) an evaluation of the reasonableness 

of such differences. We believe that we have identified all significant 

differences and provided observations on such differences. The POB 

provided one example of where it believed a gap existed between the 

Panel’s recommendation and the AICPA’s implementing action. The POB 

stated that the AICPA’s response to the Panel’s recommendation only 

addressed the POB’s authority to review the implementation of a firm’s 

action against a partner when legal action is taken against the partner 

resulting from the audit. The POB pointed out that the Panel also 

recommended that the POB review the firm’s process for deciding its 
Page 32 GAO-02-411 Accounting Profession

action against the partner. The AICPA advised us that the POB had the 

authority to also review the firm’s decision as recommended by the Panel.

The AICPA commented that it does not believe the POB oversight over the 

PEEC’s standard-setting activities was necessary given the level of public 

representation on the PEEC and given that the SEC is the primary 

independence standard-setter for public company auditors. However, we 

continue to support the Panel’s recommendation that the POB’s successor 

should have oversight over the PEEC’s independence standard-setting 

activities, particularly in light of the SEC’s point made in its comments on 

our draft report. The SEC’s Chief Accountant, who provided comments on 

the draft report, explained that in some instances the PEEC independence 

rules can apply to SEC registrants. For example, in situations where a 

PEEC ruling addresses an area that is not covered by the SEC’s rules and is 

not inconsistent with the general policies underlying the SEC’s rules, the 

SEC staff might consider the PEEC ruling in reaching its decision on an 

issue. 

The AICPA also commented that it has always supported independent 

public oversight with fiscally accountable “no strings” funding. However, 

in the POB Chairman’s recent statement during a congressional hearing,21

he specifically mentioned that the current system of self-regulation of the 

accounting profession has significant problems, including the fact that POB 

funding is subject to control by the firms through the SECPS. He pointed 

out that in the past, the SECPS cut off that funding in an effort to restrict 

POB activities. In addition, the AICPA and the SECPS insisted on a cap on 

the POB funding when the new POB charter was created.

The AICPA commented that although the Panel report recommended that 

peer review reports be addressed to the POB rather than the firm subject to 

peer review,22 the PRC fully considered this recommendation and 

concluded that it would have no affect on the quality of the peer review or 

the content of the peer review reports. The PRC further concluded that the 

peer review reports would be more appropriately addressed to the PRC as 

the body responsible for maintaining and administering the peer review 

program. As discussed in our report, we continue to believe that 

21 Statement of the Honorable Charles A. Bowsher, Chairman, Public Oversight Board, 

Before the Senate Banking Committee (March 19, 2002).

22 Technically, the Panel report contained a recommendation that the POB be the primary 

client of the peer review.
Page 33 GAO-02-411 Accounting Profession

addressing the peer review report to the PRC does not satisfy the intent of 

the Panel’s recommendation to have the POB be the primary client of the 

peer review. The Panel wanted the peer reviewers to have the “mind-set” 

that peer reviews are performed in the best interest of the public, and not 

solely for the benefit of the reviewed firm. By considering the POB as the 

primary client, the Panel hoped the peer reviewers would likely bring the 

POB more into the process up front and continue to keep them apprised of 

issues throughout the review. In its comments on the draft, the POB also 

expressed concerns that peer review reports are addressed to the PRC 

rather than the POB. The POB stated that it believes that the PRC, which 

has responsibility for maintaining and administering the peer review 

program, is more like a management function rather than an audit 

committee function and, therefore, should not be the primary client of the 

peer review process.

In comments on the draft report, NASBA officials reiterated the importance 

of communication, coordination, and sharing of information between the 

various components of the regulatory structures and the state boards of 

accountancy to better protect the public interest. For example, NASBA 

officials believe that for peer review to be effective, it has to be more 

clearly linked to the regulatory process, which would include forwarding to 

all state boards modified or adverse peer review reports so that licenses 

could be limited when appropriate, suspended, or revoked. In addition, 

firm registration renewal in many states depends on having completed a 

peer review, but the results of those reviews, in most cases, are not 

provided to the state boards. NASBA officials also stated that state boards 

operate on a complaint-driven system. Accordingly, NASBA officials 

believe that, to protect the public interest, the PEEC should directly make 

referrals, whether or not they relate to members of the SECPS, to state 

boards. We share the NASBA’s concerns related to the need to improve 

working relations between the state boards and the other components of 

the regulatory structure. As stated in our report, we believe that the POB’s 

successor, the Ethics Division, and the SEC need to build effective working 

relationships with the state boards of accountancy. Although these parties 

have common interests, they generally work separately and information is 

not freely shared, which contributes to the public perception that the 

disciplinary function of the accounting profession is not timely or effective. 

The comments of the Chair of the Panel on Audit Effectiveness were 

provided orally and were in agreement with our findings and observations. 

The SEC Chief Accountant’s comments were primarily technical 

comments, which are incorporated as appropriate. The POB, the AICPA, 
Page 34 GAO-02-411 Accounting Profession

and the NASBA, also provided technical comments, which we incorporated 

as appropriate. Written comments from the POB, the AICPA, and the 

NASBA are included in appendices III through V, respectively.

As agreed upon with your office, unless you announce its contents earlier, 

we plan no further distribution of this report until 30 days after its issuance. 

At that time, we will send copies of this report to officials of the Public 

Oversight Board, the American Institute of Certified Public Accountants, 

the Panel on Audit Effectiveness, the Securities and Exchange 

Commission, the National Association of State Boards of Accountancy, and 

other interested parties. We will make copies available to others upon 

request.

For additional information, please contact Jeffrey C. Steinhoff, Managing 

Director, Financial Management and Assurance, at 202-512-2600 or 

steinhoffj@gao.gov. Robert W. Gramling, Cheryl E. Clark, and Michael C. 

Hrapsky made key contributions to this report.

Sincerely yours,

David M. Walker

Comptroller General

of the United States
Page 35 GAO-02-411 Accounting Profession
Page 36 GAO-02-411 Accounting Profession

Appendix I

POB Charter Provisions Responding to the Apendxies

Panel on Audit Effectiveness’ 

Recommendations ApendxiI

Recommendations Related to the POB Charter Contained in 

the Panel on Audit Effectiveness Report

Provisions in the POB’s Charter Responding to the Panel’s 

Recommendations

1.1) The POB charter should address its sole authority to 

determine its budget and financial and other resources, and the 

profession's obligation to provide those resources. (Paragraph 

6.25)

The POB's funding shall be provided by the SECPS and its 

members through the AICPA. The POB must submit an annual 

budget to the SECPS Executive Committee, and to the AICPA 

Board if requested, for consultation. The budget shall not exceed 

$5.2 million. Provisions are made for unanticipated oversight 

reviews by submitting a supplemental budget that is also subject to 

the above review process. Once this consultive process is done, 

the SECPS Executive Committee and the AICPA are not to withhold 

funding for any reason. The annual budget ceiling is indexed to the 

Consumer Price Index. The POB is required to monitor its 

expenses and report any material variations likely to occur to the 

SECPS Executive Committee and the AICPA.

1.2) The POB's annual statement of expenditures should be 

audited and included in the POB's Annual Report to evidence its 

financial accountability. (Paragraph 6.25)

In furtherance of financial accountability, the POB is required to 

have its expenses audited annually and included in its annual 

report.

2.1) The POB charter should address its authority to oversee the 

activities of the ASB, the Independence Standards Board, the 

SECPS Executive Committee, the QCIC, the SECPS Peer Review 

Committee, the Professional Issues Task Force, the SEC 

Regulations Committee, and the standard-setting activities of the 

PEEC that relate to audits of public companies. (Paragraph 6.25) 

The POB's charter provides oversight authority with respect to the 

ASB, Independence Standards Board, SECPS Executive 

Committee, QCIC, SECPS Peer Review Committee, Professional 

Issues Task Force, and the SEC Regulations Committee, but not 

the PEEC.

2.3) The POB should approve all appointments to the ASB, 

SECPC Executive Committee, and the Independence Standards 

Board’s Independence Issues Committee, as well as Independence 

Standards Board members who represent the public accounting 

profession. (Paragraph 6.25)

For the ASB and the SECPS, the POB is to be consulted for 

nominations for members and concur in the selection of the chairs; 

such concurrence is not to be unreasonably withheld. Regarding 

the Independence Standards Board, the POB is to consult and 

advise on all nominations.

2.4) The POB should annually evaluate whether the resources that 

the AICPA and the SECPS provide to the ASB and the SECPS are 

sufficient for those bodies to meet their mandates. (Paragraph 

6.25)

The POB's charter provides for the POB to evaluate the adequacy 

of resources provided to the ASB and the SECPS, and to set forth 

its evaluation in its annual report. 

2.5) The POB should oversee the AICPA's evaluation, 

compensation, hiring and promotion decisions with respect to 

employees who constitute the ASB and SECPS staffs. (Paragraph 

6.25)

Not addressed in the POB's charter.

3.1) The POB charter should establish term limits for POB 

members. (Paragraph 6.25)

The term of a member is 5 calendar years ending on December 31. 

A member may be reappointed by a two-thirds vote of members in 

office, but shall not serve for more than two full terms plus the 

balance of any term filled by that member as a result of a vacancy.

3.2) POB members should be limited to two 5-year terms, with 

staggered terms to ensure continuity. (Paragraph 6.25)

As stated above, members terms are limited to two 5-year terms. 

The POB's charter provides that members terms shall be staggered 

to ensure continuity so that the term of one member shall expire 

each year. 
Appendix I

POB Charter Provisions Responding to the 

Panel on Audit Effectiveness’ 

Recommendations

Page 37 GAO-02-411 Accounting Profession

4.1) The POB charter should address establishing a nominating 

committee responsible for identifying and nominating new POB 

members. (Paragraph 6.25)

The POB's charter provides for a nominating committee consisting 

of three persons with the authority to nominate new members for 

the POB for each vacancy on the POB caused by resignation, 

removal, or death, consistent with the eligibility requirements in 

section 11. A. of the charter, which provides that members shall be 

drawn from among prominent individuals of integrity and reputation, 

including, but not limited to, former public officials, lawyers, bankers, 

non-practicing CPAs, securities industry executives, educators, 

economists, and business executives.

4.2) The nominating committee should be appointed by the POB 

from names suggested by public and private institutions that are 

most concerned with the quality of audits and financial reporting. 

(Paragraph 6.25)

The nominating committee is to consist of the POB chair or his/her 

designee from among the members, a former public member of the 

AICPA Board to be selected by the AICPA Board, and a person 

from the private sector. The POB chair or his/her designee and the 

former public member of the AICPA Board will, in turn, jointly select 

the third member of the nominating committee from the private 

sector.

5.1) The POB charter should address establishing an advisory 

council to advise the POB on issues related to its agenda, new 

agenda items, project priorities, and related matters. (Paragraph 

6.25)

The POB's charter does not provide for establishing an advisory 

council. The charter does provide for the POB to hold an annual 

outreach meeting to solicit views and recommendations about the 

accounting profession's self-regulatory program and the POB's 

oversight process.

5.2) The POB should appoint the council members, whose service 

should be limited to two 3-year terms. (Paragraph 6.25)

The POB's charter does not provide for establishing an advisory 

council.

5.3) The council should comprise 9 to 15 people selected from the 

constituencies that are concerned with audit quality and financial 

matters, thus the broadest spectrum of participants in the selfregulation of the auditing profession. (Paragraph 6.25)

The POB's charter does not provide for establishing an advisory 

council.

5.4) Council members should serve on a voluntary, part-time basis 

and be available to meet with the POB at regularly scheduled 

intervals (e.g., two to four times a year). (Paragraph 6.25)

The POB's charter does not provide for establishing an advisory 

council.

6.1) The POB charter should address establishing a coordinating 

task force of the chairs of each body within the POB's oversight. 

(Paragraph 6.25)

The POB's charter provides that the POB may have a Coordinating 

Task Force which would be a standing committee consisting of the 

chairs of each body within the POB's oversight or their designees 

and which would be responsible for exchanging information relating 

to each body's activities. Footnote 19 of the charter provides for 

the POB to monitor the agenda of the SEC and the PEEC to 

identify rule-making, regulatory, and standard-setting activities that 

relate to the audit of public companies for the purpose of 

communicating information relating to such activities to the 

Coordinating Task Force for appropriate consideration. 

6.2) The coordinating task force should meet periodically (e.g., two 

to four times a year) to ensure effective communications among 

bodies subject to POB oversight. (Paragraph 6.25)

The POB's charter provides for the coordinating task force to meet 

periodically, but at least semiannually. 

(Continued From Previous Page)

Recommendations Related to the POB Charter Contained in 

the Panel on Audit Effectiveness Report

Provisions in the POB’s Charter Responding to the Panel’s 

Recommendations
Appendix I

POB Charter Provisions Responding to the 

Panel on Audit Effectiveness’ 

Recommendations

Page 38 GAO-02-411 Accounting Profession

7.1) The POB charter should address its authority to commission 

special reviews related to significant professional matters that affect 

the public's confidence in the profession. (Paragraph 6.25)

The POB's charter provides authority for the POB to take any action 

related to its oversight activities, including authorizing any oversight 

reviews it may determine to be appropriate in order to carry out its 

responsibilities, while noting the factor of confidentiality and having 

consulted with the SECPS Executive Committee. In that respect, 

the charter further provides among the POB activities that it may 

conduct oversight reviews and undertake other projects and 

actions, after consulting the SECPS Executive Committee, on 

matters covered by the POB's activities that the POB deems 

appropriate to protect the public interest.

8.1) The POB, SEC, AICPA, SECPS, and major firms should 

promptly agree to a charter for the POB. (Paragraph 6.26)

The POB's charter is dated February 2, 2001. The POB issued an 

accompanying news release stating that the POB and the AICPA 

have formally approved the charter after extensive discussions 

between both organizations, the SECPS, the large auditing firms, 

and the SEC. The AICPA Board of Directors passed a resolution 

dated February 9, 2001, stating that it approves the proposed POB 

charter dated February 2, 2001 and that it recognizes the good 

work of the POB and that it looks forward to many more years of the 

POB's observations and comment. 

9.1) The POB charter should address the POB's role in the 

appointment of the chairs of the ASB and the SECPS Executive 

Committee. (Paragraph 6.26)

See above comment that describes the POB's consultive role rather 

than appointment authority.

10.1) The POB charter should address the procedures for 

amending the charter. (Paragraph 6.26)

The POB's charter provides that the charter may be amended by a 

vote of two-thirds of members in office at a meeting duly called for 

that purpose, with the concurrence of the AICPA Board.

11.1) The draft charter should include a provision for the POB to 

conduct an annual "outreach" meeting with representatives from 

the constituencies that are concerned with audit quality and 

financial reporting matters rather than establishing a nominating 

committee and advisory council. The Panel recommends that this 

issue be addressed in three years as part of the POB's review of 

the effectiveness of the self-regulatory oversight process as 

contemplated in the draft charter. (Paragraph 6.26)

See above comments that describe that the POB's charter provides 

for an annual outreach meeting and establishing a nominating 

committee, but does not include an advisory council. The POB's 

charter provides for the POB to arrange for a review and issuance 

of a written report by a panel containing an evaluation of the 

effectiveness of the POB's oversight role and process at the end of 

three years after the adoption of the charter and periodically 

thereafter, for purposes of evaluating the POB's accountability. The 

report is to include a review of the effectiveness of the annual 

outreach meeting provided for in section VIII.H of the charter and 

whether this annual outreach meeting alleviates the need for an 

advisory council.

(Continued From Previous Page)

Recommendations Related to the POB Charter Contained in 

the Panel on Audit Effectiveness Report

Provisions in the POB’s Charter Responding to the Panel’s 

Recommendations
Page 39 GAO-02-411 Accounting Profession

Appendix II

Actions Responding to Panel on Audit 

Effectivesness’ Recommendations ApendxiI

Issue: Governance System 

Findings From Panel 

Report

Recommendations Contained in Panel 

Report

Actions Taken as of September 2001 

(as Reported by the POB, AICPA, SEC, 

and NASBA)

Recommendations 

Directed to

1) There is a lack of 

sufficient public 

representation on the 

various self-regulatory 

bodies. (Paragraph 6.15)

1.1) The POB should have a majority of 

public members whose primary 

responsibility is to serve the public. 

(Paragraph 6.20)a

The POB consists of 5 members, all of 

whom are public members with a broad 

spectrum of business, professional, 

regulatory, and legislative experiences. 

POB

1.2) The constituencies (both 

practitioners and non-practitioners) 

represented on the ASB remain 

unchanged; however, at least a majority 

of the members represented on the ASB 

should be from CPA firms that provide 

attest services to SEC clients. 

(Paragraph 6.31)

A majority of the members represented 

on the ASB provide attest services to 

SEC clients. The ASB is a 15-member 

board, all of whom are CPAs, comprising 

representatives from each of the Big 5 

firms, 2 members from other national 

firms, 6 non-national firm 

representatives, 1 representative from 

academia, and 1 representative from a 

government audit position.

AICPA

1.3) The ISB should reconstitute its 

membership to include four members 

representing the public and three 

members representing the public 

accounting profession. (Paragraph 6.35)

The ISB ceased operations in July 2001. ISB

1.4) ISB’s public members should retain 

responsibility for the selection of their 

replacements, with the POB being 

consulted on the selections.(Paragraph 

6.35)

The ISB ceased operations in July 2001. ISB

1.5) Two of the members of the ISB that 

are representing the public accounting 

profession should be selected by the 

SECPS Executive Committee from 

member firms, with the third member 

continuing to be the AICPA president or 

his or her designee. (Paragraph 6.35)

The ISB ceased operations in July 2001. ISB

1.6) The ISB should retain sole authority 

to determine its budget and other 

resources. (Paragraph 6.35)

The ISB ceased operations in July 2001. ISB

1.7) The ISB should retain its staff and 

the responsibility for their hiring, 

supervision, and compensation. 

(Paragraph 6.35)

The ISB ceased operations in July 2001. ISB
Appendix II

Actions Responding to Panel on Audit 

Effectivesness’ Recommendations

Page 40 GAO-02-411 Accounting Profession

2) There is a lack of unified 

leadership of the various 

self-regulatory bodies. 

(Paragraph 6.15)

2.1) The POB should oversee the 

profession's activities with respect to 

standard setting, monitoring, discipline, 

and special reviews. The POB should 

oversee the ASB, the ISB, the SECPS 

Executive Committee, QCIC, the SECPS 

Peer Review Committee, the Professional 

Issues Task Force, the SEC Regulations 

Committee, and the standard-setting 

activities of the PEEC that relate to audits 

of public companies. (Paragraph 6.23)

The POB Charter gives the POB 

oversight responsibilities for the ASB, 

and maintains its oversight responsibility 

for the SECPS Executive Committee, 

QCIC, Peer Review Committee, PITF, 

and the SEC Regulations Committee. 

The ISB has recently been dissolved; 

accordingly there will be no POB 

oversight. The POB charter does not 

give POB oversight of PEEC, however, 

the POB staff attend all PEEC meetings 

and monitor the agendas and activities of 

the PEEC.

POB, AICPA, 

SECPS

2.2) The POB should report periodically 

to the public regarding its activities. 

(Paragraph 6.20)a

The POB issues an annual report that 

discloses its activities.

POB

2.3) The POB should maintain 

independence from both the profession 

and the regulatory authorities. 

(Paragraph 6.20)a

The POB’s new charter discloses that the 

POB was created by the AICPA, in 

consultation with the SEC, as an 

independent board. The charter stresses 

that the POB's role is oversight and not 

management. Members and staff of the 

POB must abide by the POB's Conflict of 

Interest Guidelines.

POB

2.4) The POB, AICPA, SECPS, and SEC 

should work together to create and 

implement a formal charter for the POB 

that would include the responsibilities 

and powers enumerated in the Panel's 

report. The POB, AICPA, SECPS, SEC, 

and major firms should agree to the 

charter and cooperate in facilitating its 

implementation. (Paragraphs 6.24 and 

6.26)

The POB and the AICPA’s Board of 

Directors adopted the charter in 

February 2001, after discussions with the 

SEC, the SECPS, and the large auditing 

firms. Refer to Appendix I for an analysis 

of the POB’ s charter.

POB, AICPA, 

SECPS, SEC, and 

major firms

2.5) The POB should enhance its 

resources in order to implement the 

POB's expanded oversight role. The 

augmented staff would assist the POB in 

overseeing peer reviews of the largest 

firms. (Paragraph 6.29)

The POB hired additional staff members 

(from 6 staff in 1999 to 13 staff in 2002) 

and has increased its budget (from $2.5 

million in 1999 to $3.5 million in 2002) in 

order to implement its expanded 

oversight role.

POB

(Continued From Previous Page)

Issue: Governance System 

Findings From Panel 

Report

Recommendations Contained in Panel 

Report

Actions Taken as of September 2001 

(as Reported by the POB, AICPA, SEC, 

and NASBA)

Recommendations 

Directed to
Appendix II

Actions Responding to Panel on Audit 

Effectivesness’ Recommendations

Page 41 GAO-02-411 Accounting Profession

2.6) The POB should review its charter 

periodically to ensure its continuing 

adequacy, and, if appropriate, work with 

the AICPA, SECPS, and SEC to amend 

it. (Paragraph 6.29)

The POB plans to review and reassess 

its charter on a periodic basis to assure 

its continuing adequacy and relevancy in 

the light of changing circumstances and, 

if appropriate, take steps to amend it. 

The charter may be amended by a vote 

of two-thirds of members in office at a 

meeting duly called for that purpose, with 

the concurrence of the AICPA Board.

POB

2.7) The POB should review periodically 

the effectiveness of the ASB, ISB, 

SECPS, and other groups that it 

oversees and include its findings and 

conclusions in its Annual Report. 

(Paragraph 6.29)

The POB's new charter includes 

responsibility for reviewing the 

effectiveness of these groups and 

reporting the results of its reviews in its 

annual report. The ISB ceased 

operations in 2001.

POB

2.8) The POB should summarize in its 

Annual Report the status of all AICPA 

Ethics Division investigations of audits of 

SEC registrants when the civil litigation 

and public regulatory investigations have 

been concluded. (Paragraph 6.29)

The POB plans to include in its next 

annual report summary statistics of the 

(i) status of all AICPA Professional Ethics 

Division investigations on audits of SEC 

registrants when the civil litigation and 

public regulatory investigations have 

been published and concluded; and (ii) 

the actions taken by and reported to the 

POB by SECPS member firms with 

respect to the foregoing.

POB

2.9) The POB should increase its public 

communications to expand the public's 

awareness of the POB, its activities, and 

its value to the capital markets. 

(Paragraph 6.29)

The POB will hold an annual meeting 

open to the public, and will also issue an 

annual report and make public such 

other written reports as the POB may 

deem necessary with respect to its 

activities. The POB will also hold an 

annual outreach meeting to solicit views 

and recommendations about the 

accounting profession's self-regulatory 

program and the POB's oversight 

process.

POB

(Continued From Previous Page)

Issue: Governance System 

Findings From Panel 

Report

Recommendations Contained in Panel 

Report

Actions Taken as of September 2001 

(as Reported by the POB, AICPA, SEC, 

and NASBA)

Recommendations 

Directed to
Appendix II

Actions Responding to Panel on Audit 

Effectivesness’ Recommendations

Page 42 GAO-02-411 Accounting Profession

3) There are constraints on 

effective communications 

with the SEC and among the 

various entities in the current 

system. (Paragraph 6.15)

3.1) The POB should serve as an 

oversight body to whom the SEC, the 

state boards of accountancy, the auditing 

profession, and the public should look to 

for leadership. This leadership position is 

intended to enhance communications 

among the profession's self-regulatory 

bodies in order to facilitate the 

profession's continuous improvement 

efforts and identify and resolve important 

issues on a timely basis. (Paragraph 

6.23)

The POB charter includes expanded 

responsibility for improving 

communication among the various 

bodies that make up the self-regulatory 

system. A Coordinating Task Force has 

been created and the POB will hold an 

Annual Meeting open to the public. The 

POB will also hold an annual outreach 

meeting to solicit views and 

recommendations about the accounting 

profession’s self-regulatory program and 

the POB’s oversight process. This 

meeting may include, among others as 

appropriate, representatives from the 

private sector, accounting profession, 

government, professional organizations 

and public. Reference to such meetings 

will be made in the POB’s annual report. 

The POB will also establish liaisons with 

national and international organizations 

regarding setting national and 

international auditing and independence 

standards, and other matters relevant to 

the cooperative self-regulation of the 

profession.

POB, AICPA, 

SECPS, and SEC

3.2) The POB and SEC should 

acknowledge the need to maintain a 

continuing dialogue that will foster a 

cooperative relationship, protect and 

enhance mutual respect and confidence, 

and increase the public's respect for the 

profession and its role in the capital 

markets. (Paragraph 6.27)

The SEC recently met with the POB in 

one of its first outreach meetings. The 

POB stated that it meets frequently with 

the staff of the SEC Chief Accountant’s 

office and other SEC staff as deemed 

necessary to discuss issues of concern 

to the SEC.

POB and SEC

3.3) The POB and state boards of 

accountancy, perhaps through the 

National Association of State Boards of 

Accountancy, should determine how best 

to facilitate meaningful continuing 

dialogue between the POB and state 

boards. (Paragraph 6.28)

The POB plans to meet occasionally with 

the individual state boards of 

accountancy and also to have ongoing 

discussions with NASBA, as the 

representative of the state boards.

POB and state 

boards of 

accountancy

(Continued From Previous Page)

Issue: Governance System 

Findings From Panel 

Report

Recommendations Contained in Panel 

Report

Actions Taken as of September 2001 

(as Reported by the POB, AICPA, SEC, 

and NASBA)

Recommendations 

Directed to
Appendix II

Actions Responding to Panel on Audit 

Effectivesness’ Recommendations

Page 43 GAO-02-411 Accounting Profession

3.4) Restore the relationship between 

the profession and the SEC to its historic 

level of candor, trust, and respect. 

(Paragraphs 6.64 and 6.20)a

The AICPA and SEC have enjoyed a 

longstanding working relationship with 

the mutual goal of protecting the public 

interest. The AICPA is committed to 

continually strengthen the profession’s 

self-regulatory activities through a 

cooperative working relationship with the 

SEC.

SEC and the 

accounting 

profession 

(including the POB)

3.5) The SEC should encourage and 

support the ISB in carrying out its 

mission, recognizing that the SEC retains 

ultimate authority over auditor 

independence with respect to SEC 

registrants. (Paragraph 6.36)

The ISB ceased operations in July 2001. SEC

3.6) The SEC should support the IIC and 

work with the ISB to clarify the IIC's role. 

(Paragraph 6.36)

The ISB ceased operations in July 2001. SEC

3.7) The SEC should assist in 

implementing the POB's activities 

contemplated by the charter. (Paragraph 

6.36)

According to the SEC, it has cooperated 

with the AICPA and others on the 

disbanding of the ISB, and met with the 

AICPA’s SEC Regulations Committee to 

discuss items of mutual interest. Further 

meetings are scheduled with other 

AICPA committees. The SEC also 

recently met with the POB in one of its 

first outreach meetings. The SEC staff 

speaks at various AICPA conferences, 

including the SEC Developments 

Conference. The SEC also anticipates 

further meetings with the AICPA and 

POB in the coming months.

SEC

3.8) The SEC should support the POB's 

authority as enumerated in its charter to 

enable the POB to serve as an 

independent, effective, unifying leader of 

the profession's voluntary self-regulatory 

process. (Paragraph 6.36)

See action taken to recommendation 3.7 

above.

SEC

(Continued From Previous Page)

Issue: Governance System 

Findings From Panel 

Report

Recommendations Contained in Panel 

Report

Actions Taken as of September 2001 

(as Reported by the POB, AICPA, SEC, 

and NASBA)

Recommendations 

Directed to
Appendix II

Actions Responding to Panel on Audit 

Effectivesness’ Recommendations

Page 44 GAO-02-411 Accounting Profession

4) There are differing 

interests and divergent views 

of the AICPA's priorities on 

the part of its diverse 

members. (Paragraph 6.15)

4.1) The AICPA should provide the 

resources necessary for the ASB to meet 

its mandates. (Paragraph 6.31)

The AICPA has provided and is 

committed to providing the financial and 

human resources necessary for the ASB 

to meet its mandates. There are 

continual and close communications 

between the chair of the ASB and AICPA 

staff regarding the assignment of staff to 

projects. The major financial components 

are for staff salaries, member 

compensation, and reimbursements for 

meeting and travel expenses. The major 

human resource components are 

volunteer hours and paid staff. Staff 

salaries are adjusted annually to be 

competitive for the skills the staff member 

possesses. Turnover of ASB staff has 

been very low. Meeting and travel 

expenses are budgeted based on current 

and expected projects.

AICPA

4.2) The AICPA should provide the 

resources necessary for the SECPS to 

meet its staffing needs, including 

providing QCIC with the resources 

needed to enable it to act quickly in 

investigating alleged audit failures and 

thereby preserve the candid dialogue 

with SECPS member firms that presently 

adds to the effectiveness of the QCIC 

process. (Paragraph 6.31)

The AICPA has provided and is 

committed to providing the financial and 

human resources necessary for the 

SECPS, including the QCIC, to meet its 

mandates. There are continual and 

close communications between the chair 

of the SECPS, QCIC and AICPA staff 

regarding the assignment of staff to 

projects. The major financial components 

are for staff salaries and reimbursements 

for meeting and travel expenses. The 

major human resource components are 

volunteer hours and paid staff. Staff 

salaries are adjusted annually to be 

competitive for the skills the staff member 

possesses. Meeting and travel expenses 

are budgeted based on current and 

expected projects.

AICPA

4.3) The ASB, SECPS, and PEEC staffs 

remain employees of the AICPA. 

(Paragraph 6.31)

ASB, SECPS, and PEEC staff are AICPA 

employees.

AICPA

(Continued From Previous Page)

Issue: Governance System 

Findings From Panel 

Report

Recommendations Contained in Panel 

Report

Actions Taken as of September 2001 

(as Reported by the POB, AICPA, SEC, 

and NASBA)

Recommendations 

Directed to
Appendix II

Actions Responding to Panel on Audit 

Effectivesness’ Recommendations

Page 45 GAO-02-411 Accounting Profession

a

This was not a formal recommendation in the Panel’s report; however, this was mentioned in the text 

of the Panel’s report.

4.4) The SECPS Executive Committee 

retains its responsibility for approving 

members of the PRC, QCIC, the SEC 

Regulations Committee, and the PITF; 

the preceding four groups continue to 

report to the Executive Committee; and 

the SECPS continues to fund the ISB. 

(Paragraph 6.32)

The SECPS Executive Committee has 

the responsibility for approving members 

of the PRC, QCIC, SEC Regulations 

Committee, and the PITF. These groups 

continue to report to the SECPS 

Executive Committee. The SECPS 

continued to fund the ISB until it ceased 

operations in July 2001.

SECPS

4.5) The QCIC should establish a panel 

of industry specialists and experts and 

specialists whose members would be 

drawn from practicing profession and 

industry and who would be available to 

QCIC members and the POB and 

SECPS staffs for consultation on various 

matters, such as industry issues and the 

application of accounting standards. 

(Paragraph 6.33)

The QCIC maintains an inventory of 

QCIC member industry and technical 

skills. In the event that a QCIC, POB, or 

SECPS staff member responsible for a 

particular review considers consultation 

outside the review team to be necessary, 

the first consultation source is with 

another QCIC member with identified 

industry skills. The review team initiates 

consultation beyond QCIC membership. 

This consultation is coordinated by the 

SECPS staff through contact with the 

Big-5 firm representative of the SECPS 

Executive Committee. The Executive 

Committee member identifies a specific 

experienced and highly qualified partner 

within his or her firm to consult with the 

review team.

SECPS QCIC

4.6) Each member firm should ensure 

that its representative on the SECPS 

Executive Committee has sufficient 

authority and responsibility to commit the 

firm to the protection of the public interest 

when this conflicts with a more favorable 

business position, and ensure that the 

public interest remains the paramount 

objective in the representative's decision 

making and voting. (Paragraph 6.34)

All members of the Executive Committee 

have sufficient authority to commit their 

firms to the protection of the public 

interest, and each representative has the 

public interest as the paramount 

objective in fulfilling his or her committee 

obligations. In selecting committee 

member replacements, the SECPS staff 

and the Executive Committee review 

resumes of prospective members prior to 

appointment and all nominations are 

made in consultation with the POB. (See 

POB charter section VII.A.1.c.)

Member firms of the 

SECPS represented 

on the SECPS 

Executive 

Committee

(Continued From Previous Page)

Issue: Governance System 

Findings From Panel 

Report

Recommendations Contained in Panel 

Report

Actions Taken as of September 2001 

(as Reported by the POB, AICPA, SEC, 

and NASBA)

Recommendations 

Directed to
Appendix II

Actions Responding to Panel on Audit 

Effectivesness’ Recommendations

Page 46 GAO-02-411 Accounting Profession

Issue: Peer Review

Findings From Panel 

Report

Recommendations Contained in Panel 

Report

Actions Taken as of September 2001 (as 

Reported by the POB, AICPA, SEC, and 

NASBA)

Recommendations 

Directed to

5) The peer review 

reporting model should 

be more transparent in 

order to better facilitate 

the communication of 

matters identified 

during peer reviews 

that should be 

addressed by the 

reviewed firm and the 

profession. (Exhibit 4, 

page 4)

5.1) The PRC should revise the standard 

peer review report to more fully describe 

the peer review process and matters 

relevant to the specific peer review. (Task 

Force Recommendation 2a.)

The peer review reporting standards were 

revised, effective for peer reviews completed 

on or after June 30, 2001, to more fully 

describe the peer review process and to 

streamline the reporting of matters relevant to 

the specific peer review. Specifically, 

to assist users of the peer review report in 

understanding the peer review process, each 

report is now accompanied by an attachment 

that provides the following:

The objectives of a peer review.

An overview of the peer review process, 

including how peer reviews are planned and 

performed and the roles of the PRC, POB, 

and the public file.

In the case of a modified report, readers will 

no longer have to refer to the letter of 

comments to understand the reasons for the 

modification. Both the reasons and the 

recommendations to cure deficiencies are 

now in the report itself. The reviewed firm's 

response will address the deficiencies and 

recommendations in both the report and the 

letter of comments. 

In the case of an adverse report, all of the 

deficiencies identified are required to be 

included in the peer review report. The 

reviewed firm’s response will address the 

deficiencies and recommendations identified 

in the report. 

The PRC also reviewed the SECPS peer 

review standards that address the specific 

matters to be reported as a result of a peer 

review. The PRC concluded, and the POB 

staff concurred, that no changes to the criteria 

set forth in the Standards were needed.

PRC
Appendix II

Actions Responding to Panel on Audit 

Effectivesness’ Recommendations

Page 47 GAO-02-411 Accounting Profession

6) The PRC needs to 

consistently consider 

the sufficiency and 

adequacy of the 

information it receives 

concerning peer 

review results in order 

to perform its function 

effectively. (Exhibit 4, 

page 4) 

6.1) The SECPS should study whether 

there are key quantitative and qualitative 

performance indicators that would be 

useful to users of SECPS member firms' 

annual reports or peer review reports. 

(Task Force Recommendation 1b.)

To date, the SECPS Executive Committee and 

PRC have not been able to identify indicators 

that are relevant, objective, or measurable. 

However, the PRC has established a standing 

task force to continuously consider ways of 

improving the peer review process, including 

the identification of such quantitative 

measures.

SECPS

6.2) Peer review reports should be 

addressed to the reviewed firm and the 

PRC to emphasize that peer reviewers 

and reviewed firms should consider the 

PRC as the "audit committee." (Task 

Force Recommendation 2b.)

Effective for peer reviews completed on or 

after June 30, 2001, the peer review report will 

be addressed to both the reviewed firm and 

the PRC. 

PRC

6.3) Require a Summary Observation 

Memorandum (SOM) be prepared on all 

peer reviews that describes the peer 

reviewer's observations regarding best 

practices, constructive suggestions that 

go beyond professional standards, and 

matters for the attention of standardsetters. The SOM should be submitted to 

the PRC. The SOM should not be made 

available for public distribution, but should 

be used as a basis for preparing the PRC 

annual report. (Task Force 

Recommendation 2c.)

The PRC is pilot testing a more qualitative, 

subjective approach to the review of emerging 

issues and higher-risk areas during the peer 

review process. It is expected that the 

findings from these procedures will result in 

observations and recommendations regarding 

best practices, constructive suggestions that 

go beyond professional standards, and 

matters for the attention of standard-setters 

that can be included in a SOM. The SOMs for 

all of the peer reviews performed during the 

year and significant, recurring findings in peer 

review reports and letters of comments will be 

the primary source for the PRC's annual 

report. The SOMs will not be publicly 

distributed.

PRC

Issue: Peer Review

Findings From Panel 

Report

Recommendations Contained in Panel 

Report

Actions Taken as of September 2001 (as 

Reported by the POB, AICPA, SEC, and 

NASBA)

Recommendations 

Directed to
Appendix II

Actions Responding to Panel on Audit 

Effectivesness’ Recommendations

Page 48 GAO-02-411 Accounting Profession

6.4) SECPS and POB staff should 

compile data from their oversight of peer 

reviews and QCIC investigations that will 

enhance the diagnostic value of the peer 

review and QCIC findings to standard 

setters and audit firms. For example, data 

on disciplinary measures taken by 

member firms resulting from substandard 

performance; data on the audit firms' 

fraud risk assessments and related 

responses on audits where fraud is 

subsequently discovered; data related to 

emerging issues that identify needed 

modifications to professional standards or 

best practices guidance; and data on 

nonaudit services provided to the audit 

clients encompassed by peer reviews and 

QCIC investigations. (Paragraph 6.30)

The SECPS has provided information to the 

POB regarding QCIC and peer review 

activities for reporting in its annual report. The 

QCIC has and continues to report its findings 

to standard-setters as well as to the PITF. 

(The PITF issues Practice Alerts that are 

disseminated through the CPA Letter and 

Technical Practice Aids to CPAs in public 

practice.) Starting in 2001, QCIC staff 

automated its previous manual information 

database to assist in analyzing issues that 

should be brought to the attention of standardsetters and the PITF. The POB intends to 

monitor the preparation and analysis of the 

information contained in this database and 

comment on the monitoring process in its 

annual report. The PRC is pilot testing an 

enhanced peer review process, a by-product 

of which is to develop recommendations to 

standard-setters and audit firms (see actions 

taken in recommendation 6.3 above regarding 

preparation of an SOM). 

SECPS and POB

7) Any changes to the 

peer review reporting 

model need to 

continue to provide 

appropriate access to 

information for SEC 

staff to assess the 

effectiveness of the 

peer review program. 

(Exhibit 4, page 4)

7.1) The SECPS should continue to 

maintain a file that provides for public 

access to peer review reports, letters of 

comments, and the firms' responses to 

the letters of comments. (Task Force 

Recommendation 1a.)

The SECPS has a file that provides for public 

access to peer review reports, letters of 

comments, and the firms’ responses to the 

letters of comments. The SECPS is in the 

process of converting the public files to 

provide for electronic access to the 

information. The website is expected to be 

fully operational in the fall of 2001.

SECPS

7.2) The SEC staff should have access to 

the PRC annual report and to the SOM 

(described above under recommendation 

6.3 above) on a no-name basis. (Task 

Force Recommendation 2c.)

The PRC annual report will be a public 

document, whose primary recipients will be 

the accounting profession, standard-setters, 

and regulators. The POB will have access to 

all SOMs and the SEC will have access to all 

SOMs on a “no name” basis.

PRC

Issue: Peer Review

Findings From Panel 

Report

Recommendations Contained in Panel 

Report

Actions Taken as of September 2001 (as 

Reported by the POB, AICPA, SEC, and 

NASBA)

Recommendations 

Directed to
Appendix II

Actions Responding to Panel on Audit 

Effectivesness’ Recommendations

Page 49 GAO-02-411 Accounting Profession

8) The peer review 

standards are common 

to all SECPS member 

firms and do not 

provide for differences 

in firm size and types 

of practices. (Exhibit 4, 

page 5)

8.1) There should be a prescribed 

differentiation of the SECPS member 

firms, based on the effectiveness and 

objectivity of the firms' internal inspection 

programs. Tier A firms should be those 

that do not have an internal inspection 

program that meets specifically defined 

criteria for a Tier B firm. Tier B firms 

should be those firms that have an 

effective internal inspection program that 

meets specifically defined criteria. The 

effectiveness of a reviewed firm’s internal 

inspection program should be determined 

by the peer reviewer. The PRC, with the 

POB’s oversight, should concur with the 

classification of firms. (Task Force 

Recommendation 3a.)

The PRC is pilot testing a two-tiered peer 

review program. Tier B firms consist of larger 

member firms meeting certain size criteria, 

i.e., firms with 30 or more SEC clients and 100 

or more accounting and auditing 

professionals. Those firms are required to 

have an effective internal inspection. Tier B 

firms are being subjected to a continuous 

review process with prescribed procedures 

being performed during the interim 2 years 

between peer review public reporting years. 

All other SECPS member firms are 

considered Tier A firms and are not subject to 

the continuous review process.

PRC

8.2) The peer reviews of Tier A firms 

should be systems- and complianceoriented but place greater emphasis on 

the reviews of engagements, while the 

peer reviews of Tier B firms should involve 

reviews of engagements but place greater 

emphasis on systems and compliance. 

(Task Force Recommendation 3b.)

The peer review procedures for the Tier B 

firms are being better integrated with the firm's 

internal inspection programs and the reviews 

of some engagements were enhanced to 

generate more qualitative, subjective, and 

judgmental considerations and findings by the 

reviewers. The approach being tested 

includes: 

obtaining an in-depth understanding of the 

engagement team's approach to the audit and 

their knowledge, skills, training, and 

experience; 

developing observations regarding the quality 

of the engagement team's performance in 

certain areas prescribed by the PRC, 

including both best practices and areas for 

improvement; 

assessing the engagement team's application 

of the firm's policies, guidance, procedures, 

and practice aids, including best practices and 

areas for improvement; and 

providing recommendations that would 

improve the firm's policies, guidance, 

procedures, practice aids, or training 

programs and/or professional standards.

Peer review standards for Tier A firms will be 

more compliance oriented and place greater 

emphasis on the reviews of engagements.

PRC

Issue: Peer Review

Findings From Panel 

Report

Recommendations Contained in Panel 

Report

Actions Taken as of September 2001 (as 

Reported by the POB, AICPA, SEC, and 

NASBA)

Recommendations 

Directed to
Appendix II

Actions Responding to Panel on Audit 

Effectivesness’ Recommendations

Page 50 GAO-02-411 Accounting Profession

8.3) Tier B firms should be required to 

engage their peer reviewers to annually 

perform certain limited review procedures, 

in addition to the peer review performed 

on a triennial basis. (Task Force 

Recommendation 3c.)

As indicated above, Tier B firms will engage 

their peer reviewers to perform certain limited 

review procedures developed by the PRC in 

the years they are not subjected to their 

triennial reviews. These limited review 

procedures will result in reports to the PRC, 

with oversight by the POB and SEC access. A 

full scope peer review continues to be 

required on a triennial basis, with a report 

available to the public.

PRC

8.4) The POB should conduct oversight of 

the annual limited procedures 

engagement discussed in 

recommendation 8.3 above. (Task Force 

Recommendation 3c.)

The POB will conduct on-site oversight of the 

Tier B firms’ annual reviews.

POB

8.5) The triennial peer review for Tier B 

firms should be integrated with the 

reviewed firm's internal inspection 

program in that year and focus on 

emerging issues and higher-risk areas, 

while relying on the internal inspection to 

review routine and compliance areas. The 

reviewed firm's internal inspection 

program should become an integral part 

of the peer review in that the peer reviewer 

should review and approve the inspection 

review procedures, review materials and 

questionnaires, and office and 

engagement selections made for the 

inspection program, and form joint teams 

of internal inspectors and peer reviewers 

for certain reviewed offices. (Task Force 

Recommendation 3d.)

Under the pilot test program, the PRC is 

testing different approaches to integrating 

peer review and the reviewed firm’s internal 

inspection program.

PRC

9) The peer review 

process should place 

greater emphasis on 

assessing auditor 

performance (versus 

evaluating 

documentation) to 

determine compliance 

with quality control 

systems and 

professional 

standards. (Exhibit 4, 

page 5)

9.1) The review materials and 

questionnaires should be revised to 

generate more qualitative, subjective, and 

judgmental considerations and findings by 

peer reviewers. Peer reviewers should 

also conduct focus group sessions with 

professional personnel at various levels in 

the organization in order to obtain candid 

feedback regarding critical matters 

pertaining to the accounting and auditing 

practice. (Task Force Recommendation 

3e.)

In addition to the matters described above, the 

pilot test program includes using 

supplemental checklists at the firm level and 

for some engagement reviews that address 

certain emerging/high-risk areas identified by 

the PRC, and conducting focus group 

sessions in some offices being reviewed that 

include separate groups of seniors and 

managers.

PRC

Issue: Peer Review

Findings From Panel 

Report

Recommendations Contained in Panel 

Report

Actions Taken as of September 2001 (as 

Reported by the POB, AICPA, SEC, and 

NASBA)

Recommendations 

Directed to
Appendix II

Actions Responding to Panel on Audit 

Effectivesness’ Recommendations

Page 51 GAO-02-411 Accounting Profession

9.2) The SECPS should emphasize the 

types of issues described in the Panel’s 

report that affect audit quality, including 

the more judgmental and less objective 

issues, such as the "tone at the top." 

(Paragraph 6.40)

See actions described in response to findings 

6, 8, and 9 that are being pilot tested during 

2001.

SECPS

9.3) The SECPS should increase the 

emphasis on which professionals perform 

various aspects of the audit, including who 

makes the risk assessments, and whether 

they have the necessary knowledge and 

skills. (Paragraph 6.40)

The pilot test program includes placing 

increased emphasis on interviewing members 

of the engagement teams whose audits are 

being reviewed.

SECPS

9.4) The SECPS should require 

additional qualitative evaluations of the 

information obtained during peer reviews 

(e.g., assess whether management’s 

representations and responses to 

inquiries were adequately corroborated; 

assess adequacy of the training materials 

distributed and available to all 

professionals). (Paragraph 6.40)

The peer review process has historically 

included qualitative evaluations of the 

information obtained during peer reviews, 

such as review of working papers for 

corroboration of management’s 

representations. However, one of the 

objectives of the pilot test, through more indepth interviews of the engagement team, is 

to enable the peer reviewers to be in a better 

position to assess this element of the audit 

rather than just relying on reviewing working 

papers. See actions described in 

recommendation 8.2 above that are being 

pilot tested during 2001.

SECPS

9.5) The SECPS should develop specific 

performance measures to be included in 

the peer review report that relate to the 

quality of the firm's practice/effectiveness 

of audits. (Paragraph 6.40)

See actions described above to finding 6. SECPS

9.6) The SECPS should include in a peer 

review the business aspects of the 

reviewed firm's practice that are closely 

related to the firm's professional practice. 

(Paragraph 6.40)

For the most part, peer reviewers don’t include 

the business aspects of the reviewed firm’s 

practice in a peer review. However, there are 

elements of this in current peer reviews, for 

example, when a peer reviewer considers 

whether sufficient time was devoted to the 

audit or specific audit areas. This was then 

expanded with the pilot by way of the focus 

group sessions (see recommendation 9.1 

above) because many of the topics relate to 

operational issues such as sufficiency of 

staffing, time being devoted to audit areas, 

emphasis on achieving time budgets, 

emphasis on training, etc. that are important 

matters to consider by the peer reviewer.

SECPS

Issue: Peer Review

Findings From Panel 

Report

Recommendations Contained in Panel 

Report

Actions Taken as of September 2001 (as 

Reported by the POB, AICPA, SEC, and 

NASBA)

Recommendations 

Directed to
Appendix II

Actions Responding to Panel on Audit 

Effectivesness’ Recommendations

Page 52 GAO-02-411 Accounting Profession

9.7) The SECPS should require a review 

of the peer-reviewed firm’s review of 

selected financial reports/filings of foreign 

registrants that are audited by the firm’s 

reviewed foreign-associated firms and for 

which the reviewed firm reviews the filing 

in accordance with the membership 

requirements of the SECPS. The peer 

reviews should include interviewing the 

"filing reviewers." (Paragraph 6.40)

According to the AICPA, this recommendation 

cannot be implemented because it is directed 

at foreign registrants who are not clients of the 

SECPS member firms (i.e., U.S. firms). 

However, the PRC has approved changes to 

the peer review standards and the related 

peer review guidance materials to test a firm's 

compliance with the SECPS membership 

requirement pertaining to an SECPS member 

firm with foreign associated firms that audit 

SEC clients.

SECPS

10) Measures to 

enhance peer reviewer 

independence and 

objectivity should be 

implemented. (Exhibit 

4, page 7)

10.1) The PRC should limit the peer 

review team captains for the reviews of 

Tier B firms to two consecutive reviews of 

the same firm and a total of three 

consecutive reviews as an engagement 

team member. (Task Force 

Recommendation 4a.i.)

The PRC will revise the peer review standards

to limit the team captains of Tier B firms to two 

consecutive triennial peer reviews.

PRC

11) The current 

protocols among the 

PRC, POB, SEC, and 

peer reviewers should 

be enhanced. (Exhibit 

4, page 7) 

11.1) The PRC should require the peer 

review captains for the reviews of Tier B 

firms to participate in a meeting (exit 

conference) with the SEC staff and POB 

staff when the SEC staff reviews the firm's 

peer review working papers to discuss 

significant matters considered by the SEC 

staff during their oversight. (Task Force 

Recommendation 4a.ii.)

The PRC will revise the peer review standards

to require the team captains of Tier B firms to 

participate in a meeting with SEC and POB 

staff to discuss significant matters considered 

by the SEC staff during its oversight of the 

peer review process.

PRC

11.2) The PRC should prepare an annual 

report for the profession, standard-setters, 

regulators, and others that describes 

significant matters noted during peer 

reviews conducted during the year to 

facilitate timely identification of matters 

that require the attention of these groups. 

(Task Force Recommendation 4b.)

See actions described in recommendation 6.3 

above that are being pilot tested during 2001.

PRC

11.3) The PRC should determine a more 

formal means of identifying emerging 

issues and higher-risk areas in a timely 

manner, and providing frequent updates 

or supplements to the review materials 

and questionnaires used to perform peer 

reviews. (Task Force Recommendation 

4c.)

The PRC has established a standing task 

force to, among other things, identify on a 

yearly basis the emerging/high-risk issues to 

be addressed by peer reviewers in the 

upcoming peer review cycle. The task force 

will also be responsible for updating the peer 

review guidance materials accordingly. In 

addition, the Chair of the PRC will be a 

member of the POB’s newly formed 

Coordinating Task Force. 

PRC

Issue: Peer Review

Findings From Panel 

Report

Recommendations Contained in Panel 

Report

Actions Taken as of September 2001 (as 

Reported by the POB, AICPA, SEC, and 

NASBA)

Recommendations 

Directed to
Appendix II

Actions Responding to Panel on Audit 

Effectivesness’ Recommendations

Page 53 GAO-02-411 Accounting Profession

11.4) The PRC should study the cost vs. 

benefit of more frequent peer reviewer 

involvement for Tier A firms in order to 

improve the effectiveness of the peer 

review process for these firms. (Task 

Force Recommendation 4d.)

This recommendation will be considered by 

the PRC after completion of the pilot test and 

standards revisions described above that will 

be applicable mostly to Tier B firms.

PRC

11.5) The PRC should establish a more 

formal means for continuously pursuing 

better approaches to performing peer 

reviews. (Task Force Recommendation 

4e.)

The PRC has established a standing task 

force to, among other things, be responsible 

for continuously reviewing the current peer 

review process and identifying better 

approaches for performing and reporting on 

peer reviews.

PRC

11.6) The SECPS should make clear to 

peer review team captains and reviewers 

that the POB, not the firm being reviewed, 

is the primary client. (Paragraph 6.40)

According to the AICPA, this recommendation 

cannot be implemented since the PRC, not 

the POB, is responsible for maintaining and 

administering the SECPS peer review 

program. The POB charter gives the POB 

responsibility for overseeing the activities of 

the PRC. The POB does not serve in a 

management capacity.

SECPS

12) Greater depth is 

needed by the POB in 

overseeing the 

performance of peer 

reviews. (Exhibit 4, 

page 7)

12.1) The POB should perform an indepth review of its current approaches to 

overseeing the performance of peer 

reviews (including reviewing the scope of 

the reviews, evaluation, and resolution of 

issues identified during the review, and 

communications of the results of the 

review) with the goal of identifying ways of 

gaining more timely (i.e., oversight of the 

work of the peer reviewers as it is being 

performed) and deeper involvement (i.e., 

participation with a peer reviewer in some 

interviews of audit engagement team 

members) by the staff and Board. (Task 

Force Recommendation 5a.)

The POB expanded its oversight of the peer 

review program to include visiting more offices 

of the largest firms that are being reviewed (5 

offices vs. 3 or 4 offices) and will be spending 

more time at those offices (5 days – 2 at the 

beginning of the review and 3 days at the end 

–vs. 3 days at the end of the review). Under 

the pilot program being tested in the 2001-

2002 peer review year, each of the 13 largest 

firms will undergo continuous review which will 

involve some level of peer review procedures 

every year (versus the previous triennial 

review requirement). The POB will conduct 

on-site oversight on all 13 firms’ reviews on a 

real-time basis. See action taken to 

recommendation 12.3 below for what the 

POB’s oversight will cover.

POB

Issue: Peer Review

Findings From Panel 

Report

Recommendations Contained in Panel 

Report

Actions Taken as of September 2001 (as 

Reported by the POB, AICPA, SEC, and 

NASBA)

Recommendations 

Directed to
Appendix II

Actions Responding to Panel on Audit 

Effectivesness’ Recommendations

Page 54 GAO-02-411 Accounting Profession

12.2) The POB should consider 

establishing a process for obtaining 

additional expertise to assist the POB 

staff, when necessary, in formulating the 

staff's views on significant matters that 

occasionally arise during the performance 

of peer reviews (i.e., to assist in evaluating 

matters where significant differences of 

professional judgment exist between the 

peer reviewers, reviewed firm, and/or POB 

staff). (Task Force Recommendation 5b.)

The POB hired five recently retired partners 

who held important quality control functions in 

their former firms to assist the POB in 

conducting oversight of the SECPS, including 

oversight of the peer reviews of the largest 

firms on a real-time basis.

POB

12.3) The POB should expand its 

oversight throughout the peer reviews of 

the largest firms on a "real-time" basis. 

The expanded oversight should cover, at a 

minimum, reviewing the qualifications of 

the peer review firm and the review team 

captain; attending all important meetings, 

focus groups, and interviews with firm 

personnel; reviewing the draft peer review 

reports before they are provided to others; 

and overseeing the planning of the review, 

and the review of the internal inspection 

program; the practice office and National 

office reviews; the debriefing of 

engagement reviewers at the conclusion 

of the reviews; and resolution of issues 

that arise during the reviews. (Paragraph 

6.41)

The fiscal 2002 budget contemplates 

expending 4000 hours for peer review 

oversight compared with 3000 hours spent 

overseeing the 2000-2001 peer review 

program. The POB has developed a 

document “SEC Practice Section Oversight” 

that specifies its oversight objectives and 

procedures with respect to the SECPS. The 

POB will continue to oversee the planning of 

peer reviews, the reviews of functional areas 

at both the national and practice offices, the 

reviews of the firms’ internal inspection 

programs, and the wrap-up of the reviews. 

However, the POB staff now will have more 

timely involvement on a real time basis in the 

resolution of issues arising during the reviews. 

The POB will continue to review the 

qualifications of the peer review firms and the 

review team captains, and when it believes 

appropriate, make suggestions for changes.

POB

Issue: Peer Review

Findings From Panel 

Report

Recommendations Contained in Panel 

Report

Actions Taken as of September 2001 (as 

Reported by the POB, AICPA, SEC, and 

NASBA)

Recommendations 

Directed to
Appendix II

Actions Responding to Panel on Audit 

Effectivesness’ Recommendations

Page 55 GAO-02-411 Accounting Profession

13) The Statements 

on Quality Control 

Standards (that 

provide that firms have 

a system of quality 

control) lack specificity. 

(Exhibit 4, page 8)

13.1) The ASB, in collaboration with the 

PRC and QCIC, should review the quality 

control standards and make them more 

specific and definitive for firms with public 

clients, especially for the largest firms. 

(Task Force Recommendation 6; and 

paragraph 6.42) 

The ASB has established a standing Quality 

Control Standards Task Force with 

representatives from the ASB, QCIC, PRC, 

and the AICPA Peer Review Board. The task 

force has preliminarily concluded that:

Statements on Auditing Standards (SASs), 

Statements on Standards for Attestation 

Engagements (SSAEs), and Statements on 

Standards for Accounting and Review 

Services (SSARSs) should be amended to 

clarify the relationship between these 

standards and the Statements on Quality 

Control Standards (SQCS).

Guide for Establishing and Maintaining a 

System of Quality Control for a CPA Firm’s 

Accounting and Auditing Practice (Guide) 

should be revised to reflect (1) recently issued 

SQCSs and (2) the POB Panel’s 

recommendation that the SQCSs be more 

specific and definitive. (Because the SQCSs 

cover the entire spectrum of attest services 

that are applicable to firms of all sizes, the 

task force believes the POB recommendation 

can best be addressed and implemented 

through more specificity to the Guide rather 

than the standards themselves.)

Through the process of updating the Guide, 

the task force will also consider whether any 

guidance should be elevated from the Guide 

to a standard.

SECPS and ASB

13.2) The ASB, PRC, and QCIC should 

establish a mechanism for on-going 

monitoring of the standards to keep them 

current. (Paragraph 6.42)

A standing Quality Control Standards Task 

Force has been established to monitor quality 

control standards and keep them current.

SECPS and ASB

14) The training 

courses and approach 

to training peer review 

captains and teams 

should be improved. 

(Exhibit 4, page 10)

14.1) The PRC should establish a 

standing task force that will oversee the 

peer review training programs to ensure 

that the training programs and methods of 

delivering them meet the needs of the 

peer review program. (Task Force 

Recommendation 7a.)

Members of the PRC and SECPS staff are 

now participating in the activities of the 

Education and Communications Task Force of 

the AICPA Peer Review Program. That Task 

Force is responsible for developing and 

overseeing appropriate peer review training 

programs.

PRC

Issue: Peer Review

Findings From Panel 

Report

Recommendations Contained in Panel 

Report

Actions Taken as of September 2001 (as 

Reported by the POB, AICPA, SEC, and 

NASBA)

Recommendations 

Directed to
Appendix II

Actions Responding to Panel on Audit 

Effectivesness’ Recommendations

Page 56 GAO-02-411 Accounting Profession

14.2) The PRC should develop a system 

for evaluating the performance of team 

captains. The results of such evaluations 

should be summarized on a periodic basis 

to identify team captains who are not 

performing at an acceptable level so that 

appropriate actions can be considered by 

the PRC. (Task Force Recommendation 

7b.)

The PRC implemented a more formal process 

for evaluating and monitoring the performance 

of peer review team captains that includes the 

completion of a written evaluation for each 

team captain whose performance on a peer 

review was deemed to be ineffective or 

unsatisfactory. POB staff provides input to 

these evaluations. The results are periodically 

summarized for consideration by the PRC so 

that appropriate actions can be taken.

PRC

15) A market-driven 

fee arrangement 

between a Committee 

Appointed Review 

Team (CART) and a 

firm would result in 

more qualified 

reviewers. (Exhibit 4, 

page 10)

15.1) The PRC should discontinue setting 

rates for peer reviews conducted by 

CARTs. Fees for participating in a CART 

review should be established by the firm 

being reviewed and the members of the 

review team. (Task Force 

Recommendation 7c.)

Effective April 1, 2001, the PRC discontinued 

allowing CARTs to be formed.

PRC

16) Peer review is only 

required for SECPS 

member firms. (Exhibit 

4, page 2)

16.1) The SEC should mandate that all 

firms that audit SEC registrants be 

enrolled in a peer review program that 

includes public oversight. With respect to 

foreign-based CPA firms, the requirement 

should extend to the peer review 

programs/processes in their foreign 

locations. (Paragraph 6.43)

The costs versus the benefits of mandating 

that all firms that audit SEC registrants join a 

peer review program would have to be 

considered in deciding whether to implement 

this recommendation. A previous SEC 

proposal to mandate such involvement was 

never adopted due, in part, to such concerns.

SEC

Issue: Peer Review

Findings From Panel 

Report

Recommendations Contained in Panel 

Report

Actions Taken as of September 2001 (as 

Reported by the POB, AICPA, SEC, and 

NASBA)

Recommendations 

Directed to
Appendix II

Actions Responding to Panel on Audit 

Effectivesness’ Recommendations

Page 57 GAO-02-411 Accounting Profession

Issue: Disciplinary Process

Findings From 

Panel Report

Recommendations Contained in Panel 

Report

Actions Taken as of September 2001 (as 

Reported by the POB, AICPA, SEC, and 

NASBA)

Recommendations 

Directed to

17) The disciplinary 

system is perceived 

to be slow and 

ineffective. 

(Paragraphs 6.15 and 

6.52)

17.1) The following procedures should be 

followed when civil litigation or a criminal or 

public regulatory investigation contains 

allegations of an audit failure: 

(1) Devote more resources to the QCIC to 

speed up the process. (2) A firm should 

conduct an internal review of the subject 

engagement to evaluate performance of the 

senior engagement personnel. The firm 

should respond to a standard question from 

the QCIC and POB staff, regarding whether 

the firm had conducted such a review. (3) 

The Ethics Division should inform the firm 

that its consideration of the matter was 

being deferred. (4) Upon notification by the 

Ethics Division regarding deferral, the firm 

should select one of the following three 

options to apply to the engagement partner 

during the period of deferral, if the partner 

was still with the firm: (A) Terminate or retire 

the partner; (B) Remove the partner from all 

public company audit engagements until the 

Ethics Division's process is complete; (C) 

Perform an additional second partner review 

of all public company audit engagements 

completed by the partner in the 12 months 

prior to the deferral. The firm would report 

the results of such review to both the QCIC 

and the POB, and subject the partner to 

additional oversight on all public company 

audit engagements for at least one year and 

thereafter subject the partner to those 

additional oversight procedures that are 

determined necessary. (5) The process 

implemented by SECPS member firms 

when they choose Option C should be 

subject to peer review and oversight by the 

POB. At least one engagement to which 

Option C is being applied should be a 

mandatory selection in the firm’s peer 

review and annual inspection program. If 

the POB disagrees with a member firm’s 

selection or method of applying Option C, it 

should promptly make its views known to the 

firm, SECPS committee representatives, 

and the SEC through its normal 

The SECPS membership requirement 

(Procedures in Connection with an Alleged 

Audit Failure) which became effective 

January 1, 2001, requires SECPS member 

firms to have quality control policies and 

procedures in place, so that, in the event of 

litigation alleging deficiencies in the conduct 

of an audit of financial statements of a 

present or former SEC client, the firms will 

report that matter to the QCIC and follow 

other applicable procedures of the QCIC. 

These procedures call for the member firm 

to conduct a review of the engagement that 

is the subject of the litigation in order to 

evaluate the performance of senior 

engagement personnel with respect to 

specific issues contained in the complaint 

against the firm or individuals. The QCIC 

will inquire whether the firm reviewed timely 

other public company audits that such senior 

audit personnel completed within the 

preceding 12 months. The QCIC will review 

the matter, and for each case that is closed 

by QCIC, the AICPA’s Professional Ethics 

Division is advised of those cases for which 

it is believed there may be engagement 

personnel issues of significance. The Ethics 

Division will assess whether or not the 

performance-specific issues warrant 

investigation. If the Ethics Division 

determines an investigation is appropriate, it 

will inform the member firm of that and also 

that the investigation of the matter will be 

deferred until the litigation is resolved. Once 

the member firm and the audit engagement 

partner involved have been notified by the 

Ethics Division that the matter is being 

deferred, then the firm must select one of the 

following options to apply to the engagement 

partner during the period of deferral, if that 

individual is still associated with the firm: (A) 

terminate or retire the individual from the 

member firm, (B) remove the individual from 

performing or supervising audits of public 

companies until the Ethics Division's ethics 

enforcement process is completed, or (C) 

SECPS, AICPA, the 

POB, and audit firms
Appendix II

Actions Responding to Panel on Audit 

Effectivesness’ Recommendations

Page 58 GAO-02-411 Accounting Profession

communication channels, and to the public 

through its annual report and other 

publications. (6) The POB should report on 

these activities in its Annual Report on an 

aggregate no-name basis. (7) SECPS 

member firms should apply one of the 

foregoing options to a professional that joins 

a member firm while subject to one of the 

options at his or her former firm. (8) The 

Ethics Division should refer matters to the 

QCIC that involve financial reporting of an 

SEC registrant in which the SECPS member 

firm has not been made a party, and the 

Ethics Division would otherwise open an 

investigation. (9) If the matter ends without 

the firm having been made a party, the 

QCIC would keep the case closed. If the 

firm becomes a party at a later date, the 

QCIC reporting requirement should be 

reduced to 15 days for the matter. (10) 

Once the Ethics Division referral is lifted, the 

Ethics Division should expedite its 

investigation of the matter. The AICPA 

should allocate additional resources to both 

QCIC and the Ethics Division to enable both 

bodies to perform their responsibilities 

promptly and effectively. (Paragraph 6.56)

subject the individual to additional, 

prescribed oversight on all public company 

audit engagements in which she/he is 

involved for at least 1 year. Additional 

oversight, for the purpose of this 

membership requirement, is defined to 

mean for at least 1 year, the individual will 

perform such audits subject to oversight by a 

senior technical partner appointed by the 

member firm’s Managing Partner/CEO. The 

senior technical partner oversight of such 

engagements, at a minimum, will meet the 

SECPS’s concurring partner review 

membership requirement, which in these 

circumstances, will include timely 

involvement in significant planning activities, 

the determination of risk assessments, and 

the designs of tests of controls and 

substantive audit procedures. Thereafter, 

the individual must remain under the 

additional oversight that the firm’s Managing 

Partner/CEO determines, in light of that 

person’s evaluation of the individual’s 

performance, is necessary to protect the 

public interest. Implementation of the option 

chosen is subject to review through the peer 

review process and by the POB. If the 

individual leaves the firm and joins another 

SECPS firm, the successor firm must select 

one of the three options. The Ethics Division 

and the QCIC staff recognize that it is in the 

public interest to cooperate with each other 

to minimize duplication of efforts, and are in 

constant communication regarding matters 

that may or may not involve litigation against 

an auditor of an SEC registrant. The Ethics 

Division and QCIC handle those matters that 

do not involve litigation on a case-by-case 

basis. Once the Ethics Division deferral is 

lifted, the Ethics Division expedites its 

investigation of the matter. The AICPA has 

allocated additional resources to both QCIC 

and the Ethics Division to enable both 

bodies to perform its responsibilities 

promptly and effectively. The POB will work 

with the PRC to develop peer review 

procedures to assure that (a) the firm has 

procedures in place to reasonably assure its 

compliance with the options chosen, and

(Continued From Previous Page)

Issue: Disciplinary Process

Findings From 

Panel Report

Recommendations Contained in Panel 

Report

Actions Taken as of September 2001 (as 

Reported by the POB, AICPA, SEC, and 

NASBA)

Recommendations 

Directed to
Appendix II

Actions Responding to Panel on Audit 

Effectivesness’ Recommendations

Page 59 GAO-02-411 Accounting Profession

(b) the peer review and inspection programs 

include the review of at least one 

engagement to which Option C was applied. 

POB is in the process of establishing a 

system to accumulate PEEC’s deferrals and 

the options chosen by the firms to apply to 

the engagement partner during the PEEC’s 

deferral period. The POB intends to report 

options chosen by the firms for those 

deferrals by the PEEC on an aggregate “noname” basis. The POB also oversees each 

QCIC case.

17.2) The POB and SECPS should review 

the results of implementing the Panel's 

recommendations concerning the 

disciplinary process over a 2- to 3-year 

period to determine their effectiveness. If 

the POB determines that these 

recommendations have not satisfactory 

protected the public, the POB, in 

cooperation with the SEC, should seek 

legislation to achieve the protections 

necessary to the make the disciplinary 

process more effective. (Paragraph 6.57)

New membership requirement concerning 

disciplinary procedures became effective for 

cases reported to the QCIC in 2001. The 

QCIC, SECPS Executive Committee, and 

POB will continually monitor the 

effectiveness of the requirement.

POB, SECPS, and 

SEC

17.3) The POB should leverage the 

knowledge it gains in its oversight of the 

disciplinary process recommended by the 

Panel, to determine whether changes in 

professional standards or further guidance 

is needed and communicate these findings 

to the appropriate standard-setters or 

authoritative bodies. (Paragraph 6.58)

The POB leverages knowledge it gains from 

its oversight of PRC, QCIC, as well as its 

liaison with PEEC, through its Coordinating 

Task Force. This task force will determine 

whether a need for changes in professional 

standards has been or should be 

communicated to standard-setters or other 

authoritative bodies, or the PITF if 

appropriate.

POB

18) Some state 

boards have not been 

effective in 

disciplining 

substandard conduct 

because of limited 

budgets and the lack 

of effective means to 

investigate 

allegations and 

impose discipline. 

(Paragraph 6.50)

No recommendation made.

(Continued From Previous Page)

Issue: Disciplinary Process

Findings From 

Panel Report

Recommendations Contained in Panel 

Report

Actions Taken as of September 2001 (as 

Reported by the POB, AICPA, SEC, and 

NASBA)

Recommendations 

Directed to
Appendix II

Actions Responding to Panel on Audit 

Effectivesness’ Recommendations

Page 60 GAO-02-411 Accounting Profession

19) The AICPA's 

Ethics Division 

cannot issue 

subpoenas (has to 

rely on the 

cooperation of the 

individual being 

investigated) or 

compel testimony 

(cannot talk to the 

plaintiff or client 

company involved). 

(Paragraphs 6.11 and 

6.51)

No recommendation made.

20) The AICPA's 

Ethics Division 

investigations and 

QCIC files are not 

privileged and are 

subject to subpoena. 

(Paragraphs 6.48 and 

6.54)

No recommendation made.

21) The AICPA's 

Ethics Division can 

impose only limited 

sanctions. Their 

disciplinary authority 

extends only to a 

CPAs membership 

rights in the AICPA or 

a state society of 

CPA's (state boards 

are the only agencies 

that can revoke a 

CPA license). 

(Paragraphs 6.6, 

6.49, and 6.51)

No recommendation made.

(Continued From Previous Page)

Issue: Disciplinary Process

Findings From 

Panel Report

Recommendations Contained in Panel 

Report

Actions Taken as of September 2001 (as 

Reported by the POB, AICPA, SEC, and 

NASBA)

Recommendations 

Directed to
Appendix II

Actions Responding to Panel on Audit 

Effectivesness’ Recommendations

Page 61 GAO-02-411 Accounting Profession

22) The AICPA's 

Ethics Division's 

disciplinary 

proceedings are not 

timely (they are 

deferred while 

litigation or regulatory 

proceedings are in 

process). 

(Paragraphs 6.11, 

6.51, and 6.52)

22.1) The Ethics Division takes all 

necessary actions to ensure timely 

processing of investigations involving audits 

of SEC registrants when the civil litigation 

and public regulatory investigations have 

been concluded. The Ethics Division should 

establish reasonable time frames for these 

matters and report the status of all such 

matters to the POB semiannually. 

(Paragraph 6.31)

The Ethics Division has received additional 

resources in order to process investigations 

involving audits of SEC registrants in a 

timely manner and has developed 

aggressive timelines to process the cases 

once litigation or regulatory investigations 

have been concluded. The PEEC has 

appointed a Statistical Reporting Task Force 

and a Disciplinary Task Force with the 

objectives of improving statistical reporting 

and making the information reported more 

descriptive and informative. A representative 

of the POB attends the meetings of the 

Statistical Reporting Task Force.

AICPA 

23) The AICPA's 

Ethics Division's 

proceedings are 

confidential, and thus 

the public cannot 

determine what went 

wrong when a 

sanction is imposed, 

and in some cases 

whether a sanction 

was imposed. 

Similarly, the QCIC's 

corrective actions it 

imposes on firms are 

not made public. 

(Paragraph 6.51)

No recommendation made. The PEEC has appointed a Statistical 

Reporting Task Force and a Disciplinary 

Task Force with the objectives of improving 

statistical reporting and making the 

information reported more descriptive and 

informative. A representative of the POB 

attends the Statistical Reporting Task Force 

meetings.

24) The SEC has 

limited resources to 

pursue cases against 

auditors. (Paragraphs 

6.5 and 6.50)

24.1) The SEC should allocate additional 

resources to its enforcement activities 

directed at allegations of failed audits. 

(Paragraph 6.59)

SEC officials stated that encouraging 

companies to engage in cooperative 

measures such as self-policing prior to the 

discovery of misconduct, self-reporting of 

misconduct when discovered, remediation, 

and cooperating with law enforcement 

authorities will allow the SEC to maximize 

the use of its enforcement staff and to 

concentrate on bringing prompt corrective 

action in the most egregious cases.

SEC

(Continued From Previous Page)

Issue: Disciplinary Process

Findings From 

Panel Report

Recommendations Contained in Panel 

Report

Actions Taken as of September 2001 (as 

Reported by the POB, AICPA, SEC, and 

NASBA)

Recommendations 

Directed to
Appendix II

Actions Responding to Panel on Audit 

Effectivesness’ Recommendations

Page 62 GAO-02-411 Accounting Profession

24.2) The SEC should periodically 

undertake similar studies (such as the study 

of AAERs in Appendix F to the Panel's 

report) and disseminate the results. 

(Paragraph 6.60)

The SEC does not plan to taken any 

additional actions to implement this 

recommendation. While SEC officials stated 

that they believe a continuing analysis of 

AAERs is important, they believe that 

significant AAERs are currently being 

analyzed and digested on a real-time basis 

by a number of organizations, including the 

press, the accounting profession, accounting 

and auditing standard-setters, academia, 

and others. The incremental benefits of an 

additional annual or biennial study by SEC 

staff, therefore, may not be sufficient to 

justify the resources it would take to 

complete such a study.

SEC

24.3) The SEC should document 

information on the auditors' work in every 

enforcement investigation involving 

materially misstated financial statements, 

not just those in which the auditor is named 

in the AAER. (Paragraph 6.60)

The SEC does not plan to taken any 

additional actions to implement this 

recommendation. The SEC stated that its 

Division of Enforcement has for many years 

reviewed the conduct of auditors in 

essentially every investigation related to 

materially misstated financial statements. 

When appropriate, the division recommends 

enforcement or disciplinary action against an 

auditor. In circumstances where the SEC 

concludes that a disciplinary action is not 

appropriate, SEC officials stated that it is 

unclear to them what benefit accrues from a 

public airing of the SEC’s determination.

SEC

(Continued From Previous Page)

Issue: Disciplinary Process

Findings From 

Panel Report

Recommendations Contained in Panel 

Report

Actions Taken as of September 2001 (as 

Reported by the POB, AICPA, SEC, and 

NASBA)

Recommendations 

Directed to
Page 63 GAO-02-411 Accounting Profession

Appendix III

Comments From the Public Oversight Board ApendxiI

Attachments A and B to this 

letter are not included in 

this report. However, they 

are available on the Public 

Oversight Board’s web site 

(http://www.publicoversight

board.org).
Appendix III

Comments From the Public Oversight Board

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Comments From the Public Oversight Board

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Appendix III

Comments From the Public Oversight Board

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Comments From the Public Oversight Board

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Comments From the Public Oversight Board

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Appendix IV

Comments From the American Institute of 

Certified Public Accountants ApendxiIV
Appendix IV

Comments From the American Institute of 

Certified Public Accountants

Page 70 GAO-02-411 Accounting Profession
Appendix IV

Comments From the American Institute of 

Certified Public Accountants

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Appendix V

Comments From the National Association of 

State Boards of Accountancy ApendxiV
Appendix V

Comments From the National Association of 

State Boards of Accountancy

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Appendix V

Comments From the National Association of 

State Boards of Accountancy

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Appendix VI

Accounting Profession: Oversight, Auditor 

Independence, and Financial Reporting IssuesApendxiVI

GAO-02-742R Accounting Profession Issues

United States General Accounting Office

Washington, DC 20548

Comptroller General

of the United States

May 3, 2002

The Honorable Paul S. Sarbanes

Chairman, Committee on Banking,

 Housing, and Urban Affairs

United States Senate

Subject: Accounting Profession: Oversight, Auditor Independence,

and Financial Reporting Issues

Dear Mr. Chairman:

This letter responds to your recent request that we provide our views regarding what

steps the Congress should consider taking to strengthen oversight of the accounting

profession, auditor independence, and selected financial reporting matters. The

sudden and largely unexpected bankruptcy of the Enron Corporation (Enron) and

other large corporations’ financial reporting restatements have raised questions about

the soundness of the current self-regulatory and financial reporting systems and

resulted in substantial losses to employees, shareholders, and other investors. These

events have also raised a range of questions regarding how such dramatic and

unexpected events can happen and the role and capacities of various key players

under the existing systems.

The issues surrounding the accounting profession’s current self-regulatory system for

auditors involves many players in a fragmented system that is not well coordinated,

involves certain conflicts of interest, lacks effective communication, has a funding

mechanism that is dependent upon voluntary contributions from the accounting

profession, and has a discipline system that is largely perceived as being ineffective.

(Enclosure 1 serves to illustrate the complexity of the current system of regulation

and oversight and the stakeholders who rely on the system.)

Simply stated, the current self-regulatory system is broken and oversight of the selfregulatory system by the Securities and Exchange Commission (SEC) has not been

effective in addressing these issues to adequately protect the public interest. As a

result, given the important role that independent auditors play and various inherent

problems in the current self-regulatory system, direct government intervention is

needed to statutorily create a new body to oversee the accounting profession’s

responsibilities for auditing public companies. This step is necessary in order to

increase the effectiveness of the audit process and to rebuild public confidence.

The new body should be independent of the accounting profession, have significant

standards-setting, oversight, and disciplinary authority, be adequately resourced to
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fulfill its responsibilities, and have sufficient operating flexibility to attract and retain

quality leadership and supporting staff.

On the other hand, the concerns relating to the timeliness, relevancy and

transparency of the financial reporting model may be best addressed through the

SEC working more closely with the Financial Accounting Standards Board (FASB),

assuring that the FASB has an adequate and independent source of funding for its

operations, and reporting periodically to the Congress in connection with certain

FASB matters. If such an approach is not successful in achieving the expected

improvements in the financial reporting model in a timely and effective manner,

the government can then take further action.

The areas of oversight of the accounting profession, auditor independence, and

financial reporting are important on their own, but they also represent interrelated

keystones to protecting the public’s interest. Failure in any of these areas can place

a strain on the entire system. Consequently, potential actions should be guided by

the fundamental principles of having the right incentives for the key parties to do the

right thing, adequate transparency to provide reasonable assurance that the right

thing will be done, and full accountability if the right thing is not done. These three

fundamental principles represent a system of controls that should operate in

conjunction with a policy of placing special attention on areas of greatest risk.

NEW BODY NEEDED TO REGULATE AND

OVERSEE THE ACCOUNTING PROFESSION

Enron’s failure and a variety of other recent events have brought a direct focus on the

ineffectiveness of the current system of regulation and oversight of the accounting

profession. Independent auditors have a key role to play in protecting shareholders

and the public’s interest in our capital market system. They hold a public trust and

their actions or inactions can have significant implications on investors, creditors

and other users of financial reports. In this regard, auditors must place additional

emphasis on whether financial statements are “fairly presented in all material

respects” in addition to their traditional emphasis on whether such financial

statements are prepared “in accordance with generally accepted accounting

principles.” Fair presentation requires providing reasonable assurance that major

value and risk elements are appropriately reflected in the financial statements and

related notes in an understandable fashion. It also requires employing an “economic

substance” versus “transaction form” approach to important accounting and

reporting issues.

Many proposals are before the Congress to establish a new body to regulate and/or

oversee accounting firms that audit public companies. In our view, the Congress

should consider the following key factors or criteria in establishing this new body,

each of which is critical to its likely effectiveness.
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Functions of the New Body

The new body should have direct responsibility and authority for certain critical

functions in connection with public accounting firms and their members who audit

public companies. These include:

• establishing professional standards (independence standards; quality control

standards, auditing standards, and attestation standards). The new body should

be authorized to issue professional standards. In that respect, the new body

should also be authorized to affirmatively adopt, at its discretion, professional

standards, in whole or in part, promulgated by another standard-setting body.

In the area of new standards, the new body may choose to require auditor

reporting on the effectiveness of internal control over financial reporting in

connection with audits of public companies, which is currently not required

under existing auditing standards. It may also decide not to affirmatively adopt

a standard developed by another standard-setting body but instead issue a

modified version of the standard.

• monitoring public accounting firms for compliance with applicable professional

standards. For efficiency, except for quality reviews of the largest firms and those

firms in which the nature of the audits they perform pose a higher level of risk

as determined by the new body, the new body should be authorized to use

contractors or accounting firms to perform quality reviews in accordance with

standards and processes set by the new body. However, the new body should

have final approval authority in connection with any quality review engagements

performed by any contractors or accounting firms.

• investigating and disciplining public accounting firms and/or individual auditors

of public accounting firms who do not comply with applicable professional

standards. Investigations and disciplinary actions of the new body should be in

addition to existing investigatory and disciplinary authority that already exists

with the SEC and state boards of accountancy.

• establishing various auditor rotation requirements for key public company audit

engagement personnel (i.e., primary and second partners, and engagement

managers). Related to this function, we believe the new body should undertake a

study and report to the Congress on the pros and cons of any mandatory rotation

of accounting firms that audit public companies before taking any action with

regard to establishing requirements for any mandatory rotation of accounting

firms.

Funding for the New Body

The new body should have independent sources of funding by virtue of mandatory,

not voluntary, payments. Public accounting firms and audit partners that audit

financial statements, reports, or other documents of public companies that are

required to be filed with the SEC should be required to register with the new body.

The new body should have the authority to set annual registration fees and fees for
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services such as peer reviews of public accounting firms. The fees should be set to

recover full costs and sustain the operations of the new body.

Reporting Requirement of the New Body

and GAO Access to Records

The new body should report annually to the Congress and the public on the full

range of its activities, including coordination with other standard-setting bodies

whose standards it so chooses to adopt, setting professional standards, peer reviews

of public accounting firms, and related disciplinary activities. Such reporting also

provides the opportunity for the Congress to conduct oversight of the performance

of the new body. The Congress also may wish to have GAO review and report on the

performance of the new body after the first year of its operations and periodically

thereafter. Accordingly, we suggest that the Congress provide GAO not only access

to the records of the new body, but also access to the records of other entities that

the new body has chosen to rely on, such as other standard-setting bodies, and

contractors or public accounting firms that conduct quality reviews, to the extent

GAO considers necessary to assess the performance of the new body.

Structure of the New Body

The new body should be created by statute and should be independent of the

accounting profession. To facilitate operating independently, the new body’s board

members should be highly qualified and should have authority to set and approve its

operating rules. The new body should have independent decision-making authority;

however, it should coordinate and communicate its activities with other parties such

as the SEC, the various state boards of accountancy, other standard- setters, and

GAO, as appropriate. The new body should set its own human resource and other

administrative requirements and should be given appropriate flexibility to provide

compensation that is competitive to attract highly competent board members and

supporting staff. The new body should also have adequate staff to effectively

discharge its responsibilities.

Candidates for the new body’s board membership could be identified through a

nominating committee that could include the Chairman of the Federal Reserve,

Chairman of the SEC, the Secretary of the Treasury, and the Comptroller General

of the United States. This approach would help to assure the qualifications and

independence of all board members.

The number of board members could be 5 or 7 and have stated terms, such as 5 years

with a limited renewal option, and the members’ initial terms should be staggered to

ensure some continuity. Ideally, the members of the board should be presidential

appointees who are confirmed by the Senate (PASs). However, if the board members

are not PASs, the board should be actively overseen by and accountable to a body

that is composed of PASs, such as the SEC, in order to assure adequate

accountability to the Congress and the public. At a minimum, the chair and vice-chair

should serve on a full-time basis. None of the board members should be active
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accounting profession practitioners, and a majority of board members should not

have been accounting profession practitioners within the recent past (e.g., 3 years).

There are several alternative structures that the Congress could choose from in

establishing the new body, including creating (1) a new unit within the SEC, (2)

an independent government entity within the SEC, (3) an independent government

agency outside the SEC, or (4) a non-governmental private-sector entity overseen

by the SEC. Each of the above alternative structures have various pros and cons that

should be considered in order to assure the credibility and effectiveness of the new

body in protecting the public interest. We believe that each of the alternative

structures provides an organizational foundation for managing and operating the

new body that potentially is workable. For the following reasons, we favor

alternatives two and three and believe they have a greater likelihood of success.

Under alternatives one and four, the new body’s functions (e.g., establishing

professional standards, monitoring, and discipline) would be subject to SEC

approval in order to assure that all actions are in the public’s interest and appropriate

accountability to the Congress and the public. This, however, would increase the

SEC’s responsibility as well as its workload, for the agency and the Commissioners,

both of which are already overloaded. Also, under alternatives one and four the new

body’s board members would not likely be PASs since under alternative one the SEC

Chair and other Commissioners are PASs, and since alternative four involves a nongovernmental entity. Therefore, under alternatives one and four, the new body would

have less direct accountability to the Congress and the public than a body with board

members who are PASs. This limitation could be mitigated to some extent by

ensuring that regardless of the structure of the new body that board members are

selected from candidates provided by an independent and appropriately qualified

nominating committee as previously discussed.

Although a structure that provides direct accountability to the Congress and the

public is important in our view, a more critical question regarding the structure of

alternatives one and four is whether the SEC has the capacity to effectively take on

such an additional workload. Clearly, the SEC has the culture and potential to

perform an active oversight role and this would be in line with its current mission.

But, does it realistically have the capacity to do so? From a historical perspective,

while the SEC has had authority for over 70 years to regulate the public accounting

profession under the federal securities laws and regulations related to public

companies, it has largely relied on the public accounting profession to regulate itself.

It is now apparent that this model has not adequately protected the public’s interest.

Therefore, the SEC would need to institute a new function within its organization, as

called for in alternative one, or a new oversight structure for a private-sector entity

outside the SEC, as called for in alternative four, both of which would require

additional resources and a significant increase in priority to more directly regulate

the accounting profession at a time when the SEC is already facing a range of

challenges in fulfilling its current responsibilities. Further, we believe that the SEC

also needs to increase the amount of time and attention that it allocates to interacting

with the FASB, the stock exchanges, and the investment banking/analyst community.
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As we recently reported,1

 the SEC’s ability to fulfill its mission has become

increasingly strained due, in part, to significant imbalances between the SEC’s

workload (such as filings, complaints, inquiries, investigations, examinations,

and inspections) and staff resources. Although additional resources could help the

SEC do more, additional resources alone would not help the SEC address its high

staff turnover, which continues to be a major challenge for the agency. About

40 percent of the SEC’s staff left the agency between 1998 and 2001 and, as a result,

the average level of experience at the SEC has been declining. For example, in 2000,

76 percent of the SEC’s examiners had been with the agency less than 3 years.

However, we also reported that the SEC has not made effective use of strategic

planning and information technology to leverage its limited resources. In addition to

putting more strain on the SEC’s capacity, alternatives one and four would also likely

be less efficient models for the new body to operate under by requiring additional

time and attention from the SEC.

Alternative two, which calls for the creation of an independent government entity

within the SEC, and alternative three, which calls for the creation of an independent

government agency outside the SEC, do not pose the same capacity challenges for

the SEC, especially at the Commissioner level, as alternatives one and four. Also,

alternatives two and three both meet each of the critical factors outlined above for

the structure of the new body. We recognize there may be concern over adding

more political appointments that have to be Senate confirmed, as called for under

alternatives two and three, given the recent challenges of filling positions that are

PASs. However, having an independent entity overseen by PASs serves to

significantly enhance the entity’s accountability to the Congress and the public.

Of these two alternatives, we favor alternative two as having a greater likelihood of

success because the new body would be housed within the SEC and, therefore, could

receive administrative support from the SEC, including human resources, payroll, and

other administrative support. More importantly, this alternative should better

facilitate communication and provide for maximum coordination with the SEC, while

also allowing the new body the independence to design its own policies and

procedures and systems as it deemed appropriate. In addition, alternative two would

not require the Congress to create a separate federal entity. Alternative two would

also facilitate a consolidation of the new entity under the SEC in future years if such

a consolidation was deemed to be both desirable and appropriate. Therefore, we

believe that alternative two has the greatest likelihood of success in terms of

potential effectiveness, efficiency, and accountability of the new body. However,

as previously stated, each of the alternative structures has merit and can potentially

work if properly designed and implemented.

AUDITOR INDEPENDENCE

For over 70 years, the public accounting profession, through its independent audit

function, has played a critical role in enhancing a financial reporting process that has

 1 SEC Operations: Increased Workload Creates Challenges, (GAO-02-302, March 5, 2002).
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supported the effective functioning of our domestic capital markets, which are widely

viewed as the best in the world. The public’s confidence in the reliability of issuers’

financial statements, which relies in large part on the role of independent auditors,

serves to encourage investment in securities issued by public companies. This sense

of confidence depends on reasonable investors perceiving auditors as independent

expert professionals who have neither mutual, nor conflicts of, interests in

connection with the entities they are auditing. Accordingly, investors and other users

expect auditors to bring to the financial reporting process integrity, independence,

objectivity, and technical competence, and to prevent the issuance of misleading

financial statements.

Enron’s failure and certain other recent events have raised questions concerning

whether auditors are living up to the expectations of the investing public; however,

similar questions have been raised over a number of years due to significant

restatements of financial statements and certain unexpected and costly business

failures, such as the savings and loan crisis. Issues debated over the years continue

to focus on auditor independence concerns and the auditor’s role and

responsibilities. Public accounting firms providing nonaudit services to their audit

client is one of the issues that has again surfaced by Enron’s failure and the large

amount of annual fees collected by Enron’s independent auditor for nonaudit

services.

Auditors have the capability of performing a range of valuable services for their

clients, and providing certain nonaudit services can ultimately be beneficial to

investors and other interested parties. However, in some circumstances, it is not

appropriate for auditors to perform both audit and certain nonaudit services for the

same client. In these circumstances, the auditor, the client, or both will have to make

a choice as to which of these services the auditor will provide. These concepts,

which we strongly believe are in the public’s interest, are reflected in the revisions to

auditor independence requirements for government audits,2

 which GAO recently

issued as part of Government Auditing Standards.

3

 The new independence standard

has gone through an extensive deliberative process over several years, including

extensive public comments and input from my Advisory Council on Government

Auditing Standards.4

 The standard, among other things, toughens the rules associated

with providing nonaudit services and includes a principle-based approach to

addressing this issue, supplemented with certain safeguards. The two overarching

principles in the standard for nonaudit services are that:

 2

Government Auditing Standards: Amendment No. 3, Independence (GAO-02-388G, January 2002).

3

Government Auditing Standards was first published in 1972 and is commonly referred to as the

“Yellow Book,” and covers federal entities and those organizations receiving federal funds. Various

laws require compliance with the standards in connection with audits of federal entities and funds.

Furthermore, many states and local governments and other entities, both domestically and

internationally, have voluntarily adopted these standards.

4

 The Advisory Council includes 20 experts in financial and performance auditing and reporting drawn

from all levels of government, academia, private enterprise, and public accounting, who advise the

Comptroller General on Government Auditing Standards.
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• auditors should not perform management functions or make management

decisions, and

• auditors should not audit their own work or provide nonaudit services in

situations where the amounts or services involved are significant or material to

the subject matter of the audit.

Both of the above principles should be applied using a substance over form doctrine.

Under the revised standard, auditors are allowed to perform certain nonaudit

services provided the services do not violate the above principles; however, in most

circumstances certain additional safeguards would have to be met. For example,

(1) personnel who perform allowable nonaudit services would be precluded from

performing any related audit work, (2) the auditor’s work could not be reduced

beyond the level that would be appropriate if the nonaudit work were performed

by another unrelated party, and (3) certain documentation and quality assurance

requirements must be met. The new standard includes an express prohibition

regarding auditors providing certain bookkeeping or record keeping services and

limits payroll processing and certain other services, all of which are presently

permitted under current independence rules of the AICPA. However, our new

standard allows the auditor to provide routine advice and technical assistance on

an ongoing basis and without being subject to the additional safeguards.

The focus of these changes to the government auditing standards is to better serve

the public interest and to maintain a high degree of integrity, objectivity, and

independence for audits of government entities and entities that receive federal

funding. However, these standards apply only to audits of federal entities and those

organizations receiving federal funds, and not to audits of public companies. In the

transmittal letter issuing the new independence standard, we expressed our hope

that the AICPA would raise its independence standards to those contained in this

new standard in order to eliminate any inconsistency between this standard and

their current standards. The AICPA’s recent statement before another congressional

committee that the AICPA will not oppose prohibitions on auditors providing certain

nonaudit services seems to be a step in the right direction.5

The independence of public accountants is crucial to the credibility of financial

reporting and, in turn, the capital formation process. Auditor independence

standards require that the audit organization and the auditor be independent both

in fact and in appearance. These standards place responsibility on the auditor and

the audit organization to maintain independence so that opinions, conclusions,

judgments, and recommendations will be impartial and will be viewed as being

impartial by knowledgeable third parties. Because independence standards are

fundamental to the independent audit function, as part of its mission, the new

statutorily created body, which we previously discussed, should be responsible for

setting independence standards for audits of public companies, as well as have the

 5

 Testimony of AICPA Chairman before the House Energy and Commerce Committee (Subcommittee

on Communications, Trade and Consumer Protection), February 14, 2002.
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authority to discipline members of the accounting profession that violate such

standards.

FINANCIAL REPORTING

Business financial reporting is critical in promoting an effective allocation of capital

among companies. Financial statements, which are at the center of present-day

business reporting, must be timely, relevant, and reliable to be useful for decisionmaking. In our 1996 report on the accounting profession,6

 we reported that the

current financial reporting model does not fully meet users’ needs. More recently,

we have noted that the current reporting model is not well suited to identify and

report on key value and risk elements inherent in our 21st Century knowledge-based

economy. The SEC is the primary federal agency currently involved in accounting

and auditing requirements for publicly traded companies but has traditionally relied

on the private sector for setting standards for financial reporting and independent

audits, retaining a largely oversight role. Accordingly, the SEC has accepted rules set

by the FASB—generally accepted accounting principles (GAAP)—as the primary

standard for preparation of financial statements in the private sector.

We found that despite the continuing efforts of FASB and the SEC to enhance

financial reporting, changes in the business environment, such as the growth in

information technology, new types of relationships between companies, and the

increasing use of complex business transactions and financial instruments,

constantly threaten the relevance of financial statements and pose a formidable

challenge for standard setters. A basic limitation of the model is that financial

statements present the business entity’s financial position and results of its

operations largely on the basis of historical costs, which do not fully meet the broad

range of user needs for financial information.7

 Enron’s failure and the inquiries that

have followed have raised many of the same issues about the adequacy of the current

financial reporting model, such as the need for additional transparency, clarity, more

timely information, and risk-oriented financial reporting.

Among other actions to address the Enron-specific accounting issues, the SEC has

requested that the FASB address the specific accounting rules related to Enron’s

special purpose entities and related party disclosures. In addition, the SEC Chief

Accountant has also raised concerns that the current standard-setting process is too

cumbersome and slow and that much of the FASB’s guidance is rule-based and too

 6

The Accounting Profession: Major Issues: Progress and Concerns (GAO/AIMD-96-98, September 24,

1996).

7

The accounting and reporting model under generally accepted accounting principles is actually a

mixed-attribute model. Although most transactions and balances are measured on the basis of

historical cost, which is the amount of cash or its equivalent originally paid to acquire an asset, certain

assets and liabilities are reported at current values either in the financial statements or related notes.

For example, certain investments in debt and equity securities are currently reported at fair value,

receivables are reported at net realizable value, and inventories are reported at the lower of cost or

market value. Further, certain industries such as brokerage houses and mutual funds prepare financial

statements on a fair value basis.
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complex. He believes that (1) a principle-based standards will yield a less complex

financial reporting paradigm that is more responsive to emerging issues, (2) the FASB

needs to be more responsive to accounting standards problems identified by the SEC,

and (3) the SEC needs to give the FASB freedom to address the problems, but the

SEC needs to monitor projects on an ongoing basis and, if they are languishing,

determine why.

We generally agree with the SEC Chief Accountant’s assessment. We also believe

that the issues surrounding the financial reporting model can be effectively addressed

by the SEC, in conjunction with the FASB, without statutorily changing the standardsetting process. However, we do believe that a more active and ongoing interaction

between the SEC and the FASB is needed to facilitate a mutual understanding of

priorities for standard-setting, realistic goals for achieving expectations, and timely

actions to address issues that arise when expectations are not likely to be met. In

that regard, the SEC could be directed to:

• reach agreement with the FASB on its standard-setting agenda, approach to

resolving accounting issues, and timing for completion of projects;

• monitor the FASB’s progress on projects, including taking appropriate actions

to resolve issues when projects are not meeting expectations; and

• report annually to the Congress on the FASB’s progress in setting standards,

along with any recommendations, and the FASB’s response to the SEC’s

recommendations.

The Congress may wish to have GAO evaluate and report to it one year after

enactment of legislation and periodically thereafter on the SEC’s performance in

working with the FASB to improve the timeliness and effectiveness of the accounting

standard-setting process. Accordingly, we suggest that the Congress provide GAO

access to the records of the FASB that GAO considers necessary for it to evaluate the

SEC’s performance in working with the FASB.

The FASB receives about two-thirds of its funding from the sale of publications with

the remainder of its funding coming voluntarily from the accounting profession,

industry sources, and others. One of the responsibilities of the FASB’s parent

organization, the Financial Accounting Foundation, is to raise funds for the FASB and

its standard-setting process to supplement the funding that comes from the FASB’s

sale of publications. Some have questioned whether this is the best arrangement to

ensure the independence of the standard-setting process. This issue has been raised

by the appropriateness of certain accounting standards related to consolidations, that

the FASB has been working on for some time, applicable to Enron’s restatement of

its financial statements as reported to the SEC by Enron in its November 8, 2001,

Form 8-K filing. However, the issue has previously been raised when the FASB has

addressed other controversial accounting issues, such as accounting for stock

options. We believe that the FASB should have mandatory sources of funding to

remove the appearance of any independence issues related to funding FASB.

Therefore, the Congress may wish to task the SEC with studying this issue and
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identifying alternative sources of mandatory funding to supplement the FASB’s sale

of publications, including the possibility of imposing fees on registrants and/or firms,

and to report to the Congress on its findings and actions taken to address the funding

issue.

CLOSING COMMENTS

The United States has the largest and most respected capital markets in the world.

Our capital markets have long enjoyed a reputation of integrity that promotes

investor confidence. This is critical to our economy and the economies of other

nations given the globalization of commerce. However, this long-standing reputation

is now being challenged by some parties. The effectiveness of systems relating to

independent audits and financial reporting which represent key underpinnings of

capital markets and are critical to protecting the public’s interest, has been called

into question by the failure of Enron and certain other events and practices.

Although the human elements can override any system of controls, it is clear that

there are a range of actions that are critical to the effective functioning of the system

underlying capital markets that require attention. In addition, a strong enforcement

function with appropriate civil and criminal sanctions is also needed to ensure

effective accountability when key players fail to properly perform their duties and

responsibilities.

The accounting profession’s self-regulatory system has not effectively fulfilled its

responsibilities. In addition, the current model whereby the SEC oversees various

self-regulatory organizations in connection with financial reporting and auditing has

not worked well, especially in connection with audits of public companies. Further,

the SEC is not staffed to take on a more direct role in regulating the accounting

profession nor has the SEC strategically managed its limited resources well.

Therefore, we strongly believe that a new independent body, created by statute to

regulate audits of public companies, is needed in order to better protect the public’s

interest. However, currently we do not believe that it is necessary or appropriate for

the government to assume direct responsibility for financial reporting. We do,

however, believe that the Congress should provide the SEC with direction to address

the issues concerning financial reporting as we have previously discussed.

In summary, Enron’s recent sudden collapse, coupled with other recent business

failures and certain other activities, pose a range of serious issues concerning the

accounting profession and financial reporting that should be addressed. The

fundamental principles of having the right incentives, adequate transparency, and

full accountability provide a good sounding board to evaluate proposals that are

advanced. In the end, no matter what improvements are made to strengthen the

oversight and independence of the accounting profession and enhance the relevancy

and transparency of financial reporting, bad actors will do bad things with bad

results. We must, however, strive to take steps to minimize the number of such

situations and to hold any violators of the system fully accountable for their actions.
Appendix VI

Accounting Profession: Oversight, Auditor 

Independence, and Financial Reporting 

Issues

Page 86 GAO-02-411 Accounting Profession

Page 12 GAO-02-742R Accounting Profession Issues

We would be pleased to meet with you or other members of the committee to answer

any questions that you may have or to provide further assistance.

Sincerely yours,

David M. Walker

Comptroller General

of the United States

Enclosure
Appendix VI

Accounting Profession: Oversight, Auditor 

Independence, and Financial Reporting 

Issues

Page 87 GAO-02-411 Accounting Profession

Page 13 GAO-02-742R Accounting Profession Issues

ENCLOSURE 1 ENCLOSURE 1

(194124)

Public

regulation

Financial reporting

Enforcement

• Boards of directors

• Audit committees

• Management

responsibilities for

- Financial reporting

- Internal controls

- Compliance with 

laws and regulations

- Code of ethics

Publicly traded

companies

Private sector regulation

Financial 

audits and

consulting 

services

Broker dealers 

NASDAQ

Independence standards for auditors of SEC registrants

Delegated

responsibility

FASB

Corporate 

governance

FAF

Self-regulatory

organizations

e.g. NYSE 

 NASD

SEC

Public

accounting

firms 

NYSE exchange

Direct Responsibility Oversight Delegated Responsibility

Individual Investors

Institutional Investors

Banks and Lenders (creditors)

Rating Agencies

Public Interest

Effective Financial and 

Capital Markets

State boards

of accountancy

ASB

PEEC

SECPS

(Peer review)

AICPA

POB

(194030)
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