[Federal Register Volume 73, Number 147 (Wednesday, July 30, 2008)]
[Notices]
[Pages 44315-44350]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-17441]


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DEPARTMENT OF THE TREASURY


Second Draft Report of the Advisory Committee on the Auditing 
Profession

AGENCY: Office of the Undersecretary for Domestic Finance, Treasury.

ACTION: Notice; request for comments.

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SUMMARY: The Advisory Committee on the Auditing Profession is 
publishing a Second Draft Report and soliciting public comment.

DATES: Comments should be received on or before August 26, 2008.

ADDRESSES: Comments may be submitted to the Advisory Committee by any 
of the following methods:

Electronic Comments

    <bullet> Use the Department's Internet submission form (http://www.treas.gov/offices/domestic-finance/acap/comments); or

[[Page 44316]]

Paper Comments

    <bullet> Send paper comments in triplicate to Advisory Committee on 
the Auditing Profession, Office of Financial Institutions Policy, Room 
1418, Department of the Treasury, 1500 Pennsylvania Avenue, NW., 
Washington, DC 20220.
    In general, the Department will post all comments on its Web site 
(http://www.treas.gov/offices/domestic-finance/acap/comments) without 
change, including any business or personal information provided such as 
names, addresses, e-mail addresses, or telephone numbers. The 
Department will also make such comments available for public inspection 
and copying in the Department's Library, Room 1428, Main Department 
Building, 1500 Pennsylvania Avenue, NW., Washington, DC 20220, on 
official business days between the hours of 10 a.m. and 5 p.m. Eastern 
Time. You can make an appointment to inspect comments by telephoning 
(202) 622-0990. All comments, including attachments and other 
supporting materials, received are part of the public record and 
subject to public disclosure. You should submit only information that 
you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Kristen E. Jaconi, Senior Policy 
Advisor to the Under Secretary for Domestic Finance, Department of the 
Treasury, Main Department Building, 1500 Pennsylvania Avenue, NW., 
Washington, DC 20220, at (202) 927-6618.

SUPPLEMENTARY INFORMATION: At the request of the two Co-Chairs of the 
Department of the Treasury's Advisory Committee on the Auditing 
Profession, the Department is publishing this notice soliciting public 
comment on the Advisory Committee's Second Draft Report. The text of 
the Second Draft Report is found in the appendix to this notice and may 
be found on the Web page of the Advisory Committee at http://www.treas.gov/offices/domestic-finance/acap/index.shtml. The appendices 
to the Second Draft Report are not included in this notice, but may be 
found on the Web page of the Advisory Committee at http://www.treas.gov/offices/domestic-finance/acap/index.shtml. The Second 
Draft Report contains the Advisory Committee's developed proposals on 
improving the sustainability of a strong and vibrant public company 
auditing profession. All interested parties are invited to submit their 
comments in the manner described above.

    Dated: July 25, 2008.
Taiya Smith,
Executive Secretary.

Appendix: Advisory Committee on the Auditing Profession

Second Draft Report--July 22, 2008

The Department of the Treasury

Second Draft Report of the Advisory Committee on the Auditing 
Profession to the U.S. Department of the Treasury

Table of Contents

I. Transmittal Letter [Placeholder]
II. Committee History
III. Background [Placeholder]
IV. Human Capital
V. Firm Structure and Finances
VI. Concentration and Competition
VII. Separate Statements [Placeholder]
VIII. Appendices
    A. Official Notice of Establishment of Committee
    B. Committee Charter
    C. Treasury Secretary Henry M. Paulson, Jr., Remarks at the 
Economic Club of New York, New York, NY on Capital Market 
Competitiveness (Nov. 20, 2006)
    D. Treasury Secretary Henry M. Paulson, Jr., Opening Remarks at 
the Treasury Department's Capital Markets Competitiveness Conference 
at Georgetown University (Mar. 13, 2007)
    E. Paulson Announces First Stage of Capital Markets Action Plan, 
Treasury Press Release No. HP-408 (May 17, 2007)
    F. Paulson: Financial Reporting Vital to U.S. Market Integrity, 
Strong Economy, Treasury Press Release No. HP-407 (May 17, 2008)
    G. Paulson Announces Auditing Committee Members to Make 
Recommendations for a More Sustainable, Transparent Industry, 
Treasury Press Release No. HP-585 (Oct. 2, 2007)
    H. Under Secretary for Domestic Finance Robert K. Steel, Welcome 
and Introductory Remarks Before the Initial Meeting of the 
Department of the Treasury's Advisory Committee on the Auditing 
Profession, Treasury Press Release No. HP-610 (Oct. 15, 2007)
    I. Committee By-Laws
    J. List of Witnesses
    K. List of Committee Members, Observers, and Staff
    L. Working Discussion Outline
    M. Working Bibliography

Transmittal Letter

I. Advisory Committee on the Auditing Profession

    [September 2008]
The Honorable Hank M. Paulson, Jr., Secretary,
U.S. Department of the Treasury,
1500 Pennsylvania Avenue, NW.,
Washington, DC 20220.
Dear Secretary Paulson:
    On behalf of the Department's Advisory Committee on the Auditing 
Profession, we are pleased to submit our Final Report.
    [Contents of letter to be included in Final Report]
    Respectfully Submitted on behalf of the Committee,
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Arthur Levitt, Jr.
Committee Co-Chair
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Donald T. Nicolaisen
Committee Co-Chair
Enclosure

CHAPTER I: COMMITTEE HISTORY

    On November 20, 2006, the Secretary of the Treasury, Henry M. 
Paulson, Jr., delivered a speech on the competitiveness of the U.S. 
capital markets, highlighting the need for a sustainable auditing 
profession.\1\ In March 2007, Secretary Paulson hosted a conference at 
Georgetown University with investors, current and former policymakers, 
and market participants to discuss issues impacting the competitiveness 
of the U.S. capital markets, including the sustainability of the 
auditing profession.\2\
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    \1\ Treasury Secretary Henry M. Paulson, Jr., Remarks on the 
Competitiveness of U.S. Capital Markets at the Economic Club of New 
York (Nov. 20, 2006), in Press Release No. HP-174, U.S. Dep't of 
Treas. (Nov. 20, 2006) (included as Appendix C).
    \2\ Treasury Secretary Henry M. Paulson, Jr., Opening Remarks at 
Treasury's Capital Markets Competitiveness Conference at Georgetown 
University (Mar. 13, 2007), in Press Release No. HP-306, U.S. Dep't 
of Treas. (Mar. 13, 2007) (included as Appendix D).
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    On May 17, 2007, Secretary Paulson announced the Department of the 
Treasury's (the ``Department's'') intent to establish the Advisory 
Committee on the Auditing Profession (the ``Committee'') to consider 
and develop recommendations relating to the sustainability of the 
auditing profession.\3\ At the same time, Secretary Paulson announced 
that he had asked Arthur Levitt, Jr. and Donald T. Nicolaisen to serve 
as Co-Chairs of the Committee. The Department published the official 
notice of establishment and requested nominations for membership on the 
Committee in the Federal Register on June 18, 2007.\4\ Secretary 
Paulson announced the Committee's membership on October 2, 2007, with 
members drawn from a wide range of professions, backgrounds, and 
experiences.\5\ The Department filed the

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Committee's Charter with the Senate Committee on Banking, Housing, and 
Urban Affairs, the Senate Committee on Finance, the House Committee on 
Financial Services, and the House Committee on Ways and Means on July 
3, 2007.\6\
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    \3\ Press Release, U.S. Dep't of Treas., Paulson Announces First 
Stage of Capital Markets Action Plan (May 17, 2007) (included as 
Appendix E); Press Release, U.S. Dep't of Treas., Paulson: Financial 
Reporting Vital to U.S. Market Integrity, Strong Economy (May 17, 
2008) (included as Appendix F).
    \4\ Notice of Intent to Establish; Request for Nominations, 72 
FR 33560 (U.S. Dep't of Treas. June 18, 2007) (included as Appendix 
A).
    \5\ Press Release, U.S. Dep't of Treas., Paulson Announces 
Auditing Committee Members to Make Recommendations for a More 
Sustainable, Transparent Industry (Oct. 2, 2007) (included as 
Appendix G). This press release describes the diverse backgrounds of 
the Committee members. For a list of Members, Observers, and Staff, 
see Appendix K.
    \6\ See Committee Charter (included as Appendix B).
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Committee Activities

    The Committee held its initial meeting on October 15, 2007 in 
Washington, D.C.\7\ Then Under Secretary for Domestic Finance Robert K. 
Steel welcomed the Committee members and provided introductory 
remarks.\8\ Also on October 15, 2007, the Committee adopted its by-laws 
\9\ and considered a Working Discussion Outline to be published for 
public comment.\10\ The Working Discussion Outline identified in 
general terms issues for the Committee's consideration. A Working 
Bibliography, updated intermittently throughout the course of the 
Committee's deliberations, provided the members with articles, reports, 
studies, and other written materials relating to the auditing 
profession.\11\ All full Committee meetings were open to the public and 
conducted in accordance with the requirements of the Federal Advisory 
Committee Act.\12\ The meetings of the full Committee were also Web or 
audio cast over the Internet.
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    \7\ The Record of Proceedings of this and subsequent meetings of 
the Committee are available on the Department's Web site at http://www.treas.gov/offices/domestic-finance//acap/press.shtml. See Record 
of Proceedings, Meeting of the Committee (Oct. 15, 2007, Dec. 3, 
2007, Feb. 4, 2008, Mar. 13, 2008, Apr. 1, 2008, May 5, 2008, June 
3, 2008, and [--------]) [hereinafter Record of Proceedings (with 
appropriate date)] (on file in the Department's Library, Room 1428), 
available at http://www.treas.gov/offices/domestic-finance/acap/press.shtml.
    \8\ Under Secretary for Domestic Finance Robert K. Steel, 
Welcome and Introductory Remarks Before the Initial Meeting of the 
Treasury Department's Advisory Committee on the Auditing Profession 
(Oct. 15, 2007), in Press Release No. HP-610, U.S. Dep't of Treas. 
(Oct. 15, 2007) (included as Appendix H).
    \9\ The Committee By-Laws are included as Appendix I.
    \10\ The Working Discussion Outline is included as Appendix L.
    \11\ The Working Bibliography is included as Appendix M. The 
Working Bibliography was subsequently updated in December 2007, 
February 2008, and July 2008.
    \12\ 5 U.S.C.--------App. 2 et seq.
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    The Committee held its second meeting on December 3, 2007 in 
Washington, DC. The agenda for this meeting consisted of hearing oral 
statements from witnesses and considering written submissions that 
those witnesses had filed with the Committee. The oral statements and 
written submissions focused on the issues impacting the sustainability 
of the auditing profession, including issues mentioned in the Working 
Discussion Outline. Nineteen witnesses testified at this meeting.\13\ 
The Committee held a subsequent meeting on February 4, 2008 in Los 
Angeles, California at the University of Southern California. The 
agenda for this meeting consisted of hearing oral statements from 
witnesses and considering written submissions that those witnesses had 
filed with the Committee. The oral statements and written submissions 
focused on the issues impacting the sustainability of the auditing 
profession, including issues mentioned in the Working Discussion 
Outline. Seventeen witnesses testified at this meeting.\14\ The 
Committee held additional meetings on March 13, 2008, April 1, 2008, 
May 5, 2008, June 3, 2008, and [--------]. All were face-to-face 
meetings held at the Department in Washington, DC, except for February 
4, 2008, which was held in Los Angeles, California, and the meetings on 
April 1, 2008, and [--------], which were telephonic meetings. No 
witnesses testified at these additional meetings, expect for the June 
3, 2008 meeting. The agenda for the June 3, 2008 meeting consisted of 
hearing oral statements from witnesses and considering written 
submissions that those witnesses had filed with the Committee. The oral 
statements and written submissions focused on the issues mentioned in 
the Draft Report and Draft Report Addendum. Twenty-one witnesses 
testified at this meeting.\15\
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    \13\ Appendix J contains a list of witnesses who testified 
before the Committee.
    \14\ Appendix J contains a list of witnesses who testified 
before the Committee.
    \15\ Appendix J contains a list of witnesses who testified 
before the Committee.
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    The Committee, through the Department, published [--------] 
releases in the Federal Register formally seeking public comment on 
issues under consideration. On October 31, 2007, the Committee 
published a release seeking comment on the Working Discussion 
Outline,\16\ in response to which the Committee received seventeen 
comment letters. On May 15, 2008 and on June 12, 2008, the Committee 
published releases seeking comment on the Draft Report \17\ and Draft 
Report Addendum,\18\ respectively, in response to which the Committee 
received [--------] comment letters. In addition, the Department 
announced each meeting of the Committee in the Federal Register, and in 
each announcement notice included an invitation to submit written 
statements to be considered in connection with the meeting.\19\ In 
response to these meeting notices, the Committee received [--------] 
written submissions. In total, the Committee received [--------] 
written submissions in response to Federal Register releases.\20\ All 
of the submissions made to the Committee will be archived and available 
to the public through the Department's Library.
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    \16\ Request for Comments, 72 FR 61709 (U.S. Dep't of Treas. 
Oct. 31, 2007).
    \17\ Request for Comments, 73 FR 28190 (U.S. Dep't of Treas. May 
15, 2008).
    \18\ Request for Comments, 73 FR 33487 (U.S. Dep't of Treas. 
June 12, 2008).
    \19\ Notice of Meeting, 72 FR 55272 (U.S. Dep't of Treas. Sept. 
28, 2007); Notice of Meeting, 72 FR 64283 (U.S. Dep't of Treas. Nov. 
15, 2007); Notice of Meeting, 73 FR 2981 (U.S. Dep't of Treas. Jan. 
16, 2008); Notice of Meeting, 73 FR 10511 (U.S. Dep't of Treas. Feb. 
27, 2008); Notice of Meeting, 73 FR 13070 (U.S. Dep't of Treas. Mar. 
11, 2008); Notice of Meeting, 73 FR 21016 (U.S. Dep't of Treas. Apr. 
17, 2008); Notice of Meeting, FR 28208 (U.S. Dep't of Treas. May 15, 
2008); Notice of Meeting, FR 39088 (U.S. Dep't of Treas. July 8, 
2008).
    \20\ All of the written submissions made to the Committee are 
available in the Department's Library, Room 1428 and on the 
Department's Committee's Web page at http://www.treas.gov/offices/domestic-finance/acap/press.shtml. To avoid duplicative material in 
footnotes, citations to the written submissions made to the 
Committee in this Final Report do not reference the Department's 
Library, Room 1428 or repeat the file number.
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    In addition to work carried out by the full Committee, fact finding 
and deliberations also took place within three Subcommittees appointed 
by the Co-Chairs. The Subcommittees were organized according to their 
principal areas of focus: Human Capital, Firm Structure and Finances, 
and Concentration and Competition.\21\ Each of the Subcommittees 
prepared recommendations for consideration by the full Committee.
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    \21\ For a list of members and their Subcommittee assignments, 
see Appendix K.
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III. Background

    [Contents of Background to be included in subsequent drafts of this 
Report.]

IV. Human Capital

    The Committee devoted considerable time and effort surveying the 
human capital issues impacting the auditing profession, including 
education, licensing, recruitment, retention, and training of 
accounting and auditing professionals. The charter of the Committee 
charged its members with developing recommendations relating to the 
sustainability of the public company

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auditing profession. Likewise, the Committee directs the following 
recommendations and related commentary to those practicing public 
company auditing. However, the Committee recognizes that several of its 
recommendations regarding human capital matters would have impact 
beyond the public company auditing profession, impacting the accounting 
profession as a whole. The Committee views the accelerating pace of 
change in the global corporate environment and capital markets and the 
increasing complexity of business transactions and financial reporting 
as among the most significant challenges facing the profession as well 
as financial statement issuers and investors. These are directly 
impacted by human capital issues. To ensure its viability and 
resilience and its ability to meet the needs of investors, the public 
company auditing profession needs to continue to attract and develop 
professionals at all levels who are prepared to perform high quality 
audits in this dynamic environment. It is essential that these 
professionals continue to be educated and trained to review, judge, and 
question all accounting and auditing matters with skepticism and a 
critical perspective. The recommendations presented below reflect these 
needs.
    After receiving testimony from witnesses and from comment letters, 
the Committee identified specific areas where the Committee believed it 
could develop recommendations to be implemented in the relatively short 
term to enhance the sustainability of the auditing profession. These 
specific areas include accounting curricula, accounting faculty, 
minority representation and retention, and development and maintenance 
of human capital data. The Committee has also developed a 
recommendation to study the possible future of higher accounting 
education's institutional structure.
    The Committee recommends that regulators, the auditing profession, 
educators, educational institutions, accrediting agencies, and other 
bodies, as applicable, effectuate the following:
    Recommendation 1. Implement market-driven, dynamic curricula and 
content for accounting students that continuously evolve to meet the 
needs of the auditing profession and help prepare new entrants to the 
profession to perform high quality audits.
    The Committee considered the views of all witnesses who provided 
input regarding accounting curricula at educational institutions.\22\ 
The Committee believes that the accounting curricula in higher 
education are critical to ensuring that individuals have the necessary 
knowledge, mindset, skills, and abilities to perform quality public 
company audits. In order to graduate from an educational institution 
with an accounting degree, students must have completed a certain 
number of hours in accounting and business courses. Accounting 
curricula typically include courses in auditing, financial accounting, 
cost accounting, and U.S. federal income taxation. Business curricula 
typically include courses in ethics, information systems and controls, 
finance, economics, management, marketing, oral and written 
communication, statistics, and U.S. business law.\23\ Since the 1950s, 
several private sector groups have studied and recommended changes to 
the accounting curricula,\24\ but notwithstanding these pleas for 
reform, curricula are characteristically slow to change.\25\
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    \22\ See, e.g., Record of Proceedings (Dec. 3, 2007) (Written 
Submission of Joseph V. Carcello, Director of Research, Corporate 
Governance, University of Tennessee, Knoxville, 8), available at 
http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Carcello120307.pdf (noting the market's expectations that 
university accounting curricula will expose students to recent 
financial reporting developments, such as international financial 
reporting standards and eXtensible Business Reporting Language); 
Record of Proceedings (Feb. 4, 2008) (Written Submission of Cynthia 
Fornelli, Executive Director, Center for Audit Quality, 3), 
available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Fornelli020408.pdf (stating the need to 
``[d]edicate funds and people to work with accounting professors to 
ensure that the curriculum is keeping pace with developments in 
business transactions, international economics and financial 
reporting'' and specifying the need to focus on ethical standards 
and international accounting and auditing standards); Record of 
Proceedings (Dec. 3, 2007) (Written Submission of Dennis Nally, 
Chairman and Senior Partner, PricewaterhouseCoopers LLP, 4), 
available at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Nally120307.pdf (stating the need to 
``[m]odernize and enhance the university accounting curriculum, 
which should include consideration of other global curriculum models 
to increase knowledge of International Financial Reporting Standards 
(IFRS), finance and economics, and process controls'').
    \23\ Record of Proceedings (Feb. 4, 2008) (Written Submission of 
Phillip M.J. Reckers, Professor of Accountancy, Arizona State 
University, 13), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Reckers020408.pdf (commenting that 
business students typically take two sophomore-level introductory 
accounting classes and accounting majors take six additional 
accounting courses in their final two years of schooling).
    \24\ See e.g., Franklin Pierson, et al., The Education of 
American Businessmen (1959) (noting that the main goal of a business 
education should be the development of an individual with broad 
training in both the humanities and principles of business); Robert 
A. Gordon and James E. Howell, Higher Education for Business (1959) 
(suggesting that accounting curriculum abandon its emphasis on 
financial accounting and auditing while emphasizing humanities); 
Robert H. Roy and James H. MacNeill, Horizons for a Profession 
(1967) (emphasizing the importance of a humanities background for 
accountants and recommending accounting graduate study); American 
Institute of Certified Public Accountants, Committee on Education 
and Experience Requirements for CPAs, Report of the Committee on 
Education and Experience Requirements for CPAs (Mar. 1969) 
(recommending, among other things, a five-year education requirement 
to be adopted by states by 1975); American Institute of Certified 
Public Accountants, Education Requirements for Entry into the 
Accounting Profession: A Statement of AICPA Policies (May 1978) 
(preferring a 150 semester-hour education requirement rather than a 
five-year education requirement to acquire the common body of 
knowledge and sit for the CPA examination); American Accounting 
Association, Committee on the Future Structure, Content, and Scope 
of Accounting Education, Future Accounting Education: Preparing for 
the Expanding Profession, 1 Issues in Accounting Education, No. 1, 
168-95 (Spring 1986) (examining accounting education and accounting 
practice since 1925 and concluding that, among other things, the 
current state of accounting education is inadequate to meet the 
dynamic needs of the profession and accounting education must be 
reassessed to meet these needs); American Institute of Certified 
Public Accountants, Education Requirements for Entry into the 
Accounting Profession: A Statement of AICPA Policies, 2nd Ed., 
Revised (Feb. 1988) (reaffirming the 150 semester-hour requirement); 
Arthur Andersen & Co., Arthur Young, Coopers & Lybrand, Deloitte 
Haskins & Sells, Ernst & Whinney, Peat Marwick Main & Co., Price 
Waterhouse, and Touche Ross, Perspectives on Education: Capabilities 
for Success in the Accounting Profession (1989), available at http://aaahq.org/aecc/big8/cover.htm (stating that the chief executive 
officers of the eight largest public accounting firms believe that 
graduates entering public accounting need to have greater 
interpersonal, communication, and thinking skills as well as greater 
business knowledge and that the accounting curriculum must be a 
dynamic experience); and Accounting Education Change Commission, 
Objectives of Education for Accountants: Position Statement Number 
One, 6 Issues in Accounting Education, No. 2, 307-12 (Fall 1990) 
(describing the education objectives for accountants in an 
environment where accounting education has not kept pace with the 
changing demands upon the accounting profession).
    \25\ Record of Proceedings (Dec. 3, 2007) (Written Submission of 
Ira Solomon, R.C. Evans Distinguished Professor, and Head, 
Department of Accountancy, University of Illinois, 14-15), available 
at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Solomon120307.pdf (lamenting the slow pace of change in 
accounting curricula and education).
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    In this regard, the Committee makes the following recommendations:
    (a) Regularly update the accounting certification examinations to 
reflect changes in the accounting profession, its relevant professional 
and ethical standards, and the skills and knowledge required to serve 
increasingly global capital markets.
    Accounting and auditing professionals commonly complete the 
requirements of professional examinations in order to comply with legal 
or professional association requirements. To become licensed at the 
state level as a certified public

[[Page 44319]]

accountant, an individual must, among other things, pass the Uniform 
CPA Examination. Professional examinations, such as the Uniform CPA 
Examination, influence the content of the technical, ethical, and 
professional materials comprising the accounting curricula.\26\
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    \26\ Gary Sundem, The Accounting Education Change Commission: 
Its History and Impact Chapter 6 (1999), available at http://aaahq.org/AECC/history/index.htm (``[T]he CPA examination has 
certainly had a major influence on the accounting curriculum and on 
other aspects of accounting programs.'').
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    The Committee believes that evolution of professional examination 
content serves as an important catalyst for curricular changes to 
reflect the dynamism and complexity of auditing public companies in 
global capital markets. The American Institute of Certified Public 
Accountants (AICPA) already regularly analyzes and updates its 
examination content, through practice content analysis and in 
conjunction with the AICPA Board of Examiners, which comprises members 
from the profession and state boards of accountancy. The Committee 
recommends that such changes remain a focus to ensure that both the 150 
semester hour curriculum \27\ as well as examination content reflect in 
a timely manner important ongoing market developments and investor 
needs, such as the increasing use of international financial reporting 
standards (IFRS),\28\ expanded fair value measurement and reporting, 
increasingly complex transactions, new Public Company Accounting 
Oversight Board (PCAOB) auditing and professional standards,\29\ risk-
based business judgment, and technological innovations in financial 
reporting.
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    \27\ See, e.g., Record of Proceedings (Written Submission of 
Jean C. Bedard, Timothy B. Harbert Professor of Accounting, 
Department of Accountancy, Bentley College, 1), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Bedard060308.pdf (observing that using the CPA Examination as a 
catalyst for curricula change will only be effective if the CPA 
Examination is written assuming completion of 150 hours); Record of 
Proceedings (June 3, 2008) (Questions for the Record of Joseph V. 
Carcello, Chair, AAA Task Force to Monitor the Activities of the 
Treasury ACAP, Professor and Director of Research--Corporate 
Governance Center, University of Tennessee, Jean C. Bedard, 
Professor of Accountancy, Bentley College, and Dana R. Hermanson, 
Chair of Private Enterprise and Professor of Accounting, Kennesaw 
State University, 2 (June 20, 2008)), available at http://www.treas.gov/offices/domestic-finance/acap/agendas/QFRs-6-3-08.pdf 
(noting that recent developments suggest a trend away from requiring 
150 hours to sit for the CPA examination since eighteen states allow 
candidates to sit for the exam after 120 hours); Edward P. Howard, 
Senior Counsel, and Julianne D'Angelo Fellmeth, Administrative 
Director, Center for Public Interest Law, Comment Letter Regarding 
Draft Report and Draft Report Addendum 2-4 (June 13, 2008), 
available at http://comments.treas.gov/_files/ACAP_Draft_Report_Comments.pdf (providing background on the issue of requiring 150-
hours for licensure while allowing 120-hours to sit for the CPA 
Examination in California); Record of Proceedings (June 3, 2008) 
(Oral Remarks of Anne M. Mulcahy, Chairman and Chief Executive 
Officer, Xerox Corporation, and Alan L. Beller, Partner, Cleary 
Gottlieb Steen & Hamilton LLP, 70-71, 77), available at http://www.treas.gov/offices/domestic-finance/acap/agendas/minutes-06-03-08.pdf (noting the tension between updating the curricula in order 
to keep current with the changing environment and fitting these 
changes into a four-year program).
    \28\ Samuel K. Cotterell, CPA, Chair, NASBA, and David A. 
Costello, CPA, President and CEO, NASBA, Comment Letter Regarding 
Draft Report and Draft Report Addendum 1 (June 29, 2008), available 
at http://comments.treas.gov/_files/June2908LetterheadTreasuryAdvisoryCommitteeontheAuditingProfession.pd
f (agreeing that IFRS should be reflected in the CPA examination); 
Arnold C. Hanish, Chair, Committee on Corporate Reporting, Financial 
Executives International, Comment Letter Regarding Draft Report and 
Draft Report Addendum 2 (July 3, 2008), available at http://comments.treas.gov/_files/FEICCRTreasuryACAPCommentLetterFiled73080.pdf (suggesting a greater 
emphasis of IFRS in the accounting curriculum).
    \29\ See e.g., An Audit of Internal Control Over Financial 
Reporting that is Integrated with an Audit of Financial Statements, 
Auditing Standard No. 5 (Pub. Company Accounting Oversight Bd. 
2007).
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    Moreover, the Committee believes that professional \30\ and ethical 
standards,\31\ fraud examination and forensic auditing, financial risk 
management, and valuation, and subject matter relating to their 
application, are an essential component of the accounting and auditing 
curricula and accordingly should be reflected in the professional 
examinations and throughout business and accounting coursework.\32\
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    \30\ See PCAOB Standards and Related Rules, available at http://www.pcaobus.org/Standards/Standards_and_Related_Rules/index.aspx.
    \31\ See PCAOB Interim Ethics Standards, available at http://www.pcaobus.org/Standards/Interim_Standards/Ethics/index.aspx.
    \32\ See. e.g., Samuel K. Cotterell, CPA, Chair, NASBA, and 
David A. Costello, CPA, President and CEO, NASBA, Comment Letter 
Regarding Draft Report and Draft Report Addendum 1 (June 29, 2008), 
available at http://comments.treas.gov/_files/June2908LetterheadTreasuryAdvisoryCommitteeontheAuditingProfession.pd
f (agreeing that ethics should be included in the accounting 
curriculum); Deloitte LLP, Comment Letter Regarding Draft Report and 
Draft Report Addendum 9 (June 27, 2008), available at http://comments.treas.gov/_files/DeloitteLLPCommentLetter.pdf 
(recommending that the Committee state that the following courses 
should be included in the curricula: ethics, fraud examination and 
forensic auditing, problem solving, finance, negotiation and 
communication skills, financial risk management, global business, 
taxation, and valuation); Record of Proceedings (Written Submission 
of Anne M. Lang, Chief Human Resources Officer, Grant Thornton LLP, 
3), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Lang060308.pdf (asking the Committee to 
specifically cite the need for curricula that teach specialized 
knowledge, such as risk management, computational finance, valuation 
theory, and sophisticated modeling techniques).
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    Finally, the Committee recommends that the market developments 
outlined in this section be reflected in professional examination 
content as soon as practicable, but not later than 2011.\33\ In 
particular, the CPA examination should test a candidate's knowledge 
consistent with practice needs and the highest contemporary level of 
education required based on those practice needs. In addition, the 
Committee recommends that new evolving examination content be widely 
and promptly communicated to college and university faculty and 
administrators so that corresponding curricular changes in educational 
institutions can continually occur on a timely basis.
---------------------------------------------------------------------------

    \33\ See, e.g., Samuel K. Cotterell, CPA, Chair, NASBA, and 
David A. Costello, CPA, President and CEO, NASBA, Comment Letter 
Regarding Draft Report and Draft Report Addendum 1 (June 29, 2008), 
available at http://comments.treas.gov/_files/June2908LetterheadTreasuryAdvisoryCommitteeontheAuditingProfession.pd
f (agreeing with the Recommendation to keep the CPA examination 
current).
---------------------------------------------------------------------------

    (b) Reflect real world changes in the business environment more 
rapidly in teaching materials.
    Students are expected to use a variety of sources, such as 
textbooks and online materials, to learn. Such materials are an 
important element of higher education. The Committee learned that these 
commercial materials are generally conservatively managed and follow 
rather than lead recent market developments.\34\ Because developing 
accounting materials involves a significant investment of time and 
resources, commercial content providers carefully consider the 
potential risks and rewards before publishing new materials, even where 
a more prompt response to new developments might be beneficial to 
students.
---------------------------------------------------------------------------

    \34\ Subcommittee on Human Capital Record of Proceedings (Jan. 
16, 2008) (Oral Remarks of Bruce K. Behn, President, Federation of 
Schools of Accountancy, and Ergen Professor of Business, Department 
of Accounting and Information Management, University of Tennessee, 
Knoxville).
---------------------------------------------------------------------------

    The Committee believes that accounting educational materials can 
contribute to inducing curricular changes that reflect the dynamism and 
complexity of the global capital markets and that commercial content 
providers should recognize the importance of capturing recent 
developments in their published materials. Specifically, the Committee 
recommends that organizations, such as the AICPA and the American 
Accounting Association (AAA), meet with commercial content providers 
and encourage them to update their materials promptly to reflect recent 
developments such as the increasing use

[[Page 44320]]

of IFRS, new PCAOB auditing and professional standards, risk-based 
business judgment, and expanded fair value reporting, as well as 
technological developments in financial reporting and auditing such as 
eXtensible Business Reporting Language (XBRL).\35\
---------------------------------------------------------------------------

    \35\ See, e.g., Aram Kostoglian, Eastern Region Attest Practice 
Leader, and Ernest Baugh, National Director of Professional 
Standards, Mayer Hoffman McCann P.C., Comment Letter Regarding Draft 
Report and Draft Report Addendum 1 (June 13, 2008), available at 
http://comments.treas.gov/_files/MayerHoffmanMcCannCommentLetter.pdf (noting that textbooks lack a 
thorough discussion of current market developments); 
PricewaterhouseCoopers LLP, Comment Letter Regarding Draft Report 
and Draft Report Addendum 4 (June 30, 2008), available at http://comments.treas.gov/_files/PwCCommentLtrTreasCmtDraftandAddendum63008.pdf (noting support for 
updating teaching materials promptly to reflect recent developments 
such as the increasing use of IFRS).
---------------------------------------------------------------------------

    Further, in order to ensure access to such materials and 
recognizing the benefits of technological innovations,\36\ the 
Committee recommends that authoritative bodies and agencies should be 
encouraged to provide low-cost, affordable access to digitized 
searchable authoritative literature and materials, such as Financial 
Accounting Standards Board (FASB) codification and eIFRS, to students 
and faculty members. Moreover, since the content of professional 
examinations, such as the Uniform CPA Examination, is based upon 
research using digitized materials, students need to have access to, 
among other things, searchable accounting standards.\37\ The Committee 
believes that low-cost affordable access to such primary materials 
would thus enhance student learning and performance and technical 
research.
---------------------------------------------------------------------------

    \36\ See Stephanie Woodruff, Chief Revenue Officer, AverQ, Inc, 
Comment Letter Regarding Draft Report and Draft Report Addendum 
(June 2, 2008), available at http://comments.treas.gov/index.cfm?FuseAction=Home.ViewPopup&Topic_id=9&FellowType_id=1&Reply_id=95&SuppressLayouts=True (suggesting the use or study 
of ``technology'' to address auditing profession challenges).
    \37\ See Record of Proceedings (Feb. 4, 2008) (Written 
Submission of Phillip M.J. Reckers, Professor of Accountancy, 
Arizona State University, 14), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Reckers020408.pdf 
(affirming the need for student access to digitized searchable 
accounting and auditing materials).
---------------------------------------------------------------------------

    (c) Require that schools build into accounting curricula current 
market developments.
    A common theme of our first set of recommendations is that 
accounting curricula should reflect recent developments, including 
globalization and evolving market factors. As a further catalyst to 
curricula development and evolution by educational institutions, the 
Committee recommends ongoing attention to responsiveness to recent 
developments by the bodies that accredit educational institutions. 
Accrediting agencies review institutions of higher education and their 
programs and establish that overall resources and strategies are 
conformed to the mission of the institutions. For example, the 
Association to Advance Collegiate Schools of Business (AACSB) and the 
Association of Collegiate Business Schools and Programs (ACBSP) 
accredit business administration and accounting programs. Since 1919, 
the AACSB has accredited business administration programs and, since 
1980, accounting programs offering undergraduate and graduate degrees. 
The AACSB has accredited over 450 U.S. business programs and over 150 
U.S. accounting programs. Since 1988, the ACBSP has accredited business 
programs offering associate, baccalaureate, and graduate degrees. As of 
February 2008, over 400 educational institutions have achieved ACBSP 
accreditation. The accreditation standards at both accrediting agencies 
relate to, among other things, curricula, program and faculty 
resources, and faculty development.
    The Committee believes that the accreditation process and 
appropriate accreditation standards can contribute to curricular 
changes. In particular, accreditation standards that embody curricular 
requirements to reflect the dynamism and complexity of the global 
capital markets and that evolve to keep pace in the future can be 
helpful in maintaining and advancing the quality of accounting 
curricula. The AACSB has emphasized in its accreditation standards that 
accounting curricula should reflect recent market developments. For 
example, educational institutions must include in their curricula 
international accounting issues in order to receive AACSB 
accreditation. The Committee supports the accrediting agencies' efforts 
to continually develop standards specifically emphasizing the need to 
update accounting programs.
    Recommendation 2. Improve the representation and retention of 
minorities in the auditing profession so as to enrich the pool of human 
capital in the profession.
    The auditing profession presents challenging and rewarding 
opportunities for those who pursue a career in auditing and the 
profession actively recruits talent from all backgrounds.\38\ Yet, the 
Committee was concerned by what it heard from individuals with various 
backgrounds about minority representation and retention in the auditing 
profession.\39\ In

[[Page 44321]]

2004, minorities accounted for 22% of all bachelor's and masters' 
degrees awarded in accounting, while in 2007, minorities accounted for 
21%.\40\ In 2004, African Americans represented 1% of all CPAs, 
Hispanic/Latino, 3%, and Asian/Pacific Islander, 4%.\41\ See Figure 1. 
These percentages changed very little in 2007 when African Americans 
represented 1% of all CPAs, Hispanic/Latino, 2%, and Asian/Pacific 
Islander, 4%.\42\ See Figure 2.
---------------------------------------------------------------------------

    \38\ The Committee discussed the issue of representation and 
retention of females in the profession and the Committee found that 
the profession is undertaking significant efforts to hire and retain 
females and notes that these issues are being much better managed 
today. See, e.g., Record of Proceedings (June 3, 2008) (Oral Remarks 
of Amy Woods Brinkley, Global Risk Executive, Bank of America 
Corporation, 57), available at http://www.treas.gov/offices/domestic-finance/acap/agendas/minutes-06-03-08.pdf (noting that the 
Committee spent considerable time discussing this issue of females 
in the profession); Record of Proceedings (June 3, 2008) (Written 
Submission of Kayla J. Gillan, Chief Administrative Officer, 
RiskMetrics Group, 2), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Gillan060308.pdf (urging 
the Committee to examine the issue of females in the profession); 
Record of Proceedings (June 3, 2008) (Oral Remarks of Anne M. Lang, 
Chief Human Resources Officer, Grant Thornton LLP, 100-101), 
available at http://www.treas.gov/offices/domestic-finance/acap/agendas/minutes-06-03-08.pdf (stating that ``* * * certainly 
recruiting women into the profession is something that [Grant 
Thornton LLP has] done extremely well for the last several years * * 
* [the] advancement of * * * women is something that [Grant Thornton 
LLP] still need[s] to pay attention to''). The Committee notes the 
following statistics: In 2007, at the partner level, females 
represented 23% of partners on average, while in 2004 they were 19% 
and in 1994 they were just 12% of all partners. See American 
Institute of Certified Public Accountants, A Decade of Changes in 
The Accounting Profession: Workforce Trends and Human Capital 
Practices 5 (Feb. 2006) and Dennis R. Reigle, Heather L. Bunning And 
Danielle Grant, 2008 Trends In The Supply of Accounting Graduates 
And The Demand For Public Accounting Recruits 60 (2008), available 
at http://ceae.aicpa.org/NR/rdonlyres/C1E23302-17D3-4ED5-AE81-B274D9CD7812/0/AICPA_Trends_Reports_2008.pdf. According to Public 
Accounting Report surveys, the percentage of female professionals at 
the largest firms was 47.3% in 2007 and 44.2% in 2004. See Women at 
Big Four Gain Ground in Partnership Percentage, Public Accounting 
Report 6 (Oct. 31, 2004) and Women Post Gains in Partnership 
Percentage, Public Accounting Report 11 (Jan. 31, 2008). From 2005 
to 2007, women represented about half of the new hires at the six 
largest firms. See Center For Audit Quality, Report Of The Major 
Public Company Audit Firms To The Department Of The Treasury 
Advisory Committee On The Auditing Profession 58 (Jan. 23, 2008). 
The Committee also considered the effects of workload compression on 
retention in the profession. Some Committee members believe that 
audit firms and their clients could benefit from spreading tax 
preparation work throughout the year. See, e.g., Record of 
Proceedings (Oct. 15, 2007) (Oral Remarks of William D. Travis, 
Director and Former Managing Partner, McGladrey & Pullen LLP, 71), 
available at http://www.treas.gov/offices/domestic-finance/acap/agendas/minutes-10-15-07.pdf (noting that ``[a] significant 
challenge for retention of personnel in mid-size and small audit 
firms is the extreme seasonality * * * during the winter season. 
This reality places enormous pressure on audit quality and balanced 
lives of * * * professionals''); Record of Proceedings (Mar. 13, 
2008) (Oral Remarks of Barry C. Melancon, President and Chief 
Executive Officer, American Institute of Certified Public 
Accountants, 118), available at http://www.treas.gov/offices/domestic-finance/acap/agendas/minutes-03-13-08.pdf (noting that the 
Human Capital Subcommittee discussed workload compression issues).
    \39\ See, e.g., Record of Proceedings (Dec. 3, 2007) (Written 
Submission of Ira Solomon, R.C. Evans Distinguished Professor, and 
Head, Department of Accountancy, University of Illinois, 13), 
available at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Solomon120307.pdf; Record of Proceedings (Dec. 
3, 2007) (Questions for the Record of George S. Willie, Managing 
Partner, Bert Smith & Co., 2 (Jan. 30, 2008)), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Willie120307.pdf; Record of Proceedings (Dec. 3, 2007) (Written 
Submission of Julie K. Wood, Chief People Officer, Crowe Chizek and 
Company LLC, 2), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Wood120307.pdf.
    \40\ Dennis R. Reigle, Heather L. Bunning And Danielle Grant, 
2008 Trends In The Supply Of Accounting Graduates And The Demand For 
Public Accounting Recruits 30 (2008), available at http://ceae.aicpa.org/NR/rdonlyres/C1E23302-17D3-4ED5-AE81-B274D9CD7812/0/AICPA_Trends_Reports_2008.pdf.
    \41\ Beatrice Sanders, And Leticia B. Romeo, The Supply Of 
Accounting Graduates And The Demand For Public Accounting Recruits-
2005: For Academic Year 2003-2004 35 (2005), available at http://ceae.aicpa.org/NR/rdonlyres/11715FC6-F0A7-4AD6-8D28-6285CBE77315/0/Supply_DemandReport_2005.pdf.
    \42\ Dennis R. Reigle, Heather L. Bunning And Danielle Grant, 
2008 Trends In The Supply Of Accounting Graduates And The Demand For 
Public Accounting Recruits 61 (2008), available at http://ceae.aicpa.org/NR/rdonlyres/C1E23302-17D3-4ED5-AE81-B274D9CD7812/0/AICPA_Trends_Reports_2008.pdf.
[GRAPHIC] [TIFF OMITTED] TN30JY08.038

[GRAPHIC] [TIFF OMITTED] TN30JY08.039

    African Americans accounted for 5.4% of new hires in 2007 at the 
largest

[[Page 44322]]

six accounting firms, Hispanics, 4.6%, and Asians, 21.3%.\43\ See 
Figure 3.
---------------------------------------------------------------------------

    \43\ Center For Audit Quality, Report Of The Major Public 
Company Audit Firms To The Department Of The Treasury Advisory 
Committee On The Auditing Profession 59 (Jan. 23, 2008), available 
at http://www.thecaq.org/publicpolicy/data/TRData2008-01-23-FullReport.pdf.
[GRAPHIC] [TIFF OMITTED] TN30JY08.044

    In 2007, 1.0% of the partners in the six largest accounting firms 
were African American, 1.6% were Hispanic/Latino, 3.4% were Asian, and 
less than 1.0% were Native Hawaiian/Pacific Islander or American 
Indian/Alaska Native, aggregating less than 7% of the total 
partners.\44\ See Figure 4.
---------------------------------------------------------------------------

    \44\ Center For Audit Quality, Report Of The Major Public 
Company Audit Firms To The Department Of The Treasury Advisory 
Committee On The Auditing Profession 60 (Jan. 23, 2008), available 
at http://www.thecaq.org/publicpolicy/data/TRData2008-01-23-FullReport.pdf.
[GRAPHIC] [TIFF OMITTED] TN30JY08.040

    The Committee recognizes that important groups within the minority 
population are significantly under-represented in the accounting and 
auditing profession, especially at senior levels, and this under-
representation of minorities in the profession is unacceptable from 
both a societal and business perspective. As the demographics of the 
global economy continue to expand ethnic diversity, it is imperative 
that the profession also reflect these changes. The auditing 
profession's historic role in performing audits in an increasingly 
diverse global setting and in establishing investor trust cannot be 
maintained unless the profession itself is viewed as open and

[[Page 44323]]

representative. To ensure the continued health and vibrancy of the 
profession, it is imperative that all participants in the financial, 
investor, educator, and auditor community adopt and implement policies, 
programs, practices, and curricula designed to attract and retain 
minorities. In order for minority participation in the accounting and 
auditing profession to grow and sustain itself, minority recruitment 
and retention needs to be a multi-faceted, multi-year effort, 
implemented and championed by community leaders, families, and most 
importantly business and academic leaders who educate, recruit, employ, 
and rely on accountants and auditors.
    In this regard, the Committee recognizes the importance of setting 
goals and measuring progress against these goals and thus makes the 
following recommendations:
    (a) Recruit minorities into the auditing profession from other 
disciplines and careers.
    The Committee heard from witnesses that the auditing profession has 
``fallen short'' on its minority recruitment goals.\45\ Accordingly, 
the Committee recommends that auditing firms actively market to and 
recruit from minority non-accounting graduate populations, both at the 
entry and experienced hire level, utilizing cooperative efforts by 
academics and firm-based training programs to assist in this 
process.\46\ Generally, auditing firms hire individuals for the audit 
practice who are qualified to sit for the Uniform CPA Examination.\47\
---------------------------------------------------------------------------

    \45\ See, e.g., Record of Proceedings (Dec. 3, 2007) (Written 
Submission of Julie K. Wood, Chief People Officer, Crowe Chizek and 
Company LLC, 2), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Wood120307.pdf.
    \46\ See Ernst & Young LLP, Comment Letter Regarding Draft 
Report and Draft Report Addendum 22 (June 27, 2008), available at 
http://comments.treas.gov/_files/EYACAPCommentLetterFINAL2.pdf 
(supporting this Recommendation).
    \47\ See Record of Proceedings (Dec. 3, 2007) (Questions for the 
Record of James S. Turley, Chairman and Chief Executive Officer, 
Ernst & Young LLP, 4 (Feb. 1, 2008)), available at http://www.treas.gov/offices/domestic-finance/acap/QFRs-12-3-07.pdf (noting 
that since 1997, Ernst & Young LLP has typically hired individuals 
qualified to sit for the Uniform CPA Examination).
---------------------------------------------------------------------------

    Further, the Committee recommends that auditing firms expand their 
recruitment initiatives at historically black colleges and universities 
(HBCUs), and explore the use of proprietary schools as another way to 
recruit minorities into the profession.\48\ Currently over 100 
educational institutions established before 1964 to serve the African 
American community are designated as HBCUs and over fifty of these 
HBCUs maintain accounting programs. Approximately 290,000 students are 
enrolled in HBCUs \49\ and HBCUs enroll 14% of all African American 
students in higher education.\50\ Twenty-seven HBCUs have one or more 
of the six largest accounting firms recruiting professional staff on 
their campus.\51\ Both the number of these schools visited by the 
largest firms and the number of firms recruiting at these schools 
should increase. Proprietary schools are for-profit businesses that 
teach vocational or occupational skills and there are over 2,000 
proprietary schools in the United States.\52\ In 2005, these schools 
enrolled over 1 million students: African Americans accounted for 23% 
of these students, Hispanics, 13%, and Asian/Pacific Islander, 4%.\53\
---------------------------------------------------------------------------

    \48\ Record of Proceedings (June 3, 2008) (Written Submission of 
Frank K. Ross, Director, Center for Accounting Education, Howard 
University School of Business, 3), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Ross060308.pdf (agreeing that this Recommendation will help increase 
minority recruitment).
    \49\ Stephen Provasnik and Linda L. Shafer, Historically Black 
Colleges and Universities, 1976 to 2001 2 (NCES 2004-062), available 
at http://nces.ed.gov/pubs2004/2004062.pdf.
    \50\ White House Initiative On Historically Black Colleges And 
Universities, available at http://www.ed.gov/about/inits/list/whhbcu/edlite-index.html.
    \51\ Center For Audit Quality, Supplement To Report Of The Major 
Public Company Audit Firms To The Department Of The Treasury 
Advisory Committee On The Auditing Profession 1 (Mar. 5, 2008), 
available at http://www.thecaq.org/publicpolicy/data/TRData2008-03-05-Supplement1.pdf.
    \52\ Thomas D. Snyder, Sally A. Dillow, And Charlene M. Hoffman, 
Digest Of Education Statistics 2007 Table 5 (NCES 2008-022), 
available at http://nces.ed.gov/pubs2008/2008022.pdf.
    \53\ Thomas D. Snyder, Sally A. Dillow, And Charlene M. Hoffman, 
Digest Of Education Statistics 2007 Table 220 (NCES 2008-022), 
available at http://nces.ed.gov/pubs2008/2008022.pdf.
---------------------------------------------------------------------------

    (b) Institute initiatives to increase the retention of minorities 
in the profession.
    The Committee considered testimony on the retention of minorities 
in the profession.\54\ As discussed above, minorities are significantly 
under-represented in leadership and partnership positions within the 
profession. The Committee recognizes the lack of minority mentors and 
role models \55\ in the profession and the profession's awareness of 
this situation.\56\ In a 2006 National Association of Black Accountants 
(NABA) survey, almost 60% of African American respondents stated that 
their mentors come from outside of the profession and almost 55% of 
respondents stated that they had been with their current employer for 
three years or less.\57\ The Committee considered testimony that 
African Americans leave the profession for other careers or do not wish 
to become managers or partners because they see that there are few 
African Americans in leadership positions within the firms.\58\ The 
Committee also heard testimony that the retention rate for Hispanics 
``is low.'' \59\ In 2004, Hispanics represented 3% of the professional 
staff at all CPA

[[Page 44324]]

firms \60\ and this percentage did not change in 2007.\61\
---------------------------------------------------------------------------

    \54\ Record of Proceedings (Dec. 3, 2007) (Written Submission of 
George S. Willie, Managing Partner, Bert Smith & Co., 3), available 
at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Willie120307.pdf (noting that ``firms must do more to 
retain and promote minority professionals''); Record of Proceedings 
(June 3, 2008) (Written Submission of Frank K. Ross, Director, 
Center for Accounting Education, Howard University School of 
Business, 8), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Ross060308.pdf (noting that 
``auditing firms need to establish aggressive retention programs 
that focus on retention'').
    \55\ Record of Proceedings (Feb. 4, 2008) (Written Submission of 
Gilbert R. Vasquez, Managing Partner, Vasquez & Company LLP, 4), 
available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Vasquez02042008.pdf (highlighting the lack of 
Hispanic role models and mentors in the accounting profession).
    \56\ See Record of Proceedings (July 12, 2006) (Written 
Testimony of Manuel Fernandez, National Managing Partner--Campus 
Recruiting, KPMG LLP, to the Subcommittee on Oversight and 
Investigations of the House Financial Services Committee, 5), 
available at http://financialservices.house.gov/media/pdf/071206mf.pdf (identifying the lack of minority faculty mentors and 
role models and noting ``[w]hen students of color do not see 
professors of their own ethnic background on the accounting faculty, 
they are less apt to consider the option of a career in 
accountancy''); Record of Proceedings (Dec. 3, 2007) (Questions for 
the Record of George S. Willie, Managing Partner, Bert Smith & Co., 
1 (Jan. 30, 2008)), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Willie120307.pdf 
(recommending the establishment of a mentor program for minority 
accounting students).
    \57\ The Center for Accounting Education, Howard University 
School of Business, NABA Membership Survey, Analysis of Work 
Experience of NABA Members Table 23 and 5 (Sept. 15, 2006), 
available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/NABAMembershipSurvey.pdf.
    \58\ Record of Proceedings (June 3, 2008) (Written Submission of 
Frank K. Ross, Director, Center for Accounting Education, Howard 
University School of Business, 5), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Ross060308.pdf.
    \59\ Record of Proceedings (Feb. 4, 2008) (Written Submission of 
Gilbert R. Vasquez, Managing Partner, Vasquez & Company LLP, 4), 
available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Vasquez02042008.pdf.
    \60\ Beatrice Sanders, and Leticia B. Romeo, The Supply of 
Accounting Graduates and the Demand for Public Accounting Recruits--
2005: For Academic Year 2003-2004 32 (2005), available at http://ceae.aicpa.org/NR/rdonlyres/11715FC6-F0A7-4AD6-8D28-6285CBE77315/0/Supply_DemandReport_2005.pdf.
    \61\ Dennis R. Reigle, Heather L. Bunning and Danielle Grant, 
2008 Trends in the Supply of Accounting Graduates and the Demand for 
Public Accounting Recruits 59 (2008), available at http://ceae.aicpa.org/NR/rdonlyres/C1E23302-17D3-4ED5-AE81-B274D9CD7812/0/AICPA_Trends_Reports_2008.pdf.
---------------------------------------------------------------------------

    The Committee believes that firms must continue to find ways to 
retain minorities in the profession in order to ensure the profession's 
long-term viability. The Committee believes the need to instill 
confidence is critical to an individual's career as is the need for 
mentors, especially at the start of an individual's career.\62\ The 
Committee also recognizes that auditing firms must continue to give 
challenging assignments so that individuals have the motivation to stay 
in the profession.\63\ Thus, the Committee recommends that public 
company auditing firms intensify their efforts to create and maintain 
retention programs, including mentoring programs, for their employees 
as a means to provide these individuals with guidance, career coaching, 
and networking. Further, the Committee recommends that the profession 
compile and issue best practices related to minority recruitment and 
retention.\64\
---------------------------------------------------------------------------

    \62\ Record of Proceedings (June 3, 2008) (Written Submission of 
Frank K. Ross, Director, Center for Accounting Education, Howard 
University School of Business, 8), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Ross060308.pdf (noting that ``auditing firms need to establish 
aggressive retention programs that focus on confidence * * * the 
single greatest source of confidence is a good mentor. Unless [an 
individual has] been blessed with a truly strong mentor, it may be 
hard to understand how beneficial it is'').
    \63\ Record of Proceedings (June 3, 2008) (Oral Remarks of Anne 
M. Lang, Chief Human Resources Officer, Grant Thornton LLP, 83), 
available at http://www.treas.gov/offices/domestic-finance/acap/agendas/minutes-06-03-08.pdf (stating that `` * * * what [Grant 
Thornton] find[s], at least in the research that we've done with 
people coming into the organization and staying in public 
accounting, is that meaningful and challenging work and the 
opportunity to advance, based on an individual's career aspirations, 
is really what keeps our people longer'').
    \64\ See PricewaterhouseCoopers LLP, Comment Letter Regarding 
the Draft Report and Draft Report Addendum 5 (June 30, 2008), 
available at http://comments.treas.gov/_files/PwCCommentLtrTreasCmtDraftandAddendum63008.pdf.
---------------------------------------------------------------------------

    (c) Emphasize the role of community colleges in the recruitment of 
minorities into the auditing profession.
    Community colleges are a vital part of the postsecondary education 
system. They provide open access to post-secondary education, preparing 
students for transfer to four-year institutions, providing workforce 
development and skills training, and offering non-credit programs. 
Moreover, as the cost of higher education continues its upward climb, 
more and more high-achieving students are beginning their post-
secondary study through the community college system.
    As of January 2008, approximately 11.5 million students were 
enrolled in the 1,200 community colleges in the United States: African 
Americans accounted for 13% of these students, Hispanics, 15%, and 
Asian/Pacific Islander, 6%.\65\
---------------------------------------------------------------------------

    \65\ American Association of Community Colleges, available at 
http://www2.aacc.nche.edu/research/index.htm.
---------------------------------------------------------------------------

    In August 1992, the Accounting Education Change Commission (AECC), 
created in the late 1980s by the academic community to examine 
potential changes to accounting education, recognized the importance of 
two-year colleges in accounting education. The AECC noted that over 
half of all students taking their first course in accounting do so at 
two-year colleges and that approximately one-fourth of the students 
entering the accounting profession take their initial accounting 
coursework at two-year colleges. The AECC called for ``greater 
recognition within the academic and professional communities of the 
efforts and importance of two-year accounting programs.'' \66\
---------------------------------------------------------------------------

    \66\ Accounting Education Change Commission, Issues Statement 
Number 3: The Importance of Two-Year Colleges for Accounting 
Education (Aug. 1992), available at http://aaahq.org/aecc/PositionsandIssues/issues3.htm.
---------------------------------------------------------------------------

    The Committee also heard from witnesses emphasizing the need to 
expand minority recruitment initiatives at community colleges.\67\
---------------------------------------------------------------------------

    \67\ Record of Proceedings (Feb. 4, 2008) (Written Submission of 
Gilbert R. Vasquez, Managing Partner, Vasquez & Company LLP, 4), 
available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Vasquez02042008.pdf (noting that auditing firms 
overlook community colleges where minorities, and specifically 
Latinos, represent a large student population); Record of 
Proceedings (Dec. 3, 2007) (Questions for the Record of George S. 
Willie, Managing Partner, Bert Smith & Co., 2 (Jan. 30, 2008)), 
available at http://www.treas.gov/offices/domestic-finance/acap/QFRs-12-3-07.pdf (recommending that the auditing profession increase 
it visibility at community colleges).
---------------------------------------------------------------------------

    The Committee believes that more attention to community colleges 
may provide, in addition to an increase in the overall supply of 
students, another avenue for minorities to become familiar with and 
attracted to the auditing profession. Currently none of the largest 
auditing firms recruits at community colleges because ``individuals who 
only have associate degrees typically will not have sufficient 
qualifications to satisfy state licensing requirements.'' \68\ The 
Committee recommends that accreditation of two-year college accounting 
programs at community colleges be explored and implemented when viable, 
so that these programs can be relied upon as one of the requisite steps 
toward fulfilling undergraduate educational requirements.\69\ Further, 
the Committee recommends that auditing firms and educational 
institutions at all levels support and cooperate in building strong 
fundamental academic accounting programs at community colleges, 
including providing internships or financial support for students who 
begin their studies in two-year programs and may be seeking careers in 
the auditing profession. The Committee also recommends that auditing 
firms and four-year colleges and universities and their faculty focus 
on outreach to community college students in order to support students' 
transition from community colleges to four-year educational 
institutions.\70\
---------------------------------------------------------------------------

    \68\ Center for Audit Quality, Supplement to Report of the Major 
Public Company Audit Firms to the Department of the Treasury 
Advisory Committee on the Auditing Profession 1 (Mar. 5, 2008), 
available at http://www.thecaq.org/publicpolicy/data/TRData2008-03-05-Supplement1.pdf.
    \69\ See Record of Proceedings (June 3, 2008) (Written 
Submission of Anne M. Lang, Chief Human Resources Officer, Grant 
Thornton LLP, 4), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Lang060308.pdf 
(supporting the accreditation of community colleges).
    \70\ See, e.g., Cynthia M. Fornelli, Executive Director, Center 
for Audit Quality, Comment Letter Regarding Draft Report and Draft 
Report Addendum 8 (June 26, 2008), available at http://comments.treas.gov/_files/CAQCommentletter62708FINAL.pdf (stating 
that outreach programs to community colleges could be effective); 
PricewaterhouseCoopers LLP, Comment Letter Regarding Draft Report 
and Draft Report Addendum 5 (June 30, 2008), available at http://comments.treas.gov/_files/PwCCommentLtrTreasCmtDraftandAddendum63008.pdf (suggesting that the 
Committee recommend steps to transition students from community 
colleges to four-year colleges and universities).
---------------------------------------------------------------------------

    (d) Emphasize the utility and effectiveness of cross-sabbaticals 
and internships with faculty and students at Historically Black 
Colleges and Universities.
    As discussed above, African Americans are significantly under-
represented in the auditing profession.
    The Committee recommends encouraging a concerted effort to increase 
the focus upon HBCUs in order to raise the number of African Americans 
in the auditing profession and urging the HBCUs, auditing firms, 
corporations, federal and state

[[Page 44325]]

governments, and other entities to emphasize the use of cross-
sabbaticals.\71\ Cross-sabbaticals are interactive relationships where 
faculty and seasoned professionals are regularly represented in the 
practice and academic environments through exchanges. Evidence suggests 
that such exchanges can be beneficial, and continued development of 
such exchanges is expected to provide substantial benefits for all 
parties.\72\ Cross-sabbaticals present an opportunity for ``reflective 
thinking'' for seasoned professionals.\73\
---------------------------------------------------------------------------

    \71\ See Cynthia M. Fornelli, Executive Director, Center for 
Audit Quality, Comment Letter Regarding Draft Report and Draft 
Report Addendum 8 (June 26, 2008), available at http://comments.treas.gov/_files/CAQCommentletter62708FINAL.pdf (agreeing 
with this Recommendation).
    \72\ See Record of Proceedings (Feb. 4, 2008) (Written 
Submission of Cynthia Fornelli, Executive Director, Center for Audit 
Quality, 2), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Fornelli020408.pdf (recommending 
encouraging sabbaticals, internships, and fellowship opportunities, 
structured to give faculty opportunities to conduct research for 
promotion and tenure); Record of Proceedings (Feb. 4, 2008) (Oral 
Remarks of Phillip M.J. Reckers, Professor of Accountancy, Arizona 
State University, 68), available at http://www.treas.gov/offices/domestic-finance/acap/agendas/minutes-2-4-08.pdf (stating that 
sabbaticals deliver professors ``a wealth of knowledge they could 
bring back in the classroom'').
    \73\ See Record of Proceedings (Mar. 13, 2008) (Oral Remarks of 
H. Rodgin Cohen, Chairman, Sullivan & Cromwell LLP, 69), available 
at http://www.treas.gov/offices/domestic-finance/acap/agendas/minutes-03-13-08.pdf (noting that spending time in the classroom 
should ``give the [practicing accountant] the time to do the 
reflective thinking''); Record of Proceedings (Mar. 13, 2008) (Oral 
Remarks of Zoe-Vonna Palmrose, Deputy Chief Accountant, SEC), 
available at http://www.treas.gov/offices/domestic-finance/acap/agendas/minutes-03-13-08.pdf (commenting that sabbaticals provide 
the ``opportunity for reflective thinking'').
---------------------------------------------------------------------------

    In addition, the Committee recommends that the over fifty HBCUs 
with accounting programs require one member of their accounting faculty 
annually to participate in a cross-sabbatical with a private or public 
sector entity. The Committee also recommends that the private and 
public sector entities provide these opportunities, as well as focus on 
other arrangements to build relationships at these educational 
institutions.
    The Committee received testimony regarding the lack of minority 
mentors and role models \74\ and notes that the profession has 
recognized this situation.\75\ Thus, the Committee also recommends that 
public company auditing firms intensify their efforts to create 
internships and mentoring programs for students in accounting and other 
complementary disciplines, including those from HBCUs and community 
colleges, as a means to increase the awareness of the accounting 
profession and its attractiveness among minority students.
---------------------------------------------------------------------------

    \74\ See, e.g., Record of Proceedings (June 3, 2008) (Written 
Submission of Frank K. Ross, Director, Center for Accounting 
Education, Howard University School of Business, 9), available at 
http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Ross060308.pdf (highlighting that a 2006 NABA survey 
revealed that almost 60% of African American respondents stated that 
their mentors come from outside of the profession); Record of 
Proceedings (Feb. 4, 2008) (Written Submission of Gilbert R. 
Vasquez, Managing Partner, Vasquez & Company LLP, 4), available at 
http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Vasquez02042008.pdf (highlighting the lack of Hispanic role 
models and mentors in the accounting profession).
    \75\ See Record of Proceedings (July 12, 2006) (Written 
Testimony of Manuel Fernandez, National Managing Partner--Campus 
Recruiting, KPMG LLP, to the Subcommittee on Oversight and 
Investigations of the House Financial Services Committee, 5), 
available at http://financialservices.house.gov/media/pdf/071206mf.pdf (identifying the lack of minority faculty mentors and 
role models and noting ``[w]hen students of color do not see 
professors of their own ethnic background on the accounting faculty, 
they are less apt to consider the option of a career in 
accountancy''); Record of Proceedings (Dec. 3, 2007) (Questions for 
the Record of George S. Willie, Managing Partner, Bert Smith & Co., 
1 (Jan. 30, 2008)), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Willie120307.pdf 
(recommending the establishment of a mentor program for minority 
accounting students).
---------------------------------------------------------------------------

    (e) Increase the numbers of minority accounting doctorates through 
focused efforts.
    Some dedicated programs have succeeded in attracting minorities to 
enter and complete accounting doctoral studies.\76\ In particular, the 
PhD Project, an effort of the KPMG Foundation, has worked to increase 
the diversity of business school faculty.\77\ The PhD Project focuses 
on attracting minorities to business doctoral programs, and provides a 
network of peer support. Since the PhD Project's establishment in 1994, 
the number of minority professors at U.S. business schools has 
increased from 294 to 889.\78\ Ninety percent who enter the PhD Project 
earn their doctorates, and 99% of those who complete their doctorates 
go on to teach.\79\ The PhD Project has received over $17.5 million 
\80\ in funding since 1994 from corporations, foundations, 
universities, and other interested parties.\81\
---------------------------------------------------------------------------

    \76\ For a list of educational support programs that auditing 
firms are sponsoring, see Record of Proceedings (Feb. 4, 2008) 
(Written Submission of Barry Salzberg, Chief Executive Officer, 
Deloitte LLP, Appendix A), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Salzberg020408.pdf.
    \77\ For further information on the PhD Project, see http://www.phdproject.org/mission.html.
    \78\ Record of Proceedings (Feb. 4, 2008) (Written Submission of 
Barry Salzberg, Chief Executive Officer, Deloitte LLP, Appendix A), 
available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Salzberg020408.pdf.
    \79\ See Jane Porter, Going to the Head of the Class: How the 
PhD Project is Helping to Boost the Number of Minority Professors in 
B-schools, Business Week Online (Dec. 27, 2006), available at http://www.businessweek.com/bschools/content/dec2006/bs20061227_926455.htm.
    \80\ See Record of Proceedings (July 12, 2006) (Written 
Testimony of Manuel Fernandez, National Managing Partner--Campus 
Recruiting, KPMG LLP, to the Subcommittee on Oversight and 
Investigations of the House Financial Services Committee, 5), 
available at http://financialservices.house.gov/media/pdf/071206mf.pdf.
    \81\ For further information on the PhD Project, see http://www.phdproject.org/corp_sponsors.html.
---------------------------------------------------------------------------

    The Committee believes that programs such as these can successfully 
recruit minorities to accounting doctoral studies. The Committee 
recommends that auditing firms, corporations, and other interested 
parties advertise existing and successful efforts to increase the 
number of minority doctorates by developing further dedicated 
programs.\82\ Additionally, the Committee recommends that auditing 
firms, corporations, and other interested parties maintain and increase 
the funding of these programs.
---------------------------------------------------------------------------

    \82\ See, e.g., Cynthia M. Fornelli, Executive Director, Center 
for Audit Quality, Comment Letter Regarding Draft Report and Draft 
Report Addendum 9 (June 26, 2008), available at http://comments.treas.gov/_files/CAQCommentletter62708FINAL.pdf (stating 
that this Recommendation could lead to an increase in the number of 
minority accounting doctorates); Record of Proceedings (June 3, 
2008) (Written Submission of Frank K. Ross, Director, Center for 
Accounting Education, Howard University School of Business, 11), 
available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Ross060308.pdf (noting the need to expand 
support for the PhD Project and similar initiatives).
---------------------------------------------------------------------------

    Recommendation 3. Ensure a sufficiently robust supply of qualified 
accounting faculty to meet demand for the future and help prepare new 
entrants to the profession to perform high quality audits.
    The Committee heard testimony from individuals regarding the need 
to have an adequate supply of faculty with the knowledge and experience 
to develop qualified professionals for the increasingly complex and 
global auditing profession.\83\
---------------------------------------------------------------------------

    \83\ See, e.g., Record of Proceedings (Dec. 3, 2007) (Written 
Submission of David W. Leslie, Chancellor Professor of Education, 
College of William and Mary, 2), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Leslie120307.pdf 
(noting a 13.3% decline in accounting faculty from 1988 to 2004); 
Record of Proceedings (Feb. 4, 2008) (Written Submission of Edward 
E. Nusbaum, Chief Executive Officer, Grant Thornton LLP, and 
Chairman, Grant Thornton International Board of Governors, 5), 
available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Nusbaum020408.pdf (stating that ``recent years 
have seen a reduction in accounting faculty, based on a wave of 
retirements and lack of accounting PhDs coming into the system''); 
Record of Proceedings (Dec. 3, 2007) (Written Submission of Ira 
Solomon, R.C. Evans Distinguished Professor, and Head, Department of 
Accountancy, University of Illinois, 4), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Solomon120307.pdf (stating that ``the number of persons entering 
accountancy doctoral programs is too low to sustain the accountancy 
professoriate'').

---------------------------------------------------------------------------

[[Page 44326]]

    The Committee recognizes that there is a high level of concern 
about the adequacy of both the near- and the long-term supply of 
doctoral faculty, especially given the anticipated pace of faculty 
retirements. According to National Study of Postsecondary Faculty data, 
the number of full- and part-time accounting faculty at all types of 
educational institutions fell by 13.3% from 20,321 in 1993 to 17,610 in 
2004, while student (undergraduate) enrollment increased by 12.3% over 
the same period.\84\ See Figure 5.
---------------------------------------------------------------------------

    \84\ Record of Proceedings (Dec. 3, 2007) (Written Submission of 
David W. Leslie, Chancellor Professor of Education, College of 
William and Mary, 5), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Leslie120307.pdf.
[GRAPHIC] [TIFF OMITTED] TN30JY08.041

    Moreover, the current pipeline of doctoral faculty is not keeping 
pace with anticipated retirements. In November 2006, it was estimated 
that one-third of the approximately 4,000 accounting doctoral faculty 
in the United States were 60 years old or older, and one-half were 55 
years old or older.\85\ The average retirement age of accounting 
faculty was 62.4 years.
---------------------------------------------------------------------------

    \85\ James R. Hasselback, 2007 Analysis of Accounting Faculty 
Birthdates, available at http://aaahq.org/temp/phd/JimHasselbackBirthdateSlide.pdf.
---------------------------------------------------------------------------

    In terms of specialization within the accounting discipline, an AAA 
study concluded that only 22% and 27% of the projected demand for 
doctoral faculty in auditing and tax, respectively, will be met by 
expected graduations in the coming years.\86\ However, 91% and 79% of 
the projected demand for doctoral faculty in financial accounting and 
managerial accounting, respectively, will be met.\87\
---------------------------------------------------------------------------

    \86\ R. David Plumlee, Steven J. Kachelmeier, Silvia A. Madeo, 
Jamie H. Pratt, and George Krull, Assessing the Shortage of 
Accounting Faculty, 21 Issues in Accounting Education, No. 2, 119 
(May 2006).
    \87\ R. David Plumlee, Steven J. Kachelmeier, Silvia A. Madeo, 
Jamie H. Pratt, and George Krull, Assessing the Shortage of 
Accounting Faculty, 21 Issues in Accounting Education, No. 2, 119 
(May 2006).
---------------------------------------------------------------------------

    In addition to the accounting faculty supply issues, the Committee 
heard testimony from witnesses on the need to ensure faculty are 
qualified and able to teach students the latest market developments, 
such as fair value accounting and IFRS. The Committee learned that 
often new accounting faculty may have little practical experience.\88\ 
Witnesses testified to the difficulty of academics acquiring 
``practice-oriented'' knowledge as the bond between the profession and 
academia is underdeveloped. Witnesses did suggest improving these 
relationships with incentives for sabbaticals and sharing practice 
experience.\89\
---------------------------------------------------------------------------

    \88\ Record of Proceedings (Dec. 3, 2007) (Written Submission of 
Joseph V. Carcello, Director of Research, Corporate Governance, 
University of Tennessee, Knoxville, 21), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Carcello120307.pdf.
    \89\ Record of Proceedings (Feb. 4, 2008) (Written Submission of 
Cynthia Fornelli, Executive Director, Center for Audit Quality, 2), 
available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Fornelli020408.pdf (noting that the auditing 
firms recognize the need to be more active in sharing practical 
experiences with academics); Record of Proceedings (Feb. 4, 2008) 
(Written Submission of Phillip M.J. Reckers, Professor of 
Accountancy, Arizona State University, 19), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Reckers020408.pdf (``[R]elationships between practitioners and 
academics have so diminished that they are little more than formal 
liaison assignments involving very few parties from any side * * * 
[w]here there have been opportunities for interaction (curriculum 
issues, policy deliberations, research matters), those opportunities 
have been embraced perceptibly less often.'').
---------------------------------------------------------------------------

    In this regard, the Committee makes the following recommendations:
    (a) Increase the supply of accounting faculty through public and 
private funding and raise the number of professionally qualified 
faculty that teach on campuses.
    The Committee recognizes that ensuring an adequate supply of 
doctoral accounting faculty in higher education is crucial to both 
retaining the academic standing of the discipline on campus and 
developing well-prepared and educated entry-level professionals. The 
resource represented by these professionals is essential for high 
quality audits. The Committee believes that high quality audits are 
critical to well-functioning capital markets, and therefore the funding 
necessary to

[[Page 44327]]

supply the healthy pipeline of doctoral accounting faculty to assist in 
providing these human capital resources must be made available.\90\ The 
Committee therefore recommends expanding government funding, at both 
the federal and state level, for accounting doctoral candidates. The 
Committee also recommends that private sources (including corporations, 
institutional investors, and foundations as well as auditing firms) 
continue to be encouraged to fund accounting doctoral candidates.\91\ 
The Committee recognizes and commends the auditing firms' support of 
doctoral candidates.\92\
---------------------------------------------------------------------------

    \90\ See Record of Proceedings (June 3, 2008) (Written 
Submission of Jean C. Bedard, Timothy B. Harbert Professor of 
Accounting, Department of Accountancy, Bentley College, 2), 
available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Bedard060308.pdf (noting that ``[f]unding for 
doctoral study is absolutely critical'').
    \91\ See, e.g., Record of Proceedings (June 3, 2008) (Written 
Submission of Kayla J. Gillan, Chief Administrative Officer, 
RiskMetrics Group, 2), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Gillan060308.pdf (noting 
that Sarbanes-Oxley Act Section 109(c)(2) states that monetary 
penalties assessed by the PCAOB against registered firms and 
individuals are to be used exclusively to fund merit-based 
scholarships for accounting undergraduate and graduate students and 
that Section 109(c)(2) also includes certain procedural requirements 
for the funds' release, such as Congressional approval, and 
recommending the Committee suggest eliminating the unnecessary 
procedural obstacles contained in the statute); 
PricewaterhouseCoopers LLP, Comment Letter Regarding Draft Report 
and Draft Report Addendum 6 (June 30, 2008), available at http://comments.treas.gov/_files/PwCCommentLtrTreasCmtDraftandAddendum63008.pdf (noting that the 
profession provides funding for faculty, but other private sector 
participants as well as Congress and state and local officials could 
contribute funding).
    \92\ See Record of Proceedings (Feb. 4, 2008) (Written 
Submission of Cynthia Fornelli, Executive Director, Center for Audit 
Quality, 2), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Fornelli020408.pdf. Other 
commenters have suggested another method to increase the number of 
faculty and professionals as well as potentially expand diversity 
within the profession is by increasing the current H-1B quota of 
65,000. See, e.g., Cynthia M. Fornelli, Executive Director, Center 
for Audit Quality, Comment Letter Regarding Draft Report and Draft 
Report Addendum 9 (June 26, 2008), available at http://comments.treas.gov/_files/CAQCommentletter62708FINAL.pdf (noting 
the need to increase the quota for H-1B visas to help increase the 
number of faculty and the number of professionals knowledgeable of 
international issues); PricewaterhouseCoopers LLP, Comment Letter 
Regarding Draft Report and Draft Report Addendum 7 (June 30, 2008), 
available at http://comments.treas.gov/_files/PwCCommentLtrTreasCmtDraftandAddendum63008.pdf (recommending 
immigration reform, such as expansion of H-1B visa program, to 
increase supply of accounting faculty, international experience, and 
diversity). But, c.f., Carl Olson, California National University, 
Comment Letter Regarding Draft Report and Draft Report Addendum 31-
32 (June 6, 2008), available at http://comments.treas.gov/_files/OlsonCommentLetter0606082.pdf (opposing the use of H-1B visas by 
accounting firms to recruit employees).
---------------------------------------------------------------------------

    Currently, minimum accreditation requirements for accountancy 
faculty typically require that approximately 50% of full-time faculty 
have a doctoral degree. Commonly, business school deans and academic 
vice presidents (those making the budgetary decisions regarding faculty 
allotments on campuses) interpret this accreditation requirement to 
require that a minimum of 50% of a department's faculty hold an earned 
doctorate and are actively engaged in research and publication 
activity. Although a high percentage of faculty is expected to be 
professionally qualified (i.e., having recent direct business 
experience), at times gatekeepers for budget allocations may be less 
enthusiastic about maximizing the number of professionally qualified 
teaching slots in a given program. The Committee sees benefits to the 
increased participation of professionally qualified and experienced 
faculty, who would bring additional practical business experience to 
the classrooms, and notes that witnesses and commenters have 
underscored the benefits of professionally qualified and experienced 
faculty.\93\ Therefore, the Committee recommends that accrediting 
agencies continue to actively support faculty composed of academically 
and professionally qualified and experienced faculty.
---------------------------------------------------------------------------

    \93\ See Andrew D. Bailey, Jr., Professor of Accountancy-
Emeritus, University of Illinois, and Senior Policy Advisor, Grant 
Thornton LLP, Comment Letter Regarding Discussion Outline 19 (Jan. 
30, 2008), available at http://comments.treas.gov/_files/BAILEYCOMMENTSONTREASURYADVISORYCOMMITTEEOUTLINEFINALSUBMISSION13008.
doc (stating that ``[t]here are clearly practice professionals that 
make excellent contributions to some of the most highly rated 
accounting programs in the country''); Record of Proceedings (Feb. 
4, 2008) (Written Submission of Cynthia Fornelli, Executive 
Director, Center for Audit Quality, 3), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Fornelli020408.pdf (stating that accreditation bodies ``revise 
accreditation standards to allow the employment of more audit 
professionals, either active or retired, as adjunct professors'').
---------------------------------------------------------------------------

    (b) Emphasize the utility and effectiveness of cross-sabbaticals.
    As discussed above, cross-sabbaticals are interactive relationships 
where faculty and seasoned professionals are regularly represented in 
the practice and academic environments through exchanges. For example, 
currently, the Securities and Exchange Commission (SEC) and the FASB 
offer fellowship programs for professional accountants and accounting 
academics. Evidence suggests that such exchanges can be beneficial, and 
continued development of such exchanges is expected to provide 
substantial benefits for all parties.\94\ Cross-sabbaticals present an 
opportunity for ``reflective thinking'' for seasoned professionals.\95\ 
Academics often face the disincentive of being forced to forgo their 
full salaries in order to engage in such sabbaticals,\96\ and colleges 
and universities may not encourage professional practice sabbaticals, 
preferring that the focus of faculty be directed exclusively toward 
academic research and the number and placement of scholarly articles. 
The Committee believes that changing both the academic and practice 
culture will require a plan and commitment of support at the highest 
institutional levels.
---------------------------------------------------------------------------

    \94\ See Record of Proceedings (Feb. 4, 2008) (Written 
Submission of Cynthia Fornelli, Executive Director, Center for Audit 
Quality, 2), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Fornelli020408.pdf (recommending 
encouraging sabbaticals, internships, and fellowship opportunities, 
structured to give faculty opportunities to conduct research for 
promotion and tenure); Record of Proceedings (June 3, 2008) (Written 
Submission of William Kinney, Charles & Elizabeth Prothro Regents 
Chair in Business and Price Waterhouse Fellow in Auditing, 
University of Texas, Austin, 5), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Kinney060308.pdf 
(noting the completion of an August 2007 to February 2008 assignment 
as an academic fellow in the Professional Practice Group of Office 
of Chief Accountant at the SEC, and stating that the experience 
provided a greater understanding of the regulatory process and that 
``my students have already benefited through more relevant 
classes''); Record of Proceedings (Feb. 4, 2008) (Oral Remarks of 
Phillip M.J. Reckers, Professor of Accountancy, Arizona State 
University, 68), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Reckers020408.pdf (stating that 
sabbaticals deliver professors ``a wealth of knowledge they could 
bring back in the classroom'').
    \95\ See Record of Proceedings (Mar. 13, 2008) (Oral Remarks of 
H. Rodgin Cohen, Chairman, Sullivan & Cromwell LLP, 69), available 
at http://www.treas.gov/offices/domestic-finance/acap/agendas/minutes-03-13-08.pdf; Record of Proceedings (Mar. 13, 2008) (Oral 
Remarks of Zoe-Vonna Palmrose, Deputy Chief Accountant, SEC, 67), 
available at http://www.treas.gov/offices/domestic-finance/acap/agendas/minutes-03-13-08.pdf.
    \96\ Record of Proceedings (Feb. 4, 2008) (Oral Remarks of 
Phillip M.J. Reckers, Professor of Accountancy, Arizona State 
University, 67-69), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Reckers020408.pdf (noting 
the financial disincentives associated with sabbaticals).
---------------------------------------------------------------------------

    Specifically, the Committee recommends that educational 
institutions, auditing firms, corporations, federal and state 
regulators, and others engage in a two-fold strategy to both encourage 
cross-sabbaticals and eliminate financial or career disincentives for 
participating in such experiences.\97\ Further, the

[[Page 44328]]

Committee recommends that university administrators place as high a 
value on professional sabbaticals for purposes of promotion and tenure 
as they do for research and scholarly publication.\98\
---------------------------------------------------------------------------

    \97\ See, e.g., Deloitte LLP, Comment Letter Regarding Draft 
Report and Draft Report Addendum 11 (June 27, 2008), available at 
http://comments.treas.gov/_files/DeloitteLLPCommentLetter.pdf 
(noting the formation of a task force on cross-sabbaticals with 
accounting faculty, including those at HBCUs); Record of Proceedings 
(June 3, 2008) (Written Submission of William Kinney, Charles & 
Elizabeth Prothro Regents Chair in Business and Price Waterhouse 
Fellow in Auditing, University of Texas, Austin, 5), available at 
http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Kinney060308.pdf (supporting the idea of allowing 
professors to take sabbaticals and providing direct evidence by 
describing a recent assignment as an academic fellow in the 
Professional Practice Group of the SEC's Office of Chief 
Accountant).
    \98\ See Joseph V. Carcello, Chair, AAA Task Force to Monitor 
the Activities of the Treasury ACAP, Professor and Director of 
Research--Corporate Governance Center, University of Tennessee, Jean 
C. Bedard, Professor of Accountancy, Bentley College, and Dana R. 
Hermanson, Chair of Private Enterprise and Professor of Accounting, 
Kennesaw State University, Comment Letter Regarding Draft Report and 
Draft Report Addendum 4 (May 15, 2008), available at http://comments.treas.gov/_files/ACAPCommentLetterMay152008.pdf (noting 
the need to ``[p]lace equal emphasis on completing a sabbatical with 
a private sector institution or government entity as with publishing 
one `tier A' paper'').
---------------------------------------------------------------------------

    The Committee also recommends that accrediting agencies establish 
an expectation that at least one full-time member per year of each 
accounting faculty group participate in a sabbatical with a private 
sector or a governmental entity. Auditing firms, corporations, 
government agencies, and universities should be expected to provide 
these opportunities with the elimination of any financial 
disincentives. Further, the Committee recommends expanding faculty 
fellowship programs in agencies, such as those at the SEC and the FASB, 
and making them available at the PCAOB. The successful long-term 
operation of these programs at the SEC and the FASB and the application 
of appropriate conflict-of-interest and recusal rules have demonstrated 
that these programs can be maintained and expanded while protecting 
against conflicts of interest.
    (c) Create a variety of tangible and sufficiently attractive 
incentives that will motivate private sector institutions to fund both 
accounting faculty and faculty research, to provide practice materials 
for academic research and for participation of professionals in 
behavioral and field study projects, and to encourage practicing 
accountants to pursue careers as academically and professionally 
qualified faculty.
    As discussed above, there are concerns about the adequate supply of 
accounting faculty and about the need to have faculty who can inject 
more practical experience into classroom learning. Currently, there are 
few specific financial incentives encouraging private sector funding of 
accounting doctoral faculty or sponsoring of professional accountants 
to teach at educational institutions. Nonetheless, the Committee notes 
that the profession recognizes the need to support initiatives to 
increase faculty and is currently directing its efforts to raise funds 
for such a new initiative.\99\
---------------------------------------------------------------------------

    \99\ See Record of Proceedings (Feb. 4, 2008) (Written 
Submission of Cynthia Fornelli, Executive Director, Center for Audit 
Quality, 2), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Fornelli020408.pdf (stating that 
``[b]ecause of the profession's concern over the shortage of 
qualified faculty to teach accounting, the AICPA Foundation, along 
with the 80 largest CPA firms, are working to raise more than $17 
million to fund additional PhD candidates at participating 
universities'').
---------------------------------------------------------------------------

    The Committee also heard from several witnesses regarding the 
unavailability of data relating to auditing practice and the impact 
this lack of data has on research and potentially on the profession's 
sustainability. In particular, witnesses stated that the decline in 
auditing research materials, including archival or experimental data, 
will lead to a further decline in faculty and doctoral students 
specializing in auditing.\100\ Since educational institutions normally 
require publications in top tier journals for promotion or tenure, 
faculty and doctoral students will conduct research in accounting areas 
where data are prevalent.
---------------------------------------------------------------------------

    \100\ See, e.g., Record of Proceedings (Dec. 3, 2007) (Written 
Submission of Joseph V. Carcello, Director of Research, Corporate 
Governance, University of Tennessee, Knoxville, 21), available at 
http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Carcello120307.pdf (``[D]octoral students in * * * [a 2007] 
Deloitte [Foundation] study indicated that lack of access to public 
accounting firm and client data represented a severe obstacle to the 
research they want to conduct, and that this difficulty might result 
in them focusing on a different accounting sub-area. This issue must 
be addressed, or auditing may cease to exist as a discipline on many 
university campuses.''); Record of Proceedings (Feb. 4, 2008) 
(Written Submission of Phillip M.J. Reckers, Professor of 
Accountancy, Arizona State University, 8), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Reckers020408.pdf (recommending the development of a means ``for 
researchers to gain access to auditing related data'' and noting, 
without this means, interest in doctoral auditing programs will 
continue to decline); Record of Proceedings (Dec. 3, 2007) (Written 
Submission of Ira Solomon, R.C. Evans Distinguished Professor, and 
Head, Department of Accountancy, University of Illinois, 7), 
available at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Solomon120307.pdf (noting the lack of auditing 
research data and the ``drastic decline in auditing research among 
extant accountancy faculty and among accountancy doctoral 
students'').
---------------------------------------------------------------------------

    The Committee also heard that encouraging more professionally 
qualified and experienced faculty will foster a stronger relationship 
between academia and the profession.\101\ Currently, there exists a 
need for more interaction between academia and the profession.\102\ 
Encouraging practicing accountants to pursue careers as academically 
and professionally qualified faculty would bring practical business 
experience to classrooms so that students are better prepared to 
perform quality audits in the dynamic business environment.
---------------------------------------------------------------------------

    \101\ Record of Proceedings (Feb. 4, 2008) (Written Submission 
of Cynthia Fornelli, Executive Director, Center for Audit Quality, 
2), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Fornelli020408.pdf.
    \102\ Record of Proceedings (Feb. 4, 2008) (Written Submission 
of Phillip M.J. Reckers, Professor of Accountancy, Arizona State 
University, 19), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Reckers020408.pdf.
---------------------------------------------------------------------------

    Finally, the Committee recommends that Congress pass legislation 
creating a variety of tangible incentives for private sector 
institutions to establish support for accounting and auditing faculty 
and faculty research, to facilitate access to research data and 
individuals,\103\ and to sponsor transition of professional accountants 
from practice to teaching positions. These incentives must be 
sufficiently attractive to companies and auditing firms to affect rapid 
behavioral change, and should avoid cumbersome levels of 
administration. The Committee believes that these incentives would

[[Page 44329]]

provide the necessary impetus to private sector institutions to help 
increase the number of accounting faculty as well as faculty with 
significant practical experience.
---------------------------------------------------------------------------

    \103\ See, e.g., Joseph V. Carcello, Chair, AAA Task Force to 
Monitor the Activities of the Treasury ACAP, Professor and Director 
of Research--Corporate Governance Center, University of Tennessee, 
Jean C. Bedard, Professor of Accountancy, Bentley College, and Dana 
R. Hermanson, Chair of Private Enterprise and Professor of 
Accounting, Kennesaw State University, Comment Letter Regarding 
Draft Report and Draft Report Addendum 2 (May 15, 2008), available 
at http://comments.treas.gov/_files/ACAPCommentLetterMay152008.pdf 
(recommending that auditing firms and regulators assist academic 
researchers with access to data relating to the auditing practice); 
Deloitte LLP, Comment Letter Regarding Draft Report and Draft Report 
Addendum 11-12 (June 27, 2008), available at http://comments.treas.gov/_files/DeloitteLLPCommentLetter.pdf (noting the 
attempt to actively work with academia to find ways to overcome 
confidentiality issues concerning auditing practice data); Record of 
Proceedings (June 3, 2008) (Written Submission of Kayla J. Gillan, 
Chief Administrative Officer, RiskMetrics Group, 2), available at 
http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Gillan060308.pdf (recommending that everyone have access to 
PCAOB inspection data and suggesting the Committee seek legislative 
amendments to allow this access); Record of Proceedings (June 3, 
2008) (Written Submission of William Kinney, Charles & Elizabeth 
Prothro Regents Chair in Business and Price Waterhouse Fellow in 
Auditing, University of Texas, Austin, 5), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Kinney060308.pdf (suggesting legislation encouraging access to 
data).
---------------------------------------------------------------------------

    Recommendation 4. Develop and maintain consistent demographic and 
higher education program profile data.
    The Committee heard testimony regarding the lack of consistent 
demographic and higher education program profile data concerning the 
profession.\104\ The need for comparable, consistent, periodic 
information regarding the demographic profile of professional 
accountants and auditors, related higher education program capacity, 
entry-level supply and demand of personnel, accounting firm retention 
and compensation practices, and similar particulars are fundamental to 
a meaningful understanding of the human capital circumstances impacting 
the public company auditing profession and its future and 
sustainability.
---------------------------------------------------------------------------

    \104\ See, e.g., Record of Proceedings (Dec. 3, 2007) (Questions 
for the Record of David A. Costello, President and Chief Executive 
Officer, NASBA, 2-4 (Feb. 6, 2008)), available at http://www.treas.gov/offices/domestic-finance/acap/QFRs-12-3-07.pdf 
(stating that ``[s]ince 1970, * * * NASBA and the AICPA have 
recognized the need for a national database for Certified Public 
Accountants and have taken steps leading to the development of the 
database * * * [c]urrently, NASBA is not aware of a mechanism or 
database which would provide an accurate count of CPAs, without the 
effect of `double counting' ''); Julia Grant, Demographic Challenges 
Facing the CPA Profession, 20 Research in Accounting Regulation 
(2008); Record of Proceedings (Dec. 3, 2007) (Written Submission of 
Ira Solomon, R.C. Evans Distinguished Professor, and Head, 
Department of Accountancy, University of Illinois, 13), available at 
http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Solomon120307.pdf (noting the lack of comprehensive 
accounting profession supply and demand data and recommending the 
``establishment of a continuous and comprehensive system that 
produces more timely and reliable supply and demand data'').
---------------------------------------------------------------------------

    Historically, there has been neither an ongoing collection of data 
nor a centralized location where the general public can access data. 
For instance, the AICPA publishes a supply and demand study every two 
years. Additionally, various other groups, such as the AAA, the 
National Association of State Boards of Accountancy, colleges and 
universities, and individuals collect some of these data but not in a 
manner available and useful for research.
    Materials such as those supplied by the Center for Audit Quality to 
the Committee,\105\ previous AICPA Supply and Demand studies,\106\ and 
AAA-commissioned demographic research \107\ provide examples of the 
necessary information. In addition, AICPA membership trends, augmented 
by data available from state boards of accountancy regarding numbers of 
licensees, may be useful data.
---------------------------------------------------------------------------

    \105\ Center for Audit Quality, Report of the Major Public 
Company Audit Firms to the Department of the Treasury Advisory 
Committee on the Auditing Profession (Jan. 23, 2008), available at 
http://www.thecaq.org/publicpolicy/data/TRData2008-01-23-FullReport.pdf.
    \106\ Dennis R. Reigle, Heather L. Bunning and Danielle Grant, 
2008 Trends in the Supply of Accounting Graduates and the Demand for 
Public Accounting Recruits (2008), available at http://ceae.aicpa.org/NR/rdonlyres/C1E23302-17D3-4ED5-AE81-B274D9CD7812/0/AICPA_Trends_Reports_2008.pdf.
    \107\ David Leslie, Accounting Faculty in U.S. Colleges and 
Universities: Status and Trends, 1993-2004, A Report of the American 
Accounting Association (Feb. 19, 2008).
---------------------------------------------------------------------------

    Therefore, the Committee recommends the establishment of a national 
cooperative committee, comprised of organizations such as the AICPA and 
the AAA, to encourage periodic consistent demographic and higher 
education program profile data.\108\ The Committee believes that having 
such data available will increase the ability of auditing firms, 
corporations, investors, academics, policy makers, and others to 
understand more fully, monitor and evaluate, and take necessary or 
desirable actions with respect to the human capital in the auditing 
profession and its future and sustainability.
---------------------------------------------------------------------------

    \108\ See, e.g., Joseph V. Carcello, Chair, AAA Task Force to 
Monitor the Activities of the Treasury ACAP, Professor and Director 
of Research--Corporate Governance Center, University of Tennessee, 
Jean C. Bedard, Professor of Accountancy, Bentley College, and Dana 
R. Hermanson, Chair of Private Enterprise and Professor of 
Accounting, Kennesaw State University, Comment Letter Regarding 
Draft Report and Draft Report Addendum 2 (May 15, 2008), available 
at http://comments.treas.gov/_files/ACAPCommentLetterMay152008.pdf 
(supporting this Recommendation); Ernst & Young LLP, Comment Letter 
Regarding Draft Report and Draft Report Addendum 23 (June 27, 2008), 
available at http://comments.treas.gov/_files/EYACAPCommentLetterFINAL2.pdf (supporting this Recommendation); 
Record of Proceedings (June 3, 2008) (Written Submission of Anne M. 
Lang, Chief Human Resources Officer, Grant Thornton LLP, 4), 
available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Lang060308.pdf (supporting this 
Recommendation).
---------------------------------------------------------------------------

    Recommendation 5. Encourage the AICPA and the AAA to jointly form a 
commission to provide a timely study of the possible future of the 
higher education structure for the accounting profession.
    The Committee heard testimony regarding the feasibility of 
establishing a free-standing, post-graduate professional educational 
structure.\109\ Currently, there is no post-graduate institutional 
arrangement dedicated to accounting and auditing. Graduate programs in 
accounting are generally housed within business schools and linked with 
undergraduate accounting programs.
---------------------------------------------------------------------------

    \109\ See, e.g., Record of Proceedings (Dec. 3, 2007) (Oral 
Submission of Joseph V. Carcello, Director of Research, Corporate 
Governance, University of Tennessee, Knoxville, 3), available at 
http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/CarcelloOralStatement120307.pdf (recommending that ``the 
Advisory Committee consider a different model--an education model 
involving professional schools of auditing * * *''); Record of 
Proceedings (June 3, 2008) (Written Submission of Anne M. Lang, 
Chief Human Resources Officer, Grant Thornton LLP, 5), available at 
http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Lang060308.pdf (noting that the establishment of a 
commission to study a higher education structure for the accounting 
profession ``is a very sound'' recommendation). But, c.f., Record of 
Proceedings (Feb. 4, 2008) (Written Submission of Phillip M.J. 
Reckers, Professor of Accountancy, Arizona State University, 3), 
available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Reckers020408.pdf (discounting the feasibility 
of free-standing professional schools).
---------------------------------------------------------------------------

    The history of the development of U.S. educational programs and 
preparation for accounting careers reveals a pattern of evolution of 
increasing formal higher education, with accreditation standards 
following and reinforcing this evolution, and with market needs 
providing the impetus and context. Today, accrediting agencies have 
recognized over 150 accounting programs as the result of these 
programs' improving accounting education as envisioned by prior studies 
and reports.
    In a November 2006 Vision Statement, the chief executive officers 
of the principal international auditing networks noted the challenges 
in educating future auditing professionals, including the sheer 
quantity and complexity of accounting and auditing standards, rapid 
technological advancements, and the need for specialized industry 
knowledge. \110\ This development in the market leads to a clear need 
to anticipate and enhance the human capital elements of the auditing 
profession. As such, this vision statement provides the impetus to 
commission a group to study and propose a long-term institutional 
arrangement for accounting and auditing education.
---------------------------------------------------------------------------

    \110\ Global Capital Markets and the Global Economy: A Vision 
From the CEOs of the International Audit Networks 15 (Nov. 2006).
---------------------------------------------------------------------------

    As in the past, in the face of challenges of the changing 
environment for the profession, the Committee believes that the 
educational system should thoughtfully consider the feasibility of a 
visionary educational model. Therefore, the Committee recommends that 
the AICPA and the AAA jointly form a body to provide a timely study of 
the possible future of the higher education structure for the

[[Page 44330]]

accounting profession.\111\ This commission may include representation 
from higher education, practitioners from the wide spectrum of the 
accounting and auditing profession, regulators, preparers, users of the 
profession's services, and others. The commission would consider the 
potential role of a postgraduate professional school model to enhance 
the quality and sustainability of a vibrant accounting and auditing 
profession. The commission should consider developments in accounting 
standards and their application, auditing needs, regulatory framework, 
globalization, the international pool of candidates, and technology. 
Finally, a blueprint for this sort of enhanced professional educational 
structure would also require the consideration of long-term market 
circumstances, academic governance, operations, programs, funding and 
resources, the role of accreditation, and experiential learning 
processes.
---------------------------------------------------------------------------

    \111\ See, e.g., Joseph V. Carcello, Chair, AAA Task Force to 
Monitor the Activities of the Treasury ACAP, Professor and Director 
of Research--Corporate Governance Center, University of Tennessee, 
Jean C. Bedard, Professor of Accountancy, Bentley College, and Dana 
R. Hermanson, Chair of Private Enterprise and Professor of 
Accounting, Kennesaw State University, Comment Letter Regarding 
Draft Report and Draft Report Addendum 5 (May 15, 2008), available 
at http://comments.treas.gov/_files/ACAPCommentLetterMay152008.pdf 
(supporting this Recommendation and noting the need for these 
schools to be well-funded and be independent from business schools 
with control over tenure and promotion); Deloitte LLP, Comment 
Letter Regarding Draft Report and Draft Report Addendum 23 (June 27, 
2008), available at http://comments.treas.gov/_files/DeloitteLLPCommentLetter.pdf (supporting this Recommendation and 
noting the commission should consider other human capital issues 
including financial and time concerns as well as recruiting 
individuals from other disciplines); Record of Proceedings (June 3, 
2008) (Written Submission of Anne M. Lang, Chief Human Resources 
Officer, Grant Thornton LLP, 5), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Lang060308.pdf 
(agreeing with this Recommendation). But, c.f., Record of 
Proceedings (June 3, 2008) (Written Submission of Frank K. Ross, 
Director, Center for Accounting Education, Howard University School 
of Business, 11), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Ross060308.pdf (noting 
the financial concerns that an extra year of schooling would have on 
the less affluent, which includes a ``disproportionate number'' of 
minorities).
---------------------------------------------------------------------------

V. Firm Structure and Finances

    In addressing the sustainability of the auditing profession, the 
Committee sought input on and considered a number of matters relating 
directly to auditing firms, including audit quality, governance, 
transparency, global organization, financial strength, ability to 
access capital, the investing public's understanding of auditors' 
responsibilities and communications, the limitations of audits, 
particularly relating to fraud detection and prevention, as well as the 
effect of litigation where audits are alleged to have been ineffective. 
The Committee also considered the regulatory system applicable to 
auditing firms.
    While much data was available to the Committee, such information 
was not exhaustive. Certain information regarding auditors of public 
companies, the auditor of record, and audit fees is readily available. 
Auditing firms also provide on a voluntarily basis certain other 
information they believe useful to clients, regulators, and/or 
investors. Also, in connection with the work of the Committee, the 
largest firms provided certain additional input, through the Center for 
Audit Quality (CAQ), sometimes by individual firm and sometimes in 
summarized format.\112\
---------------------------------------------------------------------------

    \112\ Center for Audit Quality, Report of the Major Public 
Company Audit Firms to the Department of the Treasury Advisory 
Committee on the Auditing Profession (Jan. 23, 2008); Center for 
Audit Quality, Second Supplement to Report of the Major Public 
Company Audit Firms to the Department of the Treasury Advisory 
Committee on the Auditing Profession (Apr. 16, 2008).
---------------------------------------------------------------------------

    After reviewing these data and receiving testimony from witnesses 
and comment letters, the Committee focused on a few specific areas: 
Fraud prevention and detection; federal and state regulatory system; 
governance; and disclosure of auditor changes.
    The Committee recommends that regulators, the auditing profession, 
and others, as applicable, effectuate the following:
    Recommendation 1. Urge the [ ] to create a national center to 
facilitate auditing firms' and other market participants' sharing of 
fraud prevention and detection experiences, practices, and data and 
innovation in fraud prevention and detection methodologies and 
technologies, and commission research and other fact-finding regarding 
fraud prevention and detection, and further, the development of best 
practices regarding fraud prevention and detection.
    Public Company Accounting Oversight Board (PCAOB) standards 
currently require auditors to plan and perform audits to obtain 
reasonable assurance whether financial statements are free of material 
misstatement, including those caused by fraud.\113\ The Committee 
considered testimony and commentary regarding auditing firms' 
responsibilities and practices relating to fraud prevention and 
detection.\114\ The auditing profession itself has recognized the 
significance of its duties with respect to fraud: ``Perhaps no single 
issue is the subject of more confusion, yet is more important, than the 
nature of the obligation of auditors to detect fraud--or intentional 
material misstatement of financial information by public companies.'' 
\115\
---------------------------------------------------------------------------

    \113\ Consideration of Fraud in a Financial Statement, Interim 
Auditing Standard AU 316 (Pub. Company Accounting Oversight Bd. 
2002).
    \114\ See, e.g., Andrew D. Bailey, Jr., Professor of 
Accountancy-Emeritus, University of Illinois, and Senior Policy 
Advisor, Grant Thornton LLP, Comment Letter Regarding Discussion 
Outline 4 (Jan. 30, 2008), available at http://comments.treas.gov/_files/BAILEYCOMMENTSONTREASURYADVISORYCOMMITTEEOUTLINEFINALSUBMISSION13008.
doc; Record of Proceedings (Feb. 4, 2008) (Written Submission of 
Dennis Johnson, Senior Portfolio Manager, Corporate Governance, 
California Public Employees' Retirement System, 5), available at 
http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Johnson020408.pdf.
    \115\ Serving Global Capital Markets and the Global Economy: A 
View from the CEOS of the International Audit Networks 12 (Nov. 
2006).
---------------------------------------------------------------------------

    No formal forum currently exists where auditors and other market 
participants regularly share their views and experiences relating to 
fraud prevention and detection in the context of fraudulent financial 
reporting. The Committee received testimony that it would improve audit 
quality and benefit the capital markets and investors and other 
financial statement users for auditing firms to share their fraud 
detection experiences \116\ and to develop best practices relating to 
fraud prevention and detection.\117\
---------------------------------------------------------------------------

    \116\ See, Record of Proceedings (Feb. 4, 2008) (Questions for 
the Record of Cynthia M. Fornelli, Executive Director, Center for 
Audit Quality, 6 (Mar. 31, 2008)), available at http://www.treas.gov/offices/domestic-finance/acap/agendas/-QFRs-2-4-08.pdf; Record of Proceedings (Dec. 3, 2007) (Written Submission of 
James S. Turley, Chairman and Chief Executive Officer, Ernst & Young 
LLP, 7), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Turley120307.pdf.
    \117\ See, e.g., Record of Proceedings (Feb. 4, 2008) (Written 
Submission of Edward E. Nusbaum, Chief Executive Officer, Grant 
Thornton LLP, and Chairman, Grant Thornton International Board of 
Governors, 10), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Nusbaum020408.pdf (stating that 
``[s]uccess also requires that the profession work with standard 
setters and regulators to develop best practices and the 
infrastructure for effective audits designed to detect material 
financial fraud'').
---------------------------------------------------------------------------

    The Committee believes that a collective sharing of fraud 
prevention and detection experiences among auditors and other market 
participants will provide a broad view of auditor practices and 
ultimately improve fraud prevention and detection capabilities and 
enable the development of best practices. The Committee also believes 
that research into industry trends and statistics will help auditors 
focus and develop procedures to identify areas

[[Page 44331]]

and situations at greater risk for fraud. The Committee believes that 
best practices regarding fraud prevention and detection will enhance 
the processes and procedures of auditing firms.
    The Committee recommends that the [ ] create a national center both 
to facilitate auditing firms' sharing of fraud prevention and detection 
experiences, practices, and data and innovation in fraud prevention and 
detection methodologies and technologies and to commission research and 
other fact-finding regarding fraud prevention and detection.\118\ The 
Committee also recommends that the auditing firms, forensic accounting 
firms, certified fraud examiners, investors, other financial statement 
users, public companies, and academics develop, in consultation with 
the PCAOB, the Securities and Exchange Commission (SEC), international 
regulators, and the National Association of State Boards of Accountancy 
(NASBA), best practices regarding fraud prevention and detection.\119\ 
The Committee also recognizes that a national center and best practices 
will have greater impact if these concepts are ultimately extended and 
embraced internationally.
---------------------------------------------------------------------------

    \118\ See, e.g., Joseph Carcello, Chair, AAA Task Force to 
Monitor the Activities of the Treasury ACAP Ernst & Young Professor 
and Director of Research--Corporate Governance Center University of 
Tennessee, Jean C. Bedard Timothy B. Harbert Professor of 
Accountancy Bentley College, Dana R. Hermanson Dinos Eminent Scholar 
Chair of Private Enterprise and Professor of Accounting Kennesaw 
State University, Comment Letter Regarding Draft Report and Draft 
Report Addendum 6, (May 15, 2008), available at http://comments.treas.gov/_files/ACAPCommentLetterMay152008.pdf 
(supporting this Recommendation); Samuel K. Cotterell, Chair, NASBA, 
and David A. Costello, President and CEO, NASBA, Comment Letter 
Regarding Draft Report and Draft Report Addendum 2, (June 27, 2008), 
available at http://comments.treas.gov/_files/June2908LetterheadTreasuryAdvisoryCommitteeontheAuditingProfession.pd
f (``Conclusions from, or approaches discussed during, Center 
deliberations could have an immediate effect on the way accounting 
practitioners approach the performance of audits and would likely 
form the basis for consideration of changes in auditing 
standards.''); Record of Proceedings (June 3, 2008) (Written 
Submission of Kenneth Nielsen Goldmann, Capital Markets and SEC 
Practice Director, J.H. Cohn LLP, 5), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Goldmann060308.pdf (noting how useful such a center would be to 
smaller firm auditors in detecting and preventing fraud.); Cynthia 
Fornelli, Executive Director, Center for Audit Quality, Comment 
Letter Regarding Draft Report and Draft Report Addendum 10-11, (June 
26, 2008), available at http://comments.treas.gov/_files/CAQCommentletter62708FINAL.pdf (agreeing with this Recommendation 
and volunteering the Center for Audit Quality to house this center). 
But c.f., Jim Wanserski, Businessman, Comment Letter Regarding Draft 
Report and Draft Report Addendum (June 3, 2008), available at http://comments.treas.gov/_files/ACAPDraftReportcommentsJune22008.doc 
(stating that public company management is key in fraud prevention 
and detection efforts more so than the external auditor and notes 
the small percentage of frauds uncovered by public company 
auditors).
    \119\ See Dave Richards, Institute of Internal Auditors, Comment 
Letter Regarding Draft Report and Draft Report Addendum 3, (June 13, 
2008), available at http://comments.treas.gov/_files/IIARESPONSETREASURYADVISORYCOMMITTEEONAUDITING061308.doc (suggesting 
the Institute of Internal Auditors be included in the listing of 
organizations providing best practices).
---------------------------------------------------------------------------

    Recommendation 2. Encourage greater regulatory cooperation and 
oversight of the public company auditing profession to improve the 
quality of the audit process and enhance confidence in the auditing 
profession and financial reporting.
    The SEC, the PCAOB, and individual state boards of accountancy 
regulate the auditing profession. The SEC and the PCAOB enforce the 
securities laws and regulations addressing public company audits. 
Individual state accountancy laws in fifty-five jurisdictions in the 
United States govern the licensing and regulation of both individuals 
and firms who practice as certified public accountants.\120\ State 
boards of accountancy enforce these laws and also administer the 
Uniform CPA Examination. NASBA serves as a forum for these boards to 
enhance their regulatory effectiveness and communication.
---------------------------------------------------------------------------

    \120\ Record of Proceedings (Dec. 3, 2007) (Written Submission 
of David A. Costello, President and Chief Executive Officer, 
National Association of State Board of Accountancy, 2), available at 
http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Costelllo120307.pdf.
---------------------------------------------------------------------------

    The Committee believes that enhancing regulatory cooperation and 
reducing duplicative oversight of the auditing profession by federal 
and state authorities and enhancing licensee practice mobility among 
the states are in the best interest of the public and the effective 
operation of the capital markets. In this regard, the Committee 
recommends the following:
    (a) Institute the following mechanism to encourage the states to 
substantially adopt the mobility provisions of the Uniform Accountancy 
Act, Fifth Edition (UAA) \121\: If states have failed to adopt the 
mobility provisions of the UAA by December 31, 2010, Congress should 
pass a federal provision requiring those states to adopt these 
provisions.
---------------------------------------------------------------------------

    \121\ Uniform Accountancy Act (Fifth Ed. July 2007).
---------------------------------------------------------------------------

    The American Institute of Certified Public Accountants (AICPA) and 
NASBA jointly author the UAA, a model bill which focuses on the 
education, examination, and experience requirements for certified 
public accountants. As the name of the bill suggests, the UAA advances 
the goal of uniformity, in addition to protecting the public interest 
and promoting high professional standards. In 2006 and 2007, 
recognizing the changing global economy and the impact of electronic 
commerce, the AICPA and NASBA proposed amendments to the UAA to allow 
for a streamlined framework for CPA ``mobility'' of practice among the 
states; that is, a CPA's practice privileges would be valid and 
portable across all state jurisdictions beyond that of the CPA's 
resident state.\122\
---------------------------------------------------------------------------

    \122\ See Record of Proceedings (Dec. 3, 2007) (Questions for 
the Record of David A. Costello, President and Chief Executive 
Officer, National Association of State Board of Accountancy, 1 (Feb. 
6, 2008)), available at http://www.treas.gov/offices/domestic-finance/acap/QFRs-12-3-2007.pdf (``As the global business community 
continues to expand, CPAs will be required to practice beyond the 
state in which they reside. Inefficiencies are created when those 
individuals are required to complete paperwork and submit a fee for 
every state in which they perform professional services.''). Note 
that the UAA does require notification or ``permitting'' for out-of-
state firms performing attest services for audit clients 
headquartered in another state, but not for individual CPAs. See 
UAA, Sec. Sec.  7(a)(1), 7(c)(1), and 23(a)(4) (Fifth Ed. July 
2007).
---------------------------------------------------------------------------

    According to NASBA, to date thirty-one states have passed mobility 
legislation. Two other states currently have mobility legislation 
introduced and other bills are anticipated in the 2009 legislative 
session. Almost every state is now discussing or considering mobility, 
and a number of other state boards of accountancy have voted to support 
and move forward with mobility.
    The Committee considered testimony and commentary on the importance 
to auditing firms' multi-state practices of the adoption of the UAA's 
mobility provisions.\123\ A NASBA representative testified, ``In order 
for our capital market system to continue to prosper and grow, NASBA 
recognized the need to ensure that an efficient, effective mobility 
system is in place that will allow CPAs and their firms, as 
professional service providers, to serve

[[Page 44332]]

the needs of American businesses, where ever they are located.'' \124\
---------------------------------------------------------------------------

    \123\ See, e.g., Amper, Politziner and Mattia, P.C., Comment 
Letter Regarding Discussion Outline 2 (Nov. 14, 2007) available at 
http://comments.treas.gov/_files/AmperPolitzinerMattia.pdf (noting 
that ``[t]he ease of performing audits in any state by a valid CPA * 
* * without requiring to be licensed by each state would be 
beneficial.''); Record of Proceedings (Dec. 3, 2007) (Written 
Submission of Dennis Nally, Chairman and Senior Partner, 
PricewaterhouseCoopers LLP, 5) (Dec. 3, 2008), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Nally120307.pdf (noting that a number of states are cooperating and 
working towards adopting uniform mobility requirements); Record of 
Proceedings (Dec. 3, 2007) (Written Submission of James S. Turley, 
Chairman and Chief Executive Officer, Ernst & Young LLP, 5), 
available at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Turley120307.pdf (``The Treasury Committee 
should suggest that the states eliminate barriers to interstate 
practice by universal adoption of the mobility provisions of the 
Uniform Accountancy Act.'').
    \124\ Record of Proceedings (Dec. 3, 2007) (Written Submission 
of David A. Costello, President and Chief Executive Officer, 
National Association of State Board of Accountancy, 6), available at 
http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Costello120307.pdf.
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    The Committee believes that, given the multi-state operations of 
many public companies and the multi-state practices of many auditing 
firms, practice mobility will foster a more efficient operation of the 
capital markets. The Committee recommends the following mechanism to 
encourage the states to adopt the UAA's mobility provisions: If states 
have failed to adopt the mobility provisions of the UAA by December 31, 
2010, Congress should pass a federal provision requiring those states 
to adopt these provisions.\125\ The Committee recognizes that some 
state legislatures meet biannually, and for such legislatures this 
deadline poses a challenge.\126\ However, such a deadline should be 
attainable and will encourage such legislatures to place this issue 
high on their agenda. The Committee also recommends that the states 
participate in NASBA's Accountancy Licensee Database (ALD) as a 
mechanism to assist in maintaining appropriate oversight of CPAs 
throughout the country regardless of where they practice and that 
appropriate authorities interpret federal and state privacy regulations 
to facilitate implementation of the ALD.
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    \125\ See, e.g., Ernst & Young LLP, Comment Letter Regarding 
Draft Report and Draft Report Addendum 24-25, (June 27, 2008), 
available at http://comments.treas.gov/_files/EYACAPCommentLetterFINAL.pdf (agreeing with this Recommendation); 
Mayer Hoffman McCann P.C., Comment Letter Regarding Draft Report and 
Draft Report Addendum 2, (June 17, 2008), available at http://comments.treas.gov/_files/MayerHoffmanMcCannCommentLetter.pdf 
(noting that the lack of mobility impairs firms from assigning the 
best people to engagements and uses important resources to establish 
and comply with multiple state licensure); PricewaterhouseCoopers, 
Comment Letter Regarding Draft Report and Draft Report Addendum 9, 
(June 30, 2008), available at http://comments.treas.gov/_files/PwCCommentLtrTreasCmtDraftandAddendum63008.pdf; Bruce Rosen, Eisner 
LLP, Comment Letter Regarding Draft Report and Draft Report Addendum 
(May 23, 2008), available at http://comments.treas.gov/index.cfm?FuseAction=Home.View&Topic_id=9&FellowType_id=1&CurrentPage=1 (noting the importance of putting the right 
resources in the right place without the needless complexity of 
differing state requirements). But c.f., Joseph Carcello, Chair, AAA 
Task Force to Monitor the Activities of the Treasury ACAP Ernst & 
Young Professor and Director of Research, Corporate Governance 
Center University of Tennessee, Jean C. Bedard Timothy B. Harbert 
Professor of Accountancy Bentley College, Dana R. Hermanson Dinos 
Eminent Scholar Chair of Private Enterprise and Professor of 
Accounting Kennesaw State University, Comment Letter Regarding Draft 
Report and Draft Report Addendum 6, (May 15, 2008), available at 
http://comments.treas.gov/_files/ACAPCommentLetterMay152008.pdf 
(recommending that while there does need to be increased mobility, 
it could be achieved by a national license for public company audits 
in addition to state licensing.); William Hermann, Managing Partner, 
and Gregory Coursen, Director of Professional Standards, Plante & 
Moran, PLLC Comment Letter Regarding Draft Report and Draft Report 
Addendum 2, (June 12, 2008), available at http://comments.treas.gov/_files/Commentletter61208.pdf (noting the AICPA's success in 
driving the adoption of the UAA's mobility provision).
    \126\ See, e.g., Samuel K. Cotterell, Chair, NASBA, and David A. 
Costello, President and CEO, NASBA, Comment Letter Regarding Draft 
Report and Draft Report Addendum 3, (June 27, 2008), available at 
http://comments.treas.gov/_files/June2908LetterheadTreasuryAdvisoryCommitteeontheAuditingProfession.pd
f (recommending a later due date because some states may not be able 
to meet the 2010 deadline due to their legislative calendars); 
Cynthia Fornelli, Executive Director, Center for Audit Quality, 
Comment Letter Regarding Draft Report and Draft Report Addendum 14-
15, (June 26, 2008), available at http://comments.treas.gov/_files/CAQCommentletter62708FINAL.pdf (suggesting delaying federal action 
as states may adopt the provisions on their own or, at the least, 
moving the deadline to December 31, 2011 to allow states adequate 
time to adopt the provisions).
---------------------------------------------------------------------------

    (b) Require regular and formal roundtable meetings of regulators 
and other governmental enforcement bodies in a cooperative effort to 
improve regulatory effectiveness and reduce the incidence of 
duplicative and potentially inconsistent enforcement regimes.
    Under the federal securities laws, the SEC has enforcement 
authority over public company auditing firms and oversight authority 
over the PCAOB under the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley). 
Sarbanes-Oxley provides the PCAOB with registration, reporting, 
inspection, standard-setting, and enforcement authority over public 
company auditing firms.\127\ In addition, the fifty-five boards of 
accountancy license, regulate, and enforce state accountancy laws 
pertaining to certified public accountants and their firms. In 
addition, the Department of Justice (DOJ) and state attorneys general 
can bring enforcement actions against auditing firms and their 
employees.
---------------------------------------------------------------------------

    \127\ Sarbanes-Oxley Act of 2002, 15 U.S.C. Sec. Sec.  7211-
7219.
---------------------------------------------------------------------------

    The Committee considered testimony from auditing firms on the 
duplicative and sometimes inconsistent federal and state oversight of 
the profession.\128\ The Committee does recognize that both federal and 
state regulators have made attempts to coordinate better their 
enforcement activities.\129\ One witness suggested the possible 
formation of a commission to help improve regulatory 
effectiveness.\130\ Another witness urged state and federal regulatory 
cooperation to ensure harmonized regulation and licensure.\131\
---------------------------------------------------------------------------

    \128\ See, e.g., Record of Proceedings (Dec. 3, 2007) (Written 
Submission of Dennis Nally, Chairman and Senior Partner, 
PricewaterhouseCoopers LLP, 5), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Nally120307.pdf; 
Record of Proceedings (Feb. 4, 2008) (Written Submission of Edward 
E. Nusbaum, Chief Executive Officer, Grant Thornton LLP, and 
Chairman, Grant Thornton International Board of Governors, 7), 
available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Nusbaum020408.pdf; Record of Proceedings (Feb. 
4, 2008) (Questions for the Record of Barry Salzberg, Chief 
Executive Officer, Deloitte LLP, App. A 4 (Mar. 31, 2008)), 
available at http://www.treas.gov/offices/domestic-finance/acap/agendas/QFRs-2-4-08.pdf (criticizing duplicative auditing firm 
investigations by states with no nexus to alleged conduct).
    \129\ See, e.g., Record of Proceedings (Dec. 3, 2007) (Oral 
Remarks of David A. Costello, President and Chief Executive Officer, 
National Association of State Board of Accountancy, 98), available 
at http://www.treas.gov/offices/domestic-finance/acap/agendas/minutes-12-3-07.pdf (noting that ``[NASBA] has been working with the 
PCAOB very closely coordinating efforts, trying to diminish as much 
as possible the redundancy in enforcement'') Record of Proceedings 
(Dec. 3, 2007) (Written Submission of David A. Costello, President 
and Chief Executive Officer, National Association of State Board of 
Accountancy, 6), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Costelllo120307.pdf (stating that 
NASBA is assisting state boards in enforcement cases involving 
multi-state activities).
    \130\ Record of Proceedings (Feb. 4, 2008) (Written Submission 
of Edward E. Nusbaum, Chief Executive Officer, Grant Thornton LLP, 
and Chairman, Grant Thornton International Board of Governors, 7), 
available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Nusbaum020408.pdf (noting that, ``it would be 
useful to evaluate the possibility of an interstate commission for 
the whole of the audit profession. Such a commission would bring 
together state licensing authorities, the PCAOB, and appropriate 
professional organizations. It would be the means to rationalize 
existing disparities in licensing qualifications, continuing 
education requirements and peer review for non-public company audit 
practices. It would also enable enforcement of common regulations 
and license discipline across state and federal jurisdictions.'').
    \131\ Record of Proceedings (Dec. 3, 2007) (Written Submission 
of Dennis Nally, Chairman and Senior Partner, PricewaterhouseCoopers 
LLP, 5), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Nally120307.pdf.
---------------------------------------------------------------------------

    The Committee recommends mandating regular and formal roundtables 
of the PCAOB, the SEC, the DOJ, the state boards of accountancy, and 
the state attorneys general, to periodically review the overall 
enforcement regimes applicable to the public company auditing 
profession.\132\

[[Page 44333]]

These roundtables also should focus on regulatory coordination, 
improvement, and consistent approaches to enforcement to minimize 
duplicative efforts. Because of the difficulty and cost of bringing 
together many different state agencies on a regular basis, the 
Committee recommends that NASBA assist states by taking a leadership 
role in coordinating their responsibilities and interests.\133\
---------------------------------------------------------------------------

    \132\ See e.g., Joseph Carcello, Chair, AAA Task Force to 
Monitor the Activities of the Treasury ACAP Ernst & Young Professor 
and Director of Research--Corporate Governance Center University of 
Tennessee, Jean C. Bedard Timothy B. Harbert Professor of 
Accountancy Bentley College, Dana R. Hermanson Dinos Eminent Scholar 
Chair of Private Enterprise and Professor of Accounting Kennesaw 
State University, Comment Letter Regarding Draft Report and Draft 
Report Addendum 6, (May 15, 2008), available at http://comments.treas.gov/_files/ACAPCommentLetterMay152008.pdf 
(supporting this Recommendation); Samuel K. Cotterell, Chair, NASBA, 
and David A. Costello, President and CEO, NASBA, Comment Letter 
Regarding Draft Report and Draft Report Addendum 3, (June 27, 2008), 
available at http://comments.treas.gov/_files/June2908LetterheadTreasuryAdvisoryCommitteeontheAuditingProfession.pd
f (supporting this Recommendation); Mayer Hoffman McCann P.C., 
Comment Letter Regarding Draft Report and Draft Report Addendum 2, 
(June 13, 2008), available at http://comments.treas.gov/_files/MayerHoffmanMcCannCommentLetter.pdf (suggesting that all meetings be 
made public); but, cf. Frank Frankowski, CFO, Airborne Systems, 
Comment Letter Regarding Draft Report and Draft Report Addendum 1, 
(June 2, 2008), available at http://comments.treas.gov/_files/FrankowskiLetter.pdf (stating that the Recommendation ``will only 
add to the confusion and lack of focus on the underlying issues'').
    \133\ Samuel K. Cotterell, Chair, NASBA, and David A. Costello, 
President and CEO, NASBA, Comment Letter Regarding Draft Report and 
Draft Report Addendum 3, (June 27, 2008), available at http://comments.treas.gov/_files/June2908LetterheadTreasuryAdvisoryCommitteeontheAuditingProfession.pd
f (supporting this Recommendation).
---------------------------------------------------------------------------

    (c) Urge the states to create greater financial and operational 
independence of their state boards of accountancy.
    The Committee is concerned about the financial and operational 
independence of state boards of accountancy from outside influences, 
such as other state agencies, and the possible effect on the regulation 
and oversight of the accounting profession. A number of state boards 
are under-funded \134\ and lack the wherewithal to incur the cost of 
investigations leading to enforcement. In addition, some state boards 
fall under the centralized administrative ``umbrella'' of other state 
agencies and lack control of financial resources and/or operational 
independence necessary to carry out their mandate of public 
protection.\135\ In some cases, board members are nominated by private 
associations whose constituencies are not necessarily focused on the 
protection of the public.
---------------------------------------------------------------------------

    \134\ National Association of State Boards of Accountancy, 
Submission in Connection With the December 3, 2007 Meeting of the 
Advisory Committee on the Auditing Profession (Jan. 2008) 
(documenting the wide spectrum of funding for individual state 
boards of accountancy and noting the number of full-time staff per 
state boards of accountancy office).
    \135\ Statement of Ronald J. Rotaru, Executive Director, 
Accountancy Board of Ohio, before Ohio H. Finance Committee of the 
Ohio House of Representatives 1 (Mar. 18, 2005) (``The evidence 
shows that `consolidated' states have difficulty in effectively 
enforcing the statutes governing the profession under their central 
agency umbrella.'').
---------------------------------------------------------------------------

    The Committee believes that greater independence of state boards of 
accountancy would enhance their regulatory effectiveness. The Committee 
recommends that, working with NASBA, states evaluate and develop means 
to make their respective state boards of accountancy more operationally 
and financially independent of outside influences.\136\ The Committee 
notes that this Recommendation to ensure the independence of state 
boards of accountancy is not meant to limit in any way the efforts of 
regulators and other governmental enforcement bodies to coordinate 
their regulatory and enforcement activities as recommended in 
Recommendation 2(b).
---------------------------------------------------------------------------

    \136\ See Samuel K. Cotterell, Chair, NASBA, and David A. 
Costello, President and CEO, NASBA, Comment Letter Regarding Draft 
Report and Draft Report Addendum 3, (June 27, 2008), available at 
http://comments.treas.gov/_files/June2908LetterheadTreasuryAdvisoryCommitteeontheAuditingProfession.pd
f (``There is a need to ensure all State Boards of Accountancy have 
adequate funding to maintain a healthy regulatory environment, which 
includes the ability to fund the costs of investigations and 
disciplinary enforcement.''); Ernst & Young LLP Comment Letter 
Regarding Draft Report and Draft Report Addendum 25, (June 27, 
2008), available at http://comments.treas.gov/_files/EYACAPCommentLetterFINAL.pdf (agreeing that appropriate operational 
support is needed to allow regulators the resources to monitor the 
profession).
---------------------------------------------------------------------------

    Recommendation 3. Urge the PCAOB and the SEC, in consultation with 
other federal and state regulators, auditing firms, investors, other 
financial statement users, and public companies, to analyze, explore, 
and enable, as appropriate, the possibility and feasibility of firms 
appointing independent members with full voting power to firm boards 
and/or advisory boards with meaningful governance responsibilities to 
improve governance and transparency of auditing firms.
    In response to the recent corporate accounting scandals, related 
legislative and regulatory requirements and best practices, public 
companies enhanced their corporate governance. One of the most 
prominent alterations to the corporate governance scheme was the 
increased representation and strengthening of independent members of 
boards of directors. The New York Stock Exchange and the Nasdaq 
enhanced their public company listing standards to call for a majority 
of independent board members.\137\ Best practices have gone even 
further, calling for a ``substantial majority'' of independent 
directors.\138\
---------------------------------------------------------------------------

    \137\ New York Stock Exchange, Listed Company Manual Sec.  
303A.01 (2003); Nasdaq, Manual, Rule 4350(c).
    \138\ See, e.g., The Business Roundtable, Principles of 
Corporate Governance (May 2002) (recommending, among other things, a 
substantial majority of independent directors and fully independent 
audit, corporate governance/nominating, and compensation 
committees); The Conference Board, Commission on Public Trust and 
Private Enterprise (Jan. 9, 2003) (recommending, among other things, 
a substantial majority of independent directors and regular 
executive sessions of the independent directors).
---------------------------------------------------------------------------

    A combination of Sarbanes-Oxley provisions and exchange listing 
standards mandate fully independent audit committees, nominating/
corporate governance, and compensation committees.\139\ In addition, 
independent directors' responsibilities have increased. For example, 
the independent audit committee now appoints, oversees, and compensates 
the auditor.\140\ Although difficult to quantify the benefits of these 
enhancements, many have extolled these reforms as improving the quality 
of board oversight, reducing conflicts of interest, and enhancing 
investor confidence in public company operations and financial 
reporting.\141\
---------------------------------------------------------------------------

    \139\ Sarbanes-Oxley Act, 15 U.S.C. Sec.  78-j (2002) (mandating 
audit committees comprised solely of independent directors); New 
York Stock Exchange, Listed Company Manual Sec.  303A.04 
(2004)(requiring nominating/corporate governance committees 
comprised solely of independent directors); New York Stock Exchange, 
Listed Company Manual Sec.  303A.05 (2004) (requiring compensation 
committees comprised solely of independent directors); New York 
Stock Exchange, Listed Company Manual Sec.  303A.06 (2003) 
(mandating compliance with SEC rules requiring audit committees 
comprised solely of independent directors); Nasdaq, Manual, Rule 
4350(d) (mandating compliance with SEC rules requiring audit 
committees comprised solely of independent directors). Nasdaq, 
Manual, Rule 4350(c)(3) (requiring independent directors to 
determine, or recommend to the full Board for determination, the 
compensation of all executive officers). Nasdaq, Manual, Rule 
4350(c)(4) (requiring independent directors to determine, or 
recommend to the full Board for determination, director nominees.).
    \140\ Sarbanes-Oxley Act, 15 U.S.C. Sec.  78-j (2002).
    \141\ For example, see the commentary accompanying New York 
Stock Exchange, Listed Company Manual Sec.  303A.01 (``Requiring a 
majority of independent directors will increase the quality of board 
oversight and lessen the possibility of damaging conflicts of 
interest.'') and the interpretive material accompanying Nasdaq Rule 
4350, IM-4350-4 (``Independent directors * * * play an important 
role in assuring investor confidence. Through the exercise of 
independent judgment, they act on behalf of investors to maximize 
shareholder value in the companies they oversee and guard against 
conflicts of interest. Requiring that the board be comprised of a 
majority of independent directors empowers such directors to carry 
out more effectively these responsibilities.'').
---------------------------------------------------------------------------

    Public company auditing firms as private partnerships are not 
subject to these requirements. Instead, state laws and partnership 
agreements determine the governance of auditing firms.\142\ Often a 
firm's governing body is

[[Page 44334]]

comprised of elected firm partners.\143\ Some firms are currently using 
advisory boards, although these may not be well-publicized or 
transparent.
---------------------------------------------------------------------------

    \142\ Center for Audit Quality, Report of the Major Public 
Company Audit Firms to the Department of the Treasury Advisory 
Committee on the Auditing Profession 2 (Jan. 23, 2008).
    \143\ Center for Audit Quality, Report of the Major Public 
Company Audit Firms to the Department of the Treasury Advisory 
Committee on the Auditing Profession 2-22 (Jan. 23, 2008) (detailing 
the various governance structures of the largest six auditing 
firms); Cynthia M. Fornelli, Executive Director, Center for Audit 
Quality, and James S. Turley, Chair, Governing Board, Center for 
Audit Quality, and Chairman and CEO, Ernst & Young LLP, Comment 
Letter Regarding Discussion Outline 13 (Nov. 30, 2007), available at 
http://comments.treas.gov/_files/Treasurycommentletterfinal11302007.pdf (noting the largest auditing 
firms have supervisory boards overseeing management).
---------------------------------------------------------------------------

    Several witnesses testified to the benefits of improving auditing 
firm governance and suggested the addition of independent members to 
the boards of directors.\144\ One witness called for an entirely 
independent board with enhanced responsibilities, including chief 
executive officer selection, determining partner compensation, and 
monitoring potential conflicts of interest and audit quality.\145\ An 
auditing firm representative noted that his firm was considering adding 
independent members on its international governing board.\146\
---------------------------------------------------------------------------

    \144\ See, e.g., Andrew D. Bailey, Jr., Professor of 
Accountancy-Emeritus, University of Illinois, and Senior Policy 
Advisory, Grant Thornton LLP, Comment Letter Regarding Discussion 
Outline 12 (Jan. 30, 2008), available at http://comments.treas.gov/_files/BAILEYCOMMENTSONTREASURYADVISORYCOMMITTEEOUTLINEFINALSUBMISSION13008 
(``[I]ndependent board members similar to those found on public 
company boards would be a good governance practice and would signal 
the markets about the firms' positive commitment to the public 
good.''); Record of Proceedings (Feb. 4, 2008) (Written Submission 
of Dennis Johnson, Senior Portfolio Manager, Corporate Governance, 
California Public Employees' Retirement System, 3), available at 
http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Johnson020408.pdf (stating that independent board of 
directors could possibly decrease potential conflicts of interest).
    \145\ Record of Proceedings (Feb. 4, 2008) (Written Submission 
of Paul G. Haaga Jr., Vice Chairman, Capital Research and Management 
Company, 2), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Haaga020408.pdf.
    \146\ Record of Proceedings (Feb. 4, 2008) (Written Submission 
of Edward E. Nusbaum, Chief Executive Officer, Grant Thornton LLP, 
and Chairman, Grant Thornton International Board of Governors, 7), 
available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Nusbaum020408.pdf.
---------------------------------------------------------------------------

    The Committee believes that enhancing corporate governance of 
auditing firms through the appointment of independent board members, 
whose duties run to the auditing firm and its partners/owners, to 
advisory boards with meaningful governance responsibilities (possible 
under the current business model), and/or to firm boards could be 
particularly beneficial to auditing firm management and 
governance.\147\ The Committee also believes that such advisory boards 
and independent board members could improve investor protection through 
enhanced audit quality and firm transparency. The Committee is 
particularly intrigued by the idea of independent board members with 
duties and responsibilities similar to those of public company non-
executive board members.
---------------------------------------------------------------------------

    \147\ Record of Proceedings (Feb. 4, 2008) (Written Submission 
of Edward E. Nusbaum, Chief Executive Officer, Grant Thornton LLP, 
and Chairman, Grant Thornton International Board of Governors, 7), 
available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Nusbaum020408.pdf (``Such a change in the 
governance model may be one way to strengthen our ability to serve 
market participants and reinforce independence.'').
---------------------------------------------------------------------------

    The Committee recognizes the multiple challenges that instituting a 
governance structure with independent board members might entail, 
including compliance with state partnership laws and independence 
requirements, insurance availability for such directors, and liability 
concerns.\148\ Accordingly, the Committee recommends that the PCAOB and 
the SEC, in consultation with federal and state regulators, auditing 
firms, investors, other financial statement users, and public 
companies, analyze, explore, and enable, as appropriate, the 
possibility and feasibility of firms' appointing independent board 
members and advisory boards.\149\ The Committee notes that the PCAOB 
and the SEC should consider the size of auditing firms in analyzing and 
developing any governance proposals.\150\
---------------------------------------------------------------------------

    \148\ Several witnesses commented on these difficulties. See, 
e.g., Ernst & Young LLP Comment Letter Regarding Draft Report and 
Draft Report Addendum 25-26, (June 27, 2008), available at http://comments.treas.gov/&_files/EYACAPCommentLetterFINAL.pdf; Cynthia 
Fornelli, Executive Director, Center for Audit Quality, Comment 
Letter Regarding Draft Report and Draft Report Addendum 17-19, (June 
26, 2008), available at http://comments.treas.gov/_files/CAQCommentletter62708FINAL.pdf; William Hermann, Managing Partner, 
and Gregory Coursen, Director of Professional Standards, Plante & 
Moran, PLLC Comment Letter Regarding Draft Report and Draft Report 
Addendum 1-2, (June 13, 2008), available at http://comments.treas.gov/&_files/Commentletter61208.pdf; Record of 
Proceedings (June 3, 2008) (Written Submission of Barry Mathews, 
Deputy Chairman, Aon Corporation, 2), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Mathews060308.pdf.; David McDonnell, Chief Executive Officer, Grant 
Thornton International Ltd, and Edward E. Nusbaum, Chief Executive 
Officer, Grant Thornton LLP, and Chairman, Grant Thornton 
International Ltd Board of Governors, Comment Letter Regarding Draft 
Report and Draft Report Addendum 4 (June 27, 2008) available at 
http://comments.treas.gov/_files/GTCommentlettertoACAPJune2008_FINAL.pdf.
    \149\ See Record of Proceedings (June 3, 2008) (Written 
Submission of Nell Minow, Editor and Co-Founder, The Corporate 
Library, 2), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Minow060308.pdf. But, cf. Wayne 
Kolins, Director of Assurance, BDO Seidman LLP, Comment Letter 
Regarding Draft Report and Draft Report Addendum 3-4, (June 27, 
2008) available at http://comments.treas.gov/_files/ResponsetoAdvisoryCommittee0627final.PDF (advising the Committee to 
keep in mind the fact that accounting firms operate differently than 
public companies and that the PCAOB currently reviews information 
that would concern independent board members); Paul Lee, Director, 
Hermes Equity Ownership Services Limited, Comment Letter Regarding 
Draft Report and Draft Report Addendum 3, (June 13, 2008), available 
at http://comments.treas.gov/_files/ACAPresponse13Jun08.pdf.
    \150\ See Record of Proceedings (June 3, 2008) (Written 
Submission of Kenneth Nielsen Goldmann, Capital Markets and SEC 
Practice Director, J.H. Cohn LLP, 4-5), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Goldmann060308.pdf (noting that smaller firms do not have large 
public company audit practices so the concept of public board 
members may be difficult).
---------------------------------------------------------------------------

    Recommendation 4. Urge the SEC to amend Form 8-K disclosure 
requirements to characterize appropriately and report every public 
company auditor change and to require auditing firms to notify the 
PCAOB of any premature engagement partner changes on public company 
audit clients.
    In 2006, over 1,300 public companies changed their auditor and from 
2002 to 2006 over 6,500 public companies changed their auditor.\151\ 
Under current SEC regulations, a public company must disclose any 
auditor change on Form 8-K.\152\ SEC regulations require disclosure of 
any disagreements on financial disclosures during the preceding two 
years prior to a resignation or termination and whether some issue, 
such as the auditor's inability to rely on management's 
representations, may put into question financial disclosure 
reliability. SEC regulations also allow a public company to request 
that the auditor respond with a letter addressed to the SEC stating 
whether it agrees with the company's disclosure and, if it does not 
agree, stating why.
---------------------------------------------------------------------------

    \151\ See Mark Grothe and Blaine Post, Speak No Evil, Glass 
Lewis & Co Research 12 (May 21, 2007).
    \152\ Form 8-K, available at http://www.sec.gov/about/forms/form8-k.pdf.
---------------------------------------------------------------------------

    While the SEC does attempt to uncover through its rules whether the 
auditor change relates to disagreements over accounting and reporting 
matters, the SEC rules do not require a public company to provide a 
reason for the auditor's departure in the vast majority of cases. The 
limitations of the existing disclosure requirements have resulted in 
companies failing to disclose any reason for their auditor changes in

[[Page 44335]]

approximately 70% of the more than 1,300 auditor changes occurring in 
2006.\153\
---------------------------------------------------------------------------

    \153\ See Mark Grothe and Blaine Post, Speak No Evil, Glass 
Lewis & Co Research 12 (May 21, 2007).
---------------------------------------------------------------------------

    The Committee considered testimony and commentary regarding the 
lack of clear disclosure surrounding auditor changes. Testimony and 
commentary viewed the lack of transparency surrounding auditor changes 
as detrimental to investor confidence in financial reporting.\154\ 
Testimony and commentary suggested greater transparency regarding 
auditor changes would compel audit committees to more closely evaluate 
auditor selection decisions and lead to greater competition in the 
audit market.\155\
---------------------------------------------------------------------------

    \154\ See, e.g., Andrew D. Bailey, Jr., Professor of 
Accountancy-Emeritus, University of Illinois, and Senior Policy 
Advisor, Grant Thornton LLP, Comment Letter Regarding Discussion 
Outline 4 (Jan. 30, 2008), available at http://comments.treas.gov/--
files/
Baileycommentsontreasuryadvisorycommitteeoutlinefinalsubmission13008.
doc (recommending SEC and PCAOB disclosures of auditor changes to 
enhance the growth of smaller auditing firms); Record of Proceedings 
(Feb. 4, 2008) (Oral Remarks of Edward E. Nusbaum, Chief Executive 
Officer, Grant Thornton LLP, and Chairman, Grant Thornton 
International Board of Governors, 193-94), available at http://www.treas.gov/offices/domestic-finance/acap/agendas/minutes-2-4-08.pdf (calling for expanded Form 8-K disclosure requirements as 
``in the best interest of investors'').
    \155\ See, e.g., Record of Proceedings (Feb. 4, 2008) (Written 
Submission of Edward E. Nusbaum, Chief Executive Officer, Grant 
Thornton LLP, and Chairman, Grant Thornton International Board of 
Governors, 3), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Nusbaum020408.pdf (noting that the 
Committee should examine ``[c]omprehensive disclosures about reasons 
for auditor switches'').
---------------------------------------------------------------------------

    The Committee believes that explicitly stating the reason for an 
auditor change will assist investors in determining the quality of 
financial reporting and subsequent investment decisions. The Committee 
recommends that the SEC amend its Form 8-K disclosure on auditor 
changes by providing for the following mechanism:\156\ The public 
company would file within four days of an auditor change a Form 8-K 
disclosing that an auditor had resigned, was terminated, or did not 
seek reappointment; the company would appropriately characterize and 
state in all cases in plain English the reason or reasons for the 
change. The company would also disclose whether its audit committee 
agreed with the disclosure it has provided. The company would also 
provide the auditor with a copy of the disclosure and request a 
response as to the accuracy of the disclosure. The company would 
include any response as an exhibit to the company's Form 8-K filing, or 
if received following the due date for the Form 8-K, in a subsequent 
Form 8-K. As discussed above under current SEC regulations, the public 
company can request that the auditor respond to the company's 
statements in the Form 8-K regarding disagreements over accounting and 
financial matters.
---------------------------------------------------------------------------

    \156\ See Record of Proceedings (June 3, 2008) (Written 
Submission of Kenneth Nielsen Goldmann, Capital Markets and SEC 
Practice Director, J.H. Cohn LLP, 4), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Goldmann060308.pdf (recommending additional disclosure regarding the 
relationship between the successor auditor and the company); Dennis 
Johnson, CFA, Senior Portfolio Manager, CalPERS, Comment Letter 
Regarding Draft Report and Draft Report Addendum 3, (June 13, 2008), 
available at http://comments.treas.gov/_files/200806;--13ACAP--
addendum--commentltr.pdf (supporting the Recommendation); Record of 
Proceedings (June 3, 2008) (Written Submission of Nell Minow, Editor 
and Co-Founder, The Corporate Library, 2), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Minow060308.pdf (stating that the Recommendation seems consistent 
with Sarbanes-Oxley Act). But, cf. Ernst & Young LLP Comment Letter 
Regarding Draft Report and Draft Report Addendum 27, (June 27, 
2008), available at http://comments.treas.gov/_files/EYACAPCommentLetterFINAL.pdf (worrying that the results will be 
``boilerplate disclosure that is of little benefit to investors 
while an expansion of the list of objective criteria could be more 
useful''); Wayne Kolins, Director of Assurance, BDO Seidman LLP, 
Comment Letter Regarding Draft Report and Draft Report Addendum 4, 
(June 27, 2008) available at http://comments.treas.gov/_files/ResponsetoAdvisoryCommittee0627final.PDF (stating ``a requirement 
for auditors to respond as to the accuracy of disclosures relating 
to subjective reasons is not feasible, since auditors have no basis 
for agreeing or disagreeing with management regarding why they 
dismissed the auditors'').
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    In addition, the Committee recommends that auditing firms notify 
the PCAOB of any engagement partner changes on public company audits if 
made before the normal rotation period and, other than for retirement, 
the reasons for those changes.\157\
---------------------------------------------------------------------------

    \157\ See, e.g., Record of Proceedings (Feb. 4, 2008) (Written 
Submission of Paul G. Haaga Jr., Vice Chairman, Capital Research and 
Management Company, 2), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Haaga020408.pdf (calling 
for public disclosure on audit partner changes other than for 
rotation requirements); Record of Proceedings (Feb. 4, 2008) (Oral 
Remarks of D. Paul Regan, President and Chairman, Hemming Morse 
Inc., 194-195 (Feb. 4, 2008)), available at http://www.treas.gov/offices/domestic-finance/acap/agendas/minutes-2-4-08.pdf (commenting 
that ``if an audit partner is * * * rotated [early] off of an 
issuer, there ought to be a disclosure, and there ought to be 
communication from the partner who was rotated off early as to [the 
reason for the early rotation] * * * because in many instances * * * 
there [i]s controversy * * *''). But, cf. Ernst & Young LLP Comment 
Letter Regarding Draft Report and Draft Report Addendum 27, (June 
27, 2008), available at http://comments.treas.gov/_files/EYACAPCommentLetterFINAL.pdf (``Unscheduled changes in an engagement 
partner are often due to circumstances that have no impact on the 
relationship between the client and the Auditor''); Wayne Kolins, 
Director of Assurance, BDO Seidman LLP, Comment Letter Regarding 
Draft Report and Draft Report Addendum 12, (June 27, 2008) available 
at http://comments.treas.gov/_files/ResponsetoAdvisoryCommittee0627final.PDF (stating that no benefit is 
gained in requiring notification to the PCAOB when there is 
premature changes in the engagement partner); 
PricewaterhouseCoopers, Comment Letter Regarding Draft Report and 
Draft Report Addendum 20, (June 30, 2008), available at http://comments.treas.gov/_files/PwCCommentLtrTreasCmtDraftandAddendum63008.pdf (noting that there 
are many reasons for the engagement partner to change including 
personal as well as professional and that the real issue is 
``whether the firm has the appropriate quality control processes in 
place'').
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    Recommendation 5: Urge the PCAOB to undertake a standard-setting 
initiative to consider improvements to the auditor's standard reporting 
model. Further, urge that the PCAOB and the SEC clarify in the 
auditor's report the auditor's role in detecting fraud under current 
auditing standards and further that the PCAOB periodically review and 
update these standards.
    The auditor's report is the primary means by which the auditor 
communicates to the users of financial statements regarding its audit 
of financial statements. The standard auditor's report, not much 
altered since the 1930s,\158\ identifies the financial statements 
audited, the scope and nature of the audit, the general 
responsibilities of the auditor and management, and the auditor's 
opinion.\159\ In addition, for companies subject to Sarbanes-Oxley's 
internal control requirements, the auditor's report includes an 
attestation as to internal control over financial reporting.\160\ The 
auditor's opinion on the financial statements states whether these 
statements present fairly, in all material respects, a company's 
financial position, results of operations, and cash flows in conformity 
with generally accepted accounting principles.\161\
---------------------------------------------------------------------------

    \158\ For a historical analysis of the evolution of the 
auditor's report, see George Cochrane, The Auditor's Report: Its 
Evolution in the U.S.A., in Perspectives in Auditing 16 (D.R. 
Carmichael and John J. Willingham 2d. ed. 1975).
    \159\ Reports on Audited Financial Statements, Interim Auditing 
Standard AU Section 508.08 (Pub. Company Accounting Oversight Bd. 
2002).
    \160\ An Audit of Internal Control Over Financial Reporting That 
Is Integrated With An Audit of Financial Statements, Auditing 
Standard No. 5, para. 85 (Pub. Company Accounting Oversight Bd. 
2007).
    \161\ Reports on Audited Financial Statements, Interim Auditing 
Standard AU Section 508.07-.08 (Pub. Company Accounting Oversight 
Bd. 2002).
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    Many consider the auditor's reporting model a pass/fail model 
because the auditor opines whether the statements are fairly presented 
(pass) or not (fail).\162\ Since the SEC does not accept filings with 
financial statements that

[[Page 44336]]

``fail,'' \163\ the vast number of audit reports issued rarely departs 
from the exact standardized wording. Some believe this pass/fail model 
with its standardized wording does not adequately reflect the amount of 
auditor work and judgment.
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    \162\ Public Company Accounting Oversight Board, Standing 
Advisory Group Meeting Briefing Paper: Auditor's Reporting Model 3 
(Feb. 16, 2005).
    \163\ SEC Staff Accounting Bulletin, Topic 1E--Requirements for 
Audited or Certified Financial Statements [Interpretive response to 
question 2], (stating, in part, ``[a]ccordingly, auditor reports 
filed with the SEC must include unqualified opinions'').
---------------------------------------------------------------------------

    Over thirty years ago, the audit ``expectations gap'' was coined 
\164\ and has been a topic of controversy ever since. The expectations 
gap has been defined as ``the difference between what the public and 
users of financial statements perceive the role of an audit to be and 
what the audit profession claim is expected of them during the conduct 
of an audit.'' \165\ The Committee considered testimony and commentary 
regarding this ``expectations gap'' between the public's expectations 
regarding auditor responsibility for fraud detection and the auditor's 
required and capable performance of fraud detection.\166\
---------------------------------------------------------------------------

    \164\ C.D. Liggio, The Expectation Gap: The Accountant's 
Waterloo Vol. 3 No. 3 Journal of Contemporary Business 27 (1974).
    \165\ Marianne Ojo, Eliminating the Audit Expectations Gap: Myth 
or Reality?, (Feb. 2006), available at http://mpra.ub.uni-muenchen.de/232/1/MPRA_paper_232.pdf.
    \166\ See, e.g, Andrew D. Bailey, Jr., Professor of 
Accountancy--Emeritus, University of Illinois, and Senior Policy 
Advisor, Grant Thornton LLP, Comment Letter Regarding Discussion 
Outline 4 (Jan. 30, 2008), available at http://comments.treas.gov/_files/BAILEYCOMMENTSONTREASURYADVISORYCOMMITTEEOUTLINEFINALSUBMISSION13008.
doc (stating that ``[i]f the discovery of material errors and fraud 
is not a major part of what the audit is about, it is not clear what 
value-added service the auditor offers the investor and capital 
markets''); Record of Proceedings (Feb. 4, 2008) (Questions for the 
Record of Cynthia M. Fornelli, Executive Director, Center for Audit 
Quality, 5 (Mar. 31, 2008)), available at http://www.treas.gov/offices/domestic-finance/acap/agendas/QFRs-2-4-08.pdf (``While 
auditors provide reasonable assurance that fraud material to the 
financial statements will be detected, they cannot be expected to 
provide absolute assurance that all material fraud will be found. 
Cost-benefit constraints and the lack of governmental subpoena and 
investigative powers, among other factors, make absolute assurance 
impossible.''); Record of Proceedings (Feb. 4, 2008) (Written 
Submission of Dennis Johnson, California Public Employees' 
Retirement System, 5), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Johnson020408.pdf 
(stating that ``[o]f critical importance to investors is the 
responsibility of auditors to detect fraud and improve the timely 
communication of these frauds to investors and shareowners.''); 
Serving Global Capital Markets and the Global Economy: A View From 
the CEOs of the International Audit Networks 12 (Nov. 2006) 
(``Nonetheless, there is a significant `expectations gap' between 
what various stakeholders believe auditors should do in detecting 
fraud, and what audit networks are actually capable of doing, at the 
prices that companies or investors are willing to pay for 
audits.'').
---------------------------------------------------------------------------

    Public investors have appropriately raised questions when large 
frauds have gone undetected. Among the attributes that the public 
expects of auditors is a clear acknowledgment of their responsibility 
for the reliability of financial statements, particularly with respect 
to the detection of fraud, notwithstanding the recognition that a 
company's management and board have the primary role in preventing 
fraud.\167\ Some say the public may believe that auditors will detect 
more fraud than those in the profession believe can be reasonably 
expected. Both beliefs may be unreasonable in some circumstances. And, 
there are difficulties of detecting fraud, especially before it has 
resulted in a material misstatement. However, even those involved 
directly in the audit process on a daily basis from time to time have 
differing views as to what the auditor should and should not have been 
expected to discover.
---------------------------------------------------------------------------

    \167\ See, e.g., Sir David Tweedie, Challenges Facing the 
Auditor: Professional Fouls and the Expectation Gap, Deloitte, 
Haskins and Sells Lecture, University College, Cardiff 20 (``The 
public appears to require (1) a burglar alarm system (protection 
against fraud) * * * (2) a radar station (early warning of future 
insolvency) * * * (3) a safety net (general re-assurance of 
financial well-being) * * * (4) an independent auditor (safeguards 
for auditor independence) * * * and (5) coherent communications 
(understanding of audit reports)'').
---------------------------------------------------------------------------

    According to existing auditing standards and SEC rules, management 
prepares and has the primary responsibility for the accuracy of 
financial statements and for prevention and identification of fraud and 
the auditor's role is to provide reasonable assurance that the 
financial statements are free of material misstatement.\168\ These 
concepts are embedded in the current auditing and audit reporting 
standards that require that the auditor ``plan and perform the audit to 
obtain reasonable assurance about whether the financial statements are 
free of material misstatement whether caused by error or fraud.'' \169\ 
It is noteworthy that the current standard auditor's report does not 
actually mention ``fraud'' and is silent about the auditor's 
responsibility to find fraud.
---------------------------------------------------------------------------

    \168\ See, e.g., Commission on Auditors' Responsibilities, 
Report, Conclusions, and Recommendations xii (1978) (concluding 
that, after having been established to investigate the existence of 
such a gap, ``[a]fter considerable study of available evidence and 
its own research......such a gap does exist''). For a more recent 
article, see Dan L. Goldwasser, The Past and Future of Reasonable 
Assurance, The CPA Journal (Nov. 2005), available at http://www.nysscpa.org/cpajournal/2005/1105/special_issue/essentials/p28.htm.
    \169\ Consideration of Fraud in a Financial Statement, Interim 
Auditing Standard AU 316 (Pub. Company Accounting Oversight Bd. 
2002).
---------------------------------------------------------------------------

    Clarification of the expectations gap and confusion about auditor 
responsibility to detect fraud are not the only criticisms of the 
standard auditor's report. Over the years there have been numerous 
recommendations that the standard report be improved. In 1978, the 
Commission on Auditors' Responsibilities (Cohen Commission) made a 
simple observation: ``For the largest corporations in the country, an 
audit may involve scores of auditors and tens of thousands of hours of 
work for which the client may pay millions of dollars. Nevertheless, 
the auditor's standard report compresses that considerable expenditure 
of skilled effort into a relatively few words and paragraphs.'' \170\ 
The Cohen Commission then called for an expansion of the auditor's 
report to include a report not merely on the financial statements, but 
covering the entire audit function.\171\ The Cohen Commission reasoned 
that this new more comprehensive information would benefit users, but 
also clarify the role and, consequently, the legal standing of the 
auditor in relation to the audit.\172\
---------------------------------------------------------------------------

    \170\ Commission on Auditors' Responsibilities, Report, 
Conclusions, and Recommendations 71 (1978).
    \171\ Commission on Auditors' Responsibilities, Report, 
Conclusions, and Recommendations 75 (1978).
    \172\ Commission on Auditors' Responsibilities, Report, 
Conclusions, and Recommendations 75-76 (1978).
---------------------------------------------------------------------------

    In 1987, the National Commission on Fraudulent Financial Reporting 
(Treadway Commission) recommended that the standard auditor's report 
more clearly identify the auditor's responsibilities, the degree to 
which users can rely on the audit, and the limitations on the audit 
process.\173\ The Treadway Commission aimed to reaffirm that management 
has ``primary responsibility for financial statements'' and to caution 
users of financial statements from placing more than ``reasonable'' 
assurance on the audit process.
---------------------------------------------------------------------------

    \173\ National Commission on Fraudulent Financial Report, Report 
of the National Commission on Fraudulent Financial Reporting (Oct. 
1987).
---------------------------------------------------------------------------

    More recently, the American Assembly called for differing 
attestation standards for different parts of the financial statements, 
depending on the amount of uncertainty and judgment required in making 
certain determinations.\174\ In addition, a February 2008 CFA Institute 
survey indicated that 80% of its member respondents believe that the 
auditor's report should provide specific information about how the 
auditor

[[Page 44337]]

reached its opinion.\175\ A majority of survey respondents thought it 
was very important to have the auditors identify key risk areas, 
significant changes in risk exposures, and amounts either involving a 
high degree of uncertainty in measurement and significant assumptions 
or requiring a higher level of professional judgment.\176\
---------------------------------------------------------------------------

    \174\ American Assembly, The Future of the Accounting Profession 
12-13 (Nov. 13-15, 2003); American Assembly, The Future of the 
Accounting Profession: Auditor Concentration 21 (May 23, 2005).
    \175\ CFA Institute, February 2008 Monthly Question Results 
(Feb. 2008), available at http://www.cfainstitute.org/memresources/monthlyquestion/2008/february.html.
    \176\ CFA Institute, February 2008 Monthly Question Results 
(Feb. 2008), available at http://www.cfainstitute.org/memresources/monthlyquestion/2008/february.html.
---------------------------------------------------------------------------

    In 2005, the PCAOB's Standing Advisory Group (SAG), which advises 
the PCAOB on the establishment of auditing and related professional 
practice standards, considered whether the auditor's report should 
include more information relating to the auditor's judgments regarding 
financial reporting quality.\177\ The SAG also considered whether 
required auditor communications to audit committees, such as the 
auditor's judgments about accounting principles \178\ and critical 
accounting policies and practices,\179\ should be incorporated into the 
auditor's report.\180\ The PCAOB has not yet taken up a standard-
setting initiative regarding the auditor's report.
---------------------------------------------------------------------------

    \177\ Public Company Accounting Oversight Board, Standing 
Advisory Group Meeting: Auditor's Reporting Model (Feb. 16, 2005).
    \178\ For this requirement, see Communications With Audit 
Committees, Interim Auditing Standard AU Section 380.11 (Public 
Company Accounting Oversight Bd. 2002).
    \179\ For this requirement, see Sarbanes-Oxley Act, 15 U.S.C. 
Sec.  78j-1 (2002).
    \180\ Public Company Accounting Oversight Board, Standing 
Advisory Group Meeting: Auditor's Reporting Model 4-5 (Feb. 16, 
2005).
---------------------------------------------------------------------------

    Foreign jurisdictions are also currently considering changes to 
their auditor's reports. For instance, the European Commission under 
the Eighth Directive is authorized to develop its own ``European Audit 
Report'' or adopt the International Federation of Accountants' 
International Auditing and Assurance Standards Board's recently revised 
auditor's report standard.\181\ In December 2007, the Audit Practices 
Board, a part of the United Kingdom's Financial Reporting Council, 
issued a Discussion Paper seeking comment on potentially altering the 
auditor's report.\182\ Currently in Germany, public companies are 
generally required to issue a long-form auditor's report, discussing 
matters such as the company's economic position and trend of business 
operations and the nature and scope of the auditor's procedures. The 
Committee is cognizant that this debate over such disclosures is 
unfolding in a litigation environment different from that in the United 
States.
---------------------------------------------------------------------------

    \181\ Directive 2006/43/EC of the European Parliament and of the 
Council Art. 28 (May 17, 2006); Auditing Practices Board, Discussion 
Paper--The Auditor's Report: A Time For Change? 6 (Dec. 2007).
    \182\ Auditing Practices Board, Discussion Paper--The Auditor's 
Report: A Time For Change? (Dec. 2007).
---------------------------------------------------------------------------

    This Committee has also heard testimony regarding expanding the 
auditor's report.\183\ One witness noted that some institutional 
investors believe an expanded auditor's report would enhance investor 
confidence in financial reporting and recommended exploring a more 
``narrative'' report in areas, such as ``estimates, judgments, 
sufficiency of evidence and uncertainties.'' \184\
---------------------------------------------------------------------------

    \183\ See, e.g., Record of Proceedings (Dec. 3, 2007) (Written 
Submission of Dennis M. Nally, Chairman and Senior Partner, 
PricewaterhouseCoopers LLP, 7), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Nally120307.pdf 
(supporting the Committee's considering whether to change the 
auditor's report's content given single financial reporting 
standards, more cohesive global auditing standards, and trends, like 
fair value measurement); Record of Proceedings (Dec. 3, 2007) (Oral 
Remarks of Ashwinpaul C. Sondhi, President, A. C. Sondhi & 
Associates, LLC, 255-57), available at http://www.treas.gov/offices/domestic-finance/acap/agendas/minutes-12-3-07.pdf; Record of 
Proceedings (Dec. 3, 2007) (Oral Remarks of James S. Turley, 
Chairman and Chief Executive Officer, Ernst & Young LLP, 253-54), 
available at http://www.treas.gov/offices/domestic-finance/acap/agendas/minutes-12-3-07.pdf.
    \184\ Record of Proceedings (Feb. 4, 2008) (Written Submission 
of Richard Fleck, Global Relationship Partner, Herbert Smith LLP, 
17, 21), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Fleck02042008.pdf.
---------------------------------------------------------------------------

    The Committee notes that the increasing complexity of global 
business operations are compelling a growing use of judgments and 
estimates, including those related to fair value measurements, and also 
contributing to greater complexity in financial reporting. The 
Committee believes this complexity supports improving the content of 
the auditor's report beyond the current pass/fail model to include a 
more relevant discussion about the audit of the financial statements. 
While there is not yet agreement as to precisely what additional 
information is sought by and would be useful to investors and other 
users of financial statements, the Committee concludes that an improved 
auditor's report would likely lead to more relevant information for 
users of financial statements and would clarify the role of the auditor 
in the financial statement audit.
    The Committee therefore recommends that the PCAOB address these 
issues, both long-debated and increasingly important given the use of 
judgments and estimates, by undertaking a standard-setting initiative 
to consider improvements to the auditor's reporting model.\185\ With 
regards to this initiative, the PCAOB should consult with investors, 
other financial statement users, auditing firms, public companies, 
academics, other market participants, and other state, federal, and 
foreign regulators. In view of the desirability of improving the 
quality of financial reporting and auditing on a global basis, the 
PCAOB should also consider the developments in foreign jurisdictions 
that improve the quality and content of the auditor's report and should 
consult with international regulatory bodies as appropriate. The PCAOB 
should also take cognizance of the proposal's potential legal 
ramifications, if any, to auditors.\186\
---------------------------------------------------------------------------

    \185\ See, e.g., Deloitte LLP, Comment Letter Regarding Draft 
Report and Draft Report Addendum 20 (June 27, 2008), available at 
http://comments.treas.gov/_files/DeloitteLLPCommentLetter.pdf 
(recommending that the Committee suggest to the PCAOB to include the 
International Auditing and Assurance Standards Board (IAASB) and the 
Auditing Standards Board (ASB), who are evaluating the auditor's 
report, in undertaking this initiative); Roderick Hills, Chairman, 
Center for Strategic and International Studies, Hills Program on 
Governance, Comment Letter Regarding Discussion Outline 3 (June 5, 
2008), available at http://comments.treas.gov/_files/commentsregardingdraftreportofadvisorycomm.pdf (agreeing that a new 
auditor's report standard is needed to allow auditors to offer a 
range of attestations to reflect the range of values possible); 
Dennis Johnson, CFA, Senior Portfolio Manager, CalPERS, Comment 
Letter Regarding Draft Report and Draft Report Addendum 1-2, (June 
13, 2008), available at http://comments.treas.gov/_files/200806--
13ACAP--addendum--commentltr.pdf (supporting the Recommendation). 
But, cf., Arnold Hanish, Financial Executives International, Chair, 
Committee on Corporate Reporting, Comment Letter Regarding Draft 
Report and Draft Report Addendum 4-5 (July 3, 2008), available at 
http://comments.treas.gov/_files/FEICCRTreasuryACAPCommentLetterFiled73080.pdf (suggesting that the 
Recommendation ``can add even more stress to an already stressed 
system'' and that changes can cause confusion); Lee Seidler, CPA, 
Comment Letter Regarding Draft Report and Draft Report Addendum 
(June 27, 2008), available at http://comments.treas.gov/index.cfm?FuseAction=Home.View&Topic_id=9&FellowType_id=1&CurrentPage=1 (stating that expansion always includes 
exculpatory language that is not useful).
    \186\ See, e.g., Deloitte LLP, Comment Letter Regarding Draft 
Report and Draft Report Addendum 20 (June 27, 2008), available at 
http://comments.treas.gov/_files/DeloitteLLPCommentLetter.pdf 
(``[T]he different liability systems where these reports exist must 
be taken into account when assessing the standard language included 
in the auditor's report in the U.S. and the U.S. litigation 
system''); Cynthia Fornelli, Executive Director, Center for Audit 
Quality, Comment Letter Regarding Draft Report and Draft Report 
Addendum 22, (June 27, 2008), available at http://comments.treas.gov/_files/CAQCommentletter62708FINAL.pdf 
(suggesting the Committee ``acknowledge that the risk of 
catastrophic liability must inform any potential changes to the 
auditor's report''); PricewaterhouseCoopers, Comment Letter 
Regarding Draft Report and Draft Report Addendum 11, (June 30, 
2008), available at http://comments.treas.gov/_files/PwCCommentLtrTreasCmtDraftandAddendum63008.pdf (acknowledging that 
litigation issues must be taken into account).

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[[Page 44338]]

    Commentary has also suggested that auditors must more effectively 
communicate their responsibility regarding fraud detection with 
investors and the capital markets. The Committee agrees with this 
suggestion. Accordingly, the Committee believes that the auditor's 
report should articulate clearly to investors the auditor's role and 
limitations in detecting fraud.\187\ The Committee believes that 
expressly communicating to investors, other financial statement users, 
and the public the role of auditors in finding and reporting fraud 
would help narrow the ``expectations gap.''
---------------------------------------------------------------------------

    \187\ See, e.g., Joseph Carcello, Chair, AAA Task Force to 
Monitor the Activities of the Treasury ACAP Ernst & Young Professor 
and Director of Research--Corporate Governance Center University of 
Tennessee, Jean C. Bedard Timothy B. Harbert Professor of 
Accountancy Bentley College, Dana R. Hermanson Dinos Eminent Scholar 
Chair of Private Enterprise and Professor of Accounting Kennesaw 
State University, Comment Letter Regarding Draft Report and Draft 
Report Addendum 6, (May 15, 2008), available at http://comments.treas.gov/&_files/ACAPCommentLetterMay152008.pdf (urging 
the PCAOB to evaluate the efficacy of SAS No. 99); Cynthia Fornelli, 
Executive Director, Center for Audit Quality, Comment Letter 
Regarding Draft Report and Draft Report Addendum 26, (June 27, 
2008), available at http://comments.treas.gov/_files/CAQCommentletter62708FINAL.pdf (supporting the Recommendation); 
Frank Frankowski, CFO, Airborne Systems, Comment Letter Regarding 
Draft Report and Draft Report Addendum 2, (June 2, 2008), available 
at http://comments.treas.gov/_files/FrankowskiLetter.pdf; Record of 
Proceedings (June 3, 2008) (Written Submission of Dan Guy, Former 
Vice President, Professional Standards and Services, American 
Institute of Certified Public Accountants, 2), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Guy060308.pdf (recommending the addition of illegal acts to the 
Recommendation).
---------------------------------------------------------------------------

    In addition, the Committee recommends that the PCAOB and the SEC 
clarify in the auditor's report the auditor's role and limitations in 
detecting fraud under current auditing standards. In addition, the 
Committee recommends, in light of this continuing ``expectations gap,'' 
that the PCAOB review the auditing standards governing fraud detection 
and fraud reporting. Specifically, the Committee recommends that the 
PCAOB periodically review and update these standards.\188\
---------------------------------------------------------------------------

    \188\ Donald Chapin, Comment Letter Regarding Draft Report and 
Draft Report Addendum 1, (June 9, 2008), available at http://comments.treas.gov/_files/TreasuryAdvisoryCommittee.doc (supporting 
the Recommendation).
---------------------------------------------------------------------------

    Recommendation 6: Urge the PCAOB to undertake a standard-setting 
initiative to consider mandating the engagement partner's signature on 
the auditor's report.
    SEC regulations require that the auditor's report be signed.\189\ 
Under current requirements, the auditor's report signature block shows 
the auditing firm's name, not the engagement partner's. In 2005, the 
PCAOB's SAG considered whether the audit partner and a concurring 
partner should sign the auditor's report in their own names.\190\ The 
Committee has received testimony and commentary regarding the benefits 
and complexities of engagement partner signatures.\191\ The Committee 
has also discussed and debated the merits of the senior engagement 
partner signing the auditor's report.\192\ Advocates believe that such 
signatures will foster greater accountability of the individuals 
signing the auditor's report, will enhance transparency, and may 
improve audit quality, and they also note the signature will create no 
additional liability concerns for the engagement partner.\193\ These 
supporters analogize the signatures to the chief executive officer and 
chief financial officer certifications under Section 302 of Sarbanes-
Oxley and directors' signatures on public company annual reports. The 
signature will also enhance the status of the engagement partner, 
putting the partner on the same level as the chief executive officer 
and chief financial officer. Opponents of such signatures argue that 
the auditing firm operates as a team and takes responsibility for the 
audit, but not individual partners. They also argue that no improvement 
in audit quality will result from such a signature.\194\
---------------------------------------------------------------------------

    \189\ SEC Regulation S-X, Rule 2-02a.
    \190\ Public Company Accounting Oversight Board, Standing 
Advisory Group Meeting: Auditor's Reporting Model 7-8 (Feb. 16, 
2005).
    \191\ See, e.g., Record of Proceedings (Feb. 4, 2008) (Written 
Submission of Paul G. Haaga, Jr., Vice Chairman, Capital Research 
and Management Company, 2), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Haaga020408.pdf 
(stating that signatures could improve audit quality and enhance 
accountability).
    \192\ See, e.g., Record of Proceedings (Mar. 13, 2008) (Oral 
Remarks of Donald T. Nicolaisen, Board Member, Morgan Stanley, 228-
230) (stating his belief that engagement partner should sign the 
auditor's report); Record of Proceedings (Mar. 13, 2008) (Oral 
Remarks of Mary Bush, Board Member, Discover Financial Services, 
231) (endorsing the engagement partner signature on the auditor's 
report).
    \193\ See, e.g., Donald Chapin, Comment Letter Regarding Draft 
Report and Draft Report Addendum 2, (June 9, 2008), available at 
http://comments.treas.gov/_files/TreasuryAdvisoryCommittee.doc 
(suggesting that if the engagement partner and concurring partner 
sign the auditor's report separately, some type of liability 
limitations should be received if the firm is not complicit in the 
audit failure); Dennis Johnson, CFA, Senior Portfolio Manager, 
CalPERS, Comment Letter Regarding Draft Report and Draft Report 
Addendum 2, (June 13, 2008), available at http://comments.treas.gov/_files/200806--13ACAP--addendum--commentltr.pdf (supporting the 
Recommendation); Paul Lee, Director, Hermes Equity Ownership 
Services Limited, Comment Letter Regarding Draft Report and Draft 
Report Addendum 4, (June 13, 2008), available at http://comments.treas.gov/_files/ACAPresponse13Jun08.pdf (noting that the 
signatures would increase accountability and professionalism).
    \194\ See, e.g., Deloitte LLP, Comment Letter Regarding Draft 
Report and Draft Report Addendum 21 (June 27, 2008), available at 
http://comments.treas.gov/_files/DeloitteLLPCommentLetter.pdf 
(arguing that regulators and others can already identify those 
involved in audits); Arnold Hanish, Financial Executives 
International, Chair, Committee on Corporate Reporting, Comment 
Letter Regarding Draft Report and Draft Report Addendum 5 (July 3, 
2008), available at http://comments.treas.gov/_files/FEICCRTreasuryACAPCommentLetterFiled73080.pdf (stating that partners 
could become excessively conservative and seek multiple opinions 
from the national office before signing their name); Wayne Kolins, 
Director of Assurance, BDO Seidman LLP, Comment Letter Regarding 
Draft Report and Draft Report Addendum 14-15, (June 27, 2008) 
available at http://comments.treas.gov/_files/ResponsetoAdvisoryCommittee0627final.PDF (noting that an audit is a 
team effort and focusing on one partner may reduce other engagement 
staff's sense of responsibility); Mayer Hoffman McCann P.C., Comment 
Letter Regarding Draft Report and Draft Report Addendum 3, (June 17, 
2008), available at http://comments.treas.gov/_files/MayerHoffmanMcCannCommentLetter.pdf (stating that the Recommendation 
``may be counterproductive since large audits require many partners 
in various parts of the country or world''); PricewaterhouseCoopers, 
Comment Letter Regarding Draft Report and Draft Report Addendum 11-
12, (June 30, 2008), available at http://comments.treas.gov/_files/PwCCommentLtrTreasCmtDraftandAddendum63008.pdf (discerning no clear 
benefit from the Recommendation).
---------------------------------------------------------------------------

    The Committee notes that engagement partner signatures are required 
in other jurisdictions. The European Union's (EU) Eighth Directive 
requires that the engagement partner sign the auditor's report.\195\ 
Even prior to the Eighth Directive, several European countries, 
including France, Germany, and Luxembourg, required engagement partner 
signatures for a number of years.\196\
---------------------------------------------------------------------------

    \195\ Directive 2006/43/EC of the European Parliament and of the 
Council Art. 28 (May 17, 2006).
    \196\ The Institute of Chartered Accountants in England and 
Wales, Shareholder Involvement--Identifying the Audit Partner (2005) 
(noting that Germany, France, and Luxembourg currently require audit 
partner signatures and European Member states must adopt such a 
requirement under Article 28 of the Directive 2006/43/EC of the 
European Parliament and of the Council of 17 May 2006 on statutory 
audits of annual accounts and consolidated accounts).
---------------------------------------------------------------------------

    The Committee notes that in Chapter VII of this Report, the 
Committee is recommending disclosure of the name(s) of the senior audit 
partner(s) staffed on the engagement in the proxy statement to increase 
transparency and affirm the accountability of the auditor.
    The Committee believes that the engagement partner's signature on 
the

[[Page 44339]]

auditor's report would increase transparency and accountability. 
Therefore, the Committee recommends that the PCAOB undertake a 
standard-setting initiative to consider mandating the engagement 
partner's signature on the auditor's report. The Committee notes the 
signature requirement should not impose on any signing partner any 
duties, obligations or liability that are greater than the duties, 
obligations and liability imposed on such person as a member of an 
auditing firm.\197\
---------------------------------------------------------------------------

    \197\ This language is similar to safe harbor language the SEC 
promulgated in its rulemaking pursuant to Sarbanes-Oxley's Section 
407 for audit committee financial experts. See, SEC, Final Rule: 
Disclosure Required by Sections 406 and 407 of the Sarbanes-Oxley 
Act of 2002, Release No. 33-8177 (Jan. 23, 2003).
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    Recommendation 7. Urge the PCAOB to require that, beginning in 
2010, larger auditing firms produce a public annual report 
incorporating (a) information required by the EU's Eighth Directive, 
Article 40 Transparency Report deemed appropriate by the PCAOB, and (b) 
such key indicators of audit quality and effectiveness as determined by 
the PCAOB in accordance with Recommendation 3 in Chapter VI of this 
Report. Further, encourage the PCAOB to require that, beginning in 
2011, the larger auditing firms file with the PCAOB on a confidential 
basis audited financial statements.
    The Committee considered testimony and commentary regarding the 
transparency of auditing firms.\198\ The Committee has reviewed and 
considered a range of transparency reporting options, including the 
PCAOB's May 2006 proposal, now finalized, requiring annual and periodic 
reporting pursuant to the mandate under Sarbanes-Oxley's Section 
102(d).\199\ This rule requires annual reporting by auditing firms on 
such items as a public company audit client list and the percentage of 
the firm's total fees attributable to public company audit clients for 
each of the following categories of services: audit services, other 
accounting services, tax services, and non-audit services. The PCAOB 
rule also requires firms to file a ``special'' report, triggered by 
such events as the initiation of certain criminal or civil governmental 
proceedings against the firm or its personnel; a new relationship with 
a previously disciplined person or entity; or the firm becoming subject 
to bankruptcy or similar proceedings.
---------------------------------------------------------------------------

    \198\ See, e.g., Record of Proceedings (Dec. 3, 2007) (Written 
Submission of James S. Turley, Chairman and Chief Executive Officer, 
Ernst & Young LLP, 10), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Turley120307.pdf; Record 
of Proceedings (Feb. 4, 2008) (Written Submission of Dennis Johnson, 
Senior Portfolio Manager, Corporate Governance, California Public 
Employees' Retirement System, 5), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Johnson020408.pdf.
    \199\ See PCAOB, Proposed Rules on Periodic Reporting by 
Registered Public Accounting Firms, available at http://www.pcaobus.org/rules/docket_019/2006-05-23_release_no._2006-004.pdf.
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    The Committee has also considered the EU's Eighth Directive, 
Article 40 Transparency Report,\200\ which requires that public company 
auditors post on their websites annual reports including the following 
information: legal and network structure and ownership description; 
governance description; most recent quality assurance review; public 
company audit client list; independence practices and confirmation of 
independence compliance review; continuing education policy; financial 
information, including audit fees, tax advisory fees, consulting fees; 
and partner remuneration policies. The Article 40 Transparency Report 
also requires a description of the auditing firm's quality control 
system and a statement by firm management on its effectiveness. 
Auditing firms and investors have expressed support for requiring U.S. 
auditing firms to publish reports similar to the Article 40 
Transparency Report.\201\
---------------------------------------------------------------------------

    \200\ Directive 2006/43/EC of the European Parliament and of the 
Council Art. 40 (May 17, 2006), available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2006:157:0087:0107:EN:PDF.
    \201\ See, e.g., Record of Proceedings (Feb. 4, 2008) (Written 
Submission of Paul G. Haaga, Jr., Vice Chairman, Capital Research 
and Management Company, 2), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Haaga020408.pdf 
(recommending auditing firm disclosure of quality control policies 
and procedures); Record of Proceedings (Feb. 4, 2008) (Written 
Submission of Edward E. Nusbaum, Chief Executive Officer, Grant 
Thornton LLP, 6), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Nusbaum020408.pdf 
(supporting an annual transparency report for U.S. auditing firms); 
Record of Proceedings (Written Submission of James S. Turley, 
Chairman and Chief Executive Officer, Ernst & Young LLP, 10), 
available at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Turley120307.pdf (suggesting the PCAOB require 
auditing firms to publish transparency reports like the European 
Union's Article 40 Transparency Report).
---------------------------------------------------------------------------

    The Committee notes that Recommendation 3 in Chapter VI of this 
Report recommends that, if feasible, the PCAOB develop audit quality 
indicators and auditing firms publish these indicators. The Committee 
believes this information could improve audit quality by enhancing the 
transparency of auditing firms and notes that some foreign affiliates 
of U.S. auditing firms provide such indicators in public reports issued 
in other jurisdictions.\202\
---------------------------------------------------------------------------

    \202\ See, e.g., Record of Proceedings (Feb. 4, 2008) (Written 
Submission of Dennis Johnson, Senior Portfolio Manager, Corporate 
Governance, California Public Employees' Retirement System, 5), 
available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Johnson020408.pdf (recommending auditing firm 
disclosure of key performance indicators, such as ``percent of 
training dollars spent on staff compared to the fees received for 
the audit, average experience of staff, partner time allocated to 
each audit'').
---------------------------------------------------------------------------

    Furthermore, for several years auditing firms in the United Kingdom 
have published annual reports containing audited financial statements 
pursuant to limited liability partnership disclosure requirements as 
well as a discussion of those statements, a statement on corporate 
governance, performance metrics, and other useful information. In the 
United States, auditing firms typically do not prepare audited 
financial statements. Some witnesses have called for the public 
disclosure of audited financial statements,\203\ whereas one auditing 
firm representative questioned the usefulness of disclosing financial 
statements of the smaller auditing firms.\204\ The Committee received

[[Page 44340]]

testimony and commentary opposed to the public release of financial 
statements.\205\
---------------------------------------------------------------------------

    \203\ See, e.g., Record of Proceedings (June 3, 2008) (Written 
Submission of John Biggs, Audit Committee Chair, Boeing, Inc., 
former Chief Executive Officer and Chairman, TIAA-CREF), available 
at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Biggs060308.pdf (stating that audited financial statements 
would be useful for audit committees); James D. Cox, Duke 
University, and Lawrence A. Cunningham, George Washington 
University, Comment Letter Regarding Draft Report and Draft Report 
Addendum 1-2, (July 4, 2008), available at http://comments.treas.gov/_files/JointCommentLetteronFACAPJuly2008.doc 
(supporting financial statement disclosure for assessing audit 
quality and independence); Record of Proceedings (Feb. 4, 2008) 
(Written Submission of Paul G. Haaga, Jr., Vice Chairman, Capital 
Research and Management Company, 2), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Haaga020408.pdf (calling for auditing firm disclosure of audited 
financial statements); Dennis Johnson, CFA, Senior Portfolio 
Manager, CalPERS, Comment Letter Regarding Draft Report and Draft 
Report Addendum 3, (June 13, 2008), available at http://comments.treas.gov/_files/200806--13ACAP--addendum--commentltr.pdf 
(recommending that all audited financial statements be publicly 
available on the PCAOB's website).
    \204\ Record of Proceedings (Feb. 4, 2008) (Questions for the 
Record of Neal Spencer, Managing Partner, BKD LLP, 38-39), available 
at http://www.treas.gov/offices/domestic-finance/acap/agendas/QFRs-2-4-08.pdf (analogizing the auditing firm to a vendor and noting 
that the profitability or financial strength of vendors ``has 
little, if any, relevance other than perhaps related to concerns 
about their ability to financially support their continued 
existence'' and noting that the profitability or financial condition 
of an auditing firm is not directly related to audit quality; and 
noting that the ``most relevant financial information for users'' of 
smaller auditing firms is insurance-related information and noting 
that larger auditing firms with limited commercial insurance 
coverage may need to disclose different financial information).
    \205\ Deloitte LLP, Comment Letter Regarding Draft Report and 
Draft Report Addendum 20 (June 27, 2008), available at http://comments.treas.gov/_files/DeloitteLLPCommentLetter.pdf (opposing 
disclosure of financial statements due to increased litigation risk 
and the impact on concentration); Record of Proceedings (June 3, 
2008) (Written Submission of Charles W. Gerdts, III, General 
Counsel, PricewaterhouseCoopers, LLP, 12), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Bedard060308.pdf (suggesting that audited financial statements would 
not help audit quality, may harm competition, and could increase 
settlement awards); Record of Proceedings (June 3, 2008) (Written 
Submission of Kenneth Nielsen Goldmann, Capital Markets and SEC 
Practice Director, J.H. Cohn LLP, 5), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Goldmann060308.pdf (stating that smaller firms would leave the 
public company audit market due to the fact that ``they would view 
such disclosure as placing them in a negative competitive position 
with respect to larger audit firms, current and potential clients, 
and potential plaintiffs''); David McDonnell, Chief Executive 
Officer, Grant Thornton International Ltd, and Edward E. Nusbaum, 
Chief Executive Officer, Grant Thornton LLP, and Chairman, Grant 
Thornton International Ltd Board of Governors, Comment Letter 
Regarding Draft Report and Draft Report Addendum 5 (June 27, 2008), 
available at http://comments.treas.gov/_files/GTCommentlettertoACAPJune2008_FINAL.pdf (noting the lack of 
evidence that audit quality would improve but states that the 
Recommendation would have an adverse affect on concentration and 
smaller firms); Record of Proceedings (June 3, 2008) (Written 
Submission of Michael R. Young, Partner, Willkie Farr & Gallagher 
LLP, 4), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Young060308.pdf (noting that the 
Recommendation may result in larger settlement demands).
---------------------------------------------------------------------------

    The Committee recommends that the PCAOB require that, beginning in 
2010, larger auditing firms (those with 100 or more public company 
audit clients that the PCAOB inspects annually) produce a public annual 
report incorporating (a) information required by the Article 40 
Transparency Report deemed appropriate by the PCAOB in consultation 
with investors, other financial statement users, auditing firms, public 
companies, academics, and other market participants, and (b) such key 
indicators of audit quality and effectiveness as determined by the 
PCAOB in accordance with Recommendation 3 in Chapter VII of this 
Report. These disclosure requirements should supplement any rules 
approved by the SEC as a result of the PCAOB's May 2006 reporting 
proposal.
    Further, the Committee also recommends that the PCAOB require that, 
beginning in 2011, the larger auditing firms file with the PCAOB on a 
confidential basis audited financial statements prepared in accordance 
with generally accepted accounting principles or international 
financial reporting standards.
    The Committee also recommends that the PCAOB determine which of the 
requirements included above should be imposed on smaller auditing firms 
(those with fewer than 100 public company audit clients), taking into 
account these firms' size and resources.

VI. Concentration and Competition

    The Committee analyzed public company audit market concentration 
and competition. In its work the Committee focused on concentration and 
competition in the context of their impact on audit quality and 
effectiveness. In turn, consideration of the sustainability of the 
auditing profession was also subject to examination in the context of 
audit quality and effectiveness. The recommendations set out below 
reflect this focus.
    During the course of its deliberations, the Committee received 
testimony and commentary from the Government Accountability Office 
(GAO), the Public Company Accounting Oversight Board (PCAOB), 
academics, auditing firms, investors, and others regarding audit market 
concentration and competition.
    In January 2008, the GAO issued Audits of Public Companies: 
Continued Concentration in Audit Market for Large Public Companies Does 
Not Call for Immediate Action,\206\ updating its 2003 report on audit 
market concentration.\207\ The GAO concluded that the four largest 
auditing firms continue to dominate the large public company audit 
market. In 2006, the four largest auditing firms audited 98% of the 
1500 largest public companies with annual revenues over $1 billion and 
92% of public companies with annual revenues between $500 million and 
$1 billion. However, concentration in the small and mid-size public 
company audit market has eased during the past five years. The largest 
firms' share in auditing small public companies with annual revenues 
under $100 million has declined from 44% in 2002 to 22% in 2006 and in 
auditing mid-size public companies with annual revenue between $100 
million and $500 million from 90% in 2002 to 71% in 2006.\208\ See 
Figure 1.
---------------------------------------------------------------------------

    \206\ U.S. Government Accountability Office, Audits of Public 
Companies: Continued Concentration in Audit Market for Large Public 
Companies Does Not Call for Immediate Action, GAO-08-163 (Jan. 2008) 
[hereinafter 2008 GAO Report].
    \207\ GAO, Public Accounting Firms: Mandated Study on 
Consolidation and Competition, GAO-03-864 (July 2003) (finding that 
``although audits for large public companies were highly 
concentrated among the largest accounting firms, the market for 
audit services appeared competitive according to various 
indicators'').
    \208\ 2008 GAO Report 19. The GAO also found that the largest 
firms collected 94% of all audit fees paid by public companies in 
2006, slightly less than the 96% they collected in 2002. 2008 GAO 
Report 16.

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[[Page 44341]]

[GRAPHIC] [TIFF OMITTED] TN30JY08.042

    The Committee considered the testimony of several witnesses 
regarding the reasons for the continued concentration in the large 
public company audit market. Auditing firms, public companies, market 
participants, academics, investors and others reasoned that large 
public companies with operations in multiple countries need auditing 
firms with global resources and technical and industry expertise to 
deal with an increasingly complex business and financial reporting 
environment.\209\ These needs limit auditor choice to only the largest 
auditing firms for many large public companies. The Committee heard 
from witnesses who also described barriers to the growth of smaller 
auditing firms, including the behavior of underwriters and other 
capital market participants.\210\
---------------------------------------------------------------------------

    \209\ See, e.g., 2008 GAO Report 21 (surveyed companies most 
frequently cited size and complexity of their operations (92%), the 
auditor's technical capability with accounting principles and 
auditing standards (80%), and the need for industry specialization 
or expertise (67%)); Record of Proceedings (Dec. 3, 2007) (Written 
Submission of Wayne Kolins, National Director of Assurance and 
Chairman, BDO Seidman LLP, 2), available at  http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Kolins120307.pdf; 
Record of Proceedings (Feb. 4, 2008) (Written Submission of Neal D. 
Spencer, Managing Partner, BKD, LLP, 1-4), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Spencer020408.pdf.
    \210\ Record of Proceedings (Feb. 4, 2008) (Oral Remarks of Brad 
Koenig, Former Managing Director and Head of Global Technology 
Investment Banking, Goldman Sachs, 219-220), available at http://www.treas.gov/offices/domestic-finance/acap/Koenig020408.pdf 
(describing underwriters' views of auditing firms other than the 
largest four auditing firms).
---------------------------------------------------------------------------

    In analyzing these data on concentration and limited auditor choice 
in the large public company audit market, the Committee focused on the 
potential negative impact of concentration on audit quality. Some have 
suggested the lack of competition may not provide sufficient incentive 
for the dominant auditing firms to deliver high quality and innovative 
audit services.\211\ Notwithstanding the increasing number of public 
company financial restatements,\212\ the Committee heard from several 
witnesses that audit quality had improved.\213\ For example, the GAO 
observed that market participants and public company officials had 
noted improvement in recent years in audit quality, including auditing 
firm staff's technical expertise, responsiveness to client needs, and 
ability to identify material financial reporting matters.\214\ Much of 
the improvement was credited to the Sarbanes-Oxley Act of 2002 
(Sarbanes-Oxley), which enhanced auditor independence, replaced the 
self-regulation of the auditing profession with the PCAOB, mandated 
evaluation and disclosure of the effectiveness of internal controls 
over financial reporting,\215\ and strengthened audit committee 
membership, independence, and responsibilities.
---------------------------------------------------------------------------

    \211\ 2008 GAO Report 31-32.
    \212\ See, e.g., Susan Scholz, The Changing Nature and 
Consequences of Public Company Financial Restatements 1997-2006 
(Apr. 2008).
    \213\ 2008 GAO Report 5; Pub. Company Accounting Oversight Bd., 
Report on the PCAOB's 2004, 2005, and 2006 Inspections of Domestic 
Triennially Inspected Firms, PCAOB Rel. No. 2007-010 (Oct. 22, 
2007).
    \214\ Record of Proceedings (Dec. 3, 2007) (Questions for the 
Record of Jeanette M. Franzel, Director, Financial Management and 
Assurance Team, U.S. Government Accountability Office, 2 (Jan. 30, 
2008)), available at http://www.treas.gov/offices/domestic-finance/acap/QFRs-12-3-2007.pdf (observing that the market believes the 
``bar had been raised'' on audit quality). See also Center for Audit 
Quality, Report on the Survey of Audit Committee Members (Mar. 2008) 
(concluding that: 17% of surveyed audit committee members view audit 
quality as good, 53% as very good, 25% as excellent, while 82% say 
overall quality has improved somewhat/significantly over the past 
several years).
    \215\ 2008 GAO Report 32.
---------------------------------------------------------------------------

    Although industry concentration can lead to increased prices, the 
Committee notes that the GAO concluded that higher audit market 
concentration has not been associated with higher fees. Public 
companies, auditing firms, and other market participants believe the 
considerable increase in audit fees in recent years is due not to 
market power of a concentrated industry, but to the increased 
requirements under Sarbanes-Oxley, the complexity of accounting and 
financial reporting standards, the need to hire and retain qualified 
audit staff, and the independence requirements (which have led to the 
possible re-pricing of audits to their unbundled market price).\216\ 
The Committee also considered the impact of the possible loss of one of 
the four largest accounting firms in light of the high degree of 
concentration of public company auditing, and especially large public 
company auditing, in those firms. The GAO noted the possibility of this 
loss due to issues arising out of firm conduct, such as civil 
litigation, federal or state regulatory action or criminal prosecution, 
or economic events, such as a merger.\217\ The GAO posited

[[Page 44342]]

potential negative effects of such a loss, including the following: 
Further limitations on large public company auditor choice, costs 
associated with changing auditors, and companies' inability to obtain 
timely financial statement audits.\218\ However, the GAO did not 
recommend insulating auditing firms directly from either the legal or 
market consequences of their actions.
---------------------------------------------------------------------------

    \216\ 2008 GAO Report 27-29. On the re-pricing of audits, see 
also James D. Cox, The Oligopolistic Gatekeeper: The U.S. Accounting 
Profession, in After Enron: Improving Corporate Law and Modernizing 
Securities Regulation in Europe and the U.S., Chapter 9, Oxford, 
forthcoming, available at http://ssrn.com/abstract=926360.
    \217\ 2008 GAO Report 34-35.
    \218\ 2008 GAO Report 35-36.
---------------------------------------------------------------------------

    With the above considerations in mind, the Committee recommends 
that regulators, the auditing profession, and other bodies, as 
applicable, effectuate the following:
    Recommendation 1. Reduce barriers to the growth of smaller auditing 
firms consistent with an overall policy goal of promoting audit 
quality. Because smaller auditing firms are likely to become 
significant competitors in the market for larger company audits only in 
the long term, the Committee recognizes that Recommendation 2 will be a 
higher priority in the near term.
    The GAO concluded that concentration in the large public company 
audit market will not be reduced in the near term by smaller auditing 
firms. The Committee considered testimony regarding the reasons that 
smaller auditing firms are unable or unwilling to enter the large 
public company audit market. Challenges facing these firms' entry into 
this market typically include the following: Lack of staffing and 
geographic limitations on both the physical span of their practices and 
experience and expertise with global auditing complexities; inability 
to create global networks necessary to serve global clients, due to 
lack of auditing firms abroad to act as potential partners; the need 
for greater technical capability and industry specialization; lack of 
name recognition and reputation; and limited access to capital.\219\ In 
addition, expanding into the large public company audit market may be 
unattractive for some smaller auditing firms for a variety of 
reasons,\220\ including increased exposure to litigation, the 
possibility that their business model is not scaleable, and the fact 
that for some smaller firms other aspects of their business (such as 
private company auditing and other work) has greater potential for 
expansion.
---------------------------------------------------------------------------

    \219\ See, e.g., 2008 GAO Report 37; Record of Proceedings (Dec. 
3, 2007) (Written Submission of Wayne Kolins, National Director of 
Assurance and Chairman, BDO Seidman LLP, 2), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Kolins120307.pdf (describing as barriers for smaller auditing firms 
liability risks, overly complex independence rules, and an array of 
factors that audit committees may review in choosing an auditor that 
best matches the company); Record of Proceedings (Feb. 4, 2008) 
(Written Submission of Neal D. Spencer, Managing Partner, BKD, LLP, 
1), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Spencer020408.pdf (noting that barriers include 
resources, institutional bias, insurability, and liability).
    \220\ 2008 GAO Report 38.
---------------------------------------------------------------------------

    To address these issues, the Committee recommends that policy 
makers press for the reduction of barriers, to the extent consistent 
with audit quality and other public interest factors, to the growth of 
smaller auditing firms. For smaller firms, this includes encouraging 
and promoting development of technical resources in such areas as 
international financial reporting standards (IFRS) and fair value 
accounting, and development of specialized or ``niche'' practices or 
industry ``verticals'' where they are in the best interests of 
investors and can lead to more effective competition. Pressure also 
should be applied against non-justifiable resistance to using smaller 
firms on the part of a variety of market actors.
    Some commentary has also noted the costs associated with public 
companies' changing auditors and how these costs can pose another 
barrier for smaller firms trying to enter the larger public company 
audit market. For example, commentary and testimony noted the often 
high fees charged for the predecessor auditor's opinion on previously 
filed financial statements and the challenges associated with having 
the predecessor auditor transfer its work papers to the successor 
auditor.\221\ Other obstacles to auditor changes discussed by the 
Committee have included poor communication between predecessor and 
successor auditors.
---------------------------------------------------------------------------

    \221\ Anonymous, Private Investor, Former Auditor, and Former 
CFO, Comment Letter Regarding Draft Report and Draft Report Addendum 
1 (May 11, 2008), available at http://comments.treas.gov/index.cfm?FuseAction=Home.View&Topic_id=9&FellowType_id=1&CurrentPage=2; Record of Proceedings (June 3, 2008) (Questions 
for the Record of Kurt N. Schacht, Managing Director, Centre for 
Financial Markets Integrity, CFA Institute (June 30, 2008)), 
available at http://www.treas.gov/offices/domestic-finance/acap/agendas/QFRs-6-3-08.pdf.
---------------------------------------------------------------------------

    The Committee believes that public companies should not be limited 
in their auditor selection by unnecessary barriers created during the 
auditor change and selection processes. Consistent with AU 315: 
Communications Between Predecessor and Successor Auditors,\222\ which 
addresses communications between predecessor and successor auditors, 
the Committee urges the Securities and Exchange Commission (SEC) and 
the PCAOB to encourage predecessor auditors to fully communicate and 
cooperate with the successor auditors. This communication and 
cooperation should apply to all auditors regardless of their size. The 
issue of auditor changes and the importance of transparency in this 
area are addressed within Chapter V of this Report.
---------------------------------------------------------------------------

    \222\ Communications Between Predecessor and Successor Auditors, 
Interim Auditing Standard AU 315 (Pub. Company Accounting Oversight 
Bd. 2002).
---------------------------------------------------------------------------

    The Committee believes that the following specific and incremental 
actions would assist in the growth of the smaller firms and their entry 
into the large public company audit market:
    (a) Require disclosure by public companies in their registration 
statements, annual reports, and proxy statements of any provisions in 
agreements with third parties that limit auditor choice.
    The Committee considered testimony and commentary that certain 
market participants, such as underwriters, banks, and lenders, may 
influence and effectively limit public company auditor selection 
decisions.\223\ For instance, certain contractual arrangements limit 
public companies' auditor choice.\224\ Consistent with the large public 
company audit market, this practice is particularly prevalent in the 
initial public offering (IPO) arena, where an underwriter may include 
in the underwriting agreement a provision limiting the company's 
auditor choice to a specified group of auditing firms.\225\

[[Page 44343]]

Evidence suggests that auditor choice may be more limited among the 
largest IPOs: While midsize and smaller firms' combined share of the 
IPO market (by number of IPOs) has increased progressively (rising from 
18% in 2003 to 40% in 2007),\226\ the largest firms continue to audit 
the majority of the largest IPOs.\227\ See Figure 2.
---------------------------------------------------------------------------

    \223\ See, e.g., Record of Proceedings (Feb. 4, 2008) (Written 
Submission of Edward E. Nusbaum, Chief Executive Officer, Grant 
Thornton LLP, and Chairman, Grant Thornton International Board of 
Governors, 3), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Nusbaum020408.pdf (noting that 
transparency regarding ``restrictive contracts with underwriters'' 
could improve auditor choice). See also 2008 GAO Report 47.
    \224\ See, e.g., Record of Proceedings (Dec. 3, 2007) (Written 
Submission of Lewis H. Ferguson, III, Partner, Gibson Dunn & 
Crutcher, 2), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Ferguson120307.pdf (``Sometimes 
lenders, investors, investment bankers or credit rating agencies 
will insist that a company seeking to access the capital markets 
have its financial statements audited by one of the largest 
accounting firms, adding a bias that has the practical effect of 
being a barrier to entry.'').
    \225\ See, e.g., Record of Proceedings (May 5, 2008) (Oral 
Remarks of Committee Member Ken Goldman, Chief Financial Officer, 
Fortinet, Inc., 143), available at http://www.treas.gov/offices/domestic-finance/acap/agendas/minutes-05-05-08.pdf. See also, Edwin 
J. Kliegman, CPA, Comment Letter Regarding Discussion Outline 2 
(Nov. 26, 2007), available at http://comments.treas.gov/index.cfm?FuseAction=Home.View&Topic_id=3&FellowType_id=1; Record 
of Proceedings (Feb. 4, 2008) (Oral Remarks of Brad Koenig, Former 
Managing Director and Head of Global Technology Investment Banking, 
Goldman Sachs, 219-220), available at http://www.treas.gov/offices/domestic-finance/acap/Koenig020408.pdf (noting underwriter practices 
in auditor selection).
    \226\ 2008 GAO Report 44.
    \227\ Record of Proceedings (Feb. 4, 2008) (Written Submission 
of Brad Koenig, Former Managing Director and Head of Global 
Technology Investment Banking, Goldman Sachs, 2), available at 
http://www.treas.gov/offices/domestic-finance/acap/Koenig020408.pdf 
(noting that from 2002-2007 the largest four auditing firms had an 
87% market share of the 817 initial public offerings that exceeded 
$20 million). See also 2008 GAO Report 44 (``Staff from some 
investment firms that underwrite stock issuances for public 
companies told [GAO] that in the past they generally had expected 
the companies for which they raised capital to use one of the 
largest firms for IPOs but that now these organizations were more 
willing to accept smaller audit firms. * * * However, * * * most of 
the companies that went public with a mid-size or smaller auditor 
were smaller. In addition, these firms' share of IPOs of larger 
companies (those with revenues greater than $150 million) rose from 
none in 2003 to about 13 percent in 2007.'').
[GRAPHIC] [TIFF OMITTED] TN30JY08.043

    The Committee believes these provisions impair competition by 
limiting public company auditor choice and the ability of smaller 
auditors to serve a greater share of the public company audit market. 
Accordingly, the Committee recommends that the SEC require public 
companies to disclose in their registration statements, annual reports, 
and proxy statements any provisions in agreements limiting auditor 
choice.\228\ The disclosure should identify the agreement and include 
the names of the parties to the agreement and the actual provisions 
limiting auditor choice.\229\
---------------------------------------------------------------------------

    \228\ See, e.g., Record of Proceedings (June 3, 2008) (Written 
Submission of Jean C. Bedard, Timothy B. Harbert Professor of 
Accounting, Department of Accountancy, Bentley College, 8), 
available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Bedard060308.pdf (supporting this 
Recommendation and noting that enhanced name recognition ``would 
provide further incentives for these [smaller] firms to build the 
personnel quality of their organizations''); Wayne Kolins, National 
Director of Assurance and Chairman, BDO Seidman LLP, Comment Letter 
Regarding Draft Report and Draft Report Addendum 5, (June 27, 2008), 
available at http://comments.treas.gov/--files/
ResponsetoAdvisoryCommittee0627FINAL.pdf (recommending that ``the 
SEC adopt a rule prohibiting agreements with third parties that 
limit auditor selection to specific firms, other than to specify 
that the firm selected must be suitably qualified to perform the 
audit''); David McDonnell, Chief Executive Officer, Grant Thornton 
International Ltd, and Edward E. Nusbaum, Chief Executive Officer, 
Grant Thornton LLP, and Chairman, Grant Thornton International Ltd 
Board of Governors, Comment Letter Regarding Draft Report and Draft 
Report Addendum 6 (June 27, 2008), available at http://comments.treas.gov/_files/GTCommentlettertoACAPJune2008_FINAL.pdf 
(``Such public disclosure will create incentives for audit 
committees to optimize their auditor choice and help clarify that 
size alone is not the best criterion when selecting an auditor.''). 
But c.f., Record of Proceedings (June 3, 2008) (Written Submission 
of Brian O'Malley, Senior Vice President and General Auditor, Nasdaq 
Stock Market, 2), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/OMalley060308.pdf (noting 
that disclosure may add transparency but the ``root causes'' of 
decisions to limit auditor choice remain).
    \229\ The Committee notes that a group of market participants 
put together by the United Kingdom's Financial Reporting Council to 
study audit market competition has suggested similar disclosure of 
contractual obligations limiting auditor choice. See Financial 
Reporting Council, FRC Update: Choice in the UK Audit Market 4 (Apr. 
2007) [hereinafter FRC Update] (recommending that ``when explaining 
auditor selection decisions, Boards should disclose any contractual 
obligations to appoint certain types of audit firms'').
---------------------------------------------------------------------------

    (b) Include representatives of smaller auditing firms in 
committees, public forums, fellowships, and other engagements.
    The Committee considered testimony that the lack of smaller firms' 
name recognition and reputation have hindered smaller auditing firms' 
ability to compete in the large public company audit market. The GAO 
noted that name recognition, reputation, and credibility

[[Page 44344]]

were significant barriers to smaller auditing firm expansion.\230\ The 
PCAOB has registered and oversees 982 U.S. auditing firms and 857 
foreign auditing firms.\231\ While it is not possible to include all 
smaller firms, the Committee received testimony and comment letters 
suggesting that there should be greater inclusion and participation of 
smaller firms in public and private sector committees, roundtables, and 
fellowships.\232\ One auditing firm representative suggested the 
creation of a PCAOB professional practice fellowship program, reaching 
out to professionals from auditing firms of various sizes.\233\
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    \230\ 2008 GAO REPORT 44 (``Fifty percent of accounting firms 
responding to [GAO's] survey that want to audit large companies said 
that name recognition or reputation with potential clients was a 
great or very great impediment to expansion. Similarly, 54 percent 
of these firms cited name recognition or credibility with financial 
markets and investment bankers as a great or very great impediment 
to expansion.''). See also Edward J. Kliegman, CPA, Comment Letter 
Regarding Discussion Outline (Nov. 16, 2007), available at http://comments.treas.gov/index.cfm?FuseAction=Home.View&Topic_id=3&FellowType_id=1.
    \231\ Data are as of Feb. 21, 2008.
    \232\ See, e.g., Andrew D. Bailey, Jr., Professor of 
Accountancy--Emeritus, University of Illinois, and Senior Policy 
Advisor, Grant Thornton LLP, Comment Letter Regarding Discussion 
Outline 16 (Jan. 30, 2008), available at http://comments.treas.gov/_files/BAILEYCOMMENTSONTREASURYADVISORYCOMMITTEEOUTLINEFINALSUBMISSION13008.
doc; Record of Proceedings (Dec. 3, 2007) (Questions for the Record 
of James S. Turley, Chairman and Chief Executive Officer, Ernst & 
Young LLP, 4 (Feb. 1, 2008)), available at http://www.treas.gov/offices/domestic-finance/acap/QFRs-12-3-2007.pdf.
    \233\ Record of Proceedings (Dec. 3, 2007) (Written Submission 
of Wayne Kolins, National Director of Assurance and Chairman, BDO 
Seidman LLP, 4), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Kolins120307.pdf. See Chapter IV 
(recommending the creation of a PCAOB fellowship program). While 
maintenance and extension of professional fellowship programs are 
also considered in the Committee's recommendations relating to human 
capital matters, extending these opportunities increasingly to firms 
of various sizes could assist smaller firms in their ability to 
compete in the public company audit market.
---------------------------------------------------------------------------

    The Committee believes increasing name recognition and reputation 
could promote audit market competition and auditor choice.\234\ 
Accordingly, the Committee recommends that regulators and policy 
makers, such as the SEC, the PCAOB, and the Financial Accounting 
Standards Board (FASB), include representatives of smaller auditing 
firms in committees, public forums, fellowships, and other 
engagements.\235\ The Committee recognizes the existence of different 
programs within regulatory agencies available to serve as a resource 
and contact point for smaller auditing firms and smaller public 
companies, such as, the SEC's Office of Small Business Policy, the 
PCAOB's Forum on Auditing in the Small Business Environment, and the 
FASB's Small Business Advisory Committee.
---------------------------------------------------------------------------

    \234\ See, e.g. Record of Proceedings (June 3, 2008) (Written 
Submission of Jean C. Bedard, Timothy B. Harbert Professor of 
Accounting, Department of Accountancy, Bentley College, 8), 
available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Bedard060308.pdf (agreeing with the 
Recommendation); Record of Proceedings (June 3, 2008) (Written 
Submission of Kenneth Nielsen Goldmann, Capital Markets and SEC 
Practice Director, J.H. Cohn LLP, 4), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Goldmann060308.pdf (``More opportunities such as this testimony for 
leaders of smaller firms to participate in important public policy 
discussions about the public company audit profession would over 
time enhance public understanding and acceptance that high quality 
in auditing is achievable in different forms and packages.''); 
Record of Proceedings (June 3, 2008) (Written Submission of Kurt N. 
Schacht, Managing Director, Centre for Financial Market Integrity, 
CFA Institute, 2-3), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Schacht060308.pdf.
    \235\ For a similar recommendation, see SEC Advisory Committee 
on Smaller Public Companies, Final Report 114 (Apr. 23, 2006).
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    Recommendation 2. Monitor potential sources of catastrophic risk 
faced by public company auditing firms and create a mechanism for the 
preservation and rehabilitation of troubled larger public company 
auditing firms.
    The Committee considered testimony regarding the variety of 
potentially catastrophic risks that public company auditing firms face. 
These risks include general financial risks and risks relating to 
failure in the provision of audit services and non-audit services, 
including civil litigation, regulatory actions, and loss of customers, 
employees, or auditing network partners due to a loss of 
reputation.\236\
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    \236\ See, e.g., 2008 GAO Report 32-36; Zoe-Vonna Palmrose, 
Maintaining the Value and Viability of Independent Auditors as 
Gatekeepers under SOX: An Auditing Master Proposal, in Brookings-
Nomura Seminar: After the Horses Have Left the Barn: the Future Role 
of Financial Gatekeepers 12-13 (Sept. 28, 2005). Civil litigation 
was the risk most often cited by witnesses before the Committee. 
See, e.g., Record of Proceedings (Dec. 3, 2007) (Written Submission 
of James D. Cox, Brainerd Currie Professor of Law, Duke University 
School of Law), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Cox120307.pdf. See also Eric R. 
Talley, Cataclysmic Liability Risk among Big Four Auditors, 106 
Colum. L. Rev. 1641 (Nov. 2006) (``On one hand, the pattern of 
liability exposure during the last decade does not appear to be the 
type that would, at least on first blush, imperil the entire 
profession. On the other hand, if one predicts historical liability 
exposure patterns into the future, the risk of another firm exiting 
due to liability concerns appears to be more than trivial.'').
---------------------------------------------------------------------------

    The Committee believes these risks are real and notes that over the 
past two decades two large auditing firms have gone out of existence. 
In 1990, Laventhol & Horwath, at the time the seventh largest auditing 
firm in the United States, filed for bankruptcy protection due in part 
to a failure in the provision of non-audit services, and subsequent 
class action litigation, loss of reputation, and inability to attract 
and retain clients.\237\ In 2002, Arthur Andersen, at the time one of 
the five largest auditing firms in the United States, dissolved. The 
Department of Justice (DOJ) had criminally indicted the auditing firm 
on obstruction of justice charges relating to the audit of Enron. The 
resulting inability to retain clients and partners and keep together 
its global affiliate network led to the collapse of Arthur 
Andersen.\238\
---------------------------------------------------------------------------

    \237\ See, e.g, 2008 GAO Report 33.
    \238\ See, e.g., U.S. Government Accountability Office, Public 
Accounting Firms: Mandated Study on Consolidation and Competition 12 
(July 2003) (``The criminal indictment of fourth-ranked Andersen for 
obstruction of justice stemming from its role as auditor of Enron 
Corporation led to a mass exodus of Andersen partners and staff as 
well as clients.'').
---------------------------------------------------------------------------

    In addition, KPMG recently faced the possibility of criminal 
indictment relating to its provision of tax-related services. In the 
end, KPMG entered into a deferred prosecution agreement with the 
DOJ.\239\ Many have suggested that a criminal indictment would have led 
to the dissolution of the firm.
---------------------------------------------------------------------------

    \239\ 2008 GAO Report 56-57, n. 60. Note that the Department of 
Justice did indict several individuals.
---------------------------------------------------------------------------

    Currently, BDO Seidman is appealing a $521 million state judgment 
involving a private company audit client. The auditing firm's chief 
executive has publicly stated that such a judgment amount would 
threaten the firm's viability.\240\
---------------------------------------------------------------------------

    \240\ Jury Awards Rise Against BDO Seidman, Assoc. Press, Aug. 
15, 2007.
---------------------------------------------------------------------------

    As discussed above, the Committee believes that the loss of one of 
the larger auditing firms would likely have a significant negative 
impact on the capital markets. Of greatest concern is the potential 
disruption to capital markets that the failure of a large auditing firm 
would cause, due to the lack of sufficient capacity to audit the 
largest public companies and the possible inability of public companies 
to obtain timely audits.\241\ The

[[Page 44345]]

Committee believes these concerns must be balanced against the 
importance of auditing firms and their partners, as private, for-profit 
businesses, being exposed to the consequences of failure, including 
both the legal consequences and economic consequences.
---------------------------------------------------------------------------

    \241\ See 2008 GAO Report 35, 36 (observing that further audit 
market concentration would ``leave large companies with potentially 
only one or two choices for a new auditor'' and that ``the market 
disruption caused by a firm failure or exit from the market could 
affect companies' abilities to obtain timely audits of their 
financial statements, reducing the audited financial information 
available to investors''). See also London Economics, Final Report 
to EC-DG Internal Market and Services, Study on the Economic Impact 
of Auditors' Liability Regimes 24 (Sept. 2006) (``The adjustment to 
a situation in which one of the Big-4 networks fails is unlikely to 
be smooth. But the long run consequences are likely to be limited 
provided the overall statutory audit capacity does not fall 
significantly. Among the various economic sectors, financial 
institutions may find such a situation particularly difficult as 
their statutory audits are viewed as more risky and * * * two Big-4 
firms dominate the market for statutory audits of financial 
institutions. The situation is likely to be much direr if a second 
Big-4 network fails shortly after the first one. Investors' 
confidence will be in all likelihood seriously affected and the 
adjustment to the new situation is likely to be difficult.'').
---------------------------------------------------------------------------

    In consideration of these competing concerns, the Committee makes 
the following recommendations:
    (a) As part of its current oversight over registered auditing 
firms, the PCAOB should monitor potential sources of catastrophic risk 
which would threaten audit quality.
    The PCAOB's mission is to oversee auditing firms conducting audits 
of public companies. Its audit quality-focused mission is intertwined 
with issues of catastrophic risk, as most often risks to firms' 
survival historically have been largely the result of significant audit 
quality failures or serious compliance issues in the non-audit services 
aspect of their business.
    Sarbanes-Oxley provides the PCAOB with registration, reporting, 
inspection, standard-setting, and enforcement authority over public 
company auditing firms.\242\ Under its inspection authority, the PCAOB 
inspects audit engagements, evaluates quality control systems, and 
tests as necessary audit, supervisory, and quality control procedures. 
For example, in its inspection of an auditing firm's quality control 
systems, the PCAOB reviews the firm's policies and procedures related 
to partner evaluation, partner compensation, new partner nominations 
and admissions, assignment of responsibilities, disciplinary actions, 
and partner terminations; compliance with independence requirements; 
client acceptance and retention policies and procedures; compliance 
with professional requirements regarding consultations on accounting, 
auditing, and SEC matters; internal inspection program; processes for 
establishing and communicating audit policies, procedures, and 
methodologies; processes related to review of a firm's foreign 
affiliate's audit performance; and tone at the top.\243\
---------------------------------------------------------------------------

    \242\ Sarbanes-Oxley Act of 2002, 15 U.S.C. Sec. Sec.  7211-
7219.
    \243\ See, e.g., PCAOB, Observations on the Initial 
Implementation of the Process for Addressing Quality Control 
Criticisms within 12 Months after an Inspection Report, PCAOB 
Release No. 104-2006-078 (Mar. 21, 2006). See also the PCAOB's 
completed inspection reports at http://www.pcaobus.org/Inspections/Public_Reports/index.aspx#k.
---------------------------------------------------------------------------

    The PCAOB also has authority to require registered auditing firms 
to provide annual and periodic reports. In May 2006, the PCAOB issued 
Proposed Rules on Periodic Reporting by Registered Public Accounting 
Firms requiring annual and periodic reporting.\244\ The PCAOB has not 
yet finalized this proposal.
---------------------------------------------------------------------------

    \244\ PCAOB Release No. 2006-004 (May 23, 2006).
---------------------------------------------------------------------------

    The Committee therefore recommends that the PCAOB, in furtherance 
of its objective to enhance audit quality and effectiveness, exercise 
its authority to monitor meaningful sources of catastrophic risk that 
potentially impact audit quality through its programs, including 
inspections, registration and reporting, or other programs, as 
appropriate.\245\ The objective of PCAOB monitoring would be to alert 
the PCAOB to situations in which auditing firm conduct is resulting in 
increased catastrophic risk which is impairing or threatens to impair 
audit quality.\246\
---------------------------------------------------------------------------

    \245\ See, e.g., Record of Proceedings (June 3, 2008) (Oral 
Remarks of James Kaplan, Chairman and Founder, Audit Integrity, 280-
283), available at http://www.treas.gov/offices/domestic-finance/acap/agendas/minutes-06-03-08.pdf (noting that ``it really only 
requires one or two catastrophic events in order to upset or disturb 
the market place. And clearly, more information needs to be gathered 
and collected to ensure, or at least assure, that the number of 
tragic incidents like that are minimized and mitigated''); Record of 
Proceedings (June 3, 2008) (Written Submission of Brian O'Malley, 
Senior Vice President and General Auditor, Nasdaq Stock Market, 2-
3), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/OMalley060308.pdf (supporting this 
Recommendation); Record of Proceedings (June 3, 2008) (Written 
Submission of Kurt N. Schacht, Managing Director, Centre for 
Financial Market Integrity, CFA Institute, 3), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Schacht060308.pdf (supporting this Recommendation).
    \246\ See, e.g., Record of Proceedings (June 3, 2008) (Written 
Submission of Jean C. Bedard, Timothy B. Harbert Professor of 
Accounting, Department of Accountancy, Bentley College, 9), 
available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Bedard060308.pdf (supporting this 
Recommendation); Record of Proceedings (June 3, 2008) (Written 
Submission of Charles W. Gerdts, III, General Counsel, 
PricewaterhouseCoopers, LLP, 8), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Bedard060308.pdf 
(stating that the ``concept'' behind this Recommendation deserves 
serious consideration).
---------------------------------------------------------------------------

    (b) Establish a mechanism to assist in the preservation and 
rehabilitation of a troubled larger auditing firm. A first step would 
encourage larger auditing firms to adopt voluntarily a contingent 
streamlined internal governance mechanism that could be triggered in 
the event of threatening circumstances. If the governance mechanism 
failed to stabilize the firm, a second step would permit the SEC to 
appoint a court-approved trustee to seek to preserve and rehabilitate 
the firm by addressing the threatening situation, including through a 
reorganization, or if such a step were unsuccessful, to pursue an 
orderly transition.
    The Committee considered testimony regarding the importance of the 
viability of the larger auditing firms and the negative consequences of 
the loss of one of these firms on the capital markets. The Committee 
also considered commentary regarding issues auditing firms faced in 
addressing circumstances that threatened their viability, including, in 
particular, problems arising from the need to work with regulators and 
law enforcement agencies.\247\ Several witnesses suggested the 
development of a mechanism to allow auditing firms facing threatening 
circumstances to emerge from those situations.\248\ Committee member 
and former Federal Reserve Chairman Paul Volcker opined that, ``[I]f we 
had [such an] arrangement at the time Andersen went down, we would have 
saved it.''\249\ The Committee notes that it is critical to have a 
process in place to quickly respond to crisis events and

[[Page 44346]]

recommends the following two-step mechanism described below.
---------------------------------------------------------------------------

    \247\ See, e.g., Securities and Exchange Commission, Temporary 
Final Rule and Final Rule: Requirements for Arthur Andersen LLP 
Auditing Clients, SEC Release No. 33-8070 (Mar. 18, 2002); 
Securities and Exchange Commission, Press Rel. No. 2002-39 and Order 
Rel. No. 33-8070 (Mar. 18, 2002) (indictment of Arthur Andersen); 
SEC Staff Accounting Bulletin No. 90 (Feb. 7, 1991) (bankruptcy of 
Laventhol & Horwath).
    \248\ Record of Proceedings (Dec. 3, 2007) (Written Submission 
of James R. Doty, Partner, Baker Botts L.L.P., 11-13), available at 
http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Doty120307.pdf (suggesting that the Bankruptcy Code be 
amended to prevent creditors whose claims relate to violations of 
professional standards from opposing reorganization under a court-
approved plan; an automatic stay against partners facilitating 
partner retention; expanding the SEC's emergency powers to enable 
the SEC to act by summary order to address the registered firm's 
ability to continue to provide audit services; and encouraging the 
SEC or PCAOB to discourage ``client poaching'' by requiring public 
companies to show that switching auditors was not related to mega-
judgments against audit affiliates in other jurisdictions). See also 
Record of Proceedings (Dec. 3, 2007) (Written Submission of Peter S. 
Christie, Principal, Friemann Christie, LLC, 6), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Christie120307.pdf (``If it remains possible that a firm can fail 
for reasons other than liability claims it may be attention needs to 
be given to devices that will permit a firm to re-emerge.'').
    \249\ Record of Proceedings (Mar. 13, 2008) (Oral Remarks of 
Paul A. Volcker, Former Chairman, Board of Governors, Federal 
Reserve System, 317), available at http://www.treas.gov/offices/domestic-finance/acap/agendas/minutes-03-13-08.pdf.
---------------------------------------------------------------------------

First Step--Internal Governance Mechanism

    The Committee notes that auditing firms operate as partnerships, 
generally led by a centralized management team, with a supervisory 
board of partners overseeing management's strategy and 
performance.\250\ In the event of threatening circumstances at a larger 
auditing firm, the Committee believes that a lack of effective 
centralized governance mechanisms may delay crucial decision making, 
impede difficult decisions that could sustain the firm and its human 
assets, and lessen the firm's ability to communicate with maximum 
responsiveness and effectiveness with private, regulatory and judicial 
bodies.
---------------------------------------------------------------------------

    \250\ Center for Audit Quality, Report of the Major Public 
Company Audit Firms to the Department of the Treasury Advisory 
Committee on the Auditing Profession 13 (Jan. 23, 2008).
---------------------------------------------------------------------------

    The Committee therefore recommends that larger auditing firms 
(those with 100 or more public company audit clients that the PCAOB 
inspects annually) establish in their partnership agreements a 
contingent internal governance mechanism, involving the creation of an 
Executive Committee (made up of partners or outsiders) with centralized 
firm management powers to address threatening circumstances. The 
centralized governance mechanism would have full authority to negotiate 
with regulators, creditors, and others, and it would seek to hold the 
firm's organization intact, including preserving the firm's reputation, 
until the mitigation of the threat, or, failing that, the 
implementation of the second step outlined below. The auditing firm 
voluntarily would trigger the operation of this mechanism upon the 
occurrence of potentially catastrophic events specified in the 
partnership agreement, such as civil litigation or actual or 
significantly threatened government or regulatory action. If necessary, 
the SEC and the PCAOB could encourage the firm to trigger the mechanism 
through private communications, public statements, or other means. 
Regulators could also assist in maintaining the firm's organization 
intact by, for example, increasing the time period for registrants that 
are audit clients to have audits or reviews completed and providing 
accelerated consultative guidance to registrants that are audit 
clients.\251\ The Committee recognizes the precise details of such a 
mechanism would vary from auditing firm to auditing firm, depending on 
firm structures, history, and culture.\252\
---------------------------------------------------------------------------

    \251\ See, e.g., Securities and Exchange Commission, Temporary 
Final Rule and Final Rule: Requirements for Arthur Andersen LLP 
Auditing Clients, SEC Release No. 33-8070 (Mar. 18, 2002); 
Securities and Exchange Commission, Press Rel. No. 2002-39 and Order 
Rel. No. 33-8070 (Mar. 18, 2002) (indictment of Arthur Andersen); 
SEC Staff Accounting Bulletin No. 90 (Feb. 7, 1991) (bankruptcy of 
Laventhol & Horwath).
    \252\ Note that some commenters sought more prescription 
surrounding the implementation of this mechanism. See, e.g., Record 
of Proceedings (June 3, 2008) (Written Submission of Jean C. Bedard, 
Timothy B. Harbert Professor of Accounting, Department of 
Accountancy, Bentley College, 9), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Bedard060308.pdf 
(recommending that the SEC and/or the PCAOB be granted the power to 
``require a firm to invoke its internal governance mechanism or to 
directly invoke the external preservation mechanism when 
particularly severe threats arise''); Deloitte LLP, Comment Letter 
Regarding Draft Report and Draft Report Addendum 27-29 (June 27, 
2008), available at http://comments.treas.gov/_files/DeloitteLLPCommentLetter.pdf (stating that ``the only effective way 
to stave off disaster is to ensure that the threat itself is 
mitigated at its source''); Cynthia Fornelli, Executive Director, 
Center for Audit Quality, Comment Letter Regarding Draft Report and 
Draft Report Addendum 34-35 (June 27, 2008), available at http://comments.treas.gov/_files/CAQCommentletter62708FINAL.pdf; Record of 
Proceedings (June 3, 2008) (Written Submission of Barry Mathews, 
Deputy Chairman, Aon Corporation, 1), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Mathews060308.pdf.
---------------------------------------------------------------------------

Second Step--External Preservation Mechanism

    The Committee also recommends that the larger auditing firms 
establish in their partnership agreements a rehabilitation mechanism 
under SEC oversight. The failure of the internal governance mechanism 
to preserve the auditing firm outlined in the first step above would 
trigger this second step, which would require legislation. Upon 
triggering of the second step, either voluntarily by the firm or by the 
SEC, the SEC would appoint a trustee, subject to court approval, whose 
mandate would be to seek to address the circumstances that threaten 
survival, and failing that, to pursue a reorganization that preserves 
and rehabilitates the firm to the extent practicable, and finally, if 
reorganization fails, to pursue an orderly transition.\253\ If this 
second mechanism is to include an element that addresses claims of 
creditors (which could include investors with claims, audit and other 
clients, partners, other employees, and others), legislation to 
integrate this mechanism with the judicial bankruptcy process may be 
necessary.
---------------------------------------------------------------------------

    \253\ Some witnesses questioned whether the SEC would be willing 
to assume such a role. See, e.g., Record of Proceedings (June 3, 
2008) (Written Submission of Charles W. Gerdts, III, General 
Counsel, PricewaterhouseCoopers, LLP, 9), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Gerdts060308.pdf (noting that the SEC may not have the resources, 
expertise, or will to assume such a role).
---------------------------------------------------------------------------

    It is important that this mechanism not be used as insurance for 
partner capital; that is, this mechanism should not be developed to 
``bail out'' a larger auditing firm, but rather to preserve and 
rehabilitate the firm in order to ensure the stable functioning of the 
capital markets and the timely delivery of audited financial statements 
to investors and other financial statement users. Accordingly, there 
must be powers that can be exercised in furtherance of the objective of 
holding the firm together.\254\
---------------------------------------------------------------------------

    \254\ Record of Proceedings (Dec. 3, 2007) (Written Submission 
of James R. Doty, Partner, Baker Botts L.L.P., 11), available at 
http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Doty120307.pdf (Dec. 3, 2007) (``It is an anecdotal but 
firmly held perception of the profession that no accounting firm has 
entered bankruptcy and emerged to continue its practice. The hard 
assets of the firm are not significant: the professionals and the 
clients are the lifeblood of the registered firm. With any 
anticipation of bankruptcy, these mobile assets are gone.'').
---------------------------------------------------------------------------

    In addition, the Committee recommends that, in order for the SEC to 
make effective and timely use of its powers under this Recommendation 
and for the DOJ to have the opportunity to be informed as to the 
consequences that would result from a potential charging decision 
against a public auditing firm (as distinct from individuals within a 
firm), the DOJ should inform the SEC prior to bringing criminal charges 
against such a firm.
    The Committee also notes that the larger auditing firms are members 
or affiliates of global networks of firms and rely on these networks to 
serve their global clients. Since the networks are maintained through 
voluntary contractual agreements, the fact that a U.S.-based firm may 
be facing threatening circumstances could lead to the disintegration of 
the network. In this regard, in developing this mechanism, auditing 
firms, regulators, policy makers, and other market participants must 
consider the practical implications resulting from the relationship 
between the U.S.-based firms and the global networks.
    Recommendation 3. Recommend the PCAOB, in consultation with 
auditors, investors, public companies, audit committees, boards of 
directors, academics, and others, determine the feasibility of 
developing key indicators of audit quality and effectiveness and 
requiring auditing firms to publicly disclose these indicators. 
Assuming development and disclosure of indicators of audit quality are 
feasible,

[[Page 44347]]

require the PCAOB to monitor these indicators.
    A key issue in the public company audit market is what drives 
competition for audit clients and whether audit quality is the most 
significant driver. Currently, there is minimal publicly available 
information regarding indicators of audit quality at individual 
auditing firms. Consequently, it is difficult to determine whether 
audit committees, who ultimately select the auditor, and management are 
focused and have the tools that are useful in assessing audit quality 
that would contribute to making the initial auditor selection and 
subsequent auditor retention evaluation processes more informed and 
meaningful.\255\ In addition, with the majority of public companies 
currently putting shareholder ratification of auditor selection to an 
annual vote, shareholders may also lack audit quality information 
important in making such a ratification decision.\256\
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    \255\ See, e.g., New York Stock Exchange, Listed Company Manual 
Sec.  303A, which the SEC approved on November 4, 2003, for the 
responsibilities of exchange-listed companies' audit committees.
    \256\ Institutional Shareholder Services, U.S. Corporate 
Governance Policy--2007 Updates 3 (2006).
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    The Committee believes that requiring firms to disclose indicators 
of audit quality may enhance not only the quality of audits provided by 
such firms, but also the ability of smaller auditing firms to compete 
with larger auditing firms, auditor choice, shareholder decision-making 
related to ratification of auditor selection, and PCAOB oversight of 
registered auditing firms.
    The Committee recognizes the challenges of developing and 
monitoring indicators of audit quality, especially in light of the 
complex factors driving the potential impact on the incentives of 
market actors, and the resulting effect on competitive dynamics among 
auditors.\257\
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    \257\ If the idea proves to be workable, implementation could be 
a major undertaking for the PCAOB. Developing meaningful quality 
indicators, defining how they should be measured, and rolling out 
the measurement process could take significant PCAOB time and 
effort. Auditing firms, public companies, investors, and academics 
would all likely have valuable ideas as to approaches the PCAOB 
could take. However the indicators were devised, firms would have to 
build their internal processes for measuring the audit quality 
indicators and the PCAOB would have to develop procedures and 
training to monitor those processes.
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    The Committee has considered testimony and comment letters as well 
as other studies and reports in developing this recommendation. A 
possible framework for PCAOB consideration is reviewing annual auditing 
firm reports in other jurisdictions. For example, one auditing firm's 
United Kingdom affiliate lists in its annual report nine ``key 
performance indicators, including average headcount, staff turnover, 
diversity, client satisfaction, audit and non-audit work, proposal win 
rate, revenue, profit, and profit per partner.'' \258\ The Financial 
Reporting Council recently published a paper setting out drivers of 
audit quality.\259\ In addition, the PCAOB also could consider some of 
the factors that auditing firms present to audit committees, such as 
engagement team composition, the nature and extent of firm training 
programs, and the nature and reason for client restatements.\260\
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    \258\ See KPMG LLP, UK Annual Report 2007 46.
    \259\ FRC Update 4.
    \260\ Record of Proceedings (Dec. 3, 2007) (Written Submission 
of Wayne Kolins, National Director of Assurance and Chairman, BDO 
Seidman LLP, 4), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Kolins120307.pdf.
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    The Committee therefore recommends that the PCAOB, in consultation 
with auditors, investors, public companies, audit committees, boards of 
directors, academics, and others, determine the feasibility of 
developing key indicators of audit quality and requiring auditing firms 
to publicly disclose these indicators.\261\ Testimonies and comment 
letters have suggested specific output-based audit quality indicators--
indicators determined by what the auditing firm has produced in terms 
of its audit work, such as number of frauds discovered and nature and 
reason for financial restatements related to time periods when the 
underlying reason for restatement occurred during the auditing firm's 
tenure as auditor for the client- and input-based audit quality 
indicators--indicators of what the auditing firm puts into its audit 
work to achieve a certain result, such as the auditing firm's processes 
and procedures used for detecting fraud, the average experience level 
of auditing firm staff on individual engagements, the average ratio of 
auditing firm professional staff to auditing firm partners on 
individual engagements, and annual staff retention.\262\ The Committee 
believes that the PCAOB should consider both output-based and input-
based indicators.\263\ The

[[Page 44348]]

Committee also recommends that, if the proposal is feasible, the PCAOB, 
through its inspection process, should monitor these indicators.
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    \261\ See, e.g., Deloitte LLP, Comment Letter Regarding Draft 
Report and Draft Report Addendum 29, (June 27, 2008), available at 
http://comments.treas.gov/_files/DeloitteLLPCommentLetter.pdf; 
Ernst & Young LLP, Comment Letter Regarding Draft Report and Draft 
Report Addendum 33-34, (June 27, 2008), available at http://comments.treas.gov/_files/EYACAPCommentLetterFINAL.pdf; Cynthia 
Fornelli, Executive Director, Center for Audit Quality, Comment 
Letter Regarding Draft Report and Draft Report Addendum 36-38, (June 
27, 2008), available at http://comments.treas.gov/_files/CAQCommentletter62708FINAL.pdf (noting that the feasibility study 
should state the overarching objectives of quality indicators, 
consider the differences in firm size, partnership model, audit 
practice scope and audit specialty, and recognize the costs, 
difficulty and complexity involved); Record of Proceedings (June 3, 
2008) (Written Submission of Kenneth Nielsen Goldmann, Capital 
Markets and SEC Practice Director, J.H. Cohn LLP, 4), available at 
http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Goldmann060308.pdf.
    \262\ See, e.g., Anonymous Retired Big 4 partner, Comment Letter 
Regarding Discussion Outline (Nov. 2007) (recommending public 
disclosure of the following audit quality drivers: (1) Average years 
of experience of audit professionals, (2) ratio of professional 
staff to audit partners, (3) chargeable hours per audit 
professional, (4) professional chargeable hours managed per audit 
partner, (5) annual professional staff retention, and (6) average 
annual training hours per audit professional); Matthew J. Barrett, 
Professor of Law, Notre Dame Law School, Comment Letter Regarding 
Draft Report and Draft Report Addendum (June 13, 2008), available at 
http://comments.treas.gov/index.cfm?FuseAction=Home.View&Topic&_id=9&FellowType&_id=1&CurrentPage=1; Dennis Johnson, CFA, Senior 
Portfolio Manager, CalPERS, Comment Letter Regarding Draft Report 
and Draft Report Addendum 3, (June 13, 2008), available at http://comments.treas.gov/_files/200806--13ACAP--addendum--commentltr.pdf 
(suggesting to include, among other things, ``average headcount, 
staff turnover, diversity, client satisfaction, audit and non-audit 
work, proposal win rate, revenue, profit, profit per partner, 
engagement team composition, the nature and extent of training 
programs and the nature and reason for client restatements''); 
Record of Proceedings (Dec. 3, 2007) (Written Submission of Wayne 
Kolins, National Director of Assurance and Chairman, BDO Seidman 
LLP, 4), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Kolins120307.pdf (recommending the 
issuance of regulatory guidance on qualitative factors to be used by 
audit committees and other market participants to evaluate auditing 
firms); Record of Proceedings (Dec. 3, 2007) (Written Submission of 
Dennis M. Nally, Chairman and Senior Partner, PricewaterhouseCoopers 
LLP, 6), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Nally120307.pdf (suggesting that 
disclosure of ``key elements that drive audit quality would be a 
useful benefit to the capital markets'' and could include ``firm 
disclosure and discussion of the levels of partner and staff 
turnover, average hours of professional training, risk management 
and compliance measurements, and metrics related to the quality of 
management and firm governance processes''); Anonymous Private 
Investor, Former Auditor, and Former CFO, Comment Letter Regarding 
Draft Report and Draft Report Addendum (May 11, 2008), available at 
http://comments.treas.gov/index.cfm?FuseAction=Home.View&Topic&_id=9&FellowType&_id=1&CurrentPage=2 (recommending that the 
auditor's report disclose, in addition to the location of the office 
conducting the audit, the percentage of office revenue attributed to 
the client, the length of the audit firm's tenure with the client, 
and the length of time until the lead and concurring partner must 
rotate).
    \263\ See, e.g., Matthew J. Barrett, Professor of Law, Notre 
Dame Law School, Comment Letter Regarding Draft Report and Draft 
Report Addendum (June 13, 2008), available at http://comments.treas.gov/index.cfm?FuseAction=Home.View&Topic_id=9&FellowType_id=1&CurrentPage=1 (suggesting that the SEC require 
registrants to publicly disclose any financial fraud uncovered by 
the auditor, including numbers and amount of all audit adjustments, 
and the number of restatements of financial statements with 
unqualified opinions); Joseph V. Carcello, Chair, AAA Task Force to 
Monitor the Activities of the Treasury ACAP Ernst & Young Professor 
and Director of Research--Corporate Governance Center University of 
Tennessee, Jean C. Bedard Timothy B. Harbert Professor of 
Accountancy Bentley College, Dana R. Hermanson Dinos Eminent Scholar 
Chair of Private Enterprise and Professor of Accounting Kennesaw 
State University, Comment Letter Regarding Draft Report and Draft 
Report Addendum 10 (May 15, 2008), available at http://comments.treas.gov/_files/ACAPCommentLetterMay152008.pdf 
(suggesting that the Committee consider ``output-based measures of 
audit quality'' such as fewer client frauds, fewer client 
restatements, less earnings management, and more accurate auditor 
reporting before a bankruptcy filing); Record of Proceedings (Dec. 
3, 2007) (Written Submission of Wayne Kolins, National Director of 
Assurance and Chairman, BDO Seidman LLP, 2), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Kolins120307.pdf; Gilbert F. Viets, Comment Letter Regarding Draft 
Report and Draft Report Addendum 2-3, (May 19, 2008), available at 
http://comments.treas.gov/_files/TREASURYLETTER3.doc (suggesting 
disclosure of instances where the auditor found and corrected, prior 
to their disclosure, material financial statement errors and the 
firms' ``acceptable audit risk'' in discovering material errors). 
The Committee recognizes the concerns noted by certain testimony and 
commentary regarding the use of audit quality indicators. See, e.g., 
Cynthia M. Fornelli, Executive Director, Center for Audit Quality, 
Comment Letter Regarding Draft Report and Draft Report Addendum 37 
(June 27, 2008), available at http://comments.treas.gov/_files/CAQCommentletter62708FINAL.pdf (``Any feasibility study should also 
consider--as the [UK's Financial Reporting Council] has recognized--
how the key indicators being considered may vary due to factors 
unrelated to audit quality.''); Wayne Kolins, National Director of 
Assurance and Chairman, BDO Seidman, LLP, Comment Letter Regarding 
Draft Report and Draft Report Addendum 11 (June 27, 2008), available 
at http://comments.treas.gov/_files/ResponsetoAdvisoryCommittee0627final.PDF (``Disclosure of indicators 
would only be meaningful if they have a clear and demonstrable 
relationship to audit quality and, even if they do, only if they can 
be understood in the context of a particular audit.''); Record of 
Proceedings (June 3, 2008) (Written Submission of Brian O'Malley, 
Senior Vice President and General Auditor, Nasdaq Stock Market, 3), 
available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/OMalley060308.pdf (cautioning against an 
auditing industry managing itself towards some set of preconceived 
metrics that might sway them from investor protection).
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    Recommendation 4. Promote the understanding of and compliance with 
auditor independence requirements among auditors, investors, public 
companies, audit committees, and boards of directors, in order to 
enhance investor confidence in the quality of audit processes and 
audits.
    The Committee considered testimony and comment letters regarding 
the significance of the independence of the public company auditor--
both in fact and appearance--to the credibility of financial reporting, 
investor protection, and the capital formation process.\264\ The 
auditor is expected to offer critical and objective judgment on the 
financial matters under consideration, and actual and perceived absence 
of conflicts is critical to that expectation.
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    \264\ See, e.g., Record of Proceedings (Dec. 3, 2007) (Written 
Submission of Dennis M. Nally, Chairman and Senior Partner, 
PricewaterhouseCoopers LLP, 5), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Nally120307.pdf 
(``Independence forms the bedrock of credibility in the auditing 
profession, and is essential to the firms' primary function in the 
capital markets.''); Record of Proceedings (Feb. 4, 2008) (Written 
Submission of Edward E. Nusbaum, Chief Executive Officer, Grant 
Thornton LLP, and Chairman, Grant Thornton International Board of 
Governors, 3), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Nusbaum020408.pdf.
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    The Committee believes that auditors, investors, public companies, 
and other market participants must understand the independence 
requirements and their objectives, and that auditors must adopt a 
mindset of skepticism when facing situations that may compromise their 
independence. In that regard, the Committee makes the following 
recommendations:
    (a) Compile the SEC and PCAOB independence requirements into a 
single document and make this document website accessible. The American 
Institute of Certified Public Accountants (AICPA) and state boards of 
accountancy should clarify and prominently note that differences exist 
between the SEC and PCAOB standards (applicable to public companies) 
and the AICPA and state standards (applicable in all circumstances, but 
subject to SEC and PCAOB standards, in the case of public companies) 
and indicate, at each place in their standards where differences exist, 
that stricter SEC and PCAOB independence requirements applicable to 
public company auditors may supersede or supplement the stated 
requirements. This compilation should not require rulemaking by either 
the SEC or the PCAOB because it only calls for assembly and compilation 
of existing rules.
    In the United States, various oversight bodies have authority to 
promulgate independence requirements, including the SEC and PCAOB for 
public company auditors, and the AICPA and state boards of accountancy 
for public and private company auditors.\265\ The Committee recommends 
that the SEC and PCAOB compile and publish their independence 
requirements in a single document and make this document easily 
accessible on their websites.\266\ The Committee recommends that the 
AICPA and state boards of accountancy clarify and prominently state 
that differences exist between their standards and those of the SEC and 
the PCAOB and indicate, at each place in their standards where 
differences exist, that additional SEC and PCAOB independence 
requirements applicable to public company auditors may supersede or 
supplement the stated requirements.\267\
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    \265\ See, e.g., SEC Regulation S-X, Article 2, Rule 2-01--
Qualifications of Accountants, 17 CFR Sec.  210.2-01; SEC Financial 
Reporting Policies, Sec. 602.01--Interpretations Relating to 
Independence; SEC Final Rule, Amendments to SEC Auditor Independence 
Requirements ``Strengthening the Commission's Requirements Regarding 
Auditor Independence'', SEC Rel. No 33-8183 (2003); SEC Final Rule, 
Revision of the Commission's Auditor Independence Requirements, SEC 
Rel. No. 33-7919 (2001); PCAOB, Interim Independence Standards, ET 
Sections 101 and 191; Independence Standards Board, Independence 
Standards Nos. 1, 2, and 3, and ISB Interpretations 99-01, 00-1, and 
00-2; PCAOB Bylaws and Rules, Section 3, Professional Standards; 
AICPA Code of Professional Conduct, ET Sections 100-102.
    \266\ See, e.g., Cynthia Fornelli, Executive Director, Center 
for Audit Quality, Comment Letter Regarding Draft Report and Draft 
Report Addendum 38-39, (June 26, 2008), available at http://comments.treas.gov/_files/CAQCommentletter62708FINAL.pdf (agreeing 
that ``such a document would make it easier for auditors to 
understand the independence requirements that apply to them''); 
Record of Proceedings (June 3, 2008) (Written Submission of Brian 
O'Malley, Senior Vice President and General Auditor, Nasdaq Stock 
Market, 3), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/OMalley060308.pdf (stating that 
the Recommendation would be a ``great asset''); 
PricewaterhouseCoopers, Comment Letter Regarding Draft Report and 
Draft Report Addendum 19, (June 30, 2008), available at http://comments.treas.gov/_files/PwCCommentLtrTreasCmtDraftandAddendum63008.pdf (supporting this 
Recommendation). Note that the Committee received testimony and 
comment letters suggesting that the Department of Labor independence 
rules be included in this compilation. See, e.g. Deloitte LLP, 
Comment Letter Regarding Draft Report and Draft Report Addendum 30, 
(June 27, 2008), available at http://comments.treas.gov/_files/DeloitteLLPCommentLetter.pdf; Record of Proceedings (June 3, 2008) 
(Written Submission of Kenneth Nielsen Goldmann, Capital Markets and 
SEC Practice Director, J.H. Cohn LLP, 7), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Goldmann060308.pdf. (recommending the inclusion of the Department of 
Labor and others in the Recommendation); Mayer Hoffman McCann P.C., 
Comment Letter Regarding Draft Report and Draft Report Addendum 5, 
(June 17, 2008), available at http://comments.treas.gov/_files/MayerHoffmanMcCannCommentLetter.pdf (suggesting the Recommendation 
include the SEC, PCAOB, AICPA, DOL, and GAO).
    \267\ The Committee took note of concerns expressed regarding 
independence issues from a variety of perspectives. See, e.g., 
Andrew D. Bailey, Jr., Professor of Accountancy--Emeritus, 
University of Illinois, and Senior Policy Advisor, Grant Thornton 
LLP, Comment Letter Regarding Discussion Outline 9 (Jan. 30, 2008), 
available at http://comments.treas.gov/_files/BAILEYCOMMENTSONTREASURYADVISORYCOMMITTEEOUTLINEFINALSUBMISSION13008.
doc (suggesting simplifying the current SEC independence standards); 
Dana R. Hermanson, Kennesaw State University, Comment Letter 
Regarding Discussion Outline 1 (Oct. 4, 2007), available at http://comments.treas.gov/_files/HermansonStatement10407.pdf (stating that 
consulting and auditing were incompatible and posed a significant 
threat to the long-term sustainability of the profession); Record of 
Proceedings (Dec. 3, 2007) (Written Submission of Dennis M. Nally, 
Chairman and Senior Partner, PricewaterhouseCoopers LLP, 5), 
available at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Nally120307.pdf (``The independence rules 
should be re-evaluated periodically to examine whether the rules 
continue to strike the right balance between cost burden and 
benefit.''); Record of Proceedings (Dec. 3, 2007) (Written 
Submission of James S. Turley, Chairman and Chief Executive Officer, 
Ernst & Young LLP, 5), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Turley120307.pdf 
(recommending consideration of potential changes to aspects of 
independence rules). Note that one witness called for adoption of a 
single set of independence rules for public and private companies. 
See, e.g., Record of Proceedings (June 3, 2008) (Written Submission 
of Kurt N. Schacht, Managing Director, Centre for Financial Market 
Integrity, CFA Institute, 6), available at http://www.treas.govoffices/domestic-finance/acap/submissions/06032008/Schacht060308.pdf.

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[[Page 44349]]

    (b) Develop training materials to help foster and maintain the 
application of healthy professional skepticism with respect to issues 
of independence and other conflicts among public company auditors, and 
inspect auditing firms, through the PCAOB inspection process, for 
independence training of partners and mid-career professionals.
    The Committee considered testimony and commentary that, to comply 
with the detailed and complex \268\ requirements, some auditors may be 
taking a ``check the box'' approach to compliance with independence 
requirements, and losing focus on the critical need to exercise 
independent judgment or professional skepticism about whether the 
substance of a potential conflict of interest may compromise integrity 
or objectivity, or create an appearance of doing so.\269\
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    \268\ See, e.g., Record of Proceedings (Dec. 3, 2007) (Written 
Submission of Michael P. Cangemi, President and Chief Executive 
Officer, Financial Executives International), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Cangemi120307.pdf; Financial Executives International, 
Recommendations to ADDRESS Complexity in Financial Reporting (Mar. 
2007).
    \269\ See, e.g., Consideration of Fraud in a Financial 
Statement, Interim Auditing Standard AU 316, Paragraph.13 (Pub. 
Company Accounting Oversight Bd. 2002) (``Professional skepticism is 
an attitude that includes a questioning mind and a critical 
assessment of audit evidence.'').
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    The Committee recommends that auditing firms develop appropriate 
independence training materials for auditing firms, especially partners 
and mid-career professionals, that help to foster a healthy 
professional skepticism with respect to issues of independence that is 
objectively focused and extends beyond a ``check the box'' 
mentality.\270\ The training materials should focus on lessons learned 
and best practices observed by the PCAOB in its inspection process and 
the experience of other relevant regulators as appropriate. To ensure 
the implementation of this training on an overall basis, the PCAOB 
should review this training as part of its inspection program.
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    \270\ See, e.g., Record of Proceedings (June 3, 2008) (Written 
Submission of Dan Guy, Former Vice President, Professional Standards 
and Services, American Institute of Certified Public Accountants, 
3), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Guy060308.pdf (stating that auditors fail to 
detect material financial statement fraud due to, among other 
things, the lack of professional skepticism); Record of Proceedings 
(June 3, 2008) (Written Submission of Brian O'Malley, Senior Vice 
President and General Auditor, Nasdaq Stock Market, 3), available at 
http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/OMalley060308.pdf (noting that ``auditor skepticism 
throughout an auditor's career is the keystone, all incentives and 
disincentives should be focused on its achievement''); 
PricewaterhouseCoopers, Comment Letter Regarding Draft Report and 
Draft Report Addendum 19, (June 30, 2008), available at http://comments.treas.gov/_files/PwCCommentLtrTreasCmtDraftandAddendum63008.pdf (stating that 
``independence forms the bedrock of credibility in the auditing 
profession, and is essential to the firm's primary function in the 
capital markets'').
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    Recommendation 5. Adopt annual shareholder ratification of public 
company auditors by all public companies.
    Although not statutorily required, the majority of public companies 
in the United States--nearly 95% of S&P 500 and 70%-80% of smaller 
companies--put auditor ratification to an annual shareholder vote.\271\ 
Even though ratification of a company's auditor is non-binding, the 
Committee learned that corporate governance experts consider this a 
best practice serving as a ``check'' on the audit committee.\272\ 
Pursuant to Sarbanes-Oxley, audit committees of exchange-listed 
companies must appoint, compensate, and oversee the auditor.\273\ SEC 
rules implementing Sarbanes-Oxley specifically permit shareholder 
ratification of auditor selection.\274\ Ratification allows 
shareholders to voice a view on the audit committee's work, including 
the reasonableness of audit fees and apparent conflicts of interest.
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    \271\ Institutional Shareholder Services, ISS U.S. Corporate 
Governance Policy--2007 Update 3 (Nov. 15, 2006).
    \272\ Institutional Shareholder Services, Request for Comment--
Ratification of Auditors ON THE Ballot 1.
    \273\ Sarbanes-Oxley Act, 15 U.S.C. Sec.  78j-1 (2002).
    \274\ SEC, Final Rule: Standards Related to Listed Audit 
Committees. Release No. 33-8220 (Apr. 9, 2003).
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    The Committee believes shareholder ratification of auditor 
selection through the annual meeting and proxy process can enhance the 
audit committee's oversight to ensure that the auditor is suitable for 
the company's size and financial reporting needs.\275\ This may enhance 
competition in the audit industry. Accordingly, the Committee 
encourages such an approach as a best practice for all public 
companies. The Committee also urges exchange self-regulatory 
organizations to adopt such a requirement as a listing standard. In 
addition, to further enhance audit committee oversight and auditor 
accountability, the Committee recommends that disclosure in the company 
proxy statement regarding shareholder ratification include the name(s) 
of the senior auditing partner(s) staffed on the engagement.\276\ The

[[Page 44350]]

Committee notes that there might be other audit-engagement specific 
data, such as the auditor's tenure with a specific public company 
client, useful to shareholders and audit committees.
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    \275\ See also FRC Update 5, 7 (recommending that ``the FRC 
should amend the section of the Smith Guidance dealing with 
communications with shareholders to include a requirement for the 
provision of information relevant to the auditor re-selection 
decision,'' and that ``investor groups, corporate representatives, 
firms and the FRC should promote good practices for shareholder 
engagement on auditor appointment and re-appointments'').
    \276\ See, e.g., Andrew D. Bailey, Jr., Professor of 
Accountancy--Emeritus, University of Illinois, and Senior Policy 
Advisor, Grant Thornton LLP, Comment Letter Regarding Draft Report 
and Draft Report Addendum 4, (June 16, 2008), available at http://comments.treas.gov/_files/TREASURYLETTER3BAILEY61608.doc (``Knowing 
that any failure will be clearly and unambiguously associated with 
the named individuals and that the veil of the firm will not be 
there to obscure their responsibility may be of value.''); Record of 
Proceedings (June 3, 2008) (Written Submission of Jean C. Bedard, 
Timothy B. Harbert Professor of Accounting, Department of 
Accountancy, Bentley College, 11), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Bedard060308.pdf (supporting the Recommendation and suggesting 
further that the Committee recommend an advisory shareholder vote on 
each member of the audit committee for companies that have not 
adopted a majority vote provision for all board members, and that 
the engagement partner sign both his or her name as well as the 
firm's name to the audit report, making it a more direct public 
statement of responsibility than proxy disclosure); Paul Lee, 
Director, Hermes Equity Ownership Services Limited, Comment Letter 
Regarding Draft Report and Draft Report Addendum 4, (June 13, 2008), 
available at http://comments.treas.gov/_files/ACAPresponse13Jun08.pdf (stating that an auditor should not continue 
in office unless it receives a majority of the votes of shareholders 
in favor of ratification, and noting that accountability and 
professional judgment would be increased if auditors' reports were 
signed by individuals as well as in the names of the relevant audit 
firm); Record of Proceedings (June 3, 2008) (Written Submission of 
Kurt N. Schacht, Managing Director, Centre for Financial Market 
Integrity, CFA Institute, 6), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Schacht060308.pdf 
(supporting the Recommendation and further recommending disclosure 
of other key engagement individuals in addition to the lead audit 
partner, and transparent disclosure of audit quality, firm financial 
strength, and professional skill level at least to the audit 
committee, if not publicly). But c.f., Deloitte LLP, Comment Letter 
Regarding Draft Report and Draft Report Addendum 21-22, (June 27, 
2008), available at http://comments.treas.gov/_files/DeloitteLLPCommentLetter.pdf (noting that the Recommendation goes 
against the team nature of audits, raises personal security and 
privacy concerns, and is unrelated to audit quality); Ernst & Young 
LLP Comment Letter Regarding Draft Report and Draft Report Addendum 
28, (June 27, 2008), available at http://comments.treas.gov/&lowbar;files/EYACAPCommentLetterFINAL.pdf; Mayer Hoffman McCann 
P.C., Comment Letter Regarding Draft Report and Draft Report 
Addendum 3, (June 17, 2008), available at http://comments.treas.gov/_files/MayerHoffmanMcCannCommentLetter.pdf (suggesting that 
``[o]ther individuals involved in the audit might actually feel less 
responsibility if only the engagement and concurring partners sign 
the report or only top partners are named, precisely the opposite of 
what should be encouraged''); David McDonnell, Chief Executive 
Officer, Grant Thornton International Ltd, and Edward E. Nusbaum, 
Chief Executive Officer, Grant Thornton LLP, and Chairman, Grant 
Thornton International Ltd Board of Governors, Comment Letter 
Regarding Draft Report and Draft Report Addendum 4, (June 27, 2008), 
available at http://comments.treas.gov/_files/GTCommentlettertoACAPJune2008_FINAL.pdf (noting the team effort 
aspect of audits and stating that partners may be unwilling to 
accept the added risk, personal security issues, and privacy 
issues). As discussed above, the Committee also believes that this 
ratification process would be made more meaningful if accompanied by 
the development and disclosure of key indicators of audit quality.
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    Recommendation 6. Enhance regulatory collaboration and coordination 
between the PCAOB and its foreign counterparts, consistent with the 
PCAOB mission of promoting quality audits of public companies in the 
United States.
    The globalization of the capital markets has compelled regulatory 
coordination and collaboration across jurisdictions. Regulators of 
public company auditors are no exception, as companies increasingly 
seek investor capital outside their home jurisdictions and the larger 
auditing firms create, expand, and, in some audits, increasingly rely 
on global networks of affiliates in order to provide auditing and other 
services to companies operating in multiple jurisdictions.\277\ The 
Committee considered commentary regarding the PCAOB's regulatory role 
on a global basis.\278\
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    \277\ See Record of Proceedings (Feb. 4, 2008) (Written 
Submission of Cynthia M. Fornelli, Executive Director, Center for 
Audit Quality, 16), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Fornelli020408.pdf 
(noting the ``growing consensus that regulators on every continent 
would be well served by working more closely together in the 
interest of improving worldwide audit quality''); PCAOB Press 
Release, PCAOB Meets with Asian Counterparts to Discuss Cooperation 
on Auditor Oversight (Mar. 23, 2007), available at http://www.pcaobus.org/News_and_Events/News/2007/03-23.aspx (``The PCAOB 
strongly believes that dialogue and cooperation among auditor 
regulators are critical to every regulator's ability to meet the 
challenges that come with the increasingly complicated and global 
capital markets.'').
    \278\ See, e.g., PCAOB Briefing Paper, Oversight of Non-U.S. 
Public Accounting Firms (Oct. 28, 2003); PCAOB Final Rules Relating 
to the Oversight of Non-U.S. Public Accounting Firms, PCAOB Rel. No. 
2004-005 (June 9, 2004); Request for Public Comment on Proposed 
Policy Statement: Guidance Regarding Implementation of PCAOB Rule 
4012, PCAOB Rel. No. 2007-001 (Dec. 5, 2007); PCAOB Chairman Mark 
Olson and EU Commissioner Charlie McCreevy Meet to Discuss 
Furthering Cooperation in the Oversight of Audit Firms, PCAOB Press 
Rel. (March 6, 2007); PCAOB Meets with Asian Counterparts to Discuss 
Cooperation on Auditor Oversight, PCAOB Press Rel. (Mar. 23, 2007); 
Establishment of the International Forum of Independent Audit 
Regulators, Haut Conseil du Commissariat aux Comptes Press Rel. 
(Sep. 15, 2006); PCAOB Enters into Cooperative Arrangement with the 
Australian Securities and Investments Commission, PCAOB Press Rel. 
(July 16, 2007); Board Establishes Standing Advisory Group, PCAOB 
Press Rel. (Apr. 15, 2004).
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    The PCAOB has the statutory responsibility for ensuring quality 
audits of public companies. In a world of global business operations 
and globalized capital markets, the PCAOB benefits from cooperation 
with foreign auditing firm regulators (many created and modeled after 
the PCAOB) to accomplish its inspections of registered foreign auditing 
firms, including firms that are members of global auditing firm 
networks.
    In May 2007, the PCAOB hosted its first International Auditor 
Regulatory Institute where representatives from more than 40 
jurisdictions gathered to learn more about PCAOB operations. In 2006, 
the PCAOB formally joined the International Forum of Independent Audit 
Regulators, created to encourage regulatory collaboration and sharing 
of regulatory knowledge and experience.
    The Committee believes that these types of global regulatory 
coordination and cooperation are important elements in making sure 
public company auditing firms of all sizes are contributing effectively 
to audit quality. The Committee strongly supports the efforts of the 
PCAOB to enhance the efficiency and effectiveness of its programs by 
communicating with foreign regulators and participating in global 
regulatory bodies. The Committee urges the PCAOB and its foreign 
counterparts to continue to improve regulatory cooperation and 
coordination on a global basis.\279\
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    \279\ See, e.g., Joseph Carcello, Chair, AAA Task Force to 
Monitor the Activities of the Treasury ACAP Ernst & Young Professor 
and Director of Research--Corporate Governance Center University of 
Tennessee, Jean C. Bedard Timothy B. Harbert Professor of 
Accountancy Bentley College, Dana R. Hermanson Dinos Eminent Scholar 
Chair of Private Enterprise and Professor of Accounting Kennesaw 
State University, Comment Letter Regarding Draft Report and Draft 
Report Addendum 11, (May 15, 2008), available at http://comments.treas.gov/_files/ACAPCommentLetterMay152008.pdf (agreeing 
with the Recommendation); Record of Proceedings (June 3, 2008) 
(Written Submission of Brian O'Malley, Senior Vice President and 
General Auditor, Nasdaq Stock Market, 4), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/OMalley060308.pdf (agreeing with the Recommendation); Record of 
Proceedings (June 3, 2008) (Written Submission of Kurt N. Schacht, 
Managing Director, Centre for Financial Market Integrity, CFA 
Institute, 6), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Schacht060308.pdf (agreeing with 
this ``most important'' Recommendation).
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    In addition, the Committee recognizes the challenges that the 
globalized regulatory environment creates for smaller firms, 
particularly with respect to the increasing acceptance of IFRS.\280\ 
The Committee believes that regulators and policy makers must recognize 
the importance of including smaller firms in international roundtables, 
discussions, and policy making decisions.\281\
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    \280\ Record of Proceedings (June 3, 2008) (Questions for the 
Record of Mr. Kenneth Nielsen Goldmann, Capital Markets and SEC 
Practice Director, J.H. Cohn LLP, 21-22 (June 30, 2008)), available 
at http://www.treas.gov/offices/domestic-finance/acap/agendas/QFRs-6-3-08.pdf (noting the difficulty and costs associated with 
implementing IFRS for smaller firms); Record of Proceedings (June 3, 
2008) (Questions for the Record of Mr. Kurt N. Schacht, Managing 
Director, Centre for Financial Market Integrity, CFA Institute, 73-
74 (June 30, 2008)), available at http://www.treas.gov/offices/domestic-finance/acap/agendas/QFRs-6-3-08.pdf (stating the 
difficulty in maintaining competence in IFRS, GAAP, and local/
national standards).
    \281\ See, e.g., Record of Proceedings (June 3, 2008) (Written 
Submission of Kurt N. Schacht, Managing Director, Centre for 
Financial Market Integrity, CFA Institute, 3), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Schacht060308.pdf (stating that demonstrating technical competence 
in international matters is of increased importance especially for 
smaller firms).

[FR Doc. E8-17441 Filed 7-29-08; 8:45 am]
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