US on the path to audit reform

THE DEBATE on audit reform in Europe is not an isolated event. The new man in charge of audit and accounting regulation in the US makes it plain that many of the same questions are being asked across the Atlantic, and reform could follow the in same vein as the EU’s consultation on the issue.

In fact so energetic has the discussion become that James Doty, recently appointed as the new chairman of the Public Company Accounting Oversight Board (PCAOB) – the opposite number to the UK’s Financial Reporting Council (FRC) – expects the US to come up with changes that we in Europe might recognise from our prolonged consultation on what should happen next.

In an interview with Accountancy Age Doty gave some insight of what the future holds under his watch at the US regulator.

He said there were questions being asked “in important venues where thoughtful people discuss things” and that on the agenda was the issue of “what auditors do, what they say they are doing and what people understand about what they do”. He adds that the profession is in a “critically important transition period”, and a “period of self examination”.

Doty is a lawyer and took over the running of the PCAOB in January this year. His legal background has seen him closely tied to financial regulation. During past postings Doty has advised the chief US financial watchdog, the SEC, on projects relating to the “integrity of financial reporting” including, in 2002, on the now famous Sarbanes Oxley Act that attempted to address deficiencies found in the wake of Enron and the collapse of Andersen.

While in practice with Baker Botts, which he joined in 1969, Doty advised big companies on regulation and compliance and even advised the PCAOB last year when opponents challenged its constitutionality.

His academic credentials are impressive. A history student, he was a Rhodes Scholar at Oxford, gained an MA in history from Harvard and then completed his law degree from Yale.

That practice background has earned Doty the observation in blogs that his attention may not entirely be on the interests of investors. He counters this with the observation that he is an investor himself, with money wrapped up in a pension fund.

Doty is now fixed on audit. The issue that is coming under scrutiny is the conduct of auditors, the audit committee, managment and the disclosures that take place once problematic issues are identified.

Emphatically he says: “All that will change.”

He reveals that he has been watching events at the European Commission, where internal markets commissioner Michel Barnier is undertaking a review of audit with a view to bringing about significant reforms. Doty also expresses some respect for the recent work of Stephen Haddrill, chief executive of the UK’s FRC, who has recently overseen the development of new proposals for improving audit through the improvement of transaprency for investors.

Doty maps out a broad direction of travel for change to the profession in the US. He says: “There will be analogues to what Mr Barnier is saying in Europe. There will be many other decisions in many other fora.”

Barnier is concerned about what he calls “hyper concentration” in the audit market and his consultation has sparked discussion around a series of interventionist proposals incuding mandatory rotation of auditors and limiting the proportion of the audit market any one firm can control.

Doty is quick to point out that he doesn’t believe that the size of the big audit firms is a determining factor in producing poor audit. “I’m not aware that mere size is an obstacle to audit quality.”

And he also seems less impressed with the issue of audit concentration.

“The big question is what are the practices that are diluting audit quality.”

Indeed his concern is “scepticism” identified by the Financial Services Authority last year. Price competition might lead audit firms to be more “amenable”. In short they will be more “reluctant” to bring issues to the attention of audit committees.

“It’s about scepticism and courage, and self confidence in bringing [difficult issues] to the attention of management and coming to grips with the disclosure requirements.”

His other issue is ensuring that audit firms, especially those working with clients in financial services, actually understand the products they are auditing.

Knowledge and skills are also on the agenda for the PCAOB itself. Since Enron in 2002 he says there never was a time when the regulator sat back and thought things were “under control”. The PCAOB, he says, “never had a vacation from Enorn” and praises the staff for having a “sense of mission”. “There’s a palpable sense of taking the job seriously,” he says.

But he will part company with them soon to make trips to London and Europe. Barnier said last week audit reform had to be global. Doty concedes reform cannot be “siloed and balkanised”. He will need to get to know his counterparts well, and soon.