State Board Report

January 2009

Restoring the public’s trust is a game of inches and yards, Congressman K. Michael Conaway (R –TX) told those attending the “Ensuring Integrity: Third Annual Auditing Conference,” co‐sponsored by the NASBA Center for the Public Trust and Baruch College on December 4. Trust “is gained back in inches, but lost in yards,” he explained. He stressed the need for those in the accounting profession to hold each other accountable.

“It can no longer be acceptable to simply go‐along‐to‐get‐along; you must demand and expect that all accountants – and politicians – uphold the highest ethical standards. Inevitably, individuals will fail. When they do, they must face appropriate and meaningful penalties,” Congressman Conaway stated. “There has never been a more important time for Americans to be able to trust the financial industry…It is your responsibility to not only individually ensure the accuracy of the information you present, but also to collectively ensure that your profession does all it can to maintain the confidence of investors,” he stated.

Baruch College Professor Douglas Carmichael, former PCAOB chief auditor, observed, “Certainly these are interesting times for auditors. As early as November 2007 auditors were being criticized for enforcing auditing standards too rigorously – now they are being criticized for not having done enough.” He moderated a panel of CPAs and attorneys discussing the implementation of AICPA Risk Assessment Standards No. 104‐111 and Consideration of Fraud, No. 99. Professor Carmichael asked if the new standards would affect the auditor’s liability risk.

Michael Young of Wilkie Farr & Gallagher, responded: “What comes through is the auditor has the responsibility for the detection of fraud no matter how GAAS is stated. “ When a case gets into court, “the defense comes down to making excuses or changing the subject,” and, in the typical four‐week trial, the jury “gets sick of hearing excuses,” he observed. The auditor’s mindset should be: “I have the responsibility to detect fraud,” he advised. Work papers will not get the auditor off if fraud is not detected, because clues will seep into those work papers. “How the standard is written really does not make a difference,” Mr. Young said.

David Simko of Ernst & Young, LLP, said the PCAOB’s new risk standards will not change the guidance the firm gives to its auditors substantially. He commented that thanks, in part, to the PCAOB, “It is now hip to be an auditor again.”

Audit firms are viewed as a great place to work internationally, Donald Nicolaisen, co‐chair of the US Treasury Department’s Advisory Committee on the Auditing Profession said in looking at the findings of ACAP. He commented that the audit process is global and its effectiveness “is dependent on a strong global organization.” Mr. Nicolaisen noted that he, and ACAP Co‐Chair Arthur Levitt, had recommended Congress consider establishing a statutory audit firm structure. He forecast that the audit profession would come under the current review of financial institutions and there would be another round of regulatory reform.

In his concluding remarks on the conference, Larry Bridgesmith, CPT board member, said, “We cannot tolerate ethical unaccountability…The soft powers of influence, modeling and mentoring are what impact cultures over time.”

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