State Board Report

October 2008

Though the banking turmoil kept him from staying on the September 26 conference call, US Treasury Secretary Henry Paulson quickly told the Advisory Committee on the Auditing Profession (ACAP) that the accounting profession is “critical to our capital markets” and expressed his gratitude for the time and effort the ACAP members had put into their recommendations. He said he looked forward to reading ACAP’s final report during the upcoming week.

The final report that was approved by ACAP on September 26 contained only a few changes from the draft report of July 22, 2008. Its three sections (Human Capital; Firm Structure and Finances; Concentration and Competition) contain more than 30 recommendations to improve the sustainability of the public company auditing profession. Among the changes from the July draft was the naming of the Public Company Accounting Oversight Board as the host for the proposed center for the sharing of fraud detection experiences.

Several undecided areas are included in the final report. It explains that the Structure and Finance Committee could not agree “as to whether either the historical record or pending litigation supports the argument that litigation threats faced by the auditing profession are sufficient to justify substantial change to the current liability regime.” An earlier draft had proposed requiring all auditrelated litigation involving public companies be brought to federal court. This was not in the final report and NASBA’s letter to the ACAP was quoted: “NASBA notes that giving the federal courts exclusive jurisdiction over private causes of action arising out of some state law claims is without precedent and might be unconstitutional…NASBA maintains that state courts are in the best position to interpret state law claims.”

While the report would require larger auditing firms to produce a public annual report and submit to the PCAOB audited financial statements, the final ACAP report intentionally remained silent as to whether or not the firms’ audited financial statements should be made public. Gaylen Hansen, ACAP member and NASBA Director?at?Large, asked PCAOB Chair Mark Olson how the Board would handle these reports. Mr. Olson responded that the PCAOB has been waiting for the recommendations to be finalized before taking any positions on them. ACAP’s final report was approved by a vote of 14 to one. The single “nay” vote was voiced by Lynn Turner, former SEC chief accountant, who told that the reason for his dissent was he believed that the financial statements should be made public.

The final report does include in Recommendation 2 from the Committee on

Firm Structure and Finances:

Institute the following mechanism to encourage the states to substantially adopt the mobility provisions of the Uniform Accountancy Act, Fifth Edition (UAA). 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.

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.

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