Speaking at a meeting of the Securities Regulation Institute, Harvey Pitt, Chairman of the Securities & Exchange Commission (SEC), spelled out some of the details of his plan to reform the accounting profession. The Chairman’s remarks about the new oversight board were carefully chosen to cut through the oft-times esoteric terminology known to many as “SEC-speak.” But it soon became clear that accountants and auditors will need to learn a few new words, including the following:
- Oversight by a “public accountability board.”
An essential plank in the SEC’s platform of reforms is the creation of a new “public accountability board” to take over the functions of auditor discipline and quality control. After acknowledging some initial misunderstandings, Chairman Pitt spelled out exactly what this entails. “We are suggesting, without always being clearly heard,” he explained, “regulation by the private sector but not by the profession.” In a letter to the Public Oversight Board (POB), he clarified that this does not rule out a place for the POB. In his speech, he described the new board as one built on the model established by the POB.
- “Unaffiliated with the accounting profession.”
A critical aspect of the SEC's plan, as Chairman Pitt sees it, is that a significant majority of the members of the new disciplinary body will be “unaffiliated with the accounting profession,” a concept that seems to be closely tied to funding. Unlike the POB, the new private-sector public accountability board will not be funded through fees paid by accounting firms to the American Institute of CPAs, at least not entirely. “The fact that some funding comes from accounting firms is a positive, not a negative,” said Chairman Pitt. “But only if the funding doesn’t give the profession influence or control over the operations or decisions of the new Board.”
- Development of a less “thaumaturgic” audit model.
Chairman Pitt faults current audit procedures for being misfocused on a nonexistent "thaumaturgic" or magical number that diverts attention from a company's trends and unfolding, dynamic situations. The SEC's plans to remedy this include replacing the current peer review process for members of the AICPA’s SEC Practice Section with a process that builds on the current system but has a different mindset and is not conducted by accounting firms. In Chairman Pitt's words, “We need a group that can look at accounting failures from the perspective of how to learn from any mistakes that occurred, and how to improve, firm-by-firm, the way the profession continuously upgrades its methodologies, systems and approaches.”
Chairman Pitt said he recognizes there was some confusion (SEC-speak for criticism) over the plans announced last week. He characterized his announcement as the beginning of a dialogue, rather than a final proposal. The first step is to get everyone speaking the same language.