Changing How Accounting Industry Operates

U.S. Treasury Secretary Henry M. Paulson plans to set up a panel to recommend ways to increase competitiveness of U.S. capital markets, with limits on liability of public accountants as part of the package.

According to the Wall Street Journal, Paulson will lay out more details this week. He is expected to discuss ways to reduce overlapping regulations and lower risk of litigation for accounting firms.

Robert Steel, Treasury's undersecretary for domestic finance, told the Journal that the liability risk is forcing accounting firms to become rigid in how they audit companies. As a result, the companies become more cautious, even though taking risks can lead to innovations, such as new products, increased productivity and advancements in research and development.

Steel said in an interview with the Journal: “Accounting is a judgment at a point in time. It's not a science. There are estimates and guidelines. If people take risks in business and it turns out that a reasonable risk with everything disclosed doesn't go well, that's not an opportunity to allege that something inappropriate happened."

Another item to be discussed would be a controversial move that allows foreign companies to comply with International Financial Reporting Standards instead of adhering only to Generally Accepted Accounting Principles, or GAAP, which U.S. companies must use.

In a May 10 interview with CNBC, Paulson mentioned possible changes to the Sarbanes-Oxley Act, which spawned the Public Company Accounting Oversight Board (PCAOB), and international accounting standards. “We're seeing (Securities and Exchange Commission) Chairman Cox and the people of the PCAOB take very important steps to reduce the burdens of section 404, which focuses on control systems. You are seeing Chairman Cox also make a very strong statement about the acceptance of IFRF standards, international standards in the U.S. by 2009. And there are a number of other things that are on their drawing board and that we're working on today.”

Treasury's advisory committee, which would be made up of about 25 representatives from accounting, corporations and investor advocates, will be expected to issue recommendations by the end of the year.

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