Fraud, Compensation Top PCAOB Priority List

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The Public Company Accounting Oversight Board (PCAOB) expects to focus on fraud in its 2004 inspections, which should begin in May and end in the fall.

PCAOB Chairman William McDonough, speaking at the annual AICPA conference in Washington, D.C. Friday, said inspectors will concentrate on whether auditors are uncovering fraud at public companies, the Wall Street Journal reported. A number of individual corporate audits will be studied, and compensation for audit partners and employees will be under the microscope, he said.

The PCAOB expects to inspect about 200 audit firms a year. The top eight accounting firms will be inspected annually, with smaller ones being examined every three years.

George Diacont, PCAOB registration and inspections director, told accountants that reviewing pay is "absolutely essential." He said inspectors want to know if audit firms are compensating employees for sales and marketing success over technical expertise. Adequate documentation, abusive tax shelters, and evaluation of risk and adherence to professional standards will also be studied.

"We will pry into your records and your work habits," McDonough said in prepared remarks. He urged accountants to work with the new board and help restore investor confidence, even though some may feel that they are getting a "bum rap."

He said most accountants are honest and were stung by Congress' decision — after a string of massive accounting scandals — to appoint the oversight board instead of allowing self-regulation to continue. "Many of you think this is a bum rap and you may well be right," he said.

The PCAOB has finished the inspections this year of the nation's four largest accounting firms — Deloitte & Touche, Ernst & Young, KPMG and PricewaterhouseCoopers. Those findings won't be publicly released if violations are corrected within one year, although disciplinary actions could result.

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