Yet Another Controversy Hits PCAOB

It seems like the organization charged with oversight of the audits of public companies just can’t stay away from controversy. First it was Harvey Pitt’s approach to naming a PCAOB head – then it was William Webster’s resignation due to undisclosed ties to a company under investigation – then SEC chief accountant Robert Herdman stepped down for his role in the Webster nomination. This time, the newly named chief auditor of the PCAOB is at the center of a controversy surrounding his role as an expert witness in currently pending court cases.

Douglas Carmichael, the new Chief Auditor for the PCAOB and a much sought after expert witness when he was an accounting professor at New York’s Baruch College, had received the green light from the PCAOB Board to fulfill his current obligations as an expert witness against major accounting firms in lawsuits brought by public companies.

"I just don't know what somebody frankly was smoking when they said he could do this."

Carmichael has said that he will only finish those cases in which he has already written a report that contains his opinion. But critics believe that companies that hired him will exploit the status attached to his position, and juries will give extra credence to his testimony now that he has been named "the auditors' auditor."

Critics point to a recent press release by Amerco, who is suing PwC for alleged bad advice, which highlights the PCAOB appointment, and singles out the opinion of Douglas Carmichael, their expert witness.

On the subject of the PCAOB Board providing its approval to continue with these cases, former FASB Chairman Dennis Beresford remarked, "I just don't know what somebody frankly was smoking when they said he could do this." FASB ethics rules prohibit staff from serving as expert witnesses in litigation.

Mr. Carmichael will take unpaid leave from his new position - slated at $425,000 per year - to complete the litigation work, and will have to recuse himself from any PCAOB decisions that may affect any of the current clients for whom he serves as an expert witness.

"Frankly, I'm amazed, I'm a little speechless," Rick Antle, an accounting professor at Yale School of Management, told Bloomberg Media. "There's such an obvious conflict of interest, being a party to litigation at the same time you're the chief adviser to the regulators setting accounting policy."

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