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James Doty: New PCAOB chairman works to increase audit enforcement initiatives

Mar 21st 2011
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To say that James Doty has had a lot on his plate during his first six weeks as chairman of the Public Company Accounting Oversight Board (PCAOB) would be an understatement. Jason Bramwell reports.

"I would like to have people see clearly that we are doing things to improve audit quality and protect investors", Doty told AccountingWEB. "This involves looking at what our inspections’ process yields, making an analysis of it, finding trends and corporate conduct patterns, and looking at which practices are emerging that are consistent with better audits and which are not."

Established under the Sarbanes-Oxley Act of 2002 – which was enacted by Congress following the corporate and accounting scandals at Enron Corp., Tyco International Ltd., Adelphia Communications Corp., and WorldCom – the PCAOB is a nonprofit corporation that oversees the audits of public companies and broker-dealers in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports. The industry had been self-regulated.

Doty, who started as PCAOB chairman February 1 after a lengthy career as a corporate lawyer and partner at Washington, D.C.-based law firm Baker Botts LLP and a two-year stint as general counsel of the U.S. Securities and Exchange Commission (SEC), said his office just launched an inspection and oversight program for auditors of broker-dealers, as was required by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

"We still need to get through a number of new standards, some of which are in the areas that are the most burning issues for financial reporting and disclosure, such as the auditor’s reporting model and communications with audit committees", he added. "We are focused on recruiting, as well, to deal with many of our new and growing responsibilities, particularly for inspections.

"We also have the aftermath of the financial crisis to deal with: What was missed? What should auditors have been looking for?" Doty continued. "We need to understand what that financial collapse teaches us about the audit process and where it’s going. We have to think about all that and put more boots on the ground."

Doty said the PCAOB is working with other countries to improve its ability to inspect auditors working overseas, especially in China. This past January, the PCAOB reached an agreement with the Professional Oversight Board in the United Kingdom to oversee auditors and public accounting firms that practice in the two regulators’ respective jurisdictions.

"We’ve got to deal with our foreign challenges, having access to inspect firms in the European Union and China, and what challenges they pose for audit quality. We want to look not just retrospectively, but also looking forward at where the audit profession is going", he stated. "The PCAOB is actively reaching out to investors and other users of financial statements to give them more information about the audit environment for companies from the China region that may access the U.S. markets through reverse merger transactions."

According to the PCAOB, of the 603 reported reverse merger transactions reported between January 2007 and March 31, 2010, 159 involved companies from the China region; the remaining 444 transactions involved primarily U.S. companies. However, the board is currently prevented from conducting inspections of the U.S.-related audit work of PCAOB-registered firms in China.

This summer, the PCAOB will start discussions on a strategic plan and budget for a fraud center, according to Doty.

"Encouraging academic research and management of resources aimed toward producing unique perspectives on the audit function is very important to the board", he said.

Doty said his time as general counsel of the SEC – the agency that oversees the PCAOB – from 1990 to 1992 gave him important insight into the process of drafting financial regulations.

"In order to truly comprehend how to distinguish sound regulatory decisions from bad ones, one must have firsthand experience with the process of making good regulatory judgments – whether it involves rulemaking, allowing exemptions, enforcement actions, or other related tasks", he said. "I anticipate working extensively with the SEC. I have a strong relationship with Chairman [Mary] Schapiro and the other commissioners. This will become a meaningful part of the contributions I hope to make while serving on the board."

Doty joined the corporate department of Baker Botts in 1969 and practiced there until 1987, when he moved from Houston to Washington to direct the law firm’s corporate practice.

During his tenure at Baker Botts, Doty represented publicly traded companies, investment banks, and securities firms – often before the SEC – in regulatory, enforcement, and compliance matters. His clients included Citigroup Inc., Conseco Inc., Invesco Ltd., Reliant Energy, and UnitedHealth Group Inc. In 2003, Doty led an independent investigative team that looked into whether accounting fraud was committed at mortgage finance company Freddie Mac.

"Audit quality is fundamental to much of capital market health. I’ve lived through audit collapses, and I have a great deal of regard for the independent attestation function,” he said. "The only thing auditors have is their independence. It gives them enormous importance in the financial system and enormous power. It’s not a power we want to see replaced by a governmental agency.

"I’ve had a very satisfactory, interesting legal career, but I’m not in a position where I need to be thinking about what my next job will be", Doty continued. "This is my last job, and I want to do it justice."

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