'Tough Love' Approach Sought For Accounting Firms That Don’t Reform

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Accounting firms should “save themselves” to restore confidence in the industry, but those that don't clean up their practices will face tough penalties, said the head of the new accounting oversight board.

William McDonough, the former Federal Reserve official who heads the Public Company Accounting Oversight Board (PCAOB), said that as a result of a wave of corporate scandals, the public “lost faith in the ability of the accounting industry to govern themselves. They should wish to rise to a new level of virtue. They should wish to save themselves.”

The PCAOB replaces the industry's own regulators. It has subpoena power and the authority to discipline accountants.

Under the PCAOB's rules, firms will be given 12 months to fix problems that show up in the board inspections. Unless the case is particularly egregious, the firm's violations will not be made public. If the board is satisfied with the firm's solution, no further action would be taken. If the fixes are not satisfactory, said McDonough, “Then we have to get very tough.”

Civil penalties may be as high as $750,000 for individual auditors and $15 million for firms, as well as temporary or even permanent suspension from auditing public companies.

Even though the PCAOB has hired only 33 inspectors so far, when about 125 are needed, McDonough said the board should be working at full speed in about a year. Only the Big Four firms have been inspected so far, and they have been cooperative, he said.

He suggested a similar agency also may be needed for the mutual fund industry.

In recent speeches, McDonough has urged accounting firm directors to go beyond mere adherence to the new rules. He tells business executives that Americans are still angry about recent corporate conduct, executive pay in particular.

“It's tough love,” he said. “I think we are being very effective already . . . I'm very, very confident we will be successful.”

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