The Public Company Accounting Oversight Board (PCAOB) is seeking public comment on several regulatory initiatives meant to spark a debate about long-standing issues involving auditor independence and credibility. The board wants to improve investor protections without forcing auditors to scrap the profession's business model.  The PCAOB is a nonprofit corporation established by Congress to oversee the audits of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit reports.

According to Juan Padilla of MFR, “The result of many of the new accounting rules issued is that, publicly-traded companies will be looking to secondary providers to serve as advisors and to comply with PCAOB rules.”

The reforms the PCAOB has undertaken in 2011 are meant to push auditors toward being more objective in their dealings with clients. The proposals share the common theme of trying to resolve what PCAOB Chairman James Doty calls a conflict of interest inherent to the profession—the rules say auditors should often take an adversarial stance with the clients, but it's the clients who pay the bills.

The financial dependence of auditors on clients creates an enormous amount of pressure to set aside professional objectivity and skepticism, said Doty, who added that auditors’ failure to be sufficiently skeptical is at the heart of many financial scandals. Doty’s remarks were made during a November 3, 2011 conference sponsored by the New York State Society of Certified Public Accountants. Signs of the conflict of interest are evident throughout the profession, including in routine matters such as the marketing of services to clients.

There are significant problems with alternative business practices based upon splitting an audit firm's ties with its clients, such as moving to a third-party payer model. According to Doty, the problems start with assigning a firm to administer the account that would be needed to disburse funds to pay the auditors. It would also be difficult to devise an approach that would limit disputes over the fees a firm would collect from a client.

Concept Release No. 2011-006, Auditor Independence and Audit Firm Rotation, which was issued in August with a comment period that ends December 14, tries to strengthen independence by breaking long-term auditor-client relationships before they become so entrenched that they erode the auditor's objectivity. Doty said he's aware of the many objections auditors have to mandatory rotation, which he called term limits, but he asked the attendees if they had alternatives that would do as much to achieve the goal of auditor independence.

The document was published in June for a three-month comment period. In his view, expanding the audit report allows regulators to meet investor demands for more information about a company's financial performance. The expanded report is intended to “shift the auditors to a position of public service rather than client service,” he said. “Investors should be able to expect that differences in [auditor] reports reflect differences in the quality of the financial reporting of the company that is subjected to the audit, not differences in the fiber of the audit,” Doty said.

In October, the PCAOB issued Release No. 2011-007, Improving the Transparency of Audits: Proposed Amendments to PCAOB Auditing Standards and Form 2. Comments are due in January. The proposal revives an idea that was debated in Congress while Sarbanes-Oxley was being written. The engagement partner signature rule was dropped from the final law at the behest of lobbying by the audit firms. Doty said the proposal is also intended to satisfy a long-held goal of investors. “It would be naïve to think that any one of these proposals would trigger the cultural change” in the audit profession that is the PCAOB's overall goal, Doty said. “I’m mindful that cultural change is not comfortable. The instruments of regulation that seek to achieve that change can do damage. That’s why we’re not proceeding rapidly.”