Editor’s note: Bob Broda is Managing Partner of Visage Solutions, LLCOn March 9, 2004 the Public Company Accounting Oversight Board (PCAOB) submitted their recommendations for Guidelines for Public Auditors to the Securities Exchange Commission (SEC) for approval.

The PCAOB indicated that members of the auditing community “are being asked to do things they never had to do before. “

The largest fundamental change for the auditor is the requirement to independently test the effectiveness of internal controls. Instead of just attesting that the financial statements follow GAAP and the auditors fundamentally agree with what management indicates, the auditor now has to indicate if there is more than a remote likelihood that a material misstatement may occur.

Many old-timer accountants indicate that most of the ‘new’ rules and regulations are exactly the same procedures they were taught and were following in the 1960’s and 1970’s. We should also recognize that the auditing community, via the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 1992, created the Internal Control Framework that now must be followed.

I do not think they were wrong in their statement of “‘doing things they never had to do before”. I just don’t think you will find the most pervasive changes of SarbOx in the PCAOB Guidelines or the COSO Framework. The changes that may need to be made may be more fundamental.

Let’s take a look the cultures and operating procedures of today’s big accounting companies. They have created the best model for consulting services both in providing value to its customers and its owners (partners).

Do you have what it takes?

They hire the brightest college graduates. They put them through an extensive boot camp ensuring they know the policies and procedures of the company before they show up on the client’s doorstep. These young recruits work sixty to eighty hours a week trying to prove they have what it takes to be a partner. Being a partner of one of the Final Four accounting companies is very lucrative and those who achieve the brass ring are usually set for life, at least until the Anderson/Enron scandal hit. It is not clear that this pressure to ‘do what ever it takes’ is the environment the SEC or the investors of the client company need or expect from the auditor.

For those unfortunate employees that don’t have what it takes to become partner, all is not lost. These people tend to land on their feet and get senior positions at the auditing firm’s clients. These people have the auditing firm’s policies and culture ingrained in their being. Let’s face it, if they made it through boot camp, they too have been striving for the brass ring. Having an ex-employee at a client site is good for the auditor and since they know what the auditor expects, it is usually good for the client. The problem is, this practice does create some conflict of interest problems. The SEC does recognize this since they mandated that a CEO or a CFO can not be hired directly from the auditing company.

Is there a partner in the house?

The Partner is driven by the auditing company to drive revenue. They are seldom, if ever, assigned full time to any individual client. Even if a partner is on site, they spend a large percentage of their time assisting with other projects and finding new clients. The methodologies that have been developed over the years consist of a number of check lists and data gathering processes that can be reviewed by the partner to ensure the audit is conducted properly. However, to identify business risks and activities to mitigate those risks needs previously seasoned business people. They need to be able to identify and probe into areas where they have not had operational experience. They need to be able to command respect and be able to identify when a senior manager is not being straight forward, and reviewing material after the fact will not allow the partner to recognize those scenarios.

The trusted advisor

Most companies treat their auditor as a trusted advisor. The auditor assists with very difficult tasks and assists solving complex business problems. The PCAOB now is trying to drive a wedge between the auditor and the client. The auditor has to become independent and objective. An advisor looses its objectiveness, since they will not want their recommendations to look wrong. If the auditor has been involved with the company for a period of time and their recommendations are some of the reasons for the company’s success, they will also loose their independence.

For those companies who have been waiting for their external auditor to give them advice on the rulings of the PCAOB and clear direction on how to proceed with implementing internal controls, they may be waiting a long time. It will be a while before the auditing firms figure out what they can tell and what they can’t.

In the mean time, the compliance clock keeps on ticking, even if the extension of the deadlines seems to have taken the pressure off. In consideration of the extension, many companies may discover too late that the level of effort necessary for successfully meeting compliance has been under estimated.

The PCAOB may not have realized just how correct they were when they indicated ‘auditors are being asked to do things they have never done before’.

Visage Solutions are results-focused operations, financial process and risk management consultants who offer extensive real-world business and executive management experience. Visage Solutions offers a suite of services that provide a strategic approach to operations to improve business processes that affect the bottom line. Sarbanes-Oxley related services include OpsAudit• and SingleVUE Methodologies that allow companies to effectively and efficiently comply and manage risk. See www.visagesolutions.com for more information and important links.