Second Draft Report of the Advisory Committee on the Auditing Profession

Federal RegisterJul 30, 2008

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DEPARTMENT OF THE TREASURY

Second Draft Report of the Advisory Committee on the Auditing Profession

AGENCY:

Office of the Undersecretary for Domestic Finance, Treasury.

ACTION:

Notice; request for comments.

SUMMARY:

The Advisory Committee on the Auditing Profession is publishing a Second Draft Report and soliciting public comment.

DATES:

Comments should be received on or before August 26, 2008.

ADDRESSES:

Comments may be submitted to the Advisory Committee by any of the following methods:

Electronic Comments

• Use the Department's Internet submission form (

http://www.treas.gov/offices/domestic-finance/acap/comments

); or

Paper Comments

• Send paper comments in triplicate to Advisory Committee on the Auditing Profession, Office of Financial Institutions Policy, Room 1418, Department of the Treasury, 1500 Pennsylvania Avenue, NW., Washington, DC 20220.

In general, the Department will post all comments on its Web site (

http://www.treas.gov/offices/domestic-finance/acap/comments

) without change, including any business or personal information provided such as names, addresses, e-mail addresses, or telephone numbers. The Department will also make such comments available for public inspection and copying in the Department's Library, Room 1428, Main Department Building, 1500 Pennsylvania Avenue, NW., Washington, DC 20220, on official business days between the hours of 10 a.m. and 5 p.m. Eastern Time. You can make an appointment to inspect comments by telephoning (202) 622-0990. All comments, including attachments and other supporting materials, received are part of the public record and subject to public disclosure. You should submit only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT:

Kristen E. Jaconi, Senior Policy Advisor to the Under Secretary for Domestic Finance, Department of the Treasury, Main Department Building, 1500 Pennsylvania Avenue, NW., Washington, DC 20220, at (202) 927-6618.

SUPPLEMENTARY INFORMATION:

At the request of the two Co-Chairs of the Department of the Treasury's Advisory Committee on the Auditing Profession, the Department is publishing this notice soliciting public comment on the Advisory Committee's Second Draft Report. The text of the Second Draft Report is found in the appendix to this notice and may be found on the Web page of the Advisory Committee at

http://www.treas.gov/offices/domestic-finance/acap/index.shtml.

The appendices to the Second Draft Report are not included in this notice, but may be found on the Web page of the Advisory Committee at

http://www.treas.gov/offices/domestic-finance/acap/index.shtml.

The Second Draft Report contains the Advisory Committee's developed proposals on improving the sustainability of a strong and vibrant public company auditing profession. All interested parties are invited to submit their comments in the manner described above.

Dated: July 25, 2008.

Taiya Smith,

Executive Secretary.

Appendix: Advisory Committee on the Auditing Profession

Second Draft Report—July 22, 2008

The Department of the Treasury

Second Draft Report of the Advisory Committee on the Auditing Profession to the U.S. Department of the Treasury

Table of Contents

I. Transmittal Letter [Placeholder]

II. Committee History

III. Background [Placeholder]

IV. Human Capital

V. Firm Structure and Finances

VI. Concentration and Competition

VII. Separate Statements [Placeholder]

VIII. Appendices

A. Official Notice of Establishment of Committee

B. Committee Charter

C. Treasury Secretary Henry M. Paulson, Jr., Remarks at the Economic Club of New York, New York, NY on Capital Market Competitiveness (Nov. 20, 2006)

D. Treasury Secretary Henry M. Paulson, Jr., Opening Remarks at the Treasury Department's Capital Markets Competitiveness Conference at Georgetown University (Mar. 13, 2007)

E. Paulson Announces First Stage of Capital Markets Action Plan, Treasury Press Release No. HP-408 (May 17, 2007)

F. Paulson: Financial Reporting Vital to U.S. Market Integrity, Strong Economy, Treasury Press Release No. HP-407 (May 17, 2008)

G. Paulson Announces Auditing Committee Members to Make Recommendations for a More Sustainable, Transparent Industry, Treasury Press Release No. HP-585 (Oct. 2, 2007)

H. Under Secretary for Domestic Finance Robert K. Steel, Welcome and Introductory Remarks Before the Initial Meeting of the Department of the Treasury's Advisory Committee on the Auditing Profession, Treasury Press Release No. HP-610 (Oct. 15, 2007)

I. Committee By-Laws

J. List of Witnesses

K. List of Committee Members, Observers, and Staff

L. Working Discussion Outline

M. Working Bibliography

Transmittal Letter

I. Advisory Committee on the Auditing Profession

[September 2008]

The Honorable Hank M. Paulson, Jr., Secretary,

U.S. Department of the Treasury,

1500 Pennsylvania Avenue, NW.,

Washington, DC 20220.

Dear Secretary Paulson:

On behalf of the Department's Advisory Committee on the Auditing Profession, we are pleased to submit our Final Report.

[Contents of letter to be included in Final Report]

Respectfully Submitted on behalf of the Committee,

Arthur Levitt, Jr.

Committee Co-Chair

Donald T. Nicolaisen

Committee Co-Chair

Enclosure

CHAPTER I: COMMITTEE HISTORY

On November 20, 2006, the Secretary of the Treasury, Henry M. Paulson, Jr., delivered a speech on the competitiveness of the U.S. capital markets, highlighting the need for a sustainable auditing profession.

In March 2007, Secretary Paulson hosted a conference at Georgetown University with investors, current and former policymakers, and market participants to discuss issues impacting the competitiveness of the U.S. capital markets, including the sustainability of the auditing profession.

Treasury Secretary Henry M. Paulson, Jr., Remarks on the Competitiveness of U.S. Capital Markets at the Economic Club of New York (Nov. 20, 2006), in Press Release No. HP-174, U.S. Dep't of Treas. (Nov. 20, 2006) (included as Appendix C).

Treasury Secretary Henry M. Paulson, Jr., Opening Remarks at Treasury's Capital Markets Competitiveness Conference at Georgetown University (Mar. 13, 2007), in Press Release No. HP-306, U.S. Dep't of Treas. (Mar. 13, 2007) (included as Appendix D).

On May 17, 2007, Secretary Paulson announced the Department of the Treasury's (the “Department's”) intent to establish the Advisory Committee on the Auditing Profession (the “Committee”) to consider and develop recommendations relating to the sustainability of the auditing profession.

At the same time, Secretary Paulson announced that he had asked Arthur Levitt, Jr. and Donald T. Nicolaisen to serve as Co-Chairs of the Committee. The Department published the official notice of establishment and requested nominations for membership on the Committee in the

Federal Register

on June 18, 2007.

Secretary Paulson announced the Committee's membership on October 2, 2007, with members drawn from a wide range of professions, backgrounds, and experiences.

The Department filed the

Committee's Charter with the Senate Committee on Banking, Housing, and Urban Affairs, the Senate Committee on Finance, the House Committee on Financial Services, and the House Committee on Ways and Means on July 3, 2007.

Press Release, U.S. Dep't of Treas., Paulson Announces First Stage of Capital Markets Action Plan (May 17, 2007) (included as Appendix E); Press Release, U.S. Dep't of Treas., Paulson: Financial Reporting Vital to U.S. Market Integrity, Strong Economy (May 17, 2008) (included as Appendix F).

Notice of Intent to Establish; Request for Nominations, 72 FR 33560 (U.S. Dep't of Treas. June 18, 2007) (included as Appendix A).

Press Release, U.S. Dep't of Treas., Paulson Announces Auditing Committee Members to Make

Recommendations for a More Sustainable, Transparent Industry (Oct. 2, 2007) (included as Appendix G). This press release describes the diverse backgrounds of the Committee members. For a list of Members, Observers, and Staff, see Appendix K.

See Committee Charter (included as Appendix B).

Committee Activities

The Committee held its initial meeting on October 15, 2007 in Washington, D.C.

Then Under Secretary for Domestic Finance Robert K. Steel welcomed the Committee members and provided introductory remarks.

Also on October 15, 2007, the Committee adopted its by-laws

and considered a Working Discussion Outline to be published for public comment.

The Working Discussion Outline identified in general terms issues for the Committee's consideration. A Working Bibliography, updated intermittently throughout the course of the Committee's deliberations, provided the members with articles, reports, studies, and other written materials relating to the auditing profession.

All full Committee meetings were open to the public and conducted in accordance with the requirements of the Federal Advisory Committee Act.

The meetings of the full Committee were also Web or audio cast over the Internet.

The Record of Proceedings of this and subsequent meetings of the Committee are available on the Department's Web site at

http://www.treas.gov/offices/domestic-finance//acap/press.shtml.

See Record of Proceedings, Meeting of the Committee (Oct. 15, 2007, Dec. 3, 2007, Feb. 4, 2008, Mar. 13, 2008, Apr. 1, 2008, May 5, 2008, June 3, 2008, and [____]) [hereinafter Record of Proceedings (with appropriate date)] (on file in the Department's Library, Room 1428), available at

http://www.treas.gov/offices/domestic-finance/acap/press.shtml.

Under Secretary for Domestic Finance Robert K. Steel, Welcome and Introductory Remarks Before the Initial Meeting of the Treasury Department's Advisory Committee on the Auditing Profession (Oct. 15, 2007), in Press Release No. HP-610, U.S. Dep't of Treas. (Oct. 15, 2007) (included as Appendix H).

The Committee By-Laws are included as Appendix I.

The Working Discussion Outline is included as Appendix L.

The Working Bibliography is included as Appendix M. The Working Bibliography was subsequently updated in December 2007, February 2008, and July 2008.

5 U.S.C.____App. 2

et seq.

The Committee held its second meeting on December 3, 2007 in Washington, DC. The agenda for this meeting consisted of hearing oral statements from witnesses and considering written submissions that those witnesses had filed with the Committee. The oral statements and written submissions focused on the issues impacting the sustainability of the auditing profession, including issues mentioned in the Working Discussion Outline. Nineteen witnesses testified at this meeting.

The Committee held a subsequent meeting on February 4, 2008 in Los Angeles, California at the University of Southern California. The agenda for this meeting consisted of hearing oral statements from witnesses and considering written submissions that those witnesses had filed with the Committee. The oral statements and written submissions focused on the issues impacting the sustainability of the auditing profession, including issues mentioned in the Working Discussion Outline. Seventeen witnesses testified at this meeting.

The Committee held additional meetings on March 13, 2008, April 1, 2008, May 5, 2008, June 3, 2008, and [____]. All were face-to-face meetings held at the Department in Washington, DC, except for February 4, 2008, which was held in Los Angeles, California, and the meetings on April 1, 2008, and [____], which were telephonic meetings. No witnesses testified at these additional meetings, expect for the June 3, 2008 meeting. The agenda for the June 3, 2008 meeting consisted of hearing oral statements from witnesses and considering written submissions that those witnesses had filed with the Committee. The oral statements and written submissions focused on the issues mentioned in the Draft Report and Draft Report Addendum. Twenty-one witnesses testified at this meeting.

Appendix J contains a list of witnesses who testified before the Committee.

The Committee, through the Department, published [____] releases in the

Federal Register

formally seeking public comment on issues under consideration. On October 31, 2007, the Committee published a release seeking comment on the Working Discussion Outline,

in response to which the Committee received seventeen comment letters. On May 15, 2008 and on June 12, 2008, the Committee published releases seeking comment on the Draft Report

and Draft Report Addendum,

respectively, in response to which the Committee received [____] comment letters. In addition, the Department announced each meeting of the Committee in the

Federal Register

, and in each announcement notice included an invitation to submit written statements to be considered in connection with the meeting.

In response to these meeting notices, the Committee received [____] written submissions. In total, the Committee received [____] written submissions in response to

Federal Register

releases.

All of the submissions made to the Committee will be archived and available to the public through the Department's Library.

Request for Comments, 72 FR 61709 (U.S. Dep't of Treas. Oct. 31, 2007).

Request for Comments, 73 FR 28190 (U.S. Dep't of Treas. May 15, 2008).

Request for Comments, 73 FR 33487 (U.S. Dep't of Treas. June 12, 2008).

Notice of Meeting, 72 FR 55272 (U.S. Dep't of Treas. Sept. 28, 2007); Notice of Meeting, 72 FR 64283 (U.S. Dep't of Treas. Nov. 15, 2007); Notice of Meeting, 73 FR 2981 (U.S. Dep't of Treas. Jan. 16, 2008); Notice of Meeting, 73 FR 10511 (U.S. Dep't of Treas. Feb. 27, 2008); Notice of Meeting, 73 FR 13070 (U.S. Dep't of Treas. Mar. 11, 2008); Notice of Meeting, 73 FR 21016 (U.S. Dep't of Treas. Apr. 17, 2008); Notice of Meeting, FR 28208 (U.S. Dep't of Treas. May 15, 2008); Notice of Meeting, FR 39088 (U.S. Dep't of Treas. July 8, 2008).

All of the written submissions made to the Committee are available in the Department's Library, Room 1428 and on the Department's Committee's Web page at

http://www.treas.gov/offices/domestic-finance/acap/press.shtml

. To avoid duplicative material in footnotes, citations to the written submissions made to the Committee in this Final Report do not reference the Department's Library, Room 1428 or repeat the file number.

In addition to work carried out by the full Committee, fact finding and deliberations also took place within three Subcommittees appointed by the Co-Chairs. The Subcommittees were organized according to their principal areas of focus: Human Capital, Firm Structure and Finances, and Concentration and Competition.

Each of the Subcommittees prepared recommendations for consideration by the full Committee.

For a list of members and their Subcommittee assignments, see Appendix K.

III. Background

[Contents of Background to be included in subsequent drafts of this Report.]

IV. Human Capital

The Committee devoted considerable time and effort surveying the human capital issues impacting the auditing profession, including education, licensing, recruitment, retention, and training of accounting and auditing professionals. The charter of the Committee charged its members with developing recommendations relating to the sustainability of the public company

auditing profession. Likewise, the Committee directs the following recommendations and related commentary to those practicing public company auditing. However, the Committee recognizes that several of its recommendations regarding human capital matters would have impact beyond the public company auditing profession, impacting the accounting profession as a whole. The Committee views the accelerating pace of change in the global corporate environment and capital markets and the increasing complexity of business transactions and financial reporting as among the most significant challenges facing the profession as well as financial statement issuers and investors. These are directly impacted by human capital issues. To ensure its viability and resilience and its ability to meet the needs of investors, the public company auditing profession needs to continue to attract and develop professionals at all levels who are prepared to perform high quality audits in this dynamic environment. It is essential that these professionals continue to be educated and trained to review, judge, and question all accounting and auditing matters with skepticism and a critical perspective. The recommendations presented below reflect these needs.

After receiving testimony from witnesses and from comment letters, the Committee identified specific areas where the Committee believed it could develop recommendations to be implemented in the relatively short term to enhance the sustainability of the auditing profession. These specific areas include accounting curricula, accounting faculty, minority representation and retention, and development and maintenance of human capital data. The Committee has also developed a recommendation to study the possible future of higher accounting education's institutional structure.

The Committee recommends that regulators, the auditing profession, educators, educational institutions, accrediting agencies, and other bodies, as applicable, effectuate the following:

Recommendation 1. Implement market-driven, dynamic curricula and content for accounting students that continuously evolve to meet the needs of the auditing profession and help prepare new entrants to the profession to perform high quality audits.

The Committee considered the views of all witnesses who provided input regarding accounting curricula at educational institutions.

The Committee believes that the accounting curricula in higher education are critical to ensuring that individuals have the necessary knowledge, mindset, skills, and abilities to perform quality public company audits. In order to graduate from an educational institution with an accounting degree, students must have completed a certain number of hours in accounting and business courses. Accounting curricula typically include courses in auditing, financial accounting, cost accounting, and U.S. federal income taxation. Business curricula typically include courses in ethics, information systems and controls, finance, economics, management, marketing, oral and written communication, statistics, and U.S. business law.

Since the 1950s, several private sector groups have studied and recommended changes to the accounting curricula,

but notwithstanding these pleas for reform, curricula are characteristically slow to change.

See,

e.g.

, Record of Proceedings (Dec. 3, 2007) (Written Submission of Joseph V. Carcello, Director of Research, Corporate Governance, University of Tennessee, Knoxville, 8), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Carcello120307.pdf

(noting the market's expectations that university accounting curricula will expose students to recent financial reporting developments, such as international financial reporting standards and eXtensible Business Reporting Language); Record of Proceedings (Feb. 4, 2008) (Written Submission of Cynthia Fornelli, Executive Director, Center for Audit Quality, 3), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Fornelli020408.pdf

(stating the need to “[d]edicate funds and people to work with accounting professors to ensure that the curriculum is keeping pace with developments in business transactions, international economics and financial reporting” and specifying the need to focus on ethical standards and international accounting and auditing standards); Record of Proceedings (Dec. 3, 2007) (Written Submission of Dennis Nally, Chairman and Senior Partner, PricewaterhouseCoopers LLP, 4), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Nally120307.pdf

(stating the need to “[m]odernize and enhance the university accounting curriculum, which should include consideration of other global curriculum models to increase knowledge of International Financial Reporting Standards (IFRS), finance and economics, and process controls”).

Record of Proceedings (Feb. 4, 2008) (Written Submission of Phillip M.J. Reckers, Professor of Accountancy, Arizona State University, 13), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Reckers020408.pdf

(commenting that business students typically take two sophomore-level introductory accounting classes and accounting majors take six additional accounting courses in their final two years of schooling).

See e.g., Franklin Pierson, et al., The Education of American Businessmen (1959) (noting that the main goal of a business education should be the development of an individual with broad training in both the humanities and principles of business); Robert A. Gordon and James E. Howell, Higher Education for Business (1959) (suggesting that accounting curriculum abandon its emphasis on financial accounting and auditing while emphasizing humanities); Robert H. Roy and James H. MacNeill, Horizons for a Profession (1967) (emphasizing the importance of a humanities background for accountants and recommending accounting graduate study); American Institute of Certified Public Accountants, Committee on Education and Experience Requirements for CPAs, Report of the Committee on Education and Experience Requirements for CPAs (Mar. 1969) (recommending, among other things, a five-year education requirement to be adopted by states by 1975); American Institute of Certified Public Accountants, Education Requirements for Entry into the Accounting Profession: A Statement of AICPA Policies (May 1978) (preferring a 150 semester-hour education requirement rather than a five-year education requirement to acquire the common body of knowledge and sit for the CPA examination); American Accounting Association, Committee on the Future Structure, Content, and Scope of Accounting Education, Future Accounting Education: Preparing for the Expanding Profession, 1 Issues in Accounting Education, No. 1, 168-95 (Spring 1986) (examining accounting education and accounting practice since 1925 and concluding that, among other things, the current state of accounting education is inadequate to meet the dynamic needs of the profession and accounting education must be reassessed to meet these needs); American Institute of Certified Public Accountants, Education Requirements for Entry into the Accounting Profession: A Statement of AICPA Policies, 2nd Ed., Revised (Feb. 1988) (reaffirming the 150 semester-hour requirement); Arthur Andersen & Co., Arthur Young, Coopers & Lybrand, Deloitte Haskins & Sells, Ernst & Whinney, Peat Marwick Main & Co., Price Waterhouse, and Touche Ross, Perspectives on Education: Capabilities for Success in the Accounting Profession (1989), available at

http://aaahq.org/aecc/big8/cover.htm

(stating that the chief executive officers of the eight largest public accounting firms believe that graduates entering public accounting need to have greater interpersonal, communication, and thinking skills as well as greater business knowledge and that the accounting curriculum must be a dynamic experience); and Accounting Education Change Commission, Objectives of Education for Accountants: Position Statement Number One, 6 Issues in Accounting Education, No. 2, 307-12 (Fall 1990) (describing the education objectives for accountants in an environment where accounting education has not kept pace with the changing demands upon the accounting profession).

Record of Proceedings (Dec. 3, 2007) (Written Submission of Ira Solomon, R.C. Evans Distinguished Professor, and Head, Department of Accountancy, University of Illinois, 14-15), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Solomon120307.pdf

(lamenting the slow pace of change in accounting curricula and education).

In this regard, the Committee makes the following recommendations:

(a) Regularly update the accounting certification examinations to reflect changes in the accounting profession, its relevant professional and ethical standards, and the skills and knowledge required to serve increasingly global capital markets.

Accounting and auditing professionals commonly complete the requirements of professional examinations in order to comply with legal or professional association requirements. To become licensed at the state level as a certified public

accountant, an individual must, among other things, pass the Uniform CPA Examination. Professional examinations, such as the Uniform CPA Examination, influence the content of the technical, ethical, and professional materials comprising the accounting curricula.

Gary Sundem, The Accounting Education Change Commission: Its History and Impact Chapter 6 (1999), available at http://aaahq.org/AECC/history/index.htm (“[T]he CPA examination has certainly had a major influence on the accounting curriculum and on other aspects of accounting programs.”).

The Committee believes that evolution of professional examination content serves as an important catalyst for curricular changes to reflect the dynamism and complexity of auditing public companies in global capital markets. The American Institute of Certified Public Accountants (AICPA) already regularly analyzes and updates its examination content, through practice content analysis and in conjunction with the AICPA Board of Examiners, which comprises members from the profession and state boards of accountancy. The Committee recommends that such changes remain a focus to ensure that both the 150 semester hour curriculum

as well as examination content reflect in a timely manner important ongoing market developments and investor needs, such as the increasing use of international financial reporting standards (IFRS),

expanded fair value measurement and reporting, increasingly complex transactions, new Public Company Accounting Oversight Board (PCAOB) auditing and professional standards,

risk-based business judgment, and technological innovations in financial reporting.

See,

e.g.

, Record of Proceedings (Written Submission of Jean C. Bedard, Timothy B. Harbert Professor of Accounting, Department of Accountancy, Bentley College, 1), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Bedard060308.pdf

(observing that using the CPA Examination as a catalyst for curricula change will only be effective if the CPA Examination is written assuming completion of 150 hours); Record of Proceedings (June 3, 2008) (Questions for the Record of Joseph V. Carcello, Chair, AAA Task Force to Monitor the Activities of the Treasury ACAP, Professor and Director of Research—Corporate Governance Center, University of Tennessee, Jean C. Bedard, Professor of Accountancy, Bentley College, and Dana R. Hermanson, Chair of Private Enterprise and Professor of Accounting, Kennesaw State University, 2 (June 20, 2008)), available at

http://www.treas.gov/offices/domestic-finance/acap/agendas/QFRs-6-3-08.pdf

(noting that recent developments suggest a trend away from requiring 150 hours to sit for the CPA examination since eighteen states allow candidates to sit for the exam after 120 hours); Edward P. Howard, Senior Counsel, and Julianne D'Angelo Fellmeth, Administrative Director, Center for Public Interest Law, Comment Letter Regarding Draft Report and Draft Report Addendum 2-4 (June 13, 2008), available at

http://comments.treas.gov/_files/ACAP_Draft_Report_Comments.pdf

(providing background on the issue of requiring 150-hours for licensure while allowing 120-hours to sit for the CPA Examination in California); Record of Proceedings (June 3, 2008) (Oral Remarks of Anne M. Mulcahy, Chairman and Chief Executive Officer, Xerox Corporation, and Alan L. Beller, Partner, Cleary Gottlieb Steen & Hamilton LLP, 70-71, 77), available at

http://www.treas.gov/offices/domestic-finance/acap/agendas/minutes-06-03-08.pdf

(noting the tension between updating the curricula in order to keep current with the changing environment and fitting these changes into a four-year program).

Samuel K. Cotterell, CPA, Chair, NASBA, and David A. Costello, CPA, President and CEO, NASBA, Comment Letter Regarding Draft Report and Draft Report Addendum 1 (June 29, 2008), available at

http://comments.treas.gov/_files/June2908LetterheadTreasuryAdvisoryCommitteeontheAuditingProfession

.pdf (agreeing that IFRS should be reflected in the CPA examination); Arnold C. Hanish, Chair, Committee on Corporate Reporting, Financial Executives International, Comment Letter Regarding Draft Report and Draft Report Addendum 2 (July 3, 2008), available at

http://comments.treas.gov/_files/FEICCRTreasuryACAPCommentLetterFiled73080.pdf

(suggesting a greater emphasis of IFRS in the accounting curriculum).

See

e.g.

, An Audit of Internal Control Over Financial Reporting that is Integrated with an Audit of Financial Statements, Auditing Standard No. 5 (Pub. Company Accounting Oversight Bd. 2007).

Moreover, the Committee believes that professional

and ethical standards,

fraud examination and forensic auditing, financial risk management, and valuation, and subject matter relating to their application, are an essential component of the accounting and auditing curricula and accordingly should be reflected in the professional examinations and throughout business and accounting coursework.

See PCAOB Standards and Related Rules, available at

http://www.pcaobus.org/Standards/Standards_and_Related_Rules/index.aspx

See PCAOB Interim Ethics Standards, available at

http://www.pcaobus.org/Standards/Interim_Standards/Ethics/index.aspx

See.

e.g.

, Samuel K. Cotterell, CPA, Chair, NASBA, and David A. Costello, CPA, President and CEO, NASBA, Comment Letter Regarding Draft Report and Draft Report Addendum 1 (June 29, 2008), available at

http://comments.treas.gov/_files/June2908LetterheadTreasuryAdvisoryCommitteeontheAuditingProfession

.pdf (agreeing that ethics should be included in the accounting curriculum); Deloitte LLP, Comment Letter Regarding Draft Report and Draft Report Addendum 9 (June 27, 2008), available at

http://comments.treas.gov/_files/DeloitteLLPCommentLetter.pdf

(recommending that the Committee state that the following courses should be included in the curricula: ethics, fraud examination and forensic auditing, problem solving, finance, negotiation and communication skills, financial risk management, global business, taxation, and valuation); Record of Proceedings (Written Submission of Anne M. Lang, Chief Human Resources Officer, Grant Thornton LLP, 3), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Lang060308.pdf

(asking the Committee to specifically cite the need for curricula that teach specialized knowledge, such as risk management, computational finance, valuation theory, and sophisticated modeling techniques).

Finally, the Committee recommends that the market developments outlined in this section be reflected in professional examination content as soon as practicable, but not later than 2011.

In particular, the CPA examination should test a candidate's knowledge consistent with practice needs and the highest contemporary level of education required based on those practice needs. In addition, the Committee recommends that new evolving examination content be widely and promptly communicated to college and university faculty and administrators so that corresponding curricular changes in educational institutions can continually occur on a timely basis.

See, e.g., Samuel K. Cotterell, CPA, Chair, NASBA, and David A. Costello, CPA, President and CEO, NASBA, Comment Letter Regarding Draft Report and Draft Report Addendum 1 (June 29, 2008), available at

http://comments.treas.gov/_files/June2908LetterheadTreasuryAdvisoryCommitteeontheAuditingProfession.pdf

(agreeing with the Recommendation to keep the CPA examination current).

(b) Reflect real world changes in the business environment more rapidly in teaching materials.

Students are expected to use a variety of sources, such as textbooks and online materials, to learn. Such materials are an important element of higher education. The Committee learned that these commercial materials are generally conservatively managed and follow rather than lead recent market developments.

Because developing accounting materials involves a significant investment of time and resources, commercial content providers carefully consider the potential risks and rewards before publishing new materials, even where a more prompt response to new developments might be beneficial to students.

Subcommittee on Human Capital Record of Proceedings (Jan. 16, 2008) (Oral Remarks of Bruce K. Behn, President, Federation of Schools of Accountancy, and Ergen Professor of Business, Department of Accounting and Information Management, University of Tennessee, Knoxville).

The Committee believes that accounting educational materials can contribute to inducing curricular changes that reflect the dynamism and complexity of the global capital markets and that commercial content providers should recognize the importance of capturing recent developments in their published materials. Specifically, the Committee recommends that organizations, such as the AICPA and the American Accounting Association (AAA), meet with commercial content providers and encourage them to update their materials promptly to reflect recent developments such as the increasing use

of IFRS, new PCAOB auditing and professional standards, risk-based business judgment, and expanded fair value reporting, as well as technological developments in financial reporting and auditing such as eXtensible Business Reporting Language (XBRL).

See, e.g., Aram Kostoglian, Eastern Region Attest Practice Leader, and Ernest Baugh, National Director of Professional Standards, Mayer Hoffman McCann P.C., Comment Letter Regarding Draft Report and Draft Report Addendum 1 (June 13, 2008), available at

http://comments.treas.gov/_files/MayerHoffmanMcCannCommentLetter.pdf

(noting that textbooks lack a thorough discussion of current market developments); PricewaterhouseCoopers LLP, Comment Letter Regarding Draft Report and Draft Report Addendum 4 (June 30, 2008), available at

http://comments.treas.gov/_files/PwCCommentLtrTreasCmtDraftandAddendum63008.pdf

(noting support for updating teaching materials promptly to reflect recent developments such as the increasing use of IFRS).

Further, in order to ensure access to such materials and recognizing the benefits of technological innovations,

the Committee recommends that authoritative bodies and agencies should be encouraged to provide low-cost, affordable access to digitized searchable authoritative literature and materials, such as Financial Accounting Standards Board (FASB) codification and eIFRS, to students and faculty members. Moreover, since the content of professional examinations, such as the Uniform CPA Examination, is based upon research using digitized materials, students need to have access to, among other things, searchable accounting standards.

The Committee believes that low-cost affordable access to such primary materials would thus enhance student learning and performance and technical research.

See Stephanie Woodruff, Chief Revenue Officer, AverQ, Inc, Comment Letter Regarding Draft Report and Draft Report Addendum (June 2, 2008), available at

http://comments.treas.gov/index.cfm?FuseAction=Home.ViewPopup&Topic_id=9&FellowType_id=1&Reply_id=95&SuppressLayouts=True

(suggesting the use or study of “technology” to address auditing profession challenges).

See Record of Proceedings (Feb. 4, 2008) (Written Submission of Phillip M.J. Reckers, Professor of Accountancy, Arizona State University, 14), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Reckers020408.pdf

(affirming the need for student access to digitized searchable accounting and auditing materials).

A common theme of our first set of recommendations is that accounting curricula should reflect recent developments, including globalization and evolving market factors. As a further catalyst to curricula development and evolution by educational institutions, the Committee recommends ongoing attention to responsiveness to recent developments by the bodies that accredit educational institutions. Accrediting agencies review institutions of higher education and their programs and establish that overall resources and strategies are conformed to the mission of the institutions. For example, the Association to Advance Collegiate Schools of Business (AACSB) and the Association of Collegiate Business Schools and Programs (ACBSP) accredit business administration and accounting programs. Since 1919, the AACSB has accredited business administration programs and, since 1980, accounting programs offering undergraduate and graduate degrees. The AACSB has accredited over 450 U.S. business programs and over 150 U.S. accounting programs. Since 1988, the ACBSP has accredited business programs offering associate, baccalaureate, and graduate degrees. As of February 2008, over 400 educational institutions have achieved ACBSP accreditation. The accreditation standards at both accrediting agencies relate to, among other things, curricula, program and faculty resources, and faculty development.

The Committee believes that the accreditation process and appropriate accreditation standards can contribute to curricular changes. In particular, accreditation standards that embody curricular requirements to reflect the dynamism and complexity of the global capital markets and that evolve to keep pace in the future can be helpful in maintaining and advancing the quality of accounting curricula. The AACSB has emphasized in its accreditation standards that accounting curricula should reflect recent market developments. For example, educational institutions must include in their curricula international accounting issues in order to receive AACSB accreditation. The Committee supports the accrediting agencies' efforts to continually develop standards specifically emphasizing the need to update accounting programs.

Recommendation 2. Improve the representation and retention of minorities in the auditing profession so as to enrich the pool of human capital in the profession.

The auditing profession presents challenging and rewarding opportunities for those who pursue a career in auditing and the profession actively recruits talent from all backgrounds.

Yet, the Committee was concerned by what it heard from individuals with various backgrounds about minority representation and retention in the auditing profession.

2004, minorities accounted for 22% of all bachelor's and masters' degrees awarded in accounting, while in 2007, minorities accounted for 21%.

In 2004, African Americans represented 1% of all CPAs, Hispanic/Latino, 3%, and Asian/Pacific Islander, 4%.

See Figure 1. These percentages changed very little in 2007 when African Americans represented 1% of all CPAs, Hispanic/Latino, 2%, and Asian/Pacific Islander, 4%.

See Figure 2.

The Committee discussed the issue of representation and retention of females in the profession and the Committee found that the profession is undertaking significant efforts to hire and retain females and notes that these issues are being much better managed today. See,

e.g.,

Record of Proceedings (June 3, 2008) (Oral Remarks of Amy Woods Brinkley, Global Risk Executive, Bank of America Corporation, 57), available at

http://www.treas.gov/offices/domestic-finance/acap/agendas/minutes-06-03-08.pdf

(noting that the Committee spent considerable time discussing this issue of females in the profession); Record of Proceedings (June 3, 2008) (Written Submission of Kayla J. Gillan, Chief Administrative Officer, RiskMetrics Group, 2), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Gillan060308.pdf

(urging the Committee to examine the issue of females in the profession); Record of Proceedings (June 3, 2008) (Oral Remarks of Anne M. Lang, Chief Human Resources Officer, Grant Thornton LLP, 100-101), available at

http://www.treas.gov/offices/domestic-finance/acap/agendas/minutes-06-03-08.pdf

(stating that “* * * certainly recruiting women into the profession is something that [Grant Thornton LLP has] done extremely well for the last several years * * * [the] advancement of * * * women is something that [Grant Thornton LLP] still need[s] to pay attention to”). The Committee notes the following statistics: In 2007, at the partner level, females represented 23% of partners on average, while in 2004 they were 19% and in 1994 they were just 12% of all partners. See American Institute of Certified Public Accountants, A Decade of Changes in The Accounting Profession: Workforce Trends and Human Capital Practices 5 (Feb. 2006) and Dennis R. Reigle, Heather L. Bunning And Danielle Grant, 2008 Trends In The Supply of Accounting Graduates And The Demand For Public Accounting Recruits 60 (2008), available at

http://ceae.aicpa.org/NR/rdonlyres/C1E23302-17D3-4ED5-AE81-B274D9CD7812/0/AICPA_Trends_Reports_2008.pdf

. According to Public Accounting Report surveys, the percentage of female professionals at the largest firms was 47.3% in 2007 and 44.2% in 2004. See Women at Big Four Gain Ground in Partnership Percentage, Public Accounting Report 6 (Oct. 31, 2004) and Women Post Gains in Partnership Percentage, Public Accounting Report 11 (Jan. 31, 2008). From 2005 to 2007, women represented about half of the new hires at the six largest firms. See Center For Audit Quality, Report Of The Major Public Company Audit Firms To The Department Of The Treasury Advisory Committee On The Auditing Profession 58 (Jan. 23, 2008). The Committee also considered the effects of workload compression on retention in the profession. Some Committee members believe that audit firms and their clients could benefit from spreading tax preparation work throughout the year. See, e.g., Record of Proceedings (Oct. 15, 2007) (Oral Remarks of William D. Travis, Director and Former Managing Partner, McGladrey & Pullen LLP, 71), available at

http://www.treas.gov/offices/domestic-finance/acap/agendas/minutes-10-15-07.pdf

(noting that “[a] significant challenge for retention of personnel in mid-size and small audit firms is the extreme seasonality * * * during the winter season. This reality places enormous pressure on audit quality and balanced lives of * * * professionals”); Record of Proceedings (Mar. 13, 2008) (Oral Remarks of Barry C. Melancon, President and Chief Executive Officer, American Institute of Certified Public Accountants, 118), available at

http://www.treas.gov/offices/domestic-finance/acap/agendas/minutes-03-13-08.pdf

(noting that the Human Capital Subcommittee discussed workload compression issues).

See, e.g., Record of Proceedings (Dec. 3, 2007) (Written Submission of Ira Solomon, R.C. Evans

Distinguished Professor, and Head, Department of Accountancy, University of Illinois, 13), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Solomon120307.pdf

; Record of Proceedings (Dec. 3, 2007) (Questions for the Record of George S. Willie, Managing Partner, Bert Smith & Co., 2 (Jan. 30, 2008)), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Willie120307.pdf

; Record of Proceedings (Dec. 3, 2007) (Written Submission of Julie K. Wood, Chief People Officer, Crowe Chizek and Company LLC, 2), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Wood120307.pdf

Dennis R. Reigle, Heather L. Bunning And Danielle Grant, 2008 Trends In The Supply Of Accounting Graduates And The Demand For Public Accounting Recruits 30 (2008), available at

http://ceae.aicpa.org/NR/rdonlyres/C1E23302-17D3-4ED5-AE81-B274D9CD7812/0/AICPA_Trends_Reports_2008.pdf

Beatrice Sanders, And Leticia B. Romeo, The Supply Of Accounting Graduates And The Demand For Public Accounting Recruits-2005: For Academic Year 2003-2004 35 (2005), available at

http://ceae.aicpa.org/NR/rdonlyres/11715FC6-F0A7-4AD6-8D28-6285CBE77315/0/Supply_DemandReport_2005.pdf

Dennis R. Reigle, Heather L. Bunning And Danielle Grant, 2008 Trends In The Supply Of Accounting Graduates And The Demand For Public Accounting Recruits 61 (2008), available at

http://ceae.aicpa.org/NR/rdonlyres/C1E23302-17D3-4ED5-AE81-B274D9CD7812/0/AICPA_Trends_Reports_2008.pdf

EN30JY08.038

EN30JY08.039

African Americans accounted for 5.4% of new hires in 2007 at the largest

six accounting firms, Hispanics, 4.6%, and Asians, 21.3%.

See Figure 3.

Center For Audit Quality, Report Of The Major Public Company Audit Firms To The Department Of The Treasury Advisory Committee On The Auditing Profession 59 (Jan. 23, 2008), available at

http://www.thecaq.org/publicpolicy/data/TRData2008-01-23-FullReport.pdf

EN30JY08.044

In 2007, 1.0% of the partners in the six largest accounting firms were African American, 1.6% were Hispanic/Latino, 3.4% were Asian, and less than 1.0% were Native Hawaiian/Pacific Islander or American Indian/Alaska Native, aggregating less than 7% of the total partners.

See Figure 4.

Center For Audit Quality, Report Of The Major Public Company Audit Firms To The Department Of The Treasury Advisory Committee On The Auditing Profession 60 (Jan. 23, 2008), available at

http://www.thecaq.org/publicpolicy/data/TRData2008-01-23-FullReport.pdf

EN30JY08.040

The Committee recognizes that important groups within the minority population are significantly under-represented in the accounting and auditing profession, especially at senior levels, and this under-representation of minorities in the profession is unacceptable from both a societal and business perspective. As the demographics of the global economy continue to expand ethnic diversity, it is imperative that the profession also reflect these changes. The auditing profession's historic role in performing audits in an increasingly diverse global setting and in establishing investor trust cannot be maintained unless the profession itself is viewed as open and

representative. To ensure the continued health and vibrancy of the profession, it is imperative that all participants in the financial, investor, educator, and auditor community adopt and implement policies, programs, practices, and curricula designed to attract and retain minorities. In order for minority participation in the accounting and auditing profession to grow and sustain itself, minority recruitment and retention needs to be a multi-faceted, multi-year effort, implemented and championed by community leaders, families, and most importantly business and academic leaders who educate, recruit, employ, and rely on accountants and auditors.

In this regard, the Committee recognizes the importance of setting goals and measuring progress against these goals and thus makes the following recommendations:

(a) Recruit minorities into the auditing profession from other disciplines and careers.

The Committee heard from witnesses that the auditing profession has “fallen short” on its minority recruitment goals.

Accordingly, the Committee recommends that auditing firms actively market to and recruit from minority non-accounting graduate populations, both at the entry and experienced hire level, utilizing cooperative efforts by academics and firm-based training programs to assist in this process.

Generally, auditing firms hire individuals for the audit practice who are qualified to sit for the Uniform CPA Examination.

See, e.g., Record of Proceedings (Dec. 3, 2007) (Written Submission of Julie K. Wood, Chief People Officer, Crowe Chizek and Company LLC, 2), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Wood120307.pdf

See Ernst & Young LLP, Comment Letter Regarding Draft Report and Draft Report Addendum 22 (June 27, 2008), available at

http://comments.treas.gov/_files/EYACAPCommentLetterFINAL2.pdf

(supporting this Recommendation).

See Record of Proceedings (Dec. 3, 2007) (Questions for the Record of James S. Turley, Chairman and Chief Executive Officer, Ernst & Young LLP, 4 (Feb. 1, 2008)), available at

http://www.treas.gov/offices/domestic-finance/acap/QFRs-12-3-07.pdf

(noting that since 1997, Ernst & Young LLP has typically hired individuals qualified to sit for the Uniform CPA Examination).

Further, the Committee recommends that auditing firms expand their recruitment initiatives at historically black colleges and universities (HBCUs), and explore the use of proprietary schools as another way to recruit minorities into the profession.

Currently over 100 educational institutions established before 1964 to serve the African American community are designated as HBCUs and over fifty of these HBCUs maintain accounting programs. Approximately 290,000 students are enrolled in HBCUs

and HBCUs enroll 14% of all African American students in higher education.

Twenty-seven HBCUs have one or more of the six largest accounting firms recruiting professional staff on their campus.

Both the number of these schools visited by the largest firms and the number of firms recruiting at these schools should increase. Proprietary schools are for-profit businesses that teach vocational or occupational skills and there are over 2,000 proprietary schools in the United States.

In 2005, these schools enrolled over 1 million students: African Americans accounted for 23% of these students, Hispanics, 13%, and Asian/Pacific Islander, 4%.

Record of Proceedings (June 3, 2008) (Written Submission of Frank K. Ross, Director, Center for Accounting Education, Howard University School of Business, 3), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Ross060308.pdf

(agreeing that this Recommendation will help increase minority recruitment).

Stephen Provasnik and Linda L. Shafer, Historically Black Colleges and Universities, 1976 to 2001 2 (NCES 2004-062), available at

http://nces.ed.gov/pubs2004/2004062.pdf

White House Initiative On Historically Black Colleges And Universities, available at

http://www.ed.gov/about/inits/list/whhbcu/edlite-index.html

Center For Audit Quality, Supplement To Report Of The Major Public Company Audit Firms To The Department Of The Treasury Advisory Committee On The Auditing Profession 1 (Mar. 5, 2008), available at

http://www.thecaq.org/publicpolicy/data/TRData2008-03-05-Supplement1.pdf

Thomas D. Snyder, Sally A. Dillow, And Charlene M. Hoffman, Digest Of Education Statistics 2007 Table 5 (NCES 2008-022), available at

http://nces.ed.gov/pubs2008/2008022.pdf

Thomas D. Snyder, Sally A. Dillow, And Charlene M. Hoffman, Digest Of Education Statistics 2007 Table 220 (NCES 2008-022), available at

http://nces.ed.gov/pubs2008/2008022.pdf

(b) Institute initiatives to increase the retention of minorities in the profession.

The Committee considered testimony on the retention of minorities in the profession.

As discussed above, minorities are significantly under-represented in leadership and partnership positions within the profession. The Committee recognizes the lack of minority mentors and role models

in the profession and the profession's awareness of this situation.

In a 2006 National Association of Black Accountants (NABA) survey, almost 60% of African American respondents stated that their mentors come from outside of the profession and almost 55% of respondents stated that they had been with their current employer for three years or less.

The Committee considered testimony that African Americans leave the profession for other careers or do not wish to become managers or partners because they see that there are few African Americans in leadership positions within the firms.

The Committee also heard testimony that the retention rate for Hispanics “is low.”

In 2004, Hispanics represented 3% of the professional staff at all CPA

firms

and this percentage did not change in 2007.

Record of Proceedings (Dec. 3, 2007) (Written Submission of George S. Willie, Managing Partner, Bert Smith & Co., 3), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Willie120307.pdf

(noting that “firms must do more to retain and promote minority professionals”); Record of Proceedings (June 3, 2008) (Written Submission of Frank K. Ross, Director, Center for Accounting Education, Howard University School of Business, 8), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Ross060308.pdf

(noting that “auditing firms need to establish aggressive retention programs that focus on retention”).

Record of Proceedings (Feb. 4, 2008) (Written Submission of Gilbert R. Vasquez, Managing Partner, Vasquez & Company LLP, 4), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Vasquez02042008.pdf

(highlighting the lack of Hispanic role models and mentors in the accounting profession).

See Record of Proceedings (July 12, 2006) (Written Testimony of Manuel Fernandez, National Managing Partner—Campus Recruiting, KPMG LLP, to the Subcommittee on Oversight and Investigations of the House Financial Services Committee, 5), available at

http://financialservices.house.gov/media/pdf/071206mf.pdf

(identifying the lack of minority faculty mentors and role models and noting “[w]hen students of color do not see professors of their own ethnic background on the accounting faculty, they are less apt to consider the option of a career in accountancy”); Record of Proceedings (Dec. 3, 2007) (Questions for the Record of George S. Willie, Managing Partner, Bert Smith & Co., 1 (Jan. 30, 2008)), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Willie120307.pdf

(recommending the establishment of a mentor program for minority accounting students).

The Center for Accounting Education, Howard University School of Business, NABA Membership Survey, Analysis of Work Experience of NABA Members Table 23 and 5 (Sept. 15, 2006), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/NABAMembershipSurvey.pdf.

Record of Proceedings (June 3, 2008) (Written Submission of Frank K. Ross, Director, Center for Accounting Education, Howard University School of Business, 5), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Ross060308.pdf.

Record of Proceedings (Feb. 4, 2008) (Written Submission of Gilbert R. Vasquez, Managing Partner, Vasquez & Company LLP, 4), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Vasquez02042008.pdf.

Beatrice Sanders, and Leticia B. Romeo, The Supply of Accounting Graduates and the Demand for Public Accounting Recruits—2005: For Academic Year 2003-2004 32 (2005), available at

http://ceae.aicpa.org/NR/rdonlyres/11715FC6-F0A7-4AD6-8D28-6285CBE77315/0/Supply_DemandReport_2005.pdf.

Dennis R. Reigle, Heather L. Bunning and Danielle Grant, 2008 Trends in the Supply of Accounting Graduates and the Demand for Public Accounting Recruits 59 (2008), available at

http://ceae.aicpa.org/NR/rdonlyres/C1E23302-17D3-4ED5-AE81-B274D9CD7812/0/AICPA_Trends_Reports_2008.pdf

The Committee believes that firms must continue to find ways to retain minorities in the profession in order to ensure the profession's long-term viability. The Committee believes the need to instill confidence is critical to an individual's career as is the need for mentors, especially at the start of an individual's career.

The Committee also recognizes that auditing firms must continue to give challenging assignments so that individuals have the motivation to stay in the profession.

Thus, the Committee recommends that public company auditing firms intensify their efforts to create and maintain retention programs, including mentoring programs, for their employees as a means to provide these individuals with guidance, career coaching, and networking. Further, the Committee recommends that the profession compile and issue best practices related to minority recruitment and retention.

Record of Proceedings (June 3, 2008) (Written Submission of Frank K. Ross, Director, Center for Accounting Education, Howard University School of Business, 8), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Ross060308.pdf

(noting that “auditing firms need to establish aggressive retention programs that focus on confidence * * * the single greatest source of confidence is a good mentor. Unless [an individual has] been blessed with a truly strong mentor, it may be hard to understand how beneficial it is”).

Record of Proceedings (June 3, 2008) (Oral Remarks of Anne M. Lang, Chief Human Resources Officer, Grant Thornton LLP, 83), available at

http://www.treas.gov/offices/domestic-finance/acap/agendas/minutes-06-03-08.pdf

(stating that “ * * * what [Grant Thornton] find[s], at least in the research that we've done with people coming into the organization and staying in public accounting, is that meaningful and challenging work and the opportunity to advance, based on an individual's career aspirations, is really what keeps our people longer”).

See PricewaterhouseCoopers LLP, Comment Letter Regarding the Draft Report and Draft Report Addendum 5 (June 30, 2008), available at

http://comments.treas.gov/_files/PwCCommentLtrTreasCmtDraftandAddendum63008.pdf.

Community colleges are a vital part of the postsecondary education system. They provide open access to post-secondary education, preparing students for transfer to four-year institutions, providing workforce development and skills training, and offering non-credit programs. Moreover, as the cost of higher education continues its upward climb, more and more high-achieving students are beginning their post-secondary study through the community college system.

As of January 2008, approximately 11.5 million students were enrolled in the 1,200 community colleges in the United States: African Americans accounted for 13% of these students, Hispanics, 15%, and Asian/Pacific Islander, 6%.

American Association of Community Colleges, available at

http://www2.aacc.nche.edu/research/index.htm.

In August 1992, the Accounting Education Change Commission (AECC), created in the late 1980s by the academic community to examine potential changes to accounting education, recognized the importance of two-year colleges in accounting education. The AECC noted that over half of all students taking their first course in accounting do so at two-year colleges and that approximately one-fourth of the students entering the accounting profession take their initial accounting coursework at two-year colleges. The AECC called for “greater recognition within the academic and professional communities of the efforts and importance of two-year accounting programs.”

Accounting Education Change Commission, Issues Statement Number 3: The Importance of Two-Year Colleges for Accounting Education (Aug. 1992), available at

http://aaahq.org/aecc/PositionsandIssues/issues3.htm.

The Committee also heard from witnesses emphasizing the need to expand minority recruitment initiatives at community colleges.

Record of Proceedings (Feb. 4, 2008) (Written Submission of Gilbert R. Vasquez, Managing Partner, Vasquez & Company LLP, 4), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Vasquez02042008.pdf

(noting that auditing firms overlook community colleges where minorities, and specifically Latinos, represent a large student population); Record of Proceedings (Dec. 3, 2007) (Questions for the Record of George S. Willie, Managing Partner, Bert Smith & Co., 2 (Jan. 30, 2008)), available at

http://www.treas.gov/offices/domestic-finance/acap/QFRs-12-3-07.pdf

(recommending that the auditing profession increase it visibility at community colleges).

The Committee believes that more attention to community colleges may provide, in addition to an increase in the overall supply of students, another avenue for minorities to become familiar with and attracted to the auditing profession. Currently none of the largest auditing firms recruits at community colleges because “individuals who only have associate degrees typically will not have sufficient qualifications to satisfy state licensing requirements.”

The Committee recommends that accreditation of two-year college accounting programs at community colleges be explored and implemented when viable, so that these programs can be relied upon as one of the requisite steps toward fulfilling undergraduate educational requirements.

Further, the Committee recommends that auditing firms and educational institutions at all levels support and cooperate in building strong fundamental academic accounting programs at community colleges, including providing internships or financial support for students who begin their studies in two-year programs and may be seeking careers in the auditing profession. The Committee also recommends that auditing firms and four-year colleges and universities and their faculty focus on outreach to community college students in order to support students' transition from community colleges to four-year educational institutions.

Center for Audit Quality, Supplement to Report of the Major Public Company Audit Firms to the Department of the Treasury Advisory Committee on the Auditing Profession 1 (Mar. 5, 2008), available at

http://www.thecaq.org/publicpolicy/data/TRData2008-03-05-Supplement1.pdf.

See Record of Proceedings (June 3, 2008) (Written Submission of Anne M. Lang, Chief Human Resources Officer, Grant Thornton LLP, 4), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Lang060308.pdf

(supporting the accreditation of community colleges).

See, e.g., Cynthia M. Fornelli, Executive Director, Center for Audit Quality, Comment Letter Regarding Draft Report and Draft Report Addendum 8 (June 26, 2008), available at

http://comments.treas.gov/_files/CAQCommentletter62708FINAL.pdf

(stating that outreach programs to community colleges could be effective); PricewaterhouseCoopers LLP, Comment Letter Regarding Draft Report and Draft Report Addendum 5 (June 30, 2008), available at

http://comments.treas.gov/_files/PwCCommentLtrTreasCmtDraftandAddendum63008.pdf

(suggesting that the Committee recommend steps to transition students from community colleges to four-year colleges and universities).

(d) Emphasize the utility and effectiveness of cross-sabbaticals and internships with faculty and students at Historically Black Colleges and Universities.

As discussed above, African Americans are significantly under-represented in the auditing profession.

The Committee recommends encouraging a concerted effort to increase the focus upon HBCUs in order to raise the number of African Americans in the auditing profession and urging the HBCUs, auditing firms, corporations, federal and state

governments, and other entities to emphasize the use of cross-sabbaticals.

Cross-sabbaticals are interactive relationships where faculty and seasoned professionals are regularly represented in the practice and academic environments through exchanges. Evidence suggests that such exchanges can be beneficial, and continued development of such exchanges is expected to provide substantial benefits for all parties.

Cross-sabbaticals present an opportunity for “reflective thinking” for seasoned professionals.

See Cynthia M. Fornelli, Executive Director, Center for Audit Quality, Comment Letter Regarding Draft Report and Draft Report Addendum 8 (June 26, 2008), available at

http://comments.treas.gov/_files/CAQCommentletter62708FINAL.pdf

(agreeing with this Recommendation).

See Record of Proceedings (Feb. 4, 2008) (Written Submission of Cynthia Fornelli, Executive Director, Center for Audit Quality, 2), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Fornelli020408.pdf

(recommending encouraging sabbaticals, internships, and fellowship opportunities, structured to give faculty opportunities to conduct research for promotion and tenure); Record of Proceedings (Feb. 4, 2008) (Oral Remarks of Phillip M.J. Reckers, Professor of Accountancy, Arizona State University, 68), available at

http://www.treas.gov/offices/domestic-finance/acap/agendas/minutes-2-4-08.pdf

(stating that sabbaticals deliver professors “a wealth of knowledge they could bring back in the classroom”).

See Record of Proceedings (Mar. 13, 2008) (Oral Remarks of H. Rodgin Cohen, Chairman, Sullivan & Cromwell LLP, 69), available at

http://www.treas.gov/offices/domestic-finance/acap/agendas/minutes-03-13-08.pdf

(noting that spending time in the classroom should “give the [practicing accountant] the time to do the reflective thinking”); Record of Proceedings (Mar. 13, 2008) (Oral Remarks of Zoe-Vonna Palmrose, Deputy Chief Accountant, SEC), available at

http://www.treas.gov/offices/domestic-finance/acap/agendas/minutes-03-13-08.pdf

(commenting that sabbaticals provide the “opportunity for reflective thinking”).

In addition, the Committee recommends that the over fifty HBCUs with accounting programs require one member of their accounting faculty annually to participate in a cross-sabbatical with a private or public sector entity. The Committee also recommends that the private and public sector entities provide these opportunities, as well as focus on other arrangements to build relationships at these educational institutions.

The Committee received testimony regarding the lack of minority mentors and role models

and notes that the profession has recognized this situation.

Thus, the Committee also recommends that public company auditing firms intensify their efforts to create internships and mentoring programs for students in accounting and other complementary disciplines, including those from HBCUs and community colleges, as a means to increase the awareness of the accounting profession and its attractiveness among minority students.

See, e.g., Record of Proceedings (June 3, 2008) (Written Submission of Frank K. Ross, Director, Center for Accounting Education, Howard University School of Business, 9), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Ross060308.pdf

(highlighting that a 2006 NABA survey revealed that almost 60% of African American respondents stated that their mentors come from outside of the profession); Record of Proceedings (Feb. 4, 2008) (Written Submission of Gilbert R. Vasquez, Managing Partner, Vasquez & Company LLP, 4), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Vasquez02042008.pdf

(highlighting the lack of Hispanic role models and mentors in the accounting profession).

http://financialservices.house.gov/media/pdf/071206mf.pdf

http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Willie120307.pdf

(recommending the establishment of a mentor program for minority accounting students).

(e) Increase the numbers of minority accounting doctorates through focused efforts.

Some dedicated programs have succeeded in attracting minorities to enter and complete accounting doctoral studies.

In particular, the PhD Project, an effort of the KPMG Foundation, has worked to increase the diversity of business school faculty.

The PhD Project focuses on attracting minorities to business doctoral programs, and provides a network of peer support. Since the PhD Project's establishment in 1994, the number of minority professors at U.S. business schools has increased from 294 to 889.

Ninety percent who enter the PhD Project earn their doctorates, and 99% of those who complete their doctorates go on to teach.

The PhD Project has received over $17.5 million

in funding since 1994 from corporations, foundations, universities, and other interested parties.

For a list of educational support programs that auditing firms are sponsoring, see Record of Proceedings (Feb. 4, 2008) (Written Submission of Barry Salzberg, Chief Executive Officer, Deloitte LLP, Appendix A), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Salzberg020408.pdf.

For further information on the PhD Project, see

http://www.phdproject.org/mission.html.

Record of Proceedings (Feb. 4, 2008) (Written Submission of Barry Salzberg, Chief Executive Officer, Deloitte LLP, Appendix A), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Salzberg020408.pdf.

See Jane Porter, Going to the Head of the Class: How the PhD Project is Helping to Boost the Number of Minority Professors in B-schools, Business Week Online (Dec. 27, 2006), available at

http://www.businessweek.com/bschools/content/dec2006/bs20061227_926455.htm

http://financialservices.house.gov/media/pdf/071206mf.pdf.

For further information on the PhD Project, see

http://www.phdproject.org/corp_sponsors.html

The Committee believes that programs such as these can successfully recruit minorities to accounting doctoral studies. The Committee recommends that auditing firms, corporations, and other interested parties advertise existing and successful efforts to increase the number of minority doctorates by developing further dedicated programs.

Additionally, the Committee recommends that auditing firms, corporations, and other interested parties maintain and increase the funding of these programs.

See, e.g., Cynthia M. Fornelli, Executive Director, Center for Audit Quality, Comment Letter Regarding Draft Report and Draft Report Addendum 9 (June 26, 2008), available at

http://comments.treas.gov/_files/CAQCommentletter62708FINAL.pdf

(stating that this Recommendation could lead to an increase in the number of minority accounting doctorates); Record of Proceedings (June 3, 2008) (Written Submission of Frank K. Ross, Director, Center for Accounting Education, Howard University School of Business, 11), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Ross060308.pdf

(noting the need to expand support for the PhD Project and similar initiatives).

Recommendation 3. Ensure a sufficiently robust supply of qualified accounting faculty to meet demand for the future and help prepare new entrants to the profession to perform high quality audits.

The Committee heard testimony from individuals regarding the need to have an adequate supply of faculty with the knowledge and experience to develop qualified professionals for the increasingly complex and global auditing profession.

See, e.g., Record of Proceedings (Dec. 3, 2007) (Written Submission of David W. Leslie, Chancellor Professor of Education, College of William and Mary, 2), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Leslie120307.pdf

(noting a 13.3% decline in accounting faculty from 1988 to 2004); Record of Proceedings (Feb. 4, 2008) (Written Submission of Edward E. Nusbaum, Chief Executive Officer, Grant Thornton LLP, and Chairman, Grant Thornton International Board of Governors, 5), available at

http://www.treas.gov/offices/domestic-finance/

acap/submissions/02042008/Nusbaum020408.pdf

(stating that “recent years have seen a reduction in accounting faculty, based on a wave of retirements and lack of accounting PhDs coming into the system”); Record of Proceedings (Dec. 3, 2007) (Written Submission of Ira Solomon, R.C. Evans Distinguished Professor, and Head, Department of Accountancy, University of Illinois, 4), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Solomon120307.pdf

(stating that “the number of persons entering accountancy doctoral programs is too low to sustain the accountancy professoriate”).

The Committee recognizes that there is a high level of concern about the adequacy of both the near- and the long-term supply of doctoral faculty, especially given the anticipated pace of faculty retirements. According to National Study of Postsecondary Faculty data, the number of full- and part-time accounting faculty at all types of educational institutions fell by 13.3% from 20,321 in 1993 to 17,610 in 2004, while student (undergraduate) enrollment increased by 12.3% over the same period.

See Figure 5.

Record of Proceedings (Dec. 3, 2007) (Written Submission of David W. Leslie, Chancellor Professor of Education, College of William and Mary, 5), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Leslie120307.pdf.

EN30JY08.041

Moreover, the current pipeline of doctoral faculty is not keeping pace with anticipated retirements. In November 2006, it was estimated that one-third of the approximately 4,000 accounting doctoral faculty in the United States were 60 years old or older, and one-half were 55 years old or older.

The average retirement age of accounting faculty was 62.4 years.

James R. Hasselback, 2007 Analysis of Accounting Faculty Birthdates, available at

http://aaahq.org/temp/phd/JimHasselbackBirthdateSlide.pdf

In terms of specialization within the accounting discipline, an AAA study concluded that only 22% and 27% of the projected demand for doctoral faculty in auditing and tax, respectively, will be met by expected graduations in the coming years.

However, 91% and 79% of the projected demand for doctoral faculty in financial accounting and managerial accounting, respectively, will be met.

R. David Plumlee, Steven J. Kachelmeier, Silvia A. Madeo, Jamie H. Pratt, and George Krull, Assessing the Shortage of Accounting Faculty, 21 Issues in Accounting Education, No. 2, 119 (May 2006).

In addition to the accounting faculty supply issues, the Committee heard testimony from witnesses on the need to ensure faculty are qualified and able to teach students the latest market developments, such as fair value accounting and IFRS. The Committee learned that often new accounting faculty may have little practical experience.

Witnesses testified to the difficulty of academics acquiring “practice-oriented” knowledge as the bond between the profession and academia is underdeveloped. Witnesses did suggest improving these relationships with incentives for sabbaticals and sharing practice experience.

Record of Proceedings (Dec. 3, 2007) (Written Submission of Joseph V. Carcello, Director of Research, Corporate Governance, University of Tennessee, Knoxville, 21), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Carcello120307.pdf

Record of Proceedings (Feb. 4, 2008) (Written Submission of Cynthia Fornelli, Executive Director, Center for Audit Quality, 2), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Fornelli020408.pdf

(noting that the auditing firms recognize the need to be more active in sharing practical experiences with academics); Record of Proceedings (Feb. 4, 2008) (Written Submission of Phillip M.J. Reckers, Professor of Accountancy, Arizona State University, 19), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Reckers020408.pdf

(“[R]elationships between practitioners and academics have so diminished that they are little more than formal liaison assignments involving very few parties from any side * * * [w]here there have been opportunities for interaction (curriculum issues, policy deliberations, research matters), those opportunities have been embraced perceptibly less often.”).

In this regard, the Committee makes the following recommendations:

(a) Increase the supply of accounting faculty through public and private funding and raise the number of professionally qualified faculty that teach on campuses.

The Committee recognizes that ensuring an adequate supply of doctoral accounting faculty in higher education is crucial to both retaining the academic standing of the discipline on campus and developing well-prepared and educated entry-level professionals. The resource represented by these professionals is essential for high quality audits. The Committee believes that high quality audits are critical to well-functioning capital markets, and therefore the funding necessary to

supply the healthy pipeline of doctoral accounting faculty to assist in providing these human capital resources must be made available.

The Committee therefore recommends expanding government funding, at both the federal and state level, for accounting doctoral candidates. The Committee also recommends that private sources (including corporations, institutional investors, and foundations as well as auditing firms) continue to be encouraged to fund accounting doctoral candidates.

The Committee recognizes and commends the auditing firms' support of doctoral candidates.

See Record of Proceedings (June 3, 2008) (Written Submission of Jean C. Bedard, Timothy B. Harbert Professor of Accounting, Department of Accountancy, Bentley College, 2), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Bedard060308.pdf

(noting that “[f]unding for doctoral study is absolutely critical”).

See, e.g., Record of Proceedings (June 3, 2008) (Written Submission of Kayla J. Gillan, Chief Administrative Officer, RiskMetrics Group, 2), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Gillan060308.pdf

(noting that Sarbanes-Oxley Act Section 109(c)(2) states that monetary penalties assessed by the PCAOB against registered firms and individuals are to be used exclusively to fund merit-based scholarships for accounting undergraduate and graduate students and that Section 109(c)(2) also includes certain procedural requirements for the funds' release, such as Congressional approval, and recommending the Committee suggest eliminating the unnecessary procedural obstacles contained in the statute); PricewaterhouseCoopers LLP, Comment Letter Regarding Draft Report and Draft Report Addendum 6 (June 30, 2008), available at

http://comments.treas.gov/_files/PwCCommentLtrTreasCmtDraftandAddendum63008.pdf

(noting that the profession provides funding for faculty, but other private sector participants as well as Congress and state and local officials could contribute funding).

See Record of Proceedings (Feb. 4, 2008) (Written Submission of Cynthia Fornelli, Executive Director, Center for Audit Quality, 2), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Fornelli020408.pdf.

Other commenters have suggested another method to increase the number of faculty and professionals as well as potentially expand diversity within the profession is by increasing the current H-1B quota of 65,000. See, e.g., Cynthia M. Fornelli, Executive Director, Center for Audit Quality, Comment Letter Regarding Draft Report and Draft Report Addendum 9 (June 26, 2008), available at

http://comments.treas.gov/_files/CAQCommentletter62708FINAL.pdf

(noting the need to increase the quota for H-1B visas to help increase the number of faculty and the number of professionals knowledgeable of international issues); PricewaterhouseCoopers LLP, Comment Letter Regarding Draft Report and Draft Report Addendum 7 (June 30, 2008), available at

http://comments.treas.gov/_files/PwCCommentLtrTreasCmtDraftandAddendum63008.pdf

(recommending immigration reform, such as expansion of H-1B visa program, to increase supply of accounting faculty, international experience, and diversity). But, c.f., Carl Olson, California National University, Comment Letter Regarding Draft Report and Draft Report Addendum 31-32 (June 6, 2008), available at

http://comments.treas.gov/_files/OlsonCommentLetter0606082.pdf

(opposing the use of H-1B visas by accounting firms to recruit employees).

Currently, minimum accreditation requirements for accountancy faculty typically require that approximately 50% of full-time faculty have a doctoral degree. Commonly, business school deans and academic vice presidents (those making the budgetary decisions regarding faculty allotments on campuses) interpret this accreditation requirement to require that a minimum of 50% of a department's faculty hold an earned doctorate and are actively engaged in research and publication activity. Although a high percentage of faculty is expected to be professionally qualified (i.e., having recent direct business experience), at times gatekeepers for budget allocations may be less enthusiastic about maximizing the number of professionally qualified teaching slots in a given program. The Committee sees benefits to the increased participation of professionally qualified and experienced faculty, who would bring additional practical business experience to the classrooms, and notes that witnesses and commenters have underscored the benefits of professionally qualified and experienced faculty.

Therefore, the Committee recommends that accrediting agencies continue to actively support faculty composed of academically and professionally qualified and experienced faculty.

See Andrew D. Bailey, Jr., Professor of Accountancy-Emeritus, University of Illinois, and Senior Policy Advisor, Grant Thornton LLP, Comment Letter Regarding Discussion Outline 19 (Jan. 30, 2008), available at

http://comments.treas.gov/_files/BAILEYCOMMENTSONTREASURYADVISORYCOMMITTEEOUTLINEFINALSUBMISSION13008.doc

(stating that “[t]here are clearly practice professionals that make excellent contributions to some of the most highly rated accounting programs in the country”); Record of Proceedings (Feb. 4, 2008) (Written Submission of Cynthia Fornelli, Executive Director, Center for Audit Quality, 3), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Fornelli020408.pdf

(stating that accreditation bodies “revise accreditation standards to allow the employment of more audit professionals, either active or retired, as adjunct professors”).

(b) Emphasize the utility and effectiveness of cross-sabbaticals.

As discussed above, cross-sabbaticals are interactive relationships where faculty and seasoned professionals are regularly represented in the practice and academic environments through exchanges. For example, currently, the Securities and Exchange Commission (SEC) and the FASB offer fellowship programs for professional accountants and accounting academics. Evidence suggests that such exchanges can be beneficial, and continued development of such exchanges is expected to provide substantial benefits for all parties.

Cross-sabbaticals present an opportunity for “reflective thinking” for seasoned professionals.

Academics often face the disincentive of being forced to forgo their full salaries in order to engage in such sabbaticals,

and colleges and universities may not encourage professional practice sabbaticals, preferring that the focus of faculty be directed exclusively toward academic research and the number and placement of scholarly articles. The Committee believes that changing both the academic and practice culture will require a plan and commitment of support at the highest institutional levels.

See Record of Proceedings (Feb. 4, 2008) (Written Submission of Cynthia Fornelli, Executive Director, Center for Audit Quality, 2), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Fornelli020408.pdf

(recommending encouraging sabbaticals, internships, and fellowship opportunities, structured to give faculty opportunities to conduct research for promotion and tenure); Record of Proceedings (June 3, 2008) (Written Submission of William Kinney, Charles & Elizabeth Prothro Regents Chair in Business and Price Waterhouse Fellow in Auditing, University of Texas, Austin, 5), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Kinney060308.pdf

(noting the completion of an August 2007 to February 2008 assignment as an academic fellow in the Professional Practice Group of Office of Chief Accountant at the SEC, and stating that the experience provided a greater understanding of the regulatory process and that “my students have already benefited through more relevant classes”); Record of Proceedings (Feb. 4, 2008) (Oral Remarks of Phillip M.J. Reckers, Professor of Accountancy, Arizona State University, 68), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Reckers020408.pdf

(stating that sabbaticals deliver professors “a wealth of knowledge they could bring back in the classroom”).

See Record of Proceedings (Mar. 13, 2008) (Oral Remarks of H. Rodgin Cohen, Chairman, Sullivan & Cromwell LLP, 69), available at

http://www.treas.gov/offices/domestic-finance/acap/agendas/minutes-03-13-08.pdf

; Record of Proceedings (Mar. 13, 2008) (Oral Remarks of Zoe-Vonna Palmrose, Deputy Chief Accountant, SEC, 67), available at

http://www.treas.gov/offices/domestic-finance/acap/agendas/minutes-03-13-08.pdf.

Record of Proceedings (Feb. 4, 2008) (Oral Remarks of Phillip M.J. Reckers, Professor of Accountancy, Arizona State University, 67-69), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Reckers020408.pdf

(noting the financial disincentives associated with sabbaticals).

Specifically, the Committee recommends that educational institutions, auditing firms, corporations, federal and state regulators, and others engage in a two-fold strategy to both encourage cross-sabbaticals and eliminate financial or career disincentives for participating in such experiences.

Further, the

Committee recommends that university administrators place as high a value on professional sabbaticals for purposes of promotion and tenure as they do for research and scholarly publication.

See, e.g., Deloitte LLP, Comment Letter Regarding Draft Report and Draft Report Addendum 11 (June 27, 2008), available at

http://

comments.treas.gov/_files/DeloitteLLPCommentLetter.pdf

(noting the formation of a task force on cross-sabbaticals with accounting faculty, including those at HBCUs); Record of Proceedings (June 3, 2008) (Written Submission of William Kinney, Charles & Elizabeth Prothro Regents Chair in Business and Price Waterhouse Fellow in Auditing, University of Texas, Austin, 5), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Kinney060308.pdf

(supporting the idea of allowing professors to take sabbaticals and providing direct evidence by describing a recent assignment as an academic fellow in the Professional Practice Group of the SEC's Office of Chief Accountant).

See Joseph V. Carcello, Chair, AAA Task Force to Monitor the Activities of the Treasury ACAP, Professor and Director of Research—Corporate Governance Center, University of Tennessee, Jean C. Bedard, Professor of Accountancy, Bentley College, and Dana R. Hermanson, Chair of Private Enterprise and Professor of Accounting, Kennesaw State University, Comment Letter Regarding Draft Report and Draft Report Addendum 4 (May 15, 2008), available at

http://comments.treas.gov/_files/ACAPCommentLetterMay152008.pdf

(noting the need to “[p]lace equal emphasis on completing a sabbatical with a private sector institution or government entity as with publishing one ‘tier A' paper”).

The Committee also recommends that accrediting agencies establish an expectation that at least one full-time member per year of each accounting faculty group participate in a sabbatical with a private sector or a governmental entity. Auditing firms, corporations, government agencies, and universities should be expected to provide these opportunities with the elimination of any financial disincentives. Further, the Committee recommends expanding faculty fellowship programs in agencies, such as those at the SEC and the FASB, and making them available at the PCAOB. The successful long-term operation of these programs at the SEC and the FASB and the application of appropriate conflict-of-interest and recusal rules have demonstrated that these programs can be maintained and expanded while protecting against conflicts of interest.

(c) Create a variety of tangible and sufficiently attractive incentives that will motivate private sector institutions to fund both accounting faculty and faculty research, to provide practice materials for academic research and for participation of professionals in behavioral and field study projects, and to encourage practicing accountants to pursue careers as academically and professionally qualified faculty.

As discussed above, there are concerns about the adequate supply of accounting faculty and about the need to have faculty who can inject more practical experience into classroom learning. Currently, there are few specific financial incentives encouraging private sector funding of accounting doctoral faculty or sponsoring of professional accountants to teach at educational institutions. Nonetheless, the Committee notes that the profession recognizes the need to support initiatives to increase faculty and is currently directing its efforts to raise funds for such a new initiative.

See Record of Proceedings (Feb. 4, 2008) (Written Submission of Cynthia Fornelli, Executive Director, Center for Audit Quality, 2), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Fornelli020408.pdf

(stating that “[b]ecause of the profession's concern over the shortage of qualified faculty to teach accounting, the AICPA Foundation, along with the 80 largest CPA firms, are working to raise more than $17 million to fund additional PhD candidates at participating universities”).

The Committee also heard from several witnesses regarding the unavailability of data relating to auditing practice and the impact this lack of data has on research and potentially on the profession's sustainability. In particular, witnesses stated that the decline in auditing research materials, including archival or experimental data, will lead to a further decline in faculty and doctoral students specializing in auditing.

100

Since educational institutions normally require publications in top tier journals for promotion or tenure, faculty and doctoral students will conduct research in accounting areas where data are prevalent.

100

See, e.g., Record of Proceedings (Dec. 3, 2007) (Written Submission of Joseph V. Carcello, Director of Research, Corporate Governance, University of Tennessee, Knoxville, 21), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Carc ello120307.pdf

(“[D]octoral students in * * * [a 2007] Deloitte [Foundation] study indicated that lack of access to public accounting firm and client data represented a severe obstacle to the research they want to conduct, and that this difficulty might result in them focusing on a different accounting sub-area. This issue must be addressed, or auditing may cease to exist as a discipline on many university campuses.”); Record of Proceedings (Feb. 4, 2008) (Written Submission of Phillip M.J. Reckers, Professor of Accountancy, Arizona State University, 8), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Reckers020408.pdf

(recommending the development of a means “for researchers to gain access to auditing related data” and noting, without this means, interest in doctoral auditing programs will continue to decline); Record of Proceedings (Dec. 3, 2007) (Written Submission of Ira Solomon, R.C. Evans Distinguished Professor, and Head, Department of Accountancy, University of Illinois, 7), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Solomon120307.pdf

(noting the lack of auditing research data and the “drastic decline in auditing research among extant accountancy faculty and among accountancy doctoral students”).

The Committee also heard that encouraging more professionally qualified and experienced faculty will foster a stronger relationship between academia and the profession.

101

Currently, there exists a need for more interaction between academia and the profession.

102

Encouraging practicing accountants to pursue careers as academically and professionally qualified faculty would bring practical business experience to classrooms so that students are better prepared to perform quality audits in the dynamic business environment.

101

Record of Proceedings (Feb. 4, 2008) (Written Submission of Cynthia Fornelli, Executive Director, Center for Audit Quality, 2), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Fornelli020408.pdf.

102

Record of Proceedings (Feb. 4, 2008) (Written Submission of Phillip M.J. Reckers, Professor of Accountancy, Arizona State University, 19), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Reckers020408.pdf.

Finally, the Committee recommends that Congress pass legislation creating a variety of tangible incentives for private sector institutions to establish support for accounting and auditing faculty and faculty research, to facilitate access to research data and individuals,

103

and to sponsor transition of professional accountants from practice to teaching positions. These incentives must be sufficiently attractive to companies and auditing firms to affect rapid behavioral change, and should avoid cumbersome levels of administration. The Committee believes that these incentives would

provide the necessary impetus to private sector institutions to help increase the number of accounting faculty as well as faculty with significant practical experience.

103

http://comments.treas.gov/_files/ACAPCommentLetterMay152008.pdf

(recommending that auditing firms and regulators assist academic researchers with access to data relating to the auditing practice); Deloitte LLP, Comment Letter Regarding Draft Report and Draft Report Addendum 11-12 (June 27, 2008), available at

http://comments.treas.gov/_files/DeloitteLLPCommentLetter.pdf

(noting the attempt to actively work with academia to find ways to overcome confidentiality issues concerning auditing practice data); Record of Proceedings (June 3, 2008) (Written Submission of Kayla J. Gillan, Chief Administrative Officer, RiskMetrics Group, 2), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Gillan060308.pdf

(recommending that everyone have access to PCAOB inspection data and suggesting the Committee seek legislative amendments to allow this access); Record of Proceedings (June 3, 2008) (Written Submission of William Kinney, Charles & Elizabeth Prothro Regents Chair in Business and Price Waterhouse Fellow in Auditing, University of Texas, Austin, 5), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Kinney060308.pdf

(suggesting legislation encouraging access to data).

Recommendation 4. Develop and maintain consistent demographic and higher education program profile data.

The Committee heard testimony regarding the lack of consistent demographic and higher education program profile data concerning the profession.

104

The need for comparable, consistent, periodic information regarding the demographic profile of professional accountants and auditors, related higher education program capacity, entry-level supply and demand of personnel, accounting firm retention and compensation practices, and similar particulars are fundamental to a meaningful understanding of the human capital circumstances impacting the public company auditing profession and its future and sustainability.

104

See, e.g., Record of Proceedings (Dec. 3, 2007) (Questions for the Record of David A. Costello, President and Chief Executive Officer, NASBA, 2-4 (Feb. 6, 2008)), available at

http://www.treas.gov/offices/domestic-finance/acap/QFRs-12-3-07.pdf

(stating that “[s]ince 1970, * * * NASBA and the AICPA have recognized the need for a national database for Certified Public Accountants and have taken steps leading to the development of the database * * * [c]urrently, NASBA is not aware of a mechanism or database which would provide an accurate count of CPAs, without the effect of ‘double counting’ ”); Julia Grant, Demographic Challenges Facing the CPA Profession, 20 Research in Accounting Regulation (2008); Record of Proceedings (Dec. 3, 2007) (Written Submission of Ira Solomon, R.C. Evans Distinguished Professor, and Head, Department of Accountancy, University of Illinois, 13), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Solomon120307.pdf

(noting the lack of comprehensive accounting profession supply and demand data and recommending the “establishment of a continuous and comprehensive system that produces more timely and reliable supply and demand data”).

Historically, there has been neither an ongoing collection of data nor a centralized location where the general public can access data. For instance, the AICPA publishes a supply and demand study every two years. Additionally, various other groups, such as the AAA, the National Association of State Boards of Accountancy, colleges and universities, and individuals collect some of these data but not in a manner available and useful for research.

Materials such as those supplied by the Center for Audit Quality to the Committee,

105

previous AICPA Supply and Demand studies,

106

and AAA-commissioned demographic research

107

provide examples of the necessary information. In addition, AICPA membership trends, augmented by data available from state boards of accountancy regarding numbers of licensees, may be useful data.

105

Center for Audit Quality, Report of the Major Public Company Audit Firms to the Department of the Treasury Advisory Committee on the Auditing Profession (Jan. 23, 2008), available at

http://www.thecaq.org/publicpolicy/data/TRData2008-01-23-FullReport.pdf.

106

Dennis R. Reigle, Heather L. Bunning and Danielle Grant, 2008 Trends in the Supply of Accounting Graduates and the Demand for Public Accounting Recruits (2008), available at

http://ceae.aicpa.org/NR/rdonlyres/C1E23302-17D3-4ED5-AE81-B274D9CD7812/0/AICPA_Trends_Reports_2008.pdf.

107

David Leslie, Accounting Faculty in U.S. Colleges and Universities: Status and Trends, 1993-2004, A Report of the American Accounting Association (Feb. 19, 2008).

Therefore, the Committee recommends the establishment of a national cooperative committee, comprised of organizations such as the AICPA and the AAA, to encourage periodic consistent demographic and higher education program profile data.

108

The Committee believes that having such data available will increase the ability of auditing firms, corporations, investors, academics, policy makers, and others to understand more fully, monitor and evaluate, and take necessary or desirable actions with respect to the human capital in the auditing profession and its future and sustainability.

108

Recommendation 5. Encourage the AICPA and the AAA to jointly form a commission to provide a timely study of the possible future of the higher education structure for the accounting profession.

The Committee heard testimony regarding the feasibility of establishing a free-standing, post-graduate professional educational structure.

109

Currently, there is no post-graduate institutional arrangement dedicated to accounting and auditing. Graduate programs in accounting are generally housed within business schools and linked with undergraduate accounting programs.

109

See, e.g., Record of Proceedings (Dec. 3, 2007) (Oral Submission of Joseph V. Carcello, Director of Research, Corporate Governance, University of Tennessee, Knoxville, 3), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/CarcelloOralStatement120307.pdf (recommending that “the Advisory Committee consider a different model—an education model involving professional schools of auditing * * *”); Record of Proceedings (June 3, 2008) (Written Submission of Anne M. Lang, Chief Human Resources Officer, Grant Thornton LLP, 5), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Lang060308.pdf (noting that the establishment of a commission to study a higher education structure for the accounting profession “is a very sound” recommendation). But, c.f., Record of Proceedings (Feb. 4, 2008) (Written Submission of Phillip M.J. Reckers, Professor of Accountancy, Arizona State University, 3), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Reckers020408.pdf (discounting the feasibility of free-standing professional schools).

The history of the development of U.S. educational programs and preparation for accounting careers reveals a pattern of evolution of increasing formal higher education, with accreditation standards following and reinforcing this evolution, and with market needs providing the impetus and context. Today, accrediting agencies have recognized over 150 accounting programs as the result of these programs' improving accounting education as envisioned by prior studies and reports.

In a November 2006 Vision Statement, the chief executive officers of the principal international auditing networks noted the challenges in educating future auditing professionals, including the sheer quantity and complexity of accounting and auditing standards, rapid technological advancements, and the need for specialized industry knowledge.

110

This development in the market leads to a clear need to anticipate and enhance the human capital elements of the auditing profession. As such, this vision statement provides the impetus to commission a group to study and propose a long-term institutional arrangement for accounting and auditing education.

110

Global Capital Markets and the Global Economy: A Vision From the CEOs of the International Audit Networks 15 (Nov. 2006).

As in the past, in the face of challenges of the changing environment for the profession, the Committee believes that the educational system should thoughtfully consider the feasibility of a visionary educational model. Therefore, the Committee recommends that the AICPA and the AAA jointly form a body to provide a timely study of the possible future of the higher education structure for the

accounting profession.

111

This commission may include representation from higher education, practitioners from the wide spectrum of the accounting and auditing profession, regulators, preparers, users of the profession's services, and others. The commission would consider the potential role of a postgraduate professional school model to enhance the quality and sustainability of a vibrant accounting and auditing profession. The commission should consider developments in accounting standards and their application, auditing needs, regulatory framework, globalization, the international pool of candidates, and technology. Finally, a blueprint for this sort of enhanced professional educational structure would also require the consideration of long-term market circumstances, academic governance, operations, programs, funding and resources, the role of accreditation, and experiential learning processes.

111

See, e.g., Joseph V. Carcello, Chair, AAA Task Force to Monitor the Activities of the Treasury ACAP, Professor and Director of Research—Corporate Governance Center, University of Tennessee, Jean C. Bedard, Professor of Accountancy, Bentley College, and Dana R. Hermanson, Chair of Private Enterprise and Professor of Accounting, Kennesaw State University, Comment Letter Regarding Draft Report and Draft Report Addendum 5 (May 15, 2008), available at http://comments.treas.gov/_files/ACAPCommentLetterMay152008.pdf (supporting this Recommendation and noting the need for these schools to be well-funded and be independent from business schools with control over tenure and promotion); Deloitte LLP, Comment Letter Regarding Draft Report and Draft Report Addendum 23 (June 27, 2008), available at http://comments.treas.gov/_files/DeloitteLLPCommentLetter.pdf (supporting this Recommendation and noting the commission should consider other human capital issues including financial and time concerns as well as recruiting individuals from other disciplines); Record of Proceedings (June 3, 2008) (Written Submission of Anne M. Lang, Chief Human Resources Officer, Grant Thornton LLP, 5), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Lang060308.pdf (agreeing with this Recommendation). But, c.f., Record of Proceedings (June 3, 2008) (Written Submission of Frank K. Ross, Director, Center for Accounting Education, Howard University School of Business, 11), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Ross060308.pdf (noting the financial concerns that an extra year of schooling would have on the less affluent, which includes a “disproportionate number” of minorities).

V. Firm Structure and Finances

In addressing the sustainability of the auditing profession, the Committee sought input on and considered a number of matters relating directly to auditing firms, including audit quality, governance, transparency, global organization, financial strength, ability to access capital, the investing public's understanding of auditors' responsibilities and communications, the limitations of audits, particularly relating to fraud detection and prevention, as well as the effect of litigation where audits are alleged to have been ineffective. The Committee also considered the regulatory system applicable to auditing firms.

While much data was available to the Committee, such information was not exhaustive. Certain information regarding auditors of public companies, the auditor of record, and audit fees is readily available. Auditing firms also provide on a voluntarily basis certain other information they believe useful to clients, regulators, and/or investors. Also, in connection with the work of the Committee, the largest firms provided certain additional input, through the Center for Audit Quality (CAQ), sometimes by individual firm and sometimes in summarized format.

112

Center for Audit Quality, Report of the Major Public Company Audit Firms to the Department of the Treasury Advisory Committee on the Auditing Profession (Jan. 23, 2008); Center for Audit Quality, Second Supplement to Report of the Major Public Company Audit Firms to the Department of the Treasury Advisory Committee on the Auditing Profession (Apr. 16, 2008).

After reviewing these data and receiving testimony from witnesses and comment letters, the Committee focused on a few specific areas: Fraud prevention and detection; federal and state regulatory system; governance; and disclosure of auditor changes.

The Committee recommends that regulators, the auditing profession, and others, as applicable, effectuate the following:

Recommendation 1. Urge the [ ] to create a national center to facilitate auditing firms' and other market participants' sharing of fraud prevention and detection experiences, practices, and data and innovation in fraud prevention and detection methodologies and technologies, and commission research and other fact-finding regarding fraud prevention and detection, and further, the development of best practices regarding fraud prevention and detection.

Public Company Accounting Oversight Board (PCAOB) standards currently require auditors to plan and perform audits to obtain reasonable assurance whether financial statements are free of material misstatement, including those caused by fraud.

113

The Committee considered testimony and commentary regarding auditing firms' responsibilities and practices relating to fraud prevention and detection.

114

The auditing profession itself has recognized the significance of its duties with respect to fraud: “Perhaps no single issue is the subject of more confusion, yet is more important, than the nature of the obligation of auditors to detect fraud—or intentional material misstatement of financial information by public companies.”

115

113

Consideration of Fraud in a Financial Statement, Interim Auditing Standard AU 316 (Pub. Company Accounting Oversight Bd. 2002).

114

See, e.g., Andrew D. Bailey, Jr., Professor of Accountancy-Emeritus, University of Illinois, and Senior Policy Advisor, Grant Thornton LLP, Comment Letter Regarding Discussion Outline 4 (Jan. 30, 2008), available at http://comments.treas.gov/_files/BAILEYCOMMENTSONTREASURYADVISORYCOMMITTEEOUTLINEFINALSUBMISSION13008.doc; Record of Proceedings (Feb. 4, 2008) (Written Submission of Dennis Johnson, Senior Portfolio Manager, Corporate Governance, California Public Employees' Retirement System, 5), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Johnson020408.pdf.

115

Serving Global Capital Markets and the Global Economy: A View from the CEOS of the International Audit Networks 12 (Nov. 2006).

No formal forum currently exists where auditors and other market participants regularly share their views and experiences relating to fraud prevention and detection in the context of fraudulent financial reporting. The Committee received testimony that it would improve audit quality and benefit the capital markets and investors and other financial statement users for auditing firms to share their fraud detection experiences

116

and to develop best practices relating to fraud prevention and detection.

117

116

See, Record of Proceedings (Feb. 4, 2008) (Questions for the Record of Cynthia M. Fornelli, Executive Director, Center for Audit Quality, 6 (Mar. 31, 2008)), available at http://www.treas.gov/offices/domestic-finance/acap/agendas/-QFRs-2-4-08.pdf; Record of Proceedings (Dec. 3, 2007) (Written Submission of James S. Turley, Chairman and Chief Executive Officer, Ernst & Young LLP, 7), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Turley120307.pdf.

117

See, e.g., Record of Proceedings (Feb. 4, 2008) (Written Submission of Edward E. Nusbaum, Chief Executive Officer, Grant Thornton LLP, and Chairman, Grant Thornton International Board of Governors, 10), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Nusbaum020408.pdf (stating that “[s]uccess also requires that the profession work with standard setters and regulators to develop best practices and the infrastructure for effective audits designed to detect material financial fraud”).

The Committee believes that a collective sharing of fraud prevention and detection experiences among auditors and other market participants will provide a broad view of auditor practices and ultimately improve fraud prevention and detection capabilities and enable the development of best practices. The Committee also believes that research into industry trends and statistics will help auditors focus and develop procedures to identify areas

and situations at greater risk for fraud. The Committee believes that best practices regarding fraud prevention and detection will enhance the processes and procedures of auditing firms.

The Committee recommends that the [ ] create a national center both to facilitate auditing firms' sharing of fraud prevention and detection experiences, practices, and data and innovation in fraud prevention and detection methodologies and technologies and to commission research and other fact-finding regarding fraud prevention and detection.

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The Committee also recommends that the auditing firms, forensic accounting firms, certified fraud examiners, investors, other financial statement users, public companies, and academics develop, in consultation with the PCAOB, the Securities and Exchange Commission (SEC), international regulators, and the National Association of State Boards of Accountancy (NASBA), best practices regarding fraud prevention and detection.

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The Committee also recognizes that a national center and best practices will have greater impact if these concepts are ultimately extended and embraced internationally.

118

See, e.g., Joseph Carcello, Chair, AAA Task Force to Monitor the Activities of the Treasury ACAP Ernst & Young Professor and Director of Research—Corporate Governance Center University of Tennessee, Jean C. Bedard Timothy B. Harbert Professor of Accountancy Bentley College, Dana R. Hermanson Dinos Eminent Scholar Chair of Private Enterprise and Professor of Accounting Kennesaw State University, Comment Letter Regarding Draft Report and Draft Report Addendum 6, (May 15, 2008), available at http://comments.treas.gov/_files/ACAPCommentLetterMay152008.pdf (supporting this Recommendation); Samuel K. Cotterell, Chair, NASBA, and David A. Costello, President and CEO, NASBA, Comment Letter Regarding Draft Report and Draft Report Addendum 2, (June 27, 2008), available at http://comments.treas.gov/_files/June2908LetterheadTreasuryAdvisoryCommitteeontheAuditingProfession.pdf (“Conclusions from, or approaches discussed during, Center deliberations could have an immediate effect on the way accounting practitioners approach the performance of audits and would likely form the basis for consideration of changes in auditing standards.”); Record of Proceedings (June 3, 2008) (Written Submission of Kenneth Nielsen Goldmann, Capital Markets and SEC Practice Director, J.H. Cohn LLP, 5), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Goldmann060308.pdf (noting how useful such a center would be to smaller firm auditors in detecting and preventing fraud.); Cynthia Fornelli, Executive Director, Center for Audit Quality, Comment Letter Regarding Draft Report and Draft Report Addendum 10-11, (June 26, 2008), available at http://comments.treas.gov/_files/CAQCommentletter62708FINAL.pdf (agreeing with this Recommendation and volunteering the Center for Audit Quality to house this center). But c.f., Jim Wanserski, Businessman, Comment Letter Regarding Draft Report and Draft Report Addendum (June 3, 2008), available at http://comments.treas.gov/_files/ACAPDraftReportcommentsJune22008.doc (stating that public company management is key in fraud prevention and detection efforts more so than the external auditor and notes the small percentage of frauds uncovered by public company auditors).

119

See Dave Richards, Institute of Internal Auditors, Comment Letter Regarding Draft Report and Draft Report Addendum 3, (June 13, 2008), available at http://comments.treas.gov/_files/IIARESPONSETREASURYADVISORYCOMMITTEEONAUDITING061308.doc (suggesting the Institute of Internal Auditors be included in the listing of organizations providing best practices).

Recommendation 2. Encourage greater regulatory cooperation and oversight of the public company auditing profession to improve the quality of the audit process and enhance confidence in the auditing profession and financial reporting.

The SEC, the PCAOB, and individual state boards of accountancy regulate the auditing profession. The SEC and the PCAOB enforce the securities laws and regulations addressing public company audits. Individual state accountancy laws in fifty-five jurisdictions in the United States govern the licensing and regulation of both individuals and firms who practice as certified public accountants.

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State boards of accountancy enforce these laws and also administer the Uniform CPA Examination. NASBA serves as a forum for these boards to enhance their regulatory effectiveness and communication.

120

Record of Proceedings (Dec. 3, 2007) (Written Submission of David A. Costello, President and Chief Executive Officer, National Association of State Board of Accountancy, 2), available at http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Costelllo120307.pdf.

The Committee believes that enhancing regulatory cooperation and reducing duplicative oversight of the auditing profession by federal and state authorities and enhancing licensee practice mobility among the states are in the best interest of the public and the effective operation of the capital markets. In this regard, the Committee recommends the following:

(a) Institute the following mechanism to encourage the states to substantially adopt the mobility provisions of the Uniform Accountancy Act, Fifth Edition (UAA)

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: If states have failed to adopt the mobility provisions of the UAA by December 31, 2010, Congress should pass a federal provision requiring those states to adopt these provisions.

121

Uniform Accountancy Act (

Fifth Ed. July 2007

The American Institute of Certified Public Accountants (AICPA) and NASBA jointly author the UAA, a model bill which focuses on the education, examination, and experience requirements for certified public accountants. As the name of the bill suggests, the UAA advances the goal of uniformity, in addition to protecting the public interest and promoting high professional standards. In 2006 and 2007, recognizing the changing global economy and the impact of electronic commerce, the AICPA and NASBA proposed amendments to the UAA to allow for a streamlined framework for CPA “mobility” of practice among the states; that is, a CPA's practice privileges would be valid and portable across all state jurisdictions beyond that of the CPA's resident state.

122

See Record of Proceedings (Dec. 3, 2007) (Questions for the Record of David A. Costello, President and Chief Executive Officer, National Association of State Board of Accountancy, 1 (Feb. 6, 2008)), available at

http://www.treas.gov/offices/domestic-finance/acap/QFRs-12-3-2007.pdf

(“As the global business community continues to expand, CPAs will be required to practice beyond the state in which they reside. Inefficiencies are created when those individuals are required to complete paperwork and submit a fee for every state in which they perform professional services.”). Note that the UAA does require notification or “permitting” for out-of-state firms performing attest services for audit clients headquartered in another state, but not for individual CPAs. See UAA, §§ 7(a)(1), 7(c)(1), and 23(a)(4) (Fifth Ed. July 2007).

According to NASBA, to date thirty-one states have passed mobility legislation. Two other states currently have mobility legislation introduced and other bills are anticipated in the 2009 legislative session. Almost every state is now discussing or considering mobility, and a number of other state boards of accountancy have voted to support and move forward with mobility.

The Committee considered testimony and commentary on the importance to auditing firms' multi-state practices of the adoption of the UAA's mobility provisions.

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A NASBA representative testified, “In order for our capital market system to continue to prosper and grow, NASBA recognized the need to ensure that an efficient, effective mobility system is in place that will allow CPAs and their firms, as professional service providers, to serve

the needs of American businesses, where ever they are located.”

124

123

See, e.g., Amper, Politziner and Mattia, P.C., Comment Letter Regarding Discussion Outline 2 (Nov. 14, 2007) available at

http://comments.treas.gov/_files/AmperPolitzinerMattia.pdf

(noting that “[t]he ease of performing audits in any state by a valid CPA * * * without requiring to be licensed by each state would be beneficial.”); Record of Proceedings (Dec. 3, 2007) (Written Submission of Dennis Nally, Chairman and Senior Partner, PricewaterhouseCoopers LLP, 5) (Dec. 3, 2008), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Nally120307.pdf

(noting that a number of states are cooperating and working towards adopting uniform mobility requirements); Record of Proceedings (Dec. 3, 2007) (Written Submission of James S. Turley, Chairman and Chief Executive Officer, Ernst & Young LLP, 5), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Turley120307.pdf

(“The Treasury Committee should suggest that the states eliminate barriers to interstate practice by universal adoption of the mobility provisions of the Uniform Accountancy Act.”).

124

Record of Proceedings (Dec. 3, 2007) (Written Submission of David A. Costello, President and Chief Executive Officer, National Association of State Board of Accountancy, 6), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Costello120307.pdf.

The Committee believes that, given the multi-state operations of many public companies and the multi-state practices of many auditing firms, practice mobility will foster a more efficient operation of the capital markets. The Committee recommends the following mechanism to encourage the states to adopt the UAA's mobility provisions: If states have failed to adopt the mobility provisions of the UAA by December 31, 2010, Congress should pass a federal provision requiring those states to adopt these provisions.

125

The Committee recognizes that some state legislatures meet biannually, and for such legislatures this deadline poses a challenge.

126

However, such a deadline should be attainable and will encourage such legislatures to place this issue high on their agenda. The Committee also recommends that the states participate in NASBA's Accountancy Licensee Database (ALD) as a mechanism to assist in maintaining appropriate oversight of CPAs throughout the country regardless of where they practice and that appropriate authorities interpret federal and state privacy regulations to facilitate implementation of the ALD.

125

See,

e.g.

, Ernst & Young LLP, Comment Letter Regarding Draft Report and Draft Report Addendum 24-25, (June 27, 2008), available at

http://comments.treas.gov/_files/EYACAPCommentLetterFINAL.pdf

(agreeing with this Recommendation); Mayer Hoffman McCann P.C., Comment Letter Regarding Draft Report and Draft Report Addendum 2, (June 17, 2008), available at

http://comments.treas.gov/_files/MayerHoffmanMcCannCommentLetter.pdf

(noting that the lack of mobility impairs firms from assigning the best people to engagements and uses important resources to establish and comply with multiple state licensure); PricewaterhouseCoopers, Comment Letter Regarding Draft Report and Draft Report Addendum 9, (June 30, 2008), available at

http://comments.treas.gov/_files/PwCCommentLtrTreasCmtDraftandAddendum63008.pdf;

Bruce Rosen, Eisner LLP, Comment Letter Regarding Draft Report and Draft Report Addendum (May 23, 2008), available at

http://comments.treas.gov/index.cfm?FuseAction=Home.View&Topic_id=9&FellowType_id=1&CurrentPage=1

(noting the importance of putting the right resources in the right place without the needless complexity of differing state requirements). But c.f., Joseph Carcello, Chair, AAA Task Force to Monitor the Activities of the Treasury ACAP Ernst & Young Professor and Director of Research, Corporate Governance Center University of Tennessee, Jean C. Bedard Timothy B. Harbert Professor of Accountancy Bentley College, Dana R. Hermanson Dinos Eminent Scholar Chair of Private Enterprise and Professor of Accounting Kennesaw State University, Comment Letter Regarding Draft Report and Draft Report Addendum 6, (May 15, 2008), available at

http://comments.treas.gov/_files/ACAPCommentLetterMay152008.pdf

(recommending that while there does need to be increased mobility, it could be achieved by a national license for public company audits in addition to state licensing.); William Hermann, Managing Partner, and Gregory Coursen, Director of Professional Standards, Plante & Moran, PLLC Comment Letter Regarding Draft Report and Draft Report Addendum 2, (June 12, 2008), available at

http://comments.treas.gov/_files/Commentletter61208.pdf

(noting the AICPA's success in driving the adoption of the UAA's mobility provision).

126

See,

e.g.

, Samuel K. Cotterell, Chair, NASBA, and David A. Costello, President and CEO, NASBA, Comment Letter Regarding Draft Report and Draft Report Addendum 3, (June 27, 2008), available at

http://comments.treas.gov/_files/June2908LetterheadTreasuryAdvisoryCommitteeontheAuditingProfession.pdf

(recommending a later due date because some states may not be able to meet the 2010 deadline due to their legislative calendars); Cynthia Fornelli, Executive Director, Center for Audit Quality, Comment Letter Regarding Draft Report and Draft Report Addendum 14-15, (June 26, 2008), available at

http://comments.treas.gov/_files/CAQCommentletter62708FINAL.pdf

(suggesting delaying federal action as states may adopt the provisions on their own or, at the least, moving the deadline to December 31, 2011 to allow states adequate time to adopt the provisions).

(b) Require regular and formal roundtable meetings of regulators and other governmental enforcement bodies in a cooperative effort to improve regulatory effectiveness and reduce the incidence of duplicative and potentially inconsistent enforcement regimes.

Under the federal securities laws, the SEC has enforcement authority over public company auditing firms and oversight authority over the PCAOB under the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley). Sarbanes-Oxley provides the PCAOB with registration, reporting, inspection, standard-setting, and enforcement authority over public company auditing firms.

127

In addition, the fifty-five boards of accountancy license, regulate, and enforce state accountancy laws pertaining to certified public accountants and their firms. In addition, the Department of Justice (DOJ) and state attorneys general can bring enforcement actions against auditing firms and their employees.

127

Sarbanes-Oxley Act of 2002, 15 U.S.C. §§ 7211-7219.

The Committee considered testimony from auditing firms on the duplicative and sometimes inconsistent federal and state oversight of the profession.

128

The Committee does recognize that both federal and state regulators have made attempts to coordinate better their enforcement activities.

129

One witness suggested the possible formation of a commission to help improve regulatory effectiveness.

130

Another witness urged state and federal regulatory cooperation to ensure harmonized regulation and licensure.

131

128

See,

e.g.

, Record of Proceedings (Dec. 3, 2007) (Written Submission of Dennis Nally, Chairman and Senior Partner, PricewaterhouseCoopers LLP, 5), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Nally120307.pdf;

Record of Proceedings (Feb. 4, 2008) (Written Submission of Edward E. Nusbaum, Chief Executive Officer, Grant Thornton LLP, and Chairman, Grant Thornton International Board of Governors, 7), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Nusbaum020408.pdf;

Record of Proceedings (Feb. 4, 2008) (Questions for the Record of Barry Salzberg, Chief Executive Officer, Deloitte LLP, App. A 4 (Mar. 31, 2008)), available at

http://www.treas.gov/offices/domestic-finance/acap/agendas/QFRs-2-4-08.pdf

(criticizing duplicative auditing firm investigations by states with no nexus to alleged conduct).

129

See,

e.g.

, Record of Proceedings (Dec. 3, 2007) (Oral Remarks of David A. Costello, President and Chief Executive Officer, National Association of State Board of Accountancy, 98), available at

http://www.treas.gov/offices/domestic-finance/acap/agendas/minutes-12-3-07.pdf

(noting that “[NASBA] has been working with the PCAOB very closely coordinating efforts, trying to diminish as much as possible the redundancy in enforcement”) Record of Proceedings (Dec. 3, 2007) (Written Submission of David A. Costello, President and Chief Executive Officer, National Association of State Board of Accountancy, 6), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Costelllo120307.pdf

(stating that NASBA is assisting state boards in enforcement cases involving multi-state activities).

130

http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Nusbaum020408.pdf

(noting that, “it would be useful to evaluate the possibility of an interstate commission for the whole of the audit profession. Such a commission would bring together state licensing authorities, the PCAOB, and appropriate professional organizations. It would be the means to rationalize existing disparities in licensing qualifications, continuing education requirements and peer review for non-public company audit practices. It would also enable enforcement of common regulations and license discipline across state and federal jurisdictions.”).

131

Record of Proceedings (Dec. 3, 2007) (Written Submission of Dennis Nally, Chairman and Senior Partner, PricewaterhouseCoopers LLP, 5), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/12032007/Nally120307.pdf.

The Committee recommends mandating regular and formal roundtables of the PCAOB, the SEC, the DOJ, the state boards of accountancy, and the state attorneys general, to periodically review the overall enforcement regimes applicable to the public company auditing profession.

132

These roundtables also should focus on regulatory coordination, improvement, and consistent approaches to enforcement to minimize duplicative efforts. Because of the difficulty and cost of bringing together many different state agencies on a regular basis, the Committee recommends that NASBA assist states by taking a leadership role in coordinating their responsibilities and interests.

133

132

See

e.g.

, Joseph Carcello, Chair, AAA Task Force to Monitor the Activities of the Treasury ACAP Ernst & Young Professor and Director of Research—Corporate Governance Center University of Tennessee, Jean C. Bedard Timothy B. Harbert Professor of Accountancy Bentley College, Dana R. Hermanson Dinos Eminent Scholar Chair of Private Enterprise and Professor of Accounting Kennesaw State University, Comment Letter Regarding Draft Report and Draft Report Addendum 6, (May 15, 2008), available at

http://comments.treas.gov/_files/ACAPCommentLetterMay152008.pdf

(supporting this Recommendation); Samuel K. Cotterell, Chair, NASBA, and David A. Costello, President and CEO, NASBA, Comment Letter Regarding Draft Report and Draft Report Addendum 3, (June 27, 2008), available at

http://comments.treas.gov/_files/June2908Letterhead

TreasuryAdvisoryCommitteeontheAuditingProfession.pdf

(supporting this Recommendation); Mayer Hoffman McCann P.C., Comment Letter Regarding Draft Report and Draft Report Addendum 2, (June 13, 2008), available at

http://comments.treas.gov/_files/MayerHoffmanMcCannCommentLetter.pdf

(suggesting that all meetings be made public); but, cf. Frank Frankowski, CFO, Airborne Systems, Comment Letter Regarding Draft Report and Draft Report Addendum 1, (June 2, 2008), available at

http://comments.treas.gov/_files/FrankowskiLetter.pdf

(stating that the Recommendation “will only add to the confusion and lack of focus on the underlying issues”).

133

Samuel K. Cotterell, Chair, NASBA, and David A. Costello, President and CEO, NASBA, Comment Letter Regarding Draft Report and Draft Report Addendum 3, (June 27, 2008), available at

http://comments.treas.gov/_files/June2908LetterheadTreasuryAdvisoryCommitteeontheAuditingProfession.pdf

(supporting this Recommendation).

The Committee is concerned about the financial and operational independence of state boards of accountancy from outside influences, such as other state agencies, and the possible effect on the regulation and oversight of the accounting profession. A number of state boards are under-funded

134

and lack the wherewithal to incur the cost of investigations leading to enforcement. In addition, some state boards fall under the centralized administrative “umbrella” of other state agencies and lack control of financial resources and/or operational independence necessary to carry out their mandate of public protection.

135

In some cases, board members are nominated by private associations whose constituencies are not necessarily focused on the protection of the public.

134

National Association of State Boards of Accountancy, Submission in Connection With the December 3, 2007 Meeting of the Advisory Committee on the Auditing Profession (Jan. 2008) (documenting the wide spectrum of funding for individual state boards of accountancy and noting the number of full-time staff per state boards of accountancy office).

135

Statement of Ronald J. Rotaru, Executive Director, Accountancy Board of Ohio, before Ohio H. Finance Committee of the Ohio House of Representatives 1 (Mar. 18, 2005) (“The evidence shows that ‘consolidated' states have difficulty in effectively enforcing the statutes governing the profession under their central agency umbrella.”).

The Committee believes that greater independence of state boards of accountancy would enhance their regulatory effectiveness. The Committee recommends that, working with NASBA, states evaluate and develop means to make their respective state boards of accountancy more operationally and financially independent of outside influences.

136

The Committee notes that this Recommendation to ensure the independence of state boards of accountancy is not meant to limit in any way the efforts of regulators and other governmental enforcement bodies to coordinate their regulatory and enforcement activities as recommended in Recommendation 2(b).

136

See Samuel K. Cotterell, Chair, NASBA, and David A. Costello, President and CEO, NASBA, Comment Letter Regarding Draft Report and Draft Report Addendum 3, (June 27, 2008), available at

http://comments.treas.gov/_files/June2908LetterheadTreasuryAdvisoryCommitteeontheAuditingProfession.pdf

(“There is a need to ensure all State Boards of Accountancy have adequate funding to maintain a healthy regulatory environment, which includes the ability to fund the costs of investigations and disciplinary enforcement.”); Ernst & Young LLP Comment Letter Regarding Draft Report and Draft Report Addendum 25, (June 27, 2008), available at

http://comments.treas.gov/_files/EYACAPCommentLetterFINAL.pdf

(agreeing that appropriate operational support is needed to allow regulators the resources to monitor the profession).

Recommendation 3. Urge the PCAOB and the SEC, in consultation with other federal and state regulators, auditing firms, investors, other financial statement users, and public companies, to analyze, explore, and enable, as appropriate, the possibility and feasibility of firms appointing independent members with full voting power to firm boards and/or advisory boards with meaningful governance responsibilities to improve governance and transparency of auditing firms.

In response to the recent corporate accounting scandals, related legislative and regulatory requirements and best practices, public companies enhanced their corporate governance. One of the most prominent alterations to the corporate governance scheme was the increased representation and strengthening of independent members of boards of directors. The New York Stock Exchange and the Nasdaq enhanced their public company listing standards to call for a majority of independent board members.

137

Best practices have gone even further, calling for a “substantial majority” of independent directors.

138

137

New York Stock Exchange, Listed Company Manual § 303A.01 (2003); Nasdaq, Manual, Rule 4350(c).

138

See, e.g., The Business Roundtable, Principles of Corporate Governance (May 2002) (recommending, among other things, a substantial majority of independent directors and fully independent audit, corporate governance/nominating, and compensation committees); The Conference Board, Commission on Public Trust and Private Enterprise (Jan. 9, 2003) (recommending, among other things, a substantial majority of independent directors and regular executive sessions of the independent directors).

A combination of Sarbanes-Oxley provisions and exchange listing standards mandate fully independent audit committees, nominating/corporate governance, and compensation committees.

139

In addition, independent directors' responsibilities have increased. For example, the independent audit committee now appoints, oversees, and compensates the auditor.

140

Although difficult to quantify the benefits of these enhancements, many have extolled these reforms as improving the quality of board oversight, reducing conflicts of interest, and enhancing investor confidence in public company operations and financial reporting.

141

139

Sarbanes-Oxley Act, 15 U.S.C. § 78-j (2002) (mandating audit committees comprised solely of independent directors); New York Stock Exchange, Listed Company Manual § 303A.04 (2004)(requiring nominating/corporate governance committees comprised solely of independent directors); New York Stock Exchange, Listed Company Manual § 303A.05 (2004) (requiring compensation committees comprised solely of independent directors); New York Stock Exchange, Listed Company Manual § 303A.06 (2003) (mandating compliance with SEC rules requiring audit committees comprised solely of independent directors); Nasdaq, Manual, Rule 4350(d) (mandating compliance with SEC rules requiring audit committees comprised solely of independent directors). Nasdaq, Manual, Rule 4350(c)(3) (requiring independent directors to determine, or recommend to the full Board for determination, the compensation of all executive officers). Nasdaq, Manual, Rule 4350(c)(4) (requiring independent directors to determine, or recommend to the full Board for determination, director nominees.).

140

Sarbanes-Oxley Act, 15 U.S.C. § 78-j (2002).

141

For example, see the commentary accompanying New York Stock Exchange, Listed Company Manual § 303A.01 (“Requiring a majority of independent directors will increase the quality of board oversight and lessen the possibility of damaging conflicts of interest.”) and the interpretive material accompanying Nasdaq Rule 4350, IM-4350-4 (“Independent directors * * * play an important role in assuring investor confidence. Through the exercise of independent judgment, they act on behalf of investors to maximize shareholder value in the companies they oversee and guard against conflicts of interest. Requiring that the board be comprised of a majority of independent directors empowers such directors to carry out more effectively these responsibilities.”).

Public company auditing firms as private partnerships are not subject to these requirements. Instead, state laws and partnership agreements determine the governance of auditing firms.

142

Often a firm's governing body is

comprised of elected firm partners.

143

Some firms are currently using advisory boards, although these may not be well-publicized or transparent.

142

Center for Audit Quality, Report of the Major Public Company Audit Firms to the Department of the Treasury Advisory Committee on the Auditing Profession 2 (Jan. 23, 2008).

143

Center for Audit Quality, Report of the Major Public Company Audit Firms to the Department of the Treasury Advisory Committee on the Auditing Profession 2-22 (Jan. 23, 2008) (detailing the various governance structures of the largest six auditing firms); Cynthia M. Fornelli, Executive Director, Center for Audit Quality, and James S. Turley, Chair, Governing Board, Center for Audit Quality, and Chairman and CEO, Ernst & Young LLP, Comment Letter Regarding Discussion Outline 13 (Nov. 30, 2007), available at

http://comments.treas.gov/_files/Treasurycommentletterfinal11302007.pdf

(noting the largest auditing firms have supervisory boards overseeing management).

Several witnesses testified to the benefits of improving auditing firm governance and suggested the addition of independent members to the boards of directors.

144

One witness called for an entirely independent board with enhanced responsibilities, including chief executive officer selection, determining partner compensation, and monitoring potential conflicts of interest and audit quality.

145

An auditing firm representative noted that his firm was considering adding independent members on its international governing board.

146

144

See, e.g., Andrew D. Bailey, Jr., Professor of Accountancy-Emeritus, University of Illinois, and Senior Policy Advisory, Grant Thornton LLP, Comment Letter Regarding Discussion Outline 12 (Jan. 30, 2008), available at

http://comments.treas.gov/_files/BAILEYCOMMENTSONTREASURYADVISORYCOMMITTEEOUTLINEFINALSUBMISSION13008

(“[I]ndependent board members similar to those found on public company boards would be a good governance practice and would signal the markets about the firms' positive commitment to the public good.”); Record of Proceedings (Feb. 4, 2008) (Written Submission of Dennis Johnson, Senior Portfolio Manager, Corporate Governance, California Public Employees' Retirement System, 3), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Johnson020408.pdf

(stating that independent board of directors could possibly decrease potential conflicts of interest).

145

Record of Proceedings (Feb. 4, 2008) (Written Submission of Paul G. Haaga Jr., Vice Chairman, Capital Research and Management Company, 2), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Haaga020408.pdf.

146

http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Nusbaum020408.pdf.

The Committee believes that enhancing corporate governance of auditing firms through the appointment of independent board members, whose duties run to the auditing firm and its partners/owners, to advisory boards with meaningful governance responsibilities (possible under the current business model), and/or to firm boards could be particularly beneficial to auditing firm management and governance.

147

The Committee also believes that such advisory boards and independent board members could improve investor protection through enhanced audit quality and firm transparency. The Committee is particularly intrigued by the idea of independent board members with duties and responsibilities similar to those of public company non-executive board members.

147

http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Nusbaum020408.pdf

(“Such a change in the governance model may be one way to strengthen our ability to serve market participants and reinforce independence.”).

The Committee recognizes the multiple challenges that instituting a governance structure with independent board members might entail, including compliance with state partnership laws and independence requirements, insurance availability for such directors, and liability concerns.

148

Accordingly, the Committee recommends that the PCAOB and the SEC, in consultation with federal and state regulators, auditing firms, investors, other financial statement users, and public companies, analyze, explore, and enable, as appropriate, the possibility and feasibility of firms' appointing independent board members and advisory boards.

149

The Committee notes that the PCAOB and the SEC should consider the size of auditing firms in analyzing and developing any governance proposals.

150

148

Several witnesses commented on these difficulties. See, e.g., Ernst & Young LLP Comment Letter Regarding Draft Report and Draft Report Addendum 25-26, (June 27, 2008), available at

http://comments.treas.gov/&_files/EYACAPCommentLetterFINAL.pdf;

Cynthia Fornelli, Executive Director, Center for Audit Quality, Comment Letter Regarding Draft Report and Draft Report Addendum 17-19, (June 26, 2008), available at

http://comments.treas.gov/_files/CAQCommentletter62708FINAL.pdf;

William Hermann, Managing Partner, and Gregory Coursen, Director of Professional Standards, Plante & Moran, PLLC Comment Letter Regarding Draft Report and Draft Report Addendum 1-2, (June 13, 2008), available at

http://comments.treas.gov/&_files/Commentletter61208.pdf;

Record of Proceedings (June 3, 2008) (Written Submission of Barry Mathews, Deputy Chairman, Aon Corporation, 2), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Mathews060308.pdf.;

David McDonnell, Chief Executive Officer, Grant Thornton International Ltd, and Edward E. Nusbaum, Chief Executive Officer, Grant Thornton LLP, and Chairman, Grant Thornton International Ltd Board of Governors, Comment Letter Regarding Draft Report and Draft Report Addendum 4 (June 27, 2008) available at

http://comments.treas.gov/_files/GTCommentlettertoACAPJune2008_FINAL.pdf.

149

See Record of Proceedings (June 3, 2008) (Written Submission of Nell Minow, Editor and Co-Founder, The Corporate Library, 2), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Minow060308.pdf.

But, cf. Wayne Kolins, Director of Assurance, BDO Seidman LLP, Comment Letter Regarding Draft Report and Draft Report Addendum 3-4, (June 27, 2008) available at

http://comments.treas.gov/_files/ResponsetoAdvisoryCommittee0627final.PDF

(advising the Committee to keep in mind the fact that accounting firms operate differently than public companies and that the PCAOB currently reviews information that would concern independent board members); Paul Lee, Director, Hermes Equity Ownership Services Limited, Comment Letter Regarding Draft Report and Draft Report Addendum 3, (June 13, 2008), available at

http://comments.treas.gov/_files/ACAPresponse13Jun08.pdf.

150

See Record of Proceedings (June 3, 2008) (Written Submission of Kenneth Nielsen Goldmann, Capital Markets and SEC Practice Director, J.H. Cohn LLP, 4-5), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Goldmann060308.pdf

(noting that smaller firms do not have large public company audit practices so the concept of public board members may be difficult).

Recommendation 4. Urge the SEC to amend Form 8-K disclosure requirements to characterize appropriately and report every public company auditor change and to require auditing firms to notify the PCAOB of any premature engagement partner changes on public company audit clients.

In 2006, over 1,300 public companies changed their auditor and from 2002 to 2006 over 6,500 public companies changed their auditor.

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Under current SEC regulations, a public company must disclose any auditor change on Form 8-K.

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SEC regulations require disclosure of any disagreements on financial disclosures during the preceding two years prior to a resignation or termination and whether some issue, such as the auditor's inability to rely on management's representations, may put into question financial disclosure reliability. SEC regulations also allow a public company to request that the auditor respond with a letter addressed to the SEC stating whether it agrees with the company's disclosure and, if it does not agree, stating why.

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See Mark Grothe and Blaine Post, Speak No Evil, Glass Lewis & Co Research 12 (May 21, 2007).

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Form 8-K, available at

http://www.sec.gov/about/forms/form8-k.pdf.

While the SEC does attempt to uncover through its rules whether the auditor change relates to disagreements over accounting and reporting matters, the SEC rules do not require a public company to provide a reason for the auditor's departure in the vast majority of cases. The limitations of the existing disclosure requirements have resulted in companies failing to disclose any reason for their auditor changes in

approximately 70% of the more than 1,300 auditor changes occurring in 2006.

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See Mark Grothe and Blaine Post, Speak No Evil, Glass Lewis & Co Research 12 (May 21, 2007).

The Committee considered testimony and commentary regarding the lack of clear disclosure surrounding auditor changes. Testimony and commentary viewed the lack of transparency surrounding auditor changes as detrimental to investor confidence in financial reporting.

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Testimony and commentary suggested greater transparency regarding auditor changes would compel audit committees to more closely evaluate auditor selection decisions and lead to greater competition in the audit market.

155

154

http://comments.treas.gov/_files/Baileycommentsontreasuryadvisorycommitteeoutlinefinalsubmission13008.doc

(recommending SEC and PCAOB disclosures of auditor changes to enhance the growth of smaller auditing firms); Record of Proceedings (Feb. 4, 2008) (Oral Remarks of Edward E. Nusbaum, Chief Executive Officer, Grant Thornton LLP, and Chairman, Grant Thornton International Board of Governors, 193-94), available at

http://www.treas.gov/offices/domestic-finance/acap/agendas/minutes-2-4-08.pdf

(calling for expanded Form 8-K disclosure requirements as “in the best interest of investors”).

155

http://www.treas.gov/offices/domestic-finance/acap/submissions/02042008/Nusbaum020408.pdf

(noting that the Committee should examine “[c]omprehensive disclosures about reasons for auditor switches”).

The Committee believes that explicitly stating the reason for an auditor change will assist investors in determining the quality of financial reporting and subsequent investment decisions. The Committee recommends that the SEC amend its Form 8-K disclosure on auditor changes by providing for the following mechanism:

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The public company would file within four days of an auditor change a Form 8-K disclosing that an auditor had resigned, was terminated, or did not seek reappointment; the company would appropriately characterize and state in all cases in plain English the reason or reasons for the change. The company would also disclose whether its audit committee agreed with the disclosure it has provided. The company would also provide the auditor with a copy of the disclosure and request a response as to the accuracy of the disclosure. The company would include any response as an exhibit to the company's Form 8-K filing, or if received following the due date for the Form 8-K, in a subsequent Form 8-K. As discussed above under current SEC regulations, the public company can request that the auditor respond to the company's statements in the Form 8-K regarding disagreements over accounting and financial matters.

156

See Record of Proceedings (June 3, 2008) (Written Submission of Kenneth Nielsen Goldmann, Capital Markets and SEC Practice Director, J.H. Cohn LLP, 4), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Goldmann060308.pdf

(recommending additional disclosure regarding the relationship between the successor auditor and the company); Dennis Johnson, CFA, Senior Portfolio Manager, CalPERS, Comment Letter Regarding Draft Report and Draft Report Addendum 3, (June 13, 2008), available at

http://comments.treas.gov/_files/200806;_13ACAP_addendum_commentltr.pdf

(supporting the Recommendation); Record of Proceedings (June 3, 2008) (Written Submission of Nell Minow, Editor and Co-Founder, The Corporate Library, 2), available at

http://www.treas.gov/offices/domestic-finance/acap/submissions/06032008/Minow060308.pdf

(stating that the Recommendation seems consistent with Sarbanes-Oxley Act). But, cf. Ernst & Young LLP Comment Letter Regarding Draft Report and Draft Report Addendum 27, (June 27, 2008), available at

http://comments.treas.gov/_files/EYACAPCommentLetterFINAL.pdf

(worrying that the results will be “boilerplate disclosure that is of little benefit to investors while an expansion of the list of objective criteria could be more useful”); Wayne Kolins, Director of Assurance, BDO Seidman LLP, Comment Letter Regarding Draft Report and Draft Report Addendum 4, (June 27, 2008) available at

http://comments.treas.gov/_files/ResponsetoAdvisoryCommittee0627final.PDF

(stating “a requirement for auditors to respond as to the accuracy of disclosures relating to subjective reasons is not feasible, since auditors have no basis for agreeing or disagreeing with management regarding why they dismissed the auditors”).

In addition, the Committee recommends that au

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