One on One: The PCAOB Chairman and the JofA: PCAOB Chairman William McDonough Talks about Accountability, the Inspection Program Aimed at Auditors of Financial Statements and the Board's Expectations of Corporate Management

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JofA: Regaining confidence in the capital markets is job number one. From your perspective, what will it take to get things moving again? How will the PCAOB interface with corporate America, Wall Street, lawyers and the accounting profession? What specific role do you see for the accounting profession in this process? Can you comment on your timing expectations?

McDonough: Few of us could have imagined three years ago that we would be where we are today, in a world in which accounting, auditing and corporate governance would be subject to a strict new regime under the Sarbanes-Oxley Act.

Corporate America, Wall Street, lawyers and accountants have to resist the temptation to look at the act as a proscriptive, check-off list of rules. That kind of thinking is missing the point--not of the law, but of the reality that led to the Sarbanes-Oxley Act.

Sarbanes-Oxley is not about checking boxes. It is about accountability. If you audit a financial statement, if you are CEO of a publicly traded company, indeed, if you have any role in the capital markets, you must be accountable for your actions. Accountability--not just to investors, but to the public at large, indeed, to the world--is what we must be about. We're going to have to work at it, all of us, whether we are in the public sector or the private sector.

Auditors will take their lead from the standards we will set at the PCAOB. I think members of other professions would do well to look at the examples we will set at the PCAOB and act accordingly.

JofA: There has been much written about the need to improve corporate governance--the tone at the top. What are your ideas for addressing tiffs issue? What will you expect from the accounting profession in helping to meet this challenge?

McDonough: Our inspectors will play a vital role in ensuring that the tone at the top of the accounting firms is what it should be. They will want to know: Does the managing partner, does the audit team leader, understand what is demanded of the accounting firm in this new era of regulation and oversight? Do they understand the standards for audits, and just as important, do they understand why those standards are in place? Do the managers lead by example, demonstrating every day the value of those standards?

The board and our inspectors want to know whether the message of "doing the right thing" is reaching the rank and file in the firms. Our inspectors will talk to the managers, but they will also talk to the least experienced members of the audit teams to find out whether the message is reaching them. We will look at how often and how well the message is delivered.

We will look at compensation and promotion. Are the best auditors rewarded for being the best auditors, or are they rewarded for something else? We will look at how clients are selected and how they are let go.

Obviously, our inspectors will look at audits as well. We will identify and examine the audits that carry the most risk, and we will sample what should be simpler, more routine audits.

JofA: What are some of the lessons you have learned from your past financial institution responsibilities that you will use in your position as chairman of the PCAOB? Which might apply specifically to the accounting profession?

McDonough: I approach my new job at the PCAOB as I approached my job as the top bank supervisor at the New York Fed.

I expect that accountants, as members of a regulated profession, know what the rules are. I expect that they are following those rules, both in their letter and their spirit. I bring those expectations, and the respect they engender, to the table when I deal with the firms as chairman of the PCAOB.

If they depart from those expectations--that is, if they break the rules, if they ignore the spirit of the law even while meeting the letter--our dealings will be most unpleasant. There will be consequences, and they will be grave. …