Taking stock at the PCAOB: in an interview, the PCAOB's chief auditor, Douglas R. Carmichael, reviews the agency's recent actions and the evolving regulation of accounting firms.

• Author: Fraser, Bruce W.
• Position: Regulation - Public Company Accounting Oversight Board - Interview

The accounting industry has come under withering criticism in the wake of recent corporate scandals--not surprisingly, since the scandals at Enron Corp., WorldCom Inc., Adelphia Communications and elsewhere have involved accounting fraud. The accounting firms have been accused of covering up their clients' sins, or perhaps worse, being unable to detect the fraud in the first place. The scandals have decimated their ranks, even claiming the life of Arthur Andersen LLP.

In some respects, the accounting firms have been hostage to the companies that engaged them originally for audit work. Lately, headlines have been full of cases questioning auditor independence, arising from the sale by audit firms of non-audit-related services. Many of these have involved tax shelters that the firms sold to audit clients and their executives. Over the last few years, executives at the Big Four and other accounting firms have been hit with a string of indictments on auditor-independence issues and other wrongdoings.

Lots of eyes have been turning to the Public Company Accounting Oversight Board (PCAOB), launched in 2003 as part of the Sarbanes-Oxley Act. The PCAOB, which replaced the existing form of self-regulation for the industry, is the primary regulator on audit-independence issues. It is under the jurisdiction of the Securities and Exchange Commission (SEC).

Appointed two years ago as the PCAOB's chief auditor, Douglas R. Carmichael is effectively charged with overseeing the redrawing of the nation's auditing standards. He also counsels the board on auditing and accounting practices.

The 63-year-old former professor at Baruch College at the City University of New York--from which he is on leave--is based in Washington, D.C. He has worked to help eliminate auditor-consultant conflicts and steadily pushed for more transparency at accounting firms. At the PCAOB, he has drafted several standards, including one that addresses the controversial Section 404 of Sarbanes-Oxley, which requires public companies to certify that they have an operating system of internal controls to prevent fraud and provide greater managerial accountability to shareholders. Other rules eliminate certain tax services auditors can provide their audit clients. A third sets standards for annual inspections at auditing firms.

The remaining challenges before Carmichael and the PCAOB are immense. "PCAOB's biggest challenge is formulating techniques and training tools for auditors to identify areas where fraud is likely to occur. The second most important challenge is to formulate auditing standards that promote the best practices in quality-control standards," says Melvyn I. Weiss, a senior and founding partner at New York law firm Milberg Weiss Bershad & Schulman LLP, who has litigated many cases involving CPA firms.

"Doug Carmichael has expressed views that seemingly will make the PCAOB a proactive standard-setter and aggressive enforcer," Weiss adds. "The real...