Accountants and Auditors

Mr Bwoch will head the autonomous Treasury, which is presently run as an integral part of the Ministry of Finance. The intended departure from tradition has ignited a turf war. One faction at the ministry says Mr Bwoch essentially wants a complete separation of Treasury from the Ministry of Finance. But Mr Bwoch counters that the arrangement was endorsed and effected by Mr Chris Kassami, the Finance permanent secretary who also is the secretary to the Treasury.

"From July 1, the Treasury will be autonomous; we shall make our own payments," Mr Bwoch said. "We shall have our vote and our own contract committees for operational purposes. Finance is meant to make policy. Bank of Uganda and the Treasury should be operational branches functioning without interference." He said the creation of a separate vote for the Treasury resulted from delays in payment of the external debt.

"To pay external debts, I have to request money from Finance," said Mr Bwoch, who as accountant general effectively runs the Treasury. "There have been delays because the priority of Finance may not be the priority of Treasury." Ms Betty Kasimbazi, the under-secretary in the ministry, said that while it is true a separate vote has been provided for the Treasury, a separation from Finance has not been granted.

"The Treasury is supposed to handle external debts, interest payment, gross tax payment account, consolidated account and Treasury instruments, " Ms Kasimbazi said. " That is what the vote was provided for but other activities were to remain with the ministry." She added: "All I knew was that the Treasury was to directly get money to fulfil its mandate; the rest I don't know how it has come about." Although Mr Kassami gave notice of the coming autonomy, his deputy Keith Muhakanizi said Treasury activities and the accountant general cannot be detached from the parent ministry.

"The accountant general and the secretary to the Treasury are accountable to the nation, so they can't also be their own accounting officers," Mr Muhakanizi said. Under the new arrangement, Mr Bwoch has said one of the commissioners in Treasury would become the accounting officer, meaning there would be two accounting officers: one for the ministry and another for the Treasury.

According to minutes of a top management meeting held on December3, 2007, it was decided that a vote for activities of the Consolidated Fund Account should be created. However, the meeting that was chaired by Finance Minister Ezra Suruma and attended by among others State Minister for Micro-finance Salim Saleh, resolved thus: "The operations of the Office of the Accountant General should continue to be managed under vote 008 of the Ministry of Finance, Planning and Economic Development." This resolution is now at the centre of conflict. Our investigations reveal that the conflict resulted from a power struggle that has simmered in the ministry for years. Mr Bwoch reportedly sees Mr Muhakanizi as his equal but Mr Muhakanizi considers Mr Bwoch to be his junior. To sort out this confusion, a proposal was dangled that the post of accountant general be brought to the level of deputy secretary to the Treasury so as to rank Mr Bwoch and Mr Muhakanizi at par but the December 3 meeting rejected it.

"The meeting noted that the law provides for the title of Accountant General and decided that it should be maintained but the remuneration of the post be reviewed so that it is higher than that of a Director in the ministry," reads the minutes. Similarly, the meeting rejected a proposal to create a new post of deputy accountant general. "The meeting noted that the proposed post lacked strong justification for its creation [and it] would create a recipe for potential conflict if it were adopted," the minutes read.

The conflict started in 2003 when Mr Bwoch received money from the World Bank to carry out financial reforms in the government. After successfully implementing the Integrated Financial Management Systems (IFMS), Mr Bwoch reportedly slashed the procurement function from the ministry and took it over. Sources say that he also has his eyes firmly on the Aid Liaison and Tax Policy departments.

The anti-Bwoch group see his desire to take the Treasury on an independent path as seeking more influence while those pro-him say their man is spearheading positive reforms. Asked what would happen to accountants and auditors in various government ministries who report to Finance, Mr Bwoch said: "Internal audit will remain under the PS and secretary to Treasury. I will have my own accountants and auditors."

Mr Nandala Mafabi, the chairman of Parliament's Public Accounts Committee, said: "We gave instructions to separate the Treasury function from Finance. It was specifically for functions related to Treasury only but the Treasury will remain under Finance." Mr Mafabi said PAC did not recommend that Treasury becomes a separate entity but only have "a sub-vote. It will only be separate in running its mandate." Other than the Bwoch-Muhakanizi conflict, there are low intensity battles ongoing between middle level bureaucrats. The old and new generation accountants are at odds. The new generation accuse the old-timers of lacking in modern accounting principles yet they occupy big positions.

But the old-timers accuse the new crop of being "greedy for money".

"Yes, the old-timers and the new professional accountants are at loggerheads," Mr Bwoch said, "the new generation wants to take over because accounting has changed over years. Some of the [old-timers] are about to go; let them get their pension. But those who don't want to read will have problems."

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 Draft Report. The text of this 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 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 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: May 8, 2008.

Taiya Smith,

Executive Secretary.

Appendix: Advisory Committee on the Auditing Profession, Draft Report--May 5, 2008, The Department of the Treasury

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. Executive Summary [Placeholder]

III. Committee History

IV. Background [Placeholder]

V. Human Capital

VI. Firm Structure and Finances

VII. Concentration and Competition

VIII. Separate Statements [Placeholder]

IX. 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

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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

I. Transmittal Letter

Advisory Committee on the Auditing Profession

[July 2008].

The Honorable Henry 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.

cc: Undersecretary for Domestic Finance

Robert K. Steel.

II. Executive Summary

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

III. 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. *1 In March 2007, Secretary Paulson hosted a conference at Georgetown University with investors, current and former policy makers, and market participants to discuss issues impacting the competitiveness of the U.S. capital markets, including the sustainability of the auditing profession. *2

*1 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).

*2 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) 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. *3 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. *4 Secretary Paulson announced the Committee's membership on October 2, 2007, with members drawn from a wide range of professions, backgrounds and experiences. *5 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. *6

*3 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).

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

*5 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.

*6 See Committee Charter (included as Appendix B).

Committee Activities

The Committee held its initial meeting on October 15, 2007 in Washington, DC. *7 Under Secretary for Domestic Finance Robert K. Steel welcomed the Committee members and provided introductory remarks. *8 Also on October 15, 2007, the Committee adopted its by-laws *9 and considered a Working Discussion Outline to be published for public comment. *10 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. *11 All full Committee meetings were open to the public and conducted in accordance with the requirements of the Federal Advisory Committee Act. *12 The meetings of the full Committee were also Web or audio cast over the Internet.

*7 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, 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.

*8 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).

*9 The Committee By-Laws are included as Appendix I.

*10 The Working Discussion Outline is included as Appendix L.

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

*12 5 U.S.C. App. 2 [Section] 1.

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. *13 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. *14 The Committee held additional meetings on March 13, 2008, April 1, 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.

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

*14 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, *15 in response to which we received seventeen written submissions. 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. *16 In response to these meeting notices, the Committee received [_] written submissions. In total, the Committee received [_] written submissions in response to Federal Register releases. *17 All of the submissions made to the

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Committee will be archived and available to the public through the Department's Library.

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

*16 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).

*17 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.

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

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

IV. Background

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

V. 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 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. *19 The Committee believes that the accounting curricula in higher education are critical to ensuring 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. *20 Since the 1950s, several private sector groups have studied and recommended changes to the accounting curricula, *21 but notwithstanding these pleas for reform, curricula are characteristically slow to change. *22

*19 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").

*20 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).

*21 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 (1969) (recommending a five-year education requirement for accounting students); American Institute of Certified Public Accountants, Education Requirements for Entry into the Accounting Profession: A Statement of AICPA Policies (1978) (recommending a change from five years to 150 semester-hours and recommending that a graduate degree requirement at the conclusion of the 150-hours should be explicitly stated); American Accounting Association, Committee on the Future Structure, Content, and Scope of Accounting Education, Future Accounting Education: Preparing for the Expanding Profession, Issues in Accounting Education (Spring 1986) (examining accounting education and accounting practice since 1925 and concluding that since 1925, the profession has changed while accounting education has not changed); American Institute of Certified Public Accountants, Education Requirements for Entry into the Accounting Profession: A Statement of AICPA Policies, Second Edition, Revised (1988) (requiring that at least 150 semester hours are needed to obtain a CPA license); Perspectives on Education: Capabilities for Success in the Accounting Profession (1989) (noting that graduates entering public accounting need to have greater interpersonal, communication, and thinking skills as well as greater business knowledge); and Accounting Education Change Commission, Objectives of Education for Accountants: Position Statement Number One, Issues in Accounting Education (Fall 1990a) (awarding grants to schools as a catalyst for curricula changes in accounting programs).

*22 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/Solomo*120307.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

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Examination, influence the content of the technical, ethical, and professional materials comprising the accounting curricula. *23

*23 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 examination content reflects 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, *24 risk-based business judgment, and technological innovations in financial reporting.

*24 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 *25 and ethical standards *26 and subject matter relating to their application are an essential component of the accounting curricula and accordingly should be reflected in the professional examinations and throughout business and accounting coursework.

*25 See PCAOB Standards and Related Rules,available at http://www.pcaobus.org/Standards/Standards_and_Related_Rules/index.aspx.

*26 See PCAOB Interim Ethics Standards, availabe at http://www.pcaobus.org/Standards/Interim_Standards/Ethics/index.aspx.

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 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.

(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. *27 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.

*27 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).

Further, in order to ensure access to such materials, 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. *28 The Committee believes that low-cost affordable access to such primary materials would thus enhance student learning and performance and technical research.

*28 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).

(c) Require that schools build into accounting curricula current market developments.

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. *29 In 2004, minorities accounted for 23% of bachelor's degrees awarded in accounting, 21% of master's graduate degrees awarded in accounting, and 38% of doctoral

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degrees awarded in accounting-related studies. *30 In 2004, African Americans represented 1% of all CPAs, Hispanic/Latino, 3%, and Asian/Pacific Islander, 4%. *31 African Americans accounted for 5.4% of new hires in 2007 in the largest six accounting firms, Hispanics, 4.6%, and Asians, 21.3%. *32 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. *33

*29 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/Solomo*120307.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.

*30 Beatrice Sanders, and Leticia B. Romeo, The Supply of Accounting Graduates and the Demand for Public Accounting Recruits--2005: For Academic Year 2003-2004 10 (2005), available at http://ceae.aicpa.org/NR/rdonlyres/11715FC6-F0A7-4AD6-8D28- 6285CBE77315/0/Supply_DemandReport_2005.pdf.

*31 Beatrice Sanders, and Leticia B. Romeo, The Supply of Accounting Graduates and the Demand for Public Accounting Recruits--2005: For Academic Year 2003-2004 1 (2005), available at http://ceae.aicpa.org/NR/rdonlyres/11715FC6-F0A7-4AD6-8D28- 6285CBE77315/0/Supply_DemandReport_2005.pdf.

*32 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).

*33 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).

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. *34 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. *35

*34 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 (admitting an auditing firm had not met its goals in minority recruitment).

*35 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 *36 and HBCUs enroll 14% of all African American students in higher education. *37 Twenty-seven HBCUs have one or more of the six largest accounting firms recruiting professional staff on their campus. *38 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. *39 In 2005, these schools enrolled over 1 million students: African Americans accounted for 23% of these students, Hispanics, 13%, and Asian/Pacific Islander, 4%. *40

*36 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.

*37 White House Initiative on Historically Black Colleges and Universities, available at http://www.ed.gov/about/inits/list/whhbcu/edlite-index.html.

*38 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).

*39 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.

*40 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) Emphasize the role of community colleges in the recruitment of minorities into the auditing profession.

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%. *41

*41 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." *42

*42 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. *43

*43 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 recruit at community colleges because "individuals who only have associate degrees typically will not have sufficient qualifications to satisfy state licensing requirements." *44 The Committee recommends that accreditation of two-year college accounting programs at

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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.

*44 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).

(c) 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. *45 Cross- sabbaticals present an opportunity for "reflective thinking" for seasoned professionals. *46

*45 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").

*46 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 *47 and notes that the profession has recognized this situation. *48 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.

*47 See 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).

*48 See 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 (recommending the establishment of a mentor program for minority accounting students); 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").

(d) 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. *49 In particular, the PhD Project, an effort of the KPMG Foundation, has worked to increase the diversity of business school faculty. *50 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. *51 Ninety percent who enter the PhD Project earn their doctorates, and 99% of those who completed their doctorates go on to teach. *52 The PhD Project has received over $17.5 million *53 in funding since 1994 from corporations, foundations, universities, and other interested parties. *54

*49 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.

*50 For further information on the PhD Project, see http://www.phdproject.org/mission.html.

*51 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.

*52 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.

*53 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.

*54 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.

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. *55

*55 See, e.g., Record of Proceedings (Dec. 3, 2007) (Written Submission of David W. Leslie, Chancellor Professor of Education, College of William and Mary), 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/Solomo*120307.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

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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 has increased by 12.3% over the same period. *56 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. *57 The average retirement age of accounting faculty was 62.4 years.

*56 Record of Proceedings (Dec. 3, 2007) (Written Submission of David W. Leslie, Chancellor Professor of Education, College of William and Mary), available at http://www.treas.gov/offices/domestic- finance/acap/submissions/12032007/Leslie120307.pdf.

*57 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. *58 However, 91% and 79% of the projected demand for doctoral faculty in financial accounting and managerial accounting, respectively, will be met. *59

*58 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).

*59 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. *60 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. *61

*60 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.

*61 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 provide the healthy pipeline of doctoral accounting faculty to assist in providing these human capital resources must be provided. 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. *62

*62 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.

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 are 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. *63 Therefore, the Committee recommends that accrediting agencies continue to actively support faculty composed of academically and professionally qualified and experienced faculty.

*63 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/BAILEYCOMMENTSONTREASURYADVISORYCOMMITTEEOUTL INEFINALSUBMISSION13008.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. *64 Cross-sabbaticals present an opportunity for "reflective thinking" for seasoned professionals. *65 Academics often face the disincentive of being forced to forgo their full salaries in order to engage in such sabbaticals, *66 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

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plan and commitment of support at the highest institutional levels.

*64 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/submissions/02042008/Reckers020408.pdf (stating that sabbaticals deliver professors "a wealth of knowledge they could bring back in the classroom").

*65 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.

*66 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 for research and scholarly publication.

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. *67

*67 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. *68 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.

*68 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/Carcello120307.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/Solomo*120307.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. *69 Currently, there exists a need for more interaction between academia and the profession. *70 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.

*69 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.

*70 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, and to sponsor transition of professional accountants from practice to teaching positions. These incentives must be sufficiently attractive to companies and auditing firms to effect 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.

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. *71 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 which affect the public company auditing profession and its future and sustainability.

*71 See e.g., 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, 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 Regulations 5 (2007) (forthcoming); 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/Solomo*120307.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, NASBA, 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, *72 previous AICPA Supply and Demand studies *73 and AAA- commissioned demographic research *74 provide examples of

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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.

*72 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).

*73 Beatrice Sanders and Leticia B. Romeo, The Supply of Accounting Graduates and the Demand for Public Accounting Recruits--2005: For Academic Year 2003-2004 (2005), available at http://ceae.aicpa.org/NR/rdonlyres/11715FC6-F0A7-4AD6-8D28- 6285CBE77315/0/Supply_DemandReport_2005.pdf.

*74 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. 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.

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. *75 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.

*75 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 (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. *76 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.

*76 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. 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.

Other Issues Under Consideration

The Committee is also considering and debating a variety of other issues. Further elaboration on these issues will be included in subsequent drafts of this Report.

VI. 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. *77

*77 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. Strengthen auditing firms' fraud detection and prevention skills and clarify communications with investors regarding auditing firms' fraud detection responsibilities.

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. *78 The Committee considered testimony and commentary regarding auditing firms' responsibilities and practices relating to fraud prevention and detection. *79 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." *80

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

*79 See, e.g., Andrew D. Bailey, Jr., Professor of Acountancy-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/BAILEYCOMMENTSONTREASURYADVISORYCOMMITTEEOUTL INEFINALSUBMISSION13008.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/Johnso*020408.pdf.

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

The Committee believes that continued enhancement of auditors' fraud prevention and detection skills will improve financial reporting and audit quality and enhance investor confidence in financial reporting and the auditing function. In that regard, the Committee recommends the following:

(a) Urge the creation of 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.

No formal forum currently exists where auditors and other market participants

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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 *81 and to develop best practices relating to fraud prevention and detection. *82

*81 See, e.g., 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.

*82 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 internal processes and procedures of auditing firms.

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

(b) Urge that the PCAOB and the SEC clarify in the auditor's report the auditor's role in detecting fraud under current auditing standards and further that the PCAOB periodically review and update these standards.

The Committee considered testimony and commentary regarding a long-standing "expectations gap" between the public's expectations regarding auditor responsibility for fraud detection and the auditor's required and capable performance of fraud detection. *83 The public may believe that auditors will detect more fraud than those in the profession believe can be reasonably expected. This belief may be unreasonable in some circumstances given the difficulties of detecting fraud, especially before it has resulted in a material misstatement. On the other hand, public investors have raised questions when large frauds have gone undetected. The auditing standard governing fraud detection, AU Section 316, Consideration of Fraud in a Financial Statement Audit, notes that fraud may involve deliberate concealment and collusion with third parties. *84 AU Section 316 states that the "auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud." This gap between public expectation and the auditor's performance causes confusion and ultimately undermines investor confidence in financial reporting and the capital markets.

*83 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/BAILEYCOMMENTSONTREASURYADVISORYCOMMITTEEOUTL INEFINALSUBMISSION13008.doc (stating that "[i]f the discovery of material errors and fraud is not a major part of what the audit is about, it is not clear what value-added service the auditor offers the investor and capital markets"); Record of Proceedings (Feb. 4, 2008) (Questions for the Record of Cynthia M. Fornelli, Executive Director, Center for Audit Quality, 5 (Mar. 31, 2008)), available at http://www.treas.gov/offices/domestic- finance/acap/agendas/QFRs-2-4-08.pdf ("While auditors provide reasonable assurance that fraud material to the financial statements will be detected, they cannot be expected to provide absolute assurance that all material fraud will be found. Cost-benefit constraints and the lack of governmental subpoena and investigative powers, among other factors, make absolute assurance impossible."); Record of Proceedings (Feb. 4, 2008) (Written Submission of Dennis Johnson, California Public Employees' Retirement System, 5), available at http://www.treas.gov/offices/domestic- finance/acap/submissions/02042008/Johnso*020408.pdf (stating that "[o]f critical importance to investors is the responsibility of auditors to detect fraud and improve the timely communication of these frauds to investors and shareowners."); Serving Global Capital Markets and the Global Economy: A View from the CEOs of the International Audit Networks 12 (Nov. 2006) ("Nonetheless, there is a significant `expectations gap' between what various stakeholders believe auditors should do in detecting fraud, and what audit networks are actually capable of doing, at the prices that companies or investors are willing to pay for audits.").

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

Commentary has suggested that auditors must more effectively communicate their responsibility regarding fraud detection and prevention with investors and the capital markets. The Committee agrees with this suggestion. Accordingly, the Committee believes that the auditor's report should articulate clearly to investors the auditor's role and limitations in detecting fraud. The Committee believes that expressly communicating to investors, other financial statement users, and the public the role of auditors in fraud detection would help narrow the "expectations gap."

The Committee recommends that the PCAOB and the SEC clarify in the auditor's report the auditor's role and limitations in detecting fraud under current auditing standards. In addition, the Committee recommends, in light of this continuing "expectations gap," that the PCAOB review the auditing standards governing fraud detection and fraud reporting. Specifically, the Committee recommends that the PCAOB periodically review and update these standards.

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 55 jurisdictions in the United States govern the licensing and regulation of both individuals and firms who practice as certified public accountants. *85 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.

*85 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/Costello120307.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): *86 If states have failed to adopt the mobility provisions of the UAA by December 31, 2010, Congress should pass a federal provision requiring the adoption of these provisions.

*86 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

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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. *87

*87 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.").

According to NASBA, to date twenty-two states have passed mobility legislation. Twelve other states currently have mobility legislation introduced and other bills are anticipated in the 2008 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. *88 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." *89

*88 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, Pricewaterhouse Coopers 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 Sumission 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.").

*89 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 the adoption of these provisions. The Committee recognizes that some state legislatures meet biannually, and for such legislatures this deadline poses a challenge. 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.

(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. *90 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.

*90 Sarbanes-Oxley Act of 2002, 15 U.S.C. [Subsection] 7211-7219.

The Committee considered testimony from auditing firms on the duplicative and sometimes inconsistent federal and state oversight of the profession. *91 The Committee does recognize that both federal and state regulators have made attempts to coordinate better their enforcement activities. *92 One witness suggested the possible formation of a commission to help improve regulatory effectiveness. *93 Another witness urged state and federal regulatory cooperation to ensure harmonized regulation and licensure. *94

*91 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).

*92 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).

*93 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 (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.").

*94 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. 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.

(c) Urge the states to create greater financial and operational independence of their state boards of accountancy.

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 bo