A spate of financial scandals involving public companies prompted Congress to step in and prohibit auditing firms from providing non- audit services, a practice now viewed as a conflict of interest. The act also establishes the Public Company Accounting Oversight Board and forces corporate executives to take responsibility for financial reports.

Barry C. Molancon, president and CEO of the New York Citybased American Institute of Certified Public Accountants, visited Indianapolis recently. While [there], he sat down with Indianapolis Business Journal (IBJ) to discuss the implications of the act and the state of the accounting profession.

IBJ: Is the Sarbanes-Oxley Act the most influential legislation to affect the accounting profession?

Melancon: There's no question it's the most significant piece of legislation to affect our profession. One of the key changes is an emphasis and responsibility on [corporate] audit committees. The act clearly puts audit committees in control of the relationship between the business enterprise and the audit firm on behalf of shareholders, and that's a very important process. In the past, it's been more management-controlled.

It also changes regulation, particularly in the larger firms, as it relates to overseeing the quality of their work. [The Public Company Accounting Oversight Board] that's been established will have a significant role in this.

From a business perspective, the certifications that management must attest to now, as it relates to the quality of their financial statements, is a fairly significant shift.

IBJ: Is there any piece of the legislation the AICPA does not support?

Melancon: There were some things in the drafting that we were concerned about. One of those was how auditing standards will be set. The [PCAOB] has authority over that. We felt that should stay within the profession. The analogy would be that you would have medical procedures determined through a standard-setting process where doctors are involved. There is a concern about nonauditing professionals understanding what an audit is. It's a complex process. You can just imagine auditing a GE, Microsoft or GM. We're concerned about how that evolves, but we're committed to working through it.

IBJ: What is the role of the Public Company Accounting Oversight Board and how will it exist with agencies already governing the profession?

Melancon: The board has the authority over auditing standards. There is some flexibility at this point about how it will be manifested, but it will have significant influence.

The SEC maybe has a governmental oversight over both of them [PCAOB and the Financial Accounting Standards Board], but the Financial Accounting Standards Board sets accounting standards, whereas the PCAOB is going to be dealing with more of the oversight as it relates to the auditing function. The fact is, they are different.

IBJ: Who comprises the Public Company Accounting Oversight Board?

Melancon: Five people are appointed by the SEC. One has now stepped down, so the chairmanship position is open.

They are appointed to five-year terms. The law provides that two of the five can be CPAs. There is a former member of Congress on the board, a former general counsel of an institutional investor group, and the two attorney/CPAs who are from the regulatory enforcement side of the CPA profession as opposed to the practice side of the profession.

These are very good people and very talented people. But there is a notion that with the real world of practice and the government regulation, we would have liked to have seen a better tie-in there. It is what it is.

IBJ: How will the legislation affect public companies?

Melancon: We tend to focus on public companies being big companies, household names. There are about 17,000 public companies in this country. When you get down to number 16,500 or so, you end up with some fairly small companies, and their cost to comply and the difficulties they will have complying with Sarbanes-Oxley could be very traumatic for some.

For instance, it requires non-management personnel to serve on audit committees. It could be very difficult to get the right people and the quality people in that environment.

IBJ: Are tax shelters becoming a problem for the profession?

Melancon: Abusive tax shelters, things that are deemed to be illegal under the Internal Revenue Code or other laws of the land, are something we do not condone. At the same time, the Congress and the IRS have really struggled to define what an abusive tax shelter really is, because there are legitimate taxplanning strategies that are part of our tax-compliance code in this country.

We are concerned about it. I would be misleading you if I didn't say that. Any time these types of allegations come about, it affects the profession and we take a hard look at it. We have a whole tax division within our institute, and that division is actively working on information. There are bills pending in Congress that deal with tax shelters and how to define diem.

IBJ: Is the profession in a crisis concerning a dearth of new talent?

Melancon: The decade of the 1990s was not very good as far as our attractiveness to young people, and there were a lot of factors involved in that. The economy and the vibrancy of the dot-com, economy attracted a lot of bright business students in directions other than accounting. Another factor was the kids going to school in the 1990s were part of a fairly small, from a population perspective, generation.

Today, however, student enrollments are up in our profession, fairly significantly and fairly universally around the country. What we are seeing, and this is somewhat of a silver lining from the [negative] attention the profession has received in the past 18 months, is that there is an awareness among young men and women who are making career decisions about our profession.

The profession has also put a lot of resources and energy into attracting the best and brightest young students. There's sort of a set of facts out there that are reversing the trend a little bit.

IBJ: What role do auditors play in detecting corporate fraud?

Melancon: The public has an expectation that an audit per se in all cases is going to detect and eliminate fraud. Elements of an audit are really a check and balance at the end of the process. Management, boards of directors, audit committees, employees and regulators all have a role in the process to make sure we deter as much fraud as possible.

Nobody wants to support an environment in which fraud can manifest fairly easily. It's like an assembly-line situation. The most effective way of putting quality into a process is putting quality throughout a process, not to just have inspectors at the end. The best way to minimize fraud in the business environment we live in is to have fraud deterrents in that entire pipeline.

We've been trying to do a lot of work as a profession to lead that. We are trying to educate board members and audit committee members in the role they play. It's important to understand that an audit can't absolutely ensure that fraud is out of the system, but it does have a role.

IBJ: Is the worst over for the profession ?

Melancon: Look, the profession is strong. There are 350,000 men and women in this profession nationwide who are made up of honest, hard-working people. They do the right thing. They've stopped immeasurable amounts of bad things from happening that you and I will never know about because of the way it operates. You hear about the bad and the failures. We don't hear about the good. I'm confident that over time the competency level of our profession and the trust level that exists with the members of our profession will play itself out. There's no question we've taken a hit. There's no question we've had some difficulties, but at the same time, the strength of the men and women in our profession will carry the profession forward.

-- Scott Olson