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DEPARTMENT OF THE TREASURY

Treasury Department

NOTICE: NOTICES

DOCUMENT ACTION: Notice; request for comments.

SUBJECT CATEGORY: Draft Report of the Advisory Committee on the Auditing Profession

DATES: Comments should be received on or before June 13, 2008.

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

SUMMARY: Draft Report of the Advisory Committee on the Auditing Profession,

SUPPLEMENTAL 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/domesticfinance/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/ domesticfinance/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. HP408 (May 17, 2007)

F. Paulson: Financial Reporting Vital to U.S. Market Integrity, Strong Economy, Treasury Press Release No. HP407 (May 17, 2008)

G. Paulson Announces Auditing Committee Members To Make Recommendations for a More Sustainable, Transparent Industry, Treasury Press Release No. HP585 (Oct. 2, 2007)

H. Under Secretary for Domestic Finance Robert K. Steel, Welcome and
[[Page 28191]]
Introductory Remarks Before the Initial Meeting of the Department of the Treasury's Advisory Committee on the Auditing Profession, Treasury Press Release No. HP610 (Oct. 15, 2007)

I. Committee ByLaws

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 CoChair.
Donald T. Nicolaisen,
Committee CoChair.
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. HP174, 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. HP306, 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 CoChairs 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/domesticfinance//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/domesticfinance/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. HP610, U.S. Dep't of Treas. (Oct. 15, 2007) (included as Appendix H).
\9\ The Committee ByLaws 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 Sec. 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 facetoface 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 [[Page 28192]]
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/ domesticfinance/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 CoChairs. 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 marketdriven, 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/domesticfinance/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/domesticfinance/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/domesticfinance/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 sophomorelevel 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 fiveyear 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 semesterhours and recommending that a graduate degree requirement at the conclusion of the 150hours 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, 1415), available at http://www.treas.gov/offices/domesticfinance/acap/submissions/ 12032007/Solomon120307.pdf (lamenting the slow pace of change in accounting curricula and education).

In this regard, the Committee makes the following recommendations:
(a) Regularly update the accounting certification examinations to reflect changes in the accounting profession, its relevant professional and ethical standards, and the skills and knowledge required to serve increasingly global capital markets.

Accounting and auditing professionals commonly complete the requirements of professional examinations in order to comply with legal or professional association requirements. To become licensed at the state level as a certified public accountant, an individual must, among other things, pass the Uniform CPA Examination. Professional examinations, such as the Uniform CPA
[[Page 28193]]
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\ riskbased 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, riskbased 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 lowcost, 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 lowcost 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/domesticfinance/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 [[Page 28194]]
degrees awarded in accountingrelated 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/domesticfinance/acap/ submissions/12032007/Solomon120307.pdf; Record of Proceedings (Dec. 3, 2007) (Questions for the Record of George S. Willie, Managing Partner, Bert Smith & Co., 2 (Jan. 30, 2008)), available at http:// www.treas.gov/offices/domesticfinance/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 20032004 10 (2005), available at http:// ceae.aicpa.org/NR/rdonlyres/11715FC6F0A74AD68D286285CBE77315/0/ SupplyDemandReport2005.pdf.
\31\ Beatrice Sanders, and Leticia B. Romeo, The Supply of Accounting Graduates and the Demand for Public Accounting Recruits 2005: For Academic Year 20032004 1 (2005), available at http:// ceae.aicpa.org/NR/rdonlyres/11715FC6F0A74AD68D286285CBE77315/0/ SupplyDemandReport2005.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 underrepresented in the accounting and auditing profession, especially at senior levels, and this underrepresentation 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 multifaceted, multiyear 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 nonaccounting graduate populations, both at the entry and experienced hire level, utilizing cooperative efforts by academics and firmbased 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/domesticfinance/acap/QFRs12307.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\ Twentyseven 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 forprofit 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 2004062), 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/edliteindex.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 2008022), 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 2008022), 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 postsecondary education, preparing students for transfer to fouryear
institutions, providing workforce development and skills training, and offering noncredit programs. Moreover, as the cost of higher education continues its upward climb, more and more highachieving students are beginning their postsecondary 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 twoyear colleges in accounting education. The AECC noted that over half of all students taking their first course in accounting do so at twoyear colleges and that approximately one fourth of the students entering the accounting profession take their initial accounting coursework at twoyear colleges. The AECC called for ``greater recognition within the academic and professional communities of the efforts and importance of twoyear accounting programs.'' \42\
\42\ Accounting Education Change Commission, Issues Statement Number 3: The Importance of TwoYear 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/domesticfinance/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/domesticfinance/acap/ QFRs12307.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 twoyear 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 twoyear programs and may be seeking careers in the auditing profession. The Committee also recommends that auditing firms and fouryear colleges and universities and their faculty focus on outreach to community college students in order to support students' transition from community colleges to fouryear 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 crosssabbaticals 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 crosssabbaticals. 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\ Crosssabbaticals 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/ domesticfinance/acap/agendas/minutes2408.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/domesticfinance/acap/agendas/ minutes031308.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 ZoeVonna Palmrose, Deputy Chief Accountant, SEC), available at http://www.treas.gov/offices/domesticfinance/acap/ agendas/minutes031308.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 crosssabbatical 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/ domesticfinance/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 PartnerCampus 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/domesticfinance/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/domesticfinance/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 Bschools, 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 PartnerCampus 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/domesticfinance/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/domesticfinance/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/domesticfinance/acap/submissions/12032007/ Solomon120307.pdf (stating that ``the number of persons entering accountancy doctoral programs is too low to sustain the accountancy professoriate.'').

The Committee recognizes that there is a high level of concern about the adequacy of both the near and the longterm 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 parttime 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 onethird of the approximately 4,000 accounting doctoral faculty in the United States were 60 years old or older, and onehalf 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/ domesticfinance/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 ``practiceoriented'' 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/domesticfinance/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/domesticfinance/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/domesticfinance/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 wellprepared and educated entrylevel professionals. The resource represented by these professionals is essential for high quality audits. The Committee believes that high quality audits are critical to wellfunctioning 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.

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) 9276618.