As Chief Accountant of the SEC, Donald T. Nicolaisen, CPA, is charged with overseeing the commission's accounting and auditing policies and standard-setting initiatives at the national and international levels. He and his staff spent a November morning chatting with the Journal of Accountancy. In this first of a two-part interview, Nicolaisen talks about issues ranging from Sarbanes-Oxley section 404 to fair value, from fraud to the future of AICPA-PCAOB relations. (Part two of the interview will appear in the February issue.) This article is for any CPA, student or educator whose work comes into contact with the SEC.

JofA: You've been on the job a little over a year now. Where have you devoted most of your time and attention?

Nicolaisen: When I joined the SEC over a year ago, I knew that dealing with complex accounting issues and registrant matters would consume a significant amount of my time. These activities have historically been within the purview of the Chief Accountant. What's new is the Sarbanes-Oxley Act, which established an appropriate foundation to improve financial reporting. With key provisions of the act taking hold, I have spent time working with the PCAOB as it established itself as a regulator and further defined its role. In addition, I have spent considerable time on the Sarbanes-Oxley internal control requirements. I also believe that there has been a renewed focus on strengthening corporate governance and restoring investor confidence. These are all positive developments, and it is very rewarding for me personally to have a role in helping to shape these changes.
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Speaking about change, I should also mention the FASB and the IASB, who are very enthusiastic about the convergence of accounting standards. This is an enormous undertaking, and one that I fully support.

Finally, since I joined the commission, my office has doubled in size. We are now at our full complement with over 60 highly skilled and dedicated professionals. Restructuring and expanding the Office of the Chief Accountant (OCA) has been one of the most rewarding aspects of my job, and I am very proud of my staff.

These are just a few of the issues that I have been working on. As you can imagine, the last year and a half have been very busy, and I expect that will continue.

JofA: When you arrived at the OCA, you were very keen on the need for change at the top. Have you made progress?

Nicolaisen: This is a time of immense change; that's one of the reasons I chose to join the SEC. Sarbanes-Oxley has given us an opportunity to restructure all aspects of the financial reporting process--governance, audit committees, standard setting and peer review, compliance reporting, evaluation of and reporting publicly on internal controls, management reporting on the accuracy of its financial statements--and, of course, the establishment of the PCAOB. Those are very significant changes.

These pieces are in place, and I believe they will improve the financial reporting process as well as help to restore investor confidence. But doing the right thing and instilling strong moral and ethical standards cannot be done through legislation or regulation alone. This has to come from the private sector. I think it's important that we recognize the many market participants who have worked tirelessly and diligently over the past few years to improve our systems and to regain investor confidence. There's been a real dedication on the part of many people to change. For example, there's been a focus on substantively improving corporate governance and the role of audit committees. And my sense is that preparers and auditors are focusing intently on the importance of financial reporting and of the audit process. Across corporate America significant additional resources have been added, training and continuing education have increasingly focused on ethical and technical matters, and there is a real push--starting at the top of business organizations--to make the tough calls and to get the numbers right. These are all positive developments.

That being said, I also recognize that we continue to discover both industry-wide and company-specific failures of business ethics and of disclosures to shareholders. These failures are unacceptable and highlight the need for continuing vigilant oversight and enforcement.

The internal control requirements are another area of major change. Of all the reforms contained in Sarbanes-Oxley, I believe that the internal control requirements may have the greatest effect on improving the accuracy and reliability of financial reporting. It is also what I consider to be the most urgent financial reporting challenge facing a large share of corporate America and the audit profession certainly through the first quarter of 2005.

JofA: Can you give us a little detail?

Nicolaisen: We've talked about management and auditors reporting on internal controls over financial reporting for as long as I've been in the profession. Now it's a reality. The amount of effort required to implement this change has been daunting for both auditors and preparers. Coupled with that is a renewed recognition of the importance of auditing. Auditors are working hard, training their people, and spending significant resources and energy to implement the internal control requirements. It's important that with all the focus on internal controls, we don't lose sight of the importance of doing a high quality audit. And, from everything that I hear, people believe that the audit function matters and that the contributions that CPAs make do matter. So there's been a tremendous strengthening of the quality of the audit.