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April 28, 2009

Baumann prepares for full agenda

By Nicholas Moody

The new chief auditor and director of professional standards at the US Public Company Accounting Oversight Board (PCAOB) is taking over at a decisive time as regulators and governments grapple with the financial crisis.

But Martin Baumann does not seem too fazed about stepping into this key role at such a crucial point.

Martin Baumann, PCAOB“There is a banking crisis now but throughout history there have been a number of banking crises. I was a partner in the banking world in the early 1980s when there was the crisis of loans to lesser developed countries and in the early 1990s there was a real estate crisis in the US, which caused trouble for many banks,” he says.

Baumann began his career with 33 years at Price Waterhouse and PricewaterhouseCoopers, working on global audits of large financial services clients and rising to global banking leader.

In 2003, he was asked to join Freddie Mac, the US government’s residential mortgage finance agency, as chief financial officer after it announced financial reporting problems. There he led the company’s restatement and related improvements to its financial reporting and disclosure practices.

Opportunity to influence

Baumann replaces former chief auditor Thomas Ray, who left the board in early March to return to the private sector. Baumann has been with the PCAOB since 2006 as director of research and analysis. He joined the watchdog to have a chance to influence the reliability of financial reporting, the area he had worked in for 36 years. As chief auditor, Baumann’s main responsibility will be to advise the PCAOB on establishing auditing and related professional standards.

Although the subprime dramas have only been in the public consciousness since late 2007, Baumann says he started seeing issues around subprime mortgages emerging in early 2007. He also experienced problems with valuing complex securities during his time at Freddie Mac and had a sense that FASB 157 could be a challenge as markets became less liquid.

To tackle these issues his office has published several practice notes. The first, on fair value, came out in 2007. The second, about auditing in the current economic environment, was produced in December last year.

The audit veteran says preparers and auditors of financial reports are probably facing as tough a time in 2008 and 2009 as he can imagine them ever facing.

“It is just a very challenging time to assess impairment, to value assets, to assess reliability of receivables and inventories, the issue of going concern for many companies,” he says.

Baumann is careful not to be drawn into commenting on the pressures being exerted on the US Financial Accounting Standards Board to bend fair value accounting rules.

He notes that the PCAOB’s job is to make sure auditing standards are clear so that auditors are appropriately auditing against the accounting standards.

Baumann says the PCAOB’s December 2008 practice note gave a good outline of the audit risks brought on by the financial crisis, but there are a number of other issues on the board’s radar.

It recently issued a suite of risk assessment standards for comment and is assessing feedback on engagement quality reviews. It also recently sought comment on an updated standard on audit confirmations.

On top of all this, Baumann is keen to focus on taking on board the final recommendations of the US Treasury’s advisory committee on the auditing profession and increasing international co-operation with global standard setters.

“We want to make sure we have very close co-operation. Obviously the PCAOB’s and International Auditing and Assurance Standards Board’s standards have developed on their own separate paths, but going forward we want to make sure we both know what we are each doing,” he says.

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