A top U.S. audit regulator is sounding the alarm over what she fears may be a false stamp of approval that some accounting firms are using as they market themselves to potential clients.

A growing number of accounting firms register with the Public Company Accounting Oversight Board, the U.S. body that polices auditors, but are never actually inspected, PCAOB member Jeanette Franzel said in a recent Reuters interview.

Some of these firms tout their PCAOB registration on their websites to drum up business.

This raises concerns for investors, Franzel said, because registration with the board may give customers a false impression that every audit firm is subject to strict supervision.

The PCAOB has limited jurisdiction over the kinds of audits it can regulate, but any firm can pay a fee to apply to register with the board. Annual fees are as low as $500.

“There are legitimate reasons for firms to be registered with the PCAOB even if they are not currently performing work that is subject to our oversight,” Franzel said.

“But I become concerned when I see firms using their PCAOB registration as a marketing tool to tout their audit quality when their only interaction with the PCAOB has been to file registration forms and pay annual fees.”

Auditors are important gatekeepers who work to keep financial statements accurate and fair.

While auditors are not specifically charged with rooting out fraud, their independent reviews can help ensure that shareholders are not misled by company management or that unscrupulous brokers are not misappropriating customers’ money.

Lawmakers and regulators have put a number of measures in place to try to root out bad auditing practices after accountants failed to detect major problems at public companies such as Enron and Worldcom and at broker-dealers run by swindlers like Bernard Madoff.

But federal law only permits the PCAOB to inspect and regulate auditors that handle public companies and securities brokers.

It does not give the board the power to review firms that audit the books in other areas, such as futures brokers, pension funds, healthcare plan accounts, hedge funds or private companies in general.

At the end of 2012, a total of 853 accounting firms out of 2,363 registered with the PCAOB had not performed audits for a public company or a broker-dealer.

Some of these firms still point to registration as proof of their audit quality.

One Texas-based firm’s website, for instance, tells clients they can trust the quality of its audits because it is PCAOB-registered.

Another firm in Australia makes similar claims, saying such registration serves as a “measure of the strength” of its audit methodology.

“The fact that a firm may be registered is meaningless,” said Susan Coffey, a senior vice president with the American Institute of Certified Public Accountants, an association that sets standards and operates an industry peer review program that strives to fill the gaps in the PCAOB’s oversight regime.

“If you are going to be registered, you should be inspected,” Coffey said.

Looking For A Fix

Franzel said she was not yet pushing a specific remedy. For now, she is raising awareness of the issue by giving speeches and speaking with interested stakeholders.

But the problems have increased in recent years as federal and state regulators adopted a variety of rules that require PCAOB-registered auditors to review the financial statements for entities they regulate even though those audits are not subject to the PCAOB’s oversight.

These rules all aim to bolster audit quality, with the idea being that if one area of an audit firm’s business is sound, other parts probably are, too.

The rules adopted so far vary. On one end of the spectrum is a measure by the Office of Personnel Management which merely requires audits of federal employee healthcare benefit plan accounts to be performed by registered firms.

A Securities and Exchange Commission rule goes a step further, requiring auditors of investment advisers to be registered and subject to regular PCAOB inspection.

Most recently, the Commodity Futures Trading Commission adopted the toughest rule to date as a response to audit failures by a one-woman shop to detect a 20-year fraud perpetrated by Peregrine Financial Group’s founder.

The CFTC’s new rule requires auditors of futures brokers not only to be PCAOB-registered, but also to have undergone an inspection. In addition, the audits must be done using PCAOB standards, and inspection results must be shared with a futures broker’s governing board.

The CFTC’s rule is “better” than some of the others, said Daniel Goelzer, a former acting chairman of the PCAOB who now works at Baker McKenzie LLP.

“If you are talking about a one-man firm, that is one thing. But if you are talking about a larger firm, you would have a whole different … group of people working on public company audits” than those working on futures broker audits.

The PCAOB’s Franzel said that while the various rules were an “interesting experiment,” the public still needed to know what registration means.

“Regulators, the public and investors should keep in mind … that our inspections and enforcement programs represent critical components of PCAOB oversight,” she said. “These other regulators and their constituencies do not have the full protections offered by our oversight program.”

(Reporting by Sarah N. Lynch; Editing by Karey Van Hall and Lisa Von Ahn)