Retiring New York Federal Reserve President William J. McDonough is a great choice to head the new Public Company Accounting Oversight Board. He has integrity, a worldwide reputation, knowledge of the financial markets, and fine negotiating skills, having brokered the rescue of hedge fund Long-Term Capital Management in 1998. But McDonough has never been up against the accounting industry and its powerful friends in Congress. If he is to restore investor confidence in financial statements, McDonough is going to have to be tough and move fast.

The PCAOB has been under a cloud since the Securities & Exchange Commission established it last year as part of the Sarbanes-Oxley corporate governance legislation. Both SEC Chairman Harvey Pitt and his choice for the job, former CIA Director William Webster, resigned in November, when it emerged that Webster chaired the audit committee of U.S. Technologies Inc., which was under investigation for fraud -- and that Pitt had withheld this information from the SEC board.

McDonough has the opportunity to make memories of this mess fade -- and he must seize it. He should firmly endorse the PCAOB's tentative decision to wrest control of new auditing standards from the accounting industry's trade association, the AICPA. The board should quickly write a new rulebook that closes the loopholes allowing auditors to wriggle away from liability. McDonough must get the PCAOB to set up a new independent inspection regime to replace the peer review system that failed so often in recent years. Finally, McDonough has to get the PCAOB to seriously discipline accounting firms that fail to do their duty to protect investors.

McDonough worked in the State Dept. in the '60s and spent 22 years at First National Bank in Chicago before joining the Fed. He has made significant contributions in both the private and public sectors. But nothing is more important to our financial system than restoring investor trust. Achieving this would be a fitting capstone to William McDonough's career.

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