The accounting profession and its Republican allies stood by helplessly in July as a wave of reform swept the Sarbanes-Oxley Act through Congress. But in Washington, yesterday's defeat is just a prelude to tomorrow's battle. Capitol Hill's real response to Enron (ENRNQ), WorldCom (WCOEQ), and other corporate accounting scandals may well be decided in the fight now shaping up over who will chair the new Public Company Accounting Oversight Board (PCAOB).
In one corner is the reform coalition that pushed the sweeping bill drafted by Senate Banking Committee Chairman Paul S. Sarbanes (D-Md.) to victory over industry and White House opposition. They're pressing the Securities & Exchange Commission, which will appoint the new board, to select an activist head who will be a scourge of wayward auditors. Their top pick: former Fed Chairman Paul A. Volcker.
Fighting back are the Final Four accounting firms and some reform skeptics. Their early favorite is Donald J. Kirk, a former member of the Public Oversight Board (POB), the group previously charged with reviewing auditors' quality controls. Kirk also appears to have an edge with some SEC officials. Chief Accountant Robert K. Herdman has repeatedly mentioned Kirk as a potential chairman, according to several people who have talked to Herdman. However, Herdman says he's not backing anyone yet.
The choice to head the new PCAOB--dubbed "Peek-a-Boo" by Washington wags--will be a key political test for SEC Chairman Harvey L. Pitt. He found himself sidelined, with his own accounting reforms dismissed as too weak, after the WorldCom bankruptcy gave Dems the momentum to push through corporate reform. Now Pitt can't afford to ignore Capitol Hill as he puts together a slate for the oversight board. Says a top SEC official: "There's an immense premium on making a unanimous choice [for the PCAOB]."
Pitt has only until Oct. 28 to recruit five board members--two of whom must be CPAs. It's still uncertain where the PCAOB will be headquartered or what the jobs will pay (most likely $535,000 for chairman and $435,000 for members).
If Sarbanes' backers can recruit Volcker, the job is likely to be his. Volcker became a reform hero for attempting to overhaul Arthur Andersen, and his stature would lend the PCAOB instant clout. Some wonder, though, whether Volcker, at age 74, wants the job of starting a new $50 million agency from scratch. Volcker did not return calls. If he bows out, the reform coalition might rally behind former POB chairman Charles A. Bowsher. But Bowsher led the POB's mass resignation in protest of Pitt's early plans for accounting reform--and Pitt has not forgiven him.
The pro-Sarbanes coalition opposes Kirk, a former Price Waterhouse partner who also chaired the Financial Accounting Standards Board. They maintain that he went too easy on accounting firms during his POB tenure. Kirk dismisses that charge. But even if Herdman is high on Kirk, another SEC official says Kirk is not Pitt's choice.
That leaves the SEC searching for a consensus candidate. Possibilities include Mary L. Schapiro, head of regulation at the National Association of Securities Dealers, former Fed Vice-Chairman Manuel H. Johnson, and John H. Biggs, retiring chairman of giant pension fund TIAA-CREF.
Whomever he picks, Pitt must touch all the political bases this time. "This is the first critical signal of how seriously the SEC takes this new law," says a Sarbanes aide. If Pitt doesn't please Capitol Hill, Dems could make him go bye-bye over the Peek-a-Boo. Are Latino ties to the Democratic Party weakening? An August survey for the nonpartisan Latino Coalition found that 68% of 1,000 registered Hispanic voters approved of the President's performance and 42% approved of the job congressional Republicans are doing. But it may be too soon to know if the GOP can pick up Latino votes in November. In 2000, Bush first led Gore among Hispanics, only to fall behind nearly 2:1 by the election, ending up with just 35% of Latino votes. No special interests got left behind when Congress passed the $182 billion, 10-year farm bill. Besides restoring subsidies for mohair and adding chickpea producers, the law piles an additional $10 million on to the $90 million already spent this year to aid U.S. farmers marketing abroad. Among the recipients of taxpayer funds are the Popcorn Board and the National Watermelon Promotion Board. Payouts to 65 trade groups will double, to $200 million, by 2006. The huge upset in Georgia's fourth congressional district Democratic primary mirrors national concerns. Defeated Representative Cynthia A. McKinney, who suggested that President Bush knew in advance of terrorist attacks, received "lots" of contributions from out-of-state donors with Arab names, says the Center for Responsive Politics. Pro-Israel PACs contributed to McKinney's opponent, state Judge Denise L. Majette. The final figures are due on Oct. 15.