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Audit Watchdog Non-Taxpayer Budget Cut Under U.S. Sequester

The U.S. nonprofit entity that oversees corporate audits and gets no public funding may have to implement automatic spending cuts next month if Congress doesn’t delay the so-called sequester.

The Public Company Accounting Oversight Board said it would review how to carry out the cuts with the U.S. Securities and Exchange Commission, which unanimously approved the PCAOB’s $245 million budget today. The automatic spending cuts, known as the sequester and mandated by the 2011 Budget Control Act, are scheduled to take effect next month unless delayed by lawmakers.

The PCAOB could be required to cut spending by as much as 7.6 percent, or $18 million, according to a report the White House published in September. PCAOB Chairman James R. Doty said the PCAOB would try to appeal the White House’s decision that it is subject to the sequester.

“We obviously do not agree that the statutes make us subject to the Deficit Reduction Act,” Doty told reporters today after the SEC’s meeting. “We are not part of the federal government and our funds are not part of general revenue.”

SEC Chairman Elisse Walter said that while the PCAOB’s 2013 budget does not reflect the cuts, the SEC would help determine later how to deal with them.

“I would expect that in the event that sequestration occurs and the PCAOB’s 2013 budget is indeed affected, the PCAOB will work with the commission and commission staff as appropriate regarding implementation with sequestration,” Walter said.

Sarbanes-Oxley Act

The PCAOB, established by the Sarbanes-Oxley Act of 2002, oversees audits of publicly traded corporations and brokerage firms. It’s supported by annual fees charged to public companies and broker-dealers registered with the SEC.

Another SEC-supervised entity, the Financial Accounting Standards Board, also is subject to the automatic cuts. The FASB collected $29.8 million in fees last year from public issuers of debt and equity securities.

“We have been informed by the Office of Management and Budget that the accounting support fees received by the Financial Accounting Standards Board are subject to sequestration,” Robert W. Stewart, FASB’s vice president for communications, wrote in an e-mail. “We are currently in discussions with the OMB as to how that decision may impact the FASB.”

No Furloughs

Doty said any PCAOB cuts would be carried out without firing or furloughing employees. He said the total cut might be less than the $18 million identified by the White House in September.

“We will manage in the event of sequestration in a way that does not cut the muscle and destroy the ability of the PCAOB to accomplish its mission,” he said.

The board’s 2013 budget includes $234 million in industry assessments. Its total budget, $245 million, represents an 8 percent increase over 2012. The PCAOB says the increase is needed to pay for new responsibilities created by the Dodd-Frank financial overhaul law, including overseeing audits of brokerage firms.

This year, the PCAOB plans to inspect 100 auditors of brokerage firms, an increase over the 40 inspected last year, Doty said.

The PCAOB has faced criticism from some House Republicans that its auditing standards aren’t adequately informed by cost- benefit analysis. Two Republican SEC commissioners, Daniel M. Gallagher and Troy A. Paredes, pressed Doty about how the PCAOB plans to make greater use of economic analysis.

Cost-Benefit Analysis

The auditor watchdog is developing a framework for incorporating economic analysis into its work, which will soon be available for its board to review, Doty said. The PCAOB plans to hire two economists this year to help ensure new standards are cost-effective.

“The framework starts with broad and ambitious and important principles and works through the details,” Doty said.

Under questioning by Walter, Doty said China could become a higher priority for the PCAOB’s enforcement program. In December, the SEC sued the China-based affiliates of the Big Four accounting firms over their refusal to share work documents. The SEC says access to auditor work papers is essential for testing the quality of public-company audits.

Doty said the affiliates would have to turn over documents needed for SEC and PCAOB enforcement investigations before further progress could be made on an agreement providing for joint inspections of Chinese and U.S. accounting firms.

If the enforcement matters aren’t resolved, “I would think that enforcement against Chinese firms for non-cooperation would be an increasing priority for our enforcement program,” Doty said.

To contact the reporter on this story: Dave Michaels in Washington at dmichaels5@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net

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