The Accounting Board Is a Sinecure Qua NonBy
In 2002, Congress sought to make sure publicly traded companies couldn't deceive investors the way Enron did. So it created a watchdog to monitor the accountants that audit the corporations and gave it a gawky name: the Public Company Accounting Oversight Board.
In eight years the board has brought 32 disciplinary cases, only one of which was against one of the Big Four accounting firms. It has also approved six standards governing how auditors must do their work. (Eight others adopted in August await Securities and Exchange Commission sign-off.)
Some of the board's advocates find that slender record underwhelming. "They need to be more forceful in setting the audit standards, and even more importantly, they need to be more forceful in enforcement," says Edward Ketz, an accounting professor at Pennsylvania State University. "It just doesn't seem they are doing enough." Lynn E. Turner, a former SEC chief accountant, says the board is an example of how not to do reform and warns that the new Consumer Financial Protection Bureau must avoid becoming like the PCAOB—a comfortable perch for highly paid bureaucrats hamstrung by political disputes.
The five-member PCAOB offers one of Washington's most lucrative jobs. Congress stipulated that its salaries must be competitive with the private sector. The chairman earns $672,676 a year and board members make $546,891. President Barack Obama, by comparison, makes $400,000, members of Congress get $174,000, and SEC Chairman Mary L. Schapiro receives $165,300.
The board gets little media attention or congressional oversight, having sent an official to testify once in the last three years. The lone case against a major accounting firm came in 2007, when the board fined Deloitte & Touche after a former partner failed to prevent a pharmaceutical company from overstating revenue. The firm paid $1 million without admitting or denying guilt. "It's not necessarily as taxing as a high-profile, highly scrutinized political appointment," says Cynthia A. Glassman, a former Republican SEC commissioner. "It's one of those positions that is very well paid." The record belies board member Charles D. Niemeier's 2002 pledge that the PCAOB would be "extremely proactive" in setting standards. Niemeier, who has continued to serve even though his term lapsed in October 2008, has one of three seats that Schapiro must fill.
The board's showing isn't entirely its fault. It had been under a legal cloud since 2006, when a Nevada accounting firm sued it, claiming the watchdog wasn't constitutional. That put the board in limbo; the SEC even stopped replacing members whose terms had expired. The Supreme Court ruled that Congress violated the Constitution by creating a board that lacked Presidential oversight because the Securities and Exchange Commission could remove its members only for cause. The court invalidated that clause, letting the SEC remove board members at will. It left intact the board and its regulatory powers, setting off the lobbying by people interested in filling the vacancies.
A letter is circulating seeking the backing of securities lawyers for John J. Huber, an attorney with the law firm Latham & Watkins, two people who have seen the letter say. Kathleen Connell, a former California controller, has sought support from business groups for a slot, a senior employee of one of the groups says. John H. Sturc, a Gibson, Dunn & Crutcher partner, has expressed interest in a seat, according to SEC officials. Connell declines to comment. Huber and Sturc did not return calls seeking comment. SEC spokesman John Nester, who would not comment on any names, says the commission "is well on its way" to filling the three vacancies.
A congressional requirement that cases remain secret until they are resolved has also damaged the board, says Daniel L. Goelzer, interim chairman since July 2009. Accountants have an incentive to fight enforcement efforts, he says, because their cases remain confidential as long as they resist. "Nobody who isn't an employee here knows how many cases we've brought or how many have involved Big Four firms," says Goelzer, who wants Congress to change the law.
Mark W. Olson, who preceded Goelzer as chairman, says it's unfair to judge the PCAOB on how many "scalps it puts on the wall" because that's not the regulator's purpose. "There's an extra level of supervision that far exceeds what the industry had before, which was essentially self-policing," he says.
Turner, the former SEC official, sees parallels with Elizabeth Warren, who came up with the idea for the consumer bureau yet is unlikely to head it because of political objections. The PCAOB's first chairman, former FBI and CIA director William Webster, also got embroiled in politics, which prevented the board from meeting its mandate to protect investors, says Turner, who is on a PCAOB advisory panel. "I fear the consumer bureau is suffering the same, and instead of being the crown jewel of the Dodd-Frank bill, will become a cheap zirconium imitation."
The bottom line: Consumer advocates say the accounting oversight board's record is a cautionary tale for the Consumer Financial Protection Bureau.