PCAOB Selection Process and the GAO Report

Lynn E. Turner is former Chief Accountant at the U.S. Securities and Exchange Commission and currently senior advisor at Hemming Morse LLP.

The Public Company Accounting Oversight Board (PCAOB) was created when Congress passed the Sarbanes-Oxley Act of 2002 (SOX). The PCAOB is a five member quasi governmental board appointed by the SEC, with the obligation and responsibility to oversee the audits of publicly listed companies, and the audit firms who perform them. The stated purpose of the board is to “…protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports…” The members of the PCAOB are to be “…appointed from among prominent individuals of integrity and reputation who have a demonstrated commitment to the interests of investors and the public…” Two and only two of the board members can be CPA’s.

It has recently been reported that SEC Chairman Clayton has chosen former SEC Chairman Harvey Pitt to review the governance of the PCAOB. Pitt was the SEC Chairman when the original PCAOB Board Chairman was selected by a 3-2 vote of the Commission in October 2002. As has been previously reported in the NY Times and press, Pitt and then SEC Commissioner Harvey Goldschmid flew to New York City and had lunch with the then Chairman of TIAA-Cref, John Biggs. According to Goldschmid, the chair of the PCAOB was offered to Mr. Biggs who indicated he would accept the offer. But first he had to inform his Board and arrange for an orderly transition.

I understand once people became aware of this, one of Pitt’s fellow Commissioner’s pushed for a Republican to become the PCAOB Chair. That Commissioner and a former fellow SEC staffer had talked and settled on William Webster, the Former Director of the FBI. In October, 2002 Pitt and his fellow Republican Commissioners voted to appoint Webster, while withholding important information on the appointment from the Democratic Commissioners, and public.

Webster served as the chair of the audit committee of U.S. Technologies, Inc., which had fired the auditors after they reported material weaknesses in the company’s internal controls. As it turned out, the company was also the subject of an investigation by the FBI.

The NY Times ran an article on Halloween 2002, which brought to light the information which had been kept confidential. When this information became public, Webster resigned. Senators’ Sarbanes and McCain both called for the resignation of Pitt, which Pitt tendered the day of the November elections. Pitt’s SEC Chief Accountant also resigned.

Subsequently, the U.S. General Accounting Office (GAO) performed a study and issued a report on the issues that arose during the initial selection of the PCAOB. The GAO report concludes: “The overall process that emerged was neither consistent nor effective…” It seems questionable, at best, in light of this report and the surrounding circumstances that Chairman Clayton would ask former Chairman Pitt to undertake a study of the PCAOB governance. In addition, it is important to note that Pitt was not supportive of the creation of the PCAOB but favored a “lighter touch” oversight of the audit firms. The auditing profession and firms had been clients of his prior to his appointment to the SEC.

The PCAOB has never been able to overcome the partisanship the initial selection process created. Several news articles and reports as of late continue to chronicle the problem with the selection of PCAOB Board members. Unfortunately and to the detriment of the important work of the PCAOB, that process has become a heated partisan debate. It appears to be a selection process focused on rewarding friends with high paying jobs. If the PCAOB is to be successful, the process needs to begin focusing on the experience, expertise, and demonstrated ability of prospective board members to serve investors and protecting the public interest, as Congress demanded in SOX.

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One Comment

  1. Rick Murray
    Posted Thursday, November 14, 2019 at 1:13 pm | Permalink

    Mr. Turner has been admirably consistent and persistent in his discontent with the actions of US accounting and auditing regulators, few of which have made him happy since his employment at the SEC ended in the last century.

    This epistle keeps his record intact, even though he has had to reach back to 17 year old events of little apparent relevance to current conditions to imply actions of bad faith by today’s regulators. If Mr. Turner, as he often declares, is primarily motivated by the pursuit of audit quality, his comments do not seem to aid that goal, or to be intended to do so.