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March 21, 2003
Watching the Public Company Accounting Watchdog
    by William Baue

The Public Company Accounting Oversight Board Association is slowly getting to work and it will be scrutinized by the newly-formed Association for Integrity in Accounting.


Last week, the Public Company Accounting Oversight Board (PCAOB) proposed its first rules since its establishment by the Securities and Exchange Commission (SEC): a set of fees for public companies to support the functioning of the board. Proponents of accounting reform are beginning to grumble that several months have passed since the PCAOB was formed and little progress has been made.

A group that supports reform is taking action. Earlier this month the Association for Integrity in Accounting (AIA) was created as a public interest group to "watch the watchdogs." In other words, the AIA will monitor the PCAOB's policing of the accounting profession and the SEC's oversight of public companies. The PCAOB's protracted pace does not inspire confidence in AIA members.

"The PCAOB has been slow to get off the ground, given that our capital markets seem to be in a state of near crisis," said Tony Tinker, an AIA board member and a professor of accountancy at Baruch College of the City University of New York (CUNY). "There's hardly a sense of urgency with this group."

Peg O'Hara, the managing director of the Council for Institutional Investors (CII), expressed understanding of the PCAOB's predicament.

"Yes, it's true they haven't done much, but it's probably a little harsh to criticize them if actions don't come spewing out--they had to start up from scratch, and they're working without a chairman," Ms. O'Hara told SocialFunds.com.

William Webster, the SEC-nominated chair of the PCAOB, had to rescind his candidacy almost immediately upon the revelation of accounting impropriety at U.S. Technologies (ticker: USXX.PK), where Judge Webster served as chair of the audit committee.

Last year Congress asked the General Accounting Office (GAO) to investigate the appointment process. The GAO's December 2002 report pinned the blame on the SEC's chief accountant for failing to inform then-SEC chair Harvey Pitt and SEC commissioners of Judge Webster's role at U.S. Technologies.

Professor Tinker places blame more squarely on Mr. Pitt and the strong lobbying efforts of the "big four" accounting firms. The big four are Deloitte & Touche, Ernst &Young, KPMG, and PricewaterhouseCoopers.

"From Harvey Pitt's initial moves to push Webster [to] being open to the big four's lobbying against [John] Biggs, who was at least a more plausible candidate, it was clear that the SEC was already bending to pressure," said Prof. Tinker.

The AIA also calls into question one of the only other notable accomplishment by the PCAOB thus far: setting board member salaries at nearly half a million dollars.

"In its very first meeting, members voted themselves annual salaries of $452,000 apiece, and $560,000 for their chairman," said Ralph Nader at the press conference announcing the establishment of the AIA. "The President of the United States, by comparison, makes $400,000 [and] the chairman of the Securities and Exchange Commission earns $142,500."

"Anybody committed to the public interest should not require a salary greater than the President of the United States," said Ralph Estes, an AIA board member and an emeritus professor of accounting at American University.

However, Ms. O'Hara pointed out that the SEC has been losing much of its talent to more competitive salaries at corporate firms, and the PCAOB runs the same risk.

"The PCAOB needs to get good people who are knowledgeable, and it is competing with private companies that pay a lot more than the government does," Ms. O'Hara told SocialFunds.com. "We're talking about lawyers and accountants who are used to getting big bucks, so it's hard."

 

 
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