November 22, 2002
SRI Firms Caution Against a Wimpy Accounting Oversight Board
by William Baue
Despite the distractions of the current Accounting Oversight Board debacle, SRI firms focus on what
policies the board could adopt to support social and environmental issues.
The Sarbanes-Oxley Act mandated that the U.S. Securities and Exchange Commission (SEC) create the Public Company
Accounting Oversight Board (PCAOB) to confront the kinds of accounting scams that have plagued
corporate America recently. Ironically, the very formation of the board has resulted in a scandal
to rival Enron and WorldCom, complete with the elements of deceit, questionable accounting, and
multiple resignations. Instead of allowing the current debacle to shift attention from the matter
at hand, members of the socially responsible investment (SRI) community advocate for a strong board
that will consider social and environmental issues as material to their work.
scandal surrounding the accounting oversight board came to a head at the October 25 SEC Open Commission
Meeting to announce the board's members. SEC Commissioners Harvey Goldschmid and Roel Campos,
both Democrats, voiced strong opposition to the appointment of former FBI and CIA head William
Webster as chair instead of former TIAA-CREF head John Biggs, who was widely regarded as better
After informally offering Mr. Biggs the chair, Mr. Pitt inexplicably shifted
his support to Mr. Webster. In his statement, Commissioner Goldschmid cited
speculation that Mr. Pitt had buckled under influence from the accounting industry, which feared
that Mr. Biggs would fill the position too effectively. At the meeting's end, Mr. Pitt protested
this characterization, perhaps too much.
Within a week, newspapers revealed Mr. Pitt's
failure to disclose to the White House and SEC Commissioners Mr. Webster's admission that he
chaired the auditing board of U.S. Technologies, a company with questionable accounting practices.
Mr. Pitt resigned in the wake of this revelation, and soon thereafter Mr. Webster followed suit,
leaving the chair of the accounting oversight board vacant and the integrity of the board in
Title 1 of the Sarbanes-Oxley Act outlines the structure and
duties of the accounting oversight board. Sarbanes-Oxley charged the board with numerous duties,
including registering public accounting firms; establishing rules to govern auditing, quality
control, ethics, and independence; inspecting accounting firms; and investigating, disciplining,
and sanctioning auditing firms. Despite the precision of the act's language, it remains open to
"Companies are already looking for loopholes in the Sarbanes-Oxley Act,"
said Citizens Funds Director of Social Research
Diane Tod South. "For example, they are defining a wide variety of consulting services as
Confronting such creative interpretation will test the accounting
oversight board's resolve to enact its mission of weeding out such impropriety.
board needs to be a tough enforcer of the spirit of the law," Ms. South told SocialFunds.com. "A
wimpy board will get trampled."
Calvert Group Director of Social Research Julie Gorte
outlined what she believes to be the most important policies for the board to implement. These
include strong, clear and meaningful guidelines for reporting intangible liabilities and assets,
particularly regarding workforce practices, environment, product liability, reputational risk, and
human rights; clear guidance on auditor independence; and guidance to best practices for corporate
Ms. Gorte expounded on her first priority.
"One of the most
pressing needs for the accounting oversight board, in our view, is to establish strong and
enforceable standards on disclosure and materiality of social and environmental factors," Ms. Gorte
told SocialFunds.com. "There is a growing body of evidence that many environmental matters can
have profound material impacts on corporate value."
Ms. Gorte supported her point by citing a recent
Environmental Protection Agency (EPA) report documenting that nearly three-quarters of publicly
traded corporations violate the SEC's environmental debt accounting regulations, or compliance with
The answer to whether the accounting oversight board will address these
issues will remain unclear until after the dust settleds surrounding the impropriety of the Webster
appointment and the board finally gets to work policing accounting impropriety.