In an open meeting on June 20, 2002, the Securities and Exchange Commission (SEC) voted to expose for public comment its proposal for a private-sector body to oversee audits of public companies. The proposal met with a public outcry after details were provided to the media. Much of the meeting was devoted to defending the plan against those who don't see it as much of an improvement.
What Will Change?
Essentially, the SEC's plan is to create one or more bodies called Public Accountability Boards (PABs). Chief Accountant Robert Herdman said the new plan will be at least as different from the old system as football is from soccer. The reasons will be explained in the SEC's 200-page proposal. Statements made during the Webcast indicate that future quality control reviews of accounting firms will be overseen by the PAB(s), but the reviewers will probably continue to be employees of other accounting firms. SEC officials indicated a low likelihood of any significant impact on accounting or auditing standards. They said existing standard-setters will probably be designated to continue. Chief Accountant Herdman said the major improvements will be more frequent quality control reviews of larger accounting firms, along with reporting of any defects to the new board(s) for possible disciplinary action.
Outspoken critics of the plan include:
- Charles Bowsher, former chairman of the Public Oversight Board, who said: "I think the big firms will basically control" the proposed new board(s).
- Peg O'Hara, managing director of the Council of Institutional Investors, who said: "We prefer legislation to an industry-dominated structure. What have we had? The industry policing itself, and that hasn't worked."
- Senate Majority leader Tom Daschle, who said in a Democratic reaction to the SEC's proposal: "The SEC advisory board is a toothless tiger that has no real meritâ¦ This is almost a guarantee that we're going to get another Enron, if that's all we do."
- Barbara Roper, director of investor protection for the Consumer Federation of America, who said: "If the new regulator simply enforces standards that are set by industry, it is doomed to ineffectiveness."
Perhaps in an attempt to mitigate the criticism, SEC Chairman Harvey Pitt indicated that a companion proposal might follow in a month or so. This proposal would address independence concerns, such as restrictions on consulting services provided to audit clients and use of compensation plans that reward audit partners for cross-selling consulting services. In the meantime, the proposal for the PAB(s) will be exposed for comments for a 60-day period. Chief Accountant Herdman said the SEC hopes to make a final decision in November 2002 and expects to have the system in place for 2003 reviews, which typically are conducted in the spring and early summer. Asked how the board could be formed and operational in such a short timeframe, Mr. Herdman said the expectation is that "certain civic-minded individuals" will come forward when they learn of the decision, and then SEC staff will work with these individuals to get things moving.