The SEC Rules

Five years after Sarbanes-Oxley, the SEC is flexing its regulatory muscle as never before.

Setting the Standards

For a taste of the new, more assertive SEC, one need look no further than to its relationship with the PCAOB. When asked about the PCAOB’s independence at a hearing of the House Financial Services Committee in June, Cox characterized the relationship as “collegial.” At the same time, he noted that the SEC has both budget and operational oversight of the board. “We don’t want to breathe down their necks. We want to let them do their jobs and supervise it,” said Cox. “We do not want to micromanage them.”

Steven Scholes, a former SEC attorney who is now a partner at McDermott Will & Emery, says the relationship between the two agencies is a work in progress. “The PCAOB is so new that it’s still trying to figure out its role,” he says.

But other observers are more stark in their assessment. The board operates as “a wholly-owned subsidiary of the SEC,” according to Jack Ciesielski, publisher of the newsletter The Analyst’s Accounting Observer. Since the board’s creation in 2002, he says, “the SEC has pretty much set the agenda.”

That certainly seemed to be the case when the PCAOB attempted to rewrite Auditing Standard No. 2, which directs auditors’ implementation of Sarbanes-Oxley Section 404. The commission became heavily involved in order to ensure that the PCAOB’s new standard, Auditing Standard No. 5, was in sync with the SEC’s own newly issued guidance to public companies. “The recent revision of AS5 gives an indication of how closely the SEC is working with the PCAOB,” says John Archambault, managing partner of professional standards at Grant Thornton.

Independence in Principle

The relationship between the SEC and FASB is more complicated and perhaps more indicative of the SEC’s expanding reach. Ensconced in an office building in Norwalk, Connecticut, FASB has set accounting standards since 1973, in a think-tank environment largely free from the interference of the SEC — or anyone else, for that matter. With paid, full-time members hailing from industry and academia, the board’s mission is to create accounting rules independent of private interests.

Periodically, the SEC and FASB have been at odds. For example, in 1994, the board was considering requiring the expensing of stock options. Congress leaned on the SEC, which in turn pressured FASB to drop the issue. The board required disclosure of the cost of options only in the footnotes to financial statements. (In 2005, FASB — with the support of the SEC — required expensing, despite a clamoring Congress.)

But with the passage of Sarbox, the board’s funding structure changed. Instead of receiving contributions from the accounting firms and the AICPA, FASB is now funded by mandatory fees collected from public companies. The law also mandates that the SEC approve FASB’s budget.

In a 2003 conversation with CFO magazine, former FASB chairman Dennis Beresford identified a possible problem with this arrangement: while the change freed the board from the potential influence of the accounting industry, “it’s not clear that [FASB] has more independence from the political process,” he said. “In fact, it may have less [independence] from Congress and other people in Washington. The SEC could give it a hard time with its budget.”


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