The week before Supreme Court justices will hear reasons why the Public Company Accounting Oversight Board should be dissolved, the auditor watchdog appears undeterred and has asked for a 16% boost to its 2010 budget.
Members of the board attribute the request for an additional $25.7 million — for a total budget of $183.3 million — to the need for 60 more employees, as the board expects to do more international inspections, undertake a new group of audit firms, and deal with the increasing complexity of accounting rules. The board also expects increased pressure from its regulator to ensure that high-quality audits are occurring at publicly traded companies.
“Changes in economic and business conditions during the past 18 months have made auditing more difficult, particularly in areas like financial-instrument valuation, impairment, going-concern evaluation, and other aspects of financial reporting that require significant estimates and judgments,” said PCAOB acting chairman Daniel Goelzer during a meeting to approve the proposed budget earlier this week. “As a result, our inspections are more challenging and the need for thoughtful risk assessment is greater.”
Nearly half of the additional $25.7 million will go toward the board’s inspections division. In addition, for the first time, the PCAOB will be taking in registrations and annual reports from an estimated 1,200 accounting firms that audit broker-dealers (on top of the more than 2,000 already registered with the board). Before Bernard Madoff’s notorious Ponzi scheme, these firms were not required to register with the PCAOB.
Assuming the budget is approved — which is likely since the Securities and Exchange Commission, which oversees the PCAOB, works closely with the board during the budgeting process — it will mark a 78% increase over the six-year-old organization’s first full-year budget of $103 million, in 2004. The request could rankle CFOs who may see their accounting-support fees rise next year. “In this day and age, there are not a lot of CFOs who have budgets that are increasing,” notes Andy Burczyk, regional attest leader at accounting firm Mayer Hoffman McCann. “This is just another expense that public companies are going to have to bear.”
The PCAOB funds its activities through fees collected from public companies that have at least $25 million in market capitalization, as well as from investment companies. The annual fee ranges by company size: about half paid $1,000 or less annually in 2008, and 15 companies paid between $1 million and $3 million that year.
In the meantime, the board will likely spend the first half of the year wondering about its immediate future. On Monday the highest court will hear arguments in a case questioning whether the existence of the PCAOB — created out of the Sarbanes-Oxley Act of 2002 — violates the U.S. Constitution’s separation-of-powers principle. The justices are expected to make their decision by spring.
As of press time, a PCAOB spokeswoman did not respond to CFO’s request to comment for this article. In the board’s most recent strategic plan, it says it “will continue to defend this action vigorously.”
Entering its fourth year in the court system, the lawsuit was filed by the Free Enterprise Fund, a policy group interested in promoting small government, which took on the case of a small accounting firm criticized by the board after one of its inspections. The group contends that because the regulator was not a legal body, it had no standing to perform its reviews and critiques of auditors. The Supreme Court will be weighing in on the specific question of whether Sarbox violates the Constitution because it gives the President no say in the appointment of the PCAOB’s five-member board.