Mark Olson, a former PCAOB chairman who stepped down this summer, believes the oversight question will fall flat since the board — a private, nongovernmental entity — is overseen by the SEC, whose commissioners are appointed by the President. “That takes away the strongest argument, that it’s a separate agency without oversight,” he told CFO. “It doesn’t stand up to reality, either in the construct of the law or the way the law was implemented.”
The matter concerns just one provision of Sarbox that governs the accounting oversight board, but the plaintiffs have not shied away from hoping the case will make the entire seven-year-old law unravel. Moreover, Sarbox dissenters hope the Supreme Court will agree with them that there is no “severability” clause in the act and that any change made to it would open up all of its provisions to debate (including the much-maligned Section 404). “With the issue back at the forefront of the legislative agenda, we anticipate that Congress will consider proposals to reform Sarbanes-Oxley in other ways,” Chris Vergonis, a partner at Jones Day, the law firm that represents the plaintiffs in the Supreme Court case, told CFO.
Olson, who now co-chairs the consultancy Corporate Risk Advisors, considers the constitutionality argument a last-ditch effort to get Sarbox repealed by “a group that represents a point of view that was offended by the whole Sarbanes-Oxley legislation.”
The PCAOB was created as a private entity, mostly to help it keep up with private-sector salaries, as well as to keep itself independent from the industry it’s charged with scrutinizing, Olson explains. Four board members are paid just over $500,000 each, more than the SEC commissioners and the U.S. President earn, while the PCAOB chairman’s salary is $654,406.
However, the board hasn’t been able to fill its empty slots. A spokesman says the SEC has made “no final decision” on the three available seats, including Olson’s (which has been vacant since July) and that of Charles Niemeier, who still sits on the board even though his term expired in October 2008. Bill Gradison’s term recently expired as well.
Olson suggests that vacant seats at the PCAOB aren’t unusual; his spot was empty for eight months before he was appointed. The SEC “has a lot on their plate, a lot of things competing for their attention,” he adds.
A group of academics is watching the Supreme Court case closely in the hope it will lead to a rethinking of the board’s makeup and its distance from the SEC. In a critical paper published in Accounting Horizons earlier this year, three professors claim the board members lack practical public-company auditing experience, backgrounds in standard-setting, and variety of audit-related expertise. “The PCAOB approach essentially embodies, in our view, a limited form of the ‘political representative’ approach — ‘limited’ in that the board fails to adequately represent all interested parties,” they wrote.
In particular, says co-author Mark Taylor, an accounting professor at Case Western Reserve University, the PCAOB hasn’t kept pace with its standard-setting activities and has fallen behind converging its rules with other audit rule makers. A Supreme Court decision against the PCAOB could lead to the SEC having to appoint a new board, new directives on standard-setting, and a halt in inspections during any transition, Taylor theorized to CFO.
Sarbox limits the board members from having much practical experience. In response to the coziness between auditors and corporates revealed by the Enron/Arthur Andersen scandal, independence was the word of the day when Sarbox was passed in 2002. The law also put a stop to the self-regulation of public-company auditors. Only two of the PCAOB’s five members can be a certified public accountant, and if one of the CPAs serves as chairman, he or she cannot have been practicing during the previous five years. “You have to go back and remember the context of when the law was passed, that one of the objectives of Sarbanes-Oxley was to take the supervision of the profession out of the profession,” says Olson.
Olson stands by the board’s format and says it should serve as a model for new agencies. “It is extremely difficult to bring in people under a government salary structure and to be able to attract people at the same level of sophistication as the people they are trying to inspect,” he says.