Regulators Propose New Audit Body
Thu Jun 20, 7:05 PM ET
By Claire Soares
WASHINGTON (Reuters) - U.S. regulators on Thursday paved the way for a new audit oversight body to combat corporate earnings trickery, but critics immediately said that the new accounting police might be too cozy with the embattled industry.
Aiming to restore public confidence in Corporate America after the Enron Corp. collapse and other accounting scandals, the U.S. Securities and Exchange Commission ( news - web sites) on Thursday unanimously approved a proposal to set up a new industry oversight panel.
The Public Accountability Board (PAB) would replace the current system of peer reviews and employ at least 50 staffers to keep accountants honest.
Just three of its nine board seats would be open to accountants, but politicians, consumer groups and analysts expressed doubts at the board's independence. They also criticized the loose selection process for the PAB: Basically any group of people can ask the SEC for approval as a board.
"I think people would perceive it as the fox in the chicken coop," Senate Majority Leader Tom Daschle told reporters ahead of the SEC vote. "We don't need more toothless tigers ... We've got to get serious."
The Senate Banking Committee this week backed a bill that most commentators say creates better checks on auditors.
But the measure faces an uncertain future on the Senate floor and still must be reconciled with a more business-friendly version, passed by the House and authored by Ohio Republican Rep. Michael Oxley.
TUSSLING CONGRESS
So while Congress tussles, the SEC is steaming ahead with its own plan for an overseer, which Chairman Harvey Pitt hopes will be in place by year-end to start conducting reviews by spring 2003.
Oxley praised Pitt's work in ensuring that reforms would happen this year. But Maryland Democrat Sen. Paul Sarbanes, author of the Senate reform, was more cautious, saying he felt a statutory framework would assure greater independence for an oversight body.
SEC regulators envisage the new entity will have a full-time staff of about 50, who would make the key decisions and supervise reviews of the 10 largest U.S. audit firms.
But officials concede that to compile those annual snapshots of top firms, the body will need 200 staffers. And those additional inspectors would be seasonal hires from the accounting profession.
Another feature that raises fears the PAB will cater to vested interests is that former accountants would be eligible for independent board seats, as long as they have been out of the industry for 10 years.
Barbara Roper of the Consumer Federation of America even said the new system was in effect similar to the old peer reviews that let Deloitte & Touche give Enron's auditor Andersen a pass grade while a fiasco was brewing.
"Firm-on-firm inspections result in 'you scratch my back, I'll scratch yours'. Even with someone like the PAB overseeing them," she said in a telephone interview.
But Robert Herdman, the SEC's Chief Accountant, said that the accusation of replacing like with like was groundless.
"If the old system is soccer, then this is football, American football," he said.
And Pitt championed the body as "a loud and clear message that the era of self-regulation of the accounting profession is over."
The three board members from the accounting industry cannot act as chairman or vice-chairman, or vote on disciplinary matters, like imposing fines and suspending firms from auditing publicly traded companies.
MYSTERY BOARD
Another issue sounding alarm bells is the way the PAB board would be formed -- all it takes is for a group to club together and approach the SEC for approval. That process could result in multiple oversight bodies, experts said. "That's very unstructured, and I suspect what you will get at the end is people representing vested interests," said Itzhak Sharav, an accounting professor at Columbia University's Business School.
"Those who have a direct interest in a particular make-up of the board, such as the big accounting firms and trade groups, will probably rush to suggest sympathetic people for the board," he added.
Under the current proposal, only the PAB chairman or vice-chairman would work full-time, with the remaining board members devoting about 25 percent of their professional time -- a ratio Pitt said might need adjusting.
The PAB will be funded by audit members and public companies, which will have to cough up fees if they want the SEC's seal of approval on their financial statements.
Officials said the new body would probably not set standards for the accounting industry in the short term, leaving that to organizations like the Auditing Standards Board of the American Institute of Certified Public Accountants.
But the AICPA said "probably" and "short term" were worrying words as the PAB could yet decide to turn its hand to standard-setting.
"The proposal raises uncertainties about whether auditing professionals will continue to remain actively engaged in setting standards," the AICPA said in a statement.
The public and industry can comment on the SEC's proposal for the next 60 days -- so the agency should perhaps expect a heavy mailbag.
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