Speech by SEC Commissioner:
Statement at Open Meeting to Consider PCAOB's Proposed 2008 Budget
Commissioner Paul S. Atkins
U.S. Securities and Exchange Commission
December 18, 2007
Thank you, Mr. Chairman. Thank you also to Chairman Olson for your participation in today's meeting. Your joining us here today is the culmination of the cooperative work between the SEC and the Board in developing the budget that is before us. As has already been described, the budget anticipates that the Board will need $144.6 million in funds for 2008. Congress, in the Sarbanes-Oxley Act, gave the SEC approval authority over the Board's budget. This is an important task and, all the more important, because shareholders of public companies foot the Board's bills.
This year, the budget approval process has been smoother than in prior years thanks to the spirit with which Chairman Olson approaches this task. The budget rule, which the SEC developed collaboratively with the Board, has provided an effective framework for the process. I am confident that it will work even better in future years as your staff develops a better understanding of the information that we will need in reviewing your budget. I am also confident that the enunciation of a clearer vision of where the Board is headed and how it intends to get there will aid the budget process in the years to come.
The appropriate vehicle for considering the Board's goals, current position, specific objectives, and benchmarks for measuring success is a strategic plan. To date, the Board has taken steps to produce a strategic plan, and I salute you for creating an aspirational document. But that document is not yet — to quote last year's SEC order approving the Board's budget — a "comprehensive multi-year strategic plan that is integrated with the Board budget process." Good budgeting practices require a strategic plan that takes into account environmental factors, sets out objectives, analyzes current strengths and weaknesses, undertakes to identify the gaps between organizational objectives and the status quo, and lays out an action plan for achieving the objectives with benchmarks for accountability.
For an organization that has been in existence since 2003, the failure to have such a plan in place is a real hindrance to progress. That is why the SEC has been asking for this for years. As the draft order makes clear, we look forward to working with you on developing a meaningful strategic plan during the first quarter of 2008. Efforts spent on the strategic plan will yield dividends in the Board's internal budgeting process and the SEC's review of the budget.
I appreciate the meetings that we have had and your availability to discuss the matters in your budget. I have a number of questions for the public record. Our staff in the Offices of Chief Accountant and Executive Director have worked closely with Chairman Olson, the other Board members, and your staff on this budget. I greatly appreciate that work, which has stretched over many months. However, I will take advantage of Chairman Olson's presence with us today and direct my questions to him. [Questions omitted.]
There is one final issue that I must address. That is the issue of the salaries of the Board members. The pass-back letter from the SEC to the Board reflected my preferred position — that the salaries of the chairman and board members be frozen for 2008. The proposal before us reflects the Board's original request for a 3.3% increase in the salaries of the board members. The increase before us today, which is designated as a so-called "cost of living increase," will increase the Chairman's salary by about $21,000 from $633,450 to $654,353 and the salary of each board member by about $17,000 from $515,000 to about $532,000. I am concerned that the board salaries are disproportionately high. We must not forget that these salaries, along with the rest of the Board budget, are paid by investors. In this regard, the SEC truly stands in a stewardship role as the investors' advocate.
The SEC cannot therefore simply cede authority to the Board to set its own salaries without SEC oversight. To do so would be an abrogation of our duties under the Sarbanes-Oxley Act, which gave the SEC "oversight and enforcement authority over the Board."1 As the Board itself has explained in the context of litigation over the Board's constitutionality, "The SEC's expansive authority was the product of deliberate design" and the SEC's "oversight is plenary" and "pervasive."2 If it were not so, the Board would be clearly unconstitutional. The SEC can and must provide objective oversight with respect to the Board's salaries. If we do not oversee those, nobody else can. As the chairman of the House Committee on Appropriations urged us at PCAOB's inception, we must "vigorously review the Board's budget especially the proposed compensation rates for Board members and staff."3 After all, it is rather unusual for people, particularly people in positions of public trust, to be able to set their own salaries without anyone holding them accountable.
Proponents of these salary levels argue that the Sarbanes-Oxley Act gives the Board the power to appoint staff and pay them competitive salaries. This is true, but, as set forth in the statute, the Board's power is explicitly subject to SEC oversight. As the Board has explained in court, the Sarbanes-Oxley Act "gives the SEC extensive, plenary, and pervasive control."4 Moreover, the statutory provision addresses staff, versus Board, salaries. The legislative history likewise supports the importance of "the Board['s having] a strong, well-trained, and experienced staff."5 Alternate bills in both the House and Senate would have directed the Board to set Board members' salaries at a level comparable to similar private sector positions. It is telling that this directive did not make it into the final legislation.
Apparently, some at the PCAOB also assert that because the Board is set up as an "independent" entity, its independence would be threatened if the SEC could set the salaries. First, by "independence," the statute contemplates independence from the profession that the Board oversees, in contrast to the prior situation of self-regulation by the AICPA and other bodies. The PCAOB is an "RO" (Regulatory Organization), not an "SRO" (Self-Regulatory Organization). Second, if the Board be truly independent of the SEC, then it would be clearly unconstitutional, and we would need to change our position in court.
Indeed, as we have seen over the Board's initial years, it is difficult to attract and retain technical staff with the necessary experience and qualifications, which is why the budget before us today includes salaries comparable to what the technical staff could earn elsewhere. Board salaries are another matter all together. We have not had difficulty finding or retaining qualified and engaged Board candidates. The members of the Board do not have to have particular qualifications aside from their being, as the statute says, "prominent individuals of integrity and reputation" who are committed to public and investor interests and understand the nature of financial disclosures and auditor obligations. Indeed, the statute specifically limits the Board to two CPAs. This distinguishes the Board from the Financial Accounting Standards Board, the board members of which have substantial technical accounting expertise. Finally, the level of the Board's salaries is out of sync with the salaries of other prominent individuals of integrity and reputation and the rate of growth is out of sync with the rates in the growth of salaries and prices.
Let me show you just how out of alignment these salaries and the proposed growth in salaries are. First, let us look at the following chart. [See Chart 1.] It shows the salaries of the Board members and Chairman in comparison with the salaries of some other prominent figures. Let us look at some federal government salaries. The President makes $400,000, which is more than anyone else in the federal government. Among the other prominent members of the federal government is the Chairman of the Federal Reserve Board, who made $187,000 in 2006.
We can also take a look at the salaries of some prominent individuals outside of the federal government. The highest-paid state governor is entitled to a salary of $206,000, although he does not accept it. The CEO of CalPERS earns slightly more — $215,000, even though some of the employees with technical expertise earn more than he does. The average large non-profit CEO comes in at $258,000. The PCAOB Chairman's $633,450 salary and the Board members' $515,000 salaries for 2007 are substantially higher than all of these. Yet the Board is asking us to give them a raise. I did not bother to include SEC commissioners on the chart, but, in case you are wondering, the Board Chairman's salary is higher than what all of us sitting up here earn — combined.
The second and third charts show how the rate of growth in Board salaries has outpaced Cost of Living Adjustments (COLAs). The comparable COLAs are the rate of increase in the Consumer Price Index and the COLAs received by federal workers. As you can see, the federal civil service rate of increase tracks that of the consumer price index pretty closely.
I raise the issue of the Board's salary not to call into doubt the excellent work of the Board. I could tick off a list of accomplishments over the last year, including, most importantly, the replacement of the much maligned Auditing Standard 2 with AS5, which we hope will work to investors' net benefit. Rather, this is a policy issue. As a matter of policy, Board salaries are, I believe, disproportionately high, and we should not continue to increase them.
I am the last commissioner of the original Commission that implemented Sarbanes-Oxley in 2002. At the time, we looked to the FASB as a comparison for the PCAOB salaries, because the NASD, with its million-dollar salaries, was deemed much too high. To be fair, the NASD is also a much bigger organization than the PCAOB will ever be, with thousands of employees undertaking a large arbitration, market surveillance, inspection, enforcement, and rulemaking agenda. But, no one at the time contemplated the increasing pressure to raise salaries for FASB to continue to attract technically proficient people to Norwalk, Connecticut, in the greater New York metropolitan area. Thus, it is entirely appropriate that the Board has taken formal action to de-link the salaries of Board members from those of the FASB.
I would like to thank the Board for its work during the past year. I look forward to working with you during the upcoming year. My belief that the Board salaries should not be increased this year unfortunately prevents me from voting for a budget that is otherwise reasonable. I would be pleased to support the Board's budget with a salary freeze for Board members. Thank you, Chairman Cox and thank you, Chairman Olson.