Speech by SEC Commissioner :
Statement before the Open Meeting regarding PCAOB and FASB Budget Review
Paul S. Atkins
U.S. Securities and Exchange Commission
March 3, 2005
Thank you, Mr. Chairman and thank you for scheduling this matter for discussion today. I will first focus on the PCAOB and then I have a few comments and questions about our review of the FASB's budget.
We all know that the Sarbanes-Oxley Act created the PCAOB because of deep failings in the U.S. accounting profession's ability to regulate itself. During and prior to the Enron-era, the accounting profession fell down on the job and got what it deserved in the Act. Parallel to the PCAOB's oversight of the accounting profession, Congress mandated in Sarbanes-Oxley that the SEC oversee the PCAOB. We cannot shirk this statutory mandate.
The PCAOB is a unique creature in Washington - it is a non-governmental, nonprofit corporation that subsists on funding it takes from over 8,500 public companies. It is not a self-regulatory organization. In essence, this non-government organization has taxing authority. Therefore, it must be accountable to the taxpayers in a transparent way.
I would guess that in just about every public meeting we have had since I started this job, the words "transparency", "full disclosure", and "sunlight" have been uttered by one or more of us. We emphasize, encourage, and revere these qualities and instill them in the entities that we regulate.
Aren't these concepts just as important when it comes to regulators? Of course they are. Sunlight has the same disinfecting qualities in the government as it does in the private sector. Congress, after all, recognized this very principle in the Sunshine Act, which somewhat restricts our operations but reminds us constantly whom we work for. This public meeting is critically important for transparency of the PCAOB's budgeting process. Additionally, it is meaningful for the SEC's approval process to be transparent. The public deserves to know what we considered when we approve the PCAOB's budget.
The Sarbanes-Oxley Act makes clear that the PCAOB's budget is subject to the SEC's review and approval. But, the Act does not tell the SEC how to review and approve the PCAOB's budget. Thus, we are in new territory and we are setting important precedent as we blaze the trail.
Nevertheless, it is clear that Congress considered the SEC's oversight to be critical. During the floor debate when Sarbanes-Oxley was being considered, Senator Sarbanes said it bluntly "The board is subject to SEC oversight, which is important."
One of the most crucial aspects of our oversight function is our annual review and approval process of the PCAOB's budget. The PCAOB and its staff have done a wonderful job. They have responded admirably to difficult timetables. They have quickly transformed a true start-up organization into a relatively large professional services oversight agency. For this they deserve our respect and praise.
This public meeting, however, has little to do with the PCAOB's effort and accomplishments. The Sarbanes-Oxley Act did not direct the SEC to review and approve the PCAOB's budget only if we thought that there were problems or if we had reason to believe that the PCAOB was not doing an adequate job. The SEC's review and approval responsibilities are a required public check on a quasi-governmental organization. This responsibility is exercised more appropriately at a public meeting than behind closed doors.
As regulators, we need to conduct the same type of soul-searching that we expect of market participants. Unlike the members of the PCAOB, SEC commissioners are directly accountable to the American taxpayer - we are stewards of taxpayers' money and they pay our salaries.
A public meeting is also very important for process reasons. As the PCAOB moves from its infancy, it is experiencing growing pains. It is also wrestling with identity issues and the proper extent of the SEC's oversight function. These are additional reasons that it is important to establish a process now for how our two organizations will interact in the future. The organizations will outlast the terms of current commissioners and current board members. I expect that the process of a public meeting to review and approve the PCAOB's budget will continue as well.
I have a number of questions. First, I would like to compliment the efforts of the Executive Director's and OCA's staffs. You all have worked diligently as we navigate these murky waters. You have worked long hours, wrestling with difficult issues. And, you have served the taxpayers well. I should also note that some of these questions are more appropriately asked of the PCAOB board or its staff. Therefore, I expect that you might not be able to answer all of them. I understand this and wish that representatives of the PCAOB were here in person to discuss these issues. At the conclusion of this meeting, I intend to send these questions to the PCAOB and ask them to respond to them. Of course, these responses will be placed in the public record:
- What is the optimal size of the PCAOB? Will it continue to grow or do you expect it to shrink?
- It is my understanding that SEC staff salaries are all public. Are the PCAOB staff salaries public? If not, should they be? What is the average salary of the PCAOB staff? What is the average salary of the PCAOB's professional staff?
- What is the average cost per PCAOB employee (salary and benefits)? How does this compare to the SEC and the FASB?
- What is the turnover rate at the PCAOB? It is hiring, but is its staff size actually getting bigger? How large was its professional staff last year and how large is it currently?
- There appear to be three main groups at the PCAOB - the standards setting group, the inspections group, and the enforcement group. Where is the PCAOB budgeting most of its additional hiring?
- Regarding standards setting -- one of the most important aspects of a standards setting group is to provide interpretations and practice tools for outside professionals to use as they try to implement the new standards. Does the PCAOB have enough personnel to provide this type of guidance which is especially useful for the firms that do not have the same resources as the Big Four firms?
- PCAOB is involved in various international matters. How has it staffed up to deal with these issues? What are its objectives and goals in this area?
- Why does the board need eight regional offices? How big are they? Does it have plans to open more? What type of professionals are housed there? How were the locations chosen? How long are the leases? What sort of growth plans are there for the various offices?
Interaction with SEC
- Please describe how PCAOB and OCA work together. Do they have different opinions about their relative areas of responsibility?
- Regulation PCAOB was a SEC regulatory project regarding how our two organizations would interact. Recent comments by PCAOB suggest that this project is no longer moving forward. Is this true? Why was the project abandoned?
- How much documentation does the PCAOB provide to the SEC staff on the PCAOB's budget? Will most, if not all, of this documentation be available to the public?
- What is the relationship between the PCAOB's enforcement group and our enforcement group? Is there a risk of duplication of effort? What is being done to ensure that duplication does not occur?
- In its December 30, 2004 press release, the PCAOB stated that its revised budget provides it with "significantly less flexibility to respond in the event of a further tightening of the job market for relevant professionals". Is the PCAOB suggesting that the SEC's actions in tightening its budget should be blamed for its present or future hiring difficulties? Is the PCAOB suggesting that the SEC's oversight is somehow hindering its ability to perform its function?
- In this same press release, the PCAOB announced that $1.3 million in consulting fees were cut. How much is the PCAOB spending on consulting fees? Who are these consultants? How were they selected? Will the PCAOB's reliance on consultants increase or decrease over the near term?
- PCAOB ended 2004 with a large amount of unspent cash. Is the PCAOB working to improve its cash management and forecasting ability?
- The PCAOB and the AICPA just entered into in agreement pursuant to which the PCAOB can publish the AICPA's auditing standards without paying a fee. Does the PCAOB plan to write its own standards? If so, does it plan to charge for them?
- The PCAOB has done a good job in building an IT platform from scratch and has made significant expenditures in the process. How large is the PCAOB's IT staff? Can we expect that IT spending will decrease in the near term?
Our mandated responsibility with regard to FASB's budget is different than the PCAOB's budget. The SEC is responsible for "reviewing" the FASB's budget. Congress has not articulated what it means to review the FASB budget, but for the same process and transparency reasons, the public is entitled to know what we did to review it.
The FASB is a private organization that has great influence over public companies. The SEC has formally recognized the FASB as the organization that issues "generally accepted" accounting principles. Thus, the FASB's decisions affect many investors. Through this SEC review process, the public has one rare opportunity to look behind the FASB's curtain and get a sense of how this organization is funded and how it operates. It is a healthy exercise for this private organization, with great power over the public marketplace, to talk about its budget in public.
I have a few questions:
- What sort of process do you engage in with FASB over their budget? Does FASB have an outside auditor?
- Last year, the FASB sought to have us change the formulation of our review of their budget to "approval", similar to what we do for PCAOB. Was that brought up again this year? Why do you think that they sought that change last year?
- Sarbanes-Oxley was passed 2½ years ago. Since then, has there been any discussion by FAF or FASB about adopting some of the attributes of Sarbanes-Oxley? Do they have an audit committee? Do they have an independent auditor? What sort of internal controls do they have?
- Has the FASB been spending significant time and resources on lobbying efforts in Congress? The notes indicate a $64,000 consulting contract to assist in "Washington liaison activities". What is this firm and how was it chosen? Does FASB have a legislative affairs function? How big is it? How much have they spent on that function?
- Is FASB Chairman Herz registered as a lobbyist for FAF? Why is that? What sort of things has he done in that capacity? Has FAF compensated him separately for those activities, or has FASB picked up the tab for that?
- What role does income from publications play in FASB's budget? Is this amount likely to decrease? Will that lead to a need to increase their fee allocation?
Finally, I would like to revisit the Chairman's question to Don Nicolaisen regarding the planning and scheduling of this meeting and on the comment regarding "normal and customary procedures of SEC open meetings".
First, I must note that on repeated occasions during the past year I made requests for a public meeting on these budgeting matters to the staff and to the Chairman. The first time I raised this issue was almost exactly a year ago, when the SEC approved the FASB's and the PCAOB's 2004 budgets. At that time, I voted to approve our action behind closed doors only after our staff placed more information about the PCAOB's budget in the public record.
Second, I want to discuss briefly the purported distinction of a "hearing" versus a "meeting". I believe that this "distinction" is a red herring. It is undoubtedly true that at a hearing, third party participation is expected and indeed requested (at times under oath), while at a meeting third party participation is not common. I should first point out that the Sunshine Act requires that whenever a quorum of commissioners meets to discuss policy, that discussion must be done in public. Regardless of whether we call our discussion a "hearing" or a "meeting", the requirement applies. Next, there is no legal or policy reason that our meetings should consist of discussions solely of SEC employees. In fact, the SEC and the public had the benefit of third party participation at an open meeting just a few years ago. On May 8, 2002, in this very room at an open SEC meeting regarding NASD and NYSE proposed rule changes relating to research analysts' conflicts, Mary Schapiro of the NASD and Edward Kwalwasser of the NYSE attended and participated.
Most importantly, I do not see the wisdom of being bound by SEC lore or "past practice" when we are breaking new ground regarding the PCAOB. Until now, the SEC has never had this type of oversight responsibility over another entity. Thus, past precedent and lore are irrelevant. My bottom line is - this is a public meeting for the public's benefit so it makes sense for the public to hear directly from the entities whose budgets are under consideration.