A critic from Washington-based think tank the American Enterprise Institute has called on Congress to terminate the Public Company Accounting Oversight Board within five years and fold the oversight body into the Securities and Exchange Commission.
In his recent paper, "Rein in the Public Company Accounting Oversight Board," AEI resident fellow Peter J. Wallison, former general counsel of the U.S. Treasury Department and White House counsel to President Reagan, urged Congress to "take steps to gain control of the PCAOB."
According to Wallison, "The simplest and most effective method would be to fold it into the SEC," with the board then serving as an advisory body on the development of rules and standards for auditing. "But at the outside, the board should be terminated within five years, the term of the board's members. In that period, it should be possible for the board to have made all the rules and established all the standards necessary to govern the business of auditing."
Once that work is complete, Wallison says, "The PCAOB should cease to exist, and enforcement of its regulations should rest with the SEC, which could, of course, update the rules as changing conditions warranted."
"We're following the structure, including funding, that was set out by Congress in the Sarbanes-Oxley Act," said PCAOB spokeswoman Christi Harlan. "He's entitled to his opinion, but he's opining on a federal law."
According to Wallison, the PCAOB has "some truly unique and troubling features" - among them, the fact that the oversight body is funded by levying fees on all public companies, "essentially a tax on the economy as a whole."
In addition, Wallison notes that no more than two of its five members, who all must serve full-time, can have had backgrounds as accountants or auditors, which, he says, "turns the whole concept of a self-regulatory [organization] on its head."
"The members of the industry who serve on the governing board of the SRO ... are constantly in touch with others in the industry and receive critical commentary and feedback about the quality of the SRO's work. These informal elements of control over an SRO are missing in the case of the PCAOB," according to Wallison.
"Although it is too early to tell whether the PCAOB will expand its regulatory activities beyond what Congress intended, there are already indications that the organization is taking full advantage of its independence from the normal funding sources of government agencies and SROs," Wallison says.
As an example, he notes that the NASD, formerly the National Association of Securities Dealers, which regulates 5,200 brokerage firms, performed its regulatory functions in 2004 with a staff of 2,000 and a budget of approximately $400 million - $200,000 per employee and $76,000 per regulated entity, while according to Wallison, the PCAOB is "already operating at a rate of expenditure that is twice that of the NASD."
According to Wallison, with a 2004 budget of $103 million and an average staff of about 200 employees during the year in which it regulated approximately 1,400 registered auditing firms, the board's cost per employee was over $500,000. The PCAOB's 2005 budget calls for expenditures of approximately $388,000 per employee, according to Wallison.
