The prospect of widespread regulatory reform, pushback from Europe on auditing foreign firms, a Supreme Court challenge and increasing political influence on financial reporting will be just a few of the hurdles that await the new, as-yet-unnamed chair of the Public Company Accounting Oversight Board.
The audit overseer is currently on a search to find a successor to Mark Olson, who abruptly announced his resignation last month after a three-year tenure. Olson, 66, is slated to leave at the end of July. His term was set to expire in 2010.
"Any regulator or policy-maker is going to be met with a slew of challenges," said Cindy Fornelli, executive director at the Center for Audit Quality, including "the economy, the globalization of the marketplace and a sweeping review of the regulatory scheme. But he or she will also have a fantastic legacy in which to build on. They will have been left with a good foundation by Chairman Olson."
Olson was appointed to helm the PCAOB in 2006 after serving on the Board of Governors of the Federal Reserve.
A Securities and Exchange Commission spokesman declined to disclose the names of any potential candidates under consideration.
"One of the challenges to the new head will come from accounting firms, which these days are pulled in opposite directions," said high-profile securities lawyer Michael Young of Willkie Farr & Gallagher in New York. "On the one hand, some feel they're being too hard on fair value determinations, and on the other hand, they're also getting sued for not being tough enough. The new person will have to figure it out."
Young also pointed out the growing politicization of financial reporting rules, a not-so-veiled reference to the recent pressure from Congress to soften mark-to-market guidelines. "The PCAOB, to its credit, wants to preserve the purity and integrity of the audit function and thereby contribute to the soundness of financial reporting," he said.
The PCAOB also faces an imposing legal challenge that has been traversing the courts since 2006.
The Free Enterprise Fund, a conservative legal group, and Beckstead & Watts, a small auditing firm in Nevada, have contended that, constitutionally, the president - and not the SEC - must appoint board members. An appeals court rejected that suit, but the Supreme Court has agreed to consider the case in its next term.
"The mere fact that the Supreme Court decided to take up the case is a strong indication that they may have some trouble there," said former SEC chief accountant Lynn Turner. "They have an incredible task ahead of them. If the decision goes against them, it will create a feeling of instability - it will be difficult to hire people, who may feel that they may not be there a year down the road."
There's also a diplomatic issue centering on inspections of overseas audit firms. Sarbanes-Oxley mandates that the PCAOB inspect those foreign firms that audit companies whose securities trade on U.S. markets. However, the European Commission has worked to stifle joint inspections, claiming that the U.S. is not authorized to inspect Europe-based firms.
In internal matters, the board will also have to replace two other members whose terms are expiring. Charles Niemeier's term expired last October, but the SEC has not as yet named a successor, so he still serves on the board. Meanwhile, the term of board member Willis "Bill" Gradison ends in October.
Said the CAQ's Fornelli on a new PCAOB chair, "Obviously you need someone who understands the markets, the regulatory experience, the SEC and Sarbanes-Oxley. And understands how these various pieces work together. You need someone willing to be bold."
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