PCAOB lays down tough ethics code

by Ken Rankin with staff reports

Washington - The Public Company Accounting Oversight Board has approved a stringent set of ethics rules for its board and staff - in an apparent effort to stave off any future conflicts of interest that could impede the group’s advances against corporate fraud.

The board also adopted a new rule for seeking help from outside experts in the financial markets - including working auditors and accountants - to help the board carry out its work.

On June 30, the oversight body adopted a 14-section code that would sharply limit financial dealings between accounting firms and the PCAOB’s board members and professional staff.

The guidelines explicitly prohibit the PCAOB’s five-member board, as well as their dependents, spouses and “spousal equivalents,” from sharing in the profits of a public accounting firm, or from receiving payments from such a firm. The sole exception: “fixed continuing payments under standard retirement arrangements” with a CPA firm.

The new ethics code further bars board members and PCAOB staff employees from having any financial interest in a public accounting firm, and instructs them to “avoid investments that affect or reasonably create the appearance of affecting their independence or objectivity.”

Although personal investment decisions that meet this standard will not be considered an ethical breach, the code requires PCAOB board members and professional staff to make annual disclosures of their holdings of the securities of public companies subject to the board’s regulation.

Members are also forbidden to accept any other employment outside of service to the board, even volunteer work if it interferes with their responsibilities to the board or creates a “reasonable appearance of a conflict of interest.”

“On the positive side, they want to send the message that anybody working for them is squeaky clean, but I don’t think they’d be going there without the fiasco of [former chair William] Webster,” said industry consultant Allan Koltin, president of Chicago-based PDI Global. Just weeks after being appointed as the inaugural PCOAB chair, Webster resigned after it was learned that he served as internal audit chair of a publicly held technology company that was being investigated for accounting irregularities.

Koltin added that he felt the rules as they related to volunteer work might be “just a bit of overkill.”

“Part of why these people are who they are is because they’re active in their communities,” he added.

The new ethics guidelines, which are still subject to review and approval by the Securities and Exchange Commission, include several changes made to an earlier proposed version in response to public comments on that plan.

In response to concerns raised by the National Association of State Boards of Accountancy, for example, the board agreed to allow its personnel to accept compensation for travel to meetings of “associations of governmental (federal, state or local) bodies and non-U.S. institutions equivalent to the permissible domestic sponsors.”

Without such a provision, NASBA argued, “PCAOB speakers [might be] unable to add to our meetings because of travel budget restrictions.”

The board also responded to concerns raised by Big Four firm Deloitte & Touche that the PCAOB’s staff may be casting too wide a net in applying ethical standards to “consultants and contractors” selected to do business with the board.

In the proposed version, “it could be read that the board’s cleaning contractors” would be subject to the same tough ethical standards intended for professional service providers, D&T argued. Moreover, “if one person in a large organization provided services to the board, the entire organization may be required to comply with the code,” the firm noted.

In the final version, the board clarified the code’s application to “designated contractors and consultants” by requiring a three-step process. “First, there will have to be a contract for services; second, the board (or its designate) will have to determine that the code should be applied to the contractor, in whole or in part; and last, the contract will have to contain specific provisions incorporating those portions of this code applicable to the contractor.”

In announcing the rules, the PCAOB said that the goal of the code is “to ensure the highest standards of ethical conduct, and to provide the public with confidence in the objectivity of the board’s decisions by seeking to avoid both actual and perceived conflicts of interests.”

At the same meeting at which the board approved the ethics code, the PCAOB also issued rules designed to codify the board’s “exclusive, statutory authority to establish and amend auditing and related professional practice standards.” Under that edict, “all public accounting firms that are registered with the board must comply with the board’s standards” - a requirement that the PCAOB said “is implicit in the Sarbanes-Oxley Act.”

“Any registered public accounting firm or person associated with such a firm that fails to adhere to the board’s standards may be subject to a board disciplinary proceeding,” the PCAOB declared.

The board also approved final rules governing the formation of PCAOB advisory groups, and will create a 25-member “standing advisory group” composed of “practicing auditors,” state accounting regulators, members of the investment community, academics and others to make recommendations to the board at least twice annually at public meetings.

SAG’s first chair will be Douglas Carmichael, the PCAOB’s chief auditor and director of professional standards, who will prepare the group’s meeting agendas, oversee meetings and act as liaison to the board.

The board is seeking nominations (including self-nominations) for SAG participants who possess “integrity and a working knowledge of one or more of the following subjects - generally accepted accounting standards, generally accepted auditing standards, public company financial statements, corporate governance and other pertinent areas.” Successful candidates will be expected to attend meetings and dedicate 50 to 100 hours per year (or more if necessary) to SAG service on a voluntary basis.

Separately, the PCAOB said it has filled two key posts. Samantha E. Ross takes over as chief of staff after serving as special counsel to current board member Charles D. Niemeier. Previously, she coordinated accounting-fraud investigations as special counsel to the chief accountant of the SEC enforcement division. Mary Moore Hamrick was appointed director of government relations. She spent nine years with New York Life Insurance Co., where she was a vice president and headed the company’s Washington lobbying office.

“Thus far the board has shown they’re serious in getting qualified people,” said California-based CPA and author Art Berkowitz. “They’re the player to be reckoned with for fraud or to consult with if you want to remain in the game.”