SEC to put U.S. audit watchdog under microscope

Reuters News
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Posted: Jan 10, 2012 6:13 PM
SEC to put U.S. audit watchdog under microscope

By Sarah N. Lynch

WASHINGTON (Reuters) - U.S. securities regulators will question the top U.S. audit watchdog about his budget and policy priorities on Wednesday, in a rare public meeting designed to shed more transparency on the agency that has tightened the screws on the auditing profession over the past year.

The meeting at the Securities and Exchange Commission will be styled like a congressional hearing, with Public Company Accounting Oversight Board Chairman James Doty on hand to answer questions and make the case for why the SEC should agree to give the PCAOB a budget boost.

The meeting on the PCAOB budget comes at a crucial time. Since Doty first joined the PCAOB about a year ago, he has greatly raised the profile of the audit watchdog.

A vocal critic of the way auditors did their job during the 2007-2009 financial crisis, Doty has called for a series of major regulatory changes that have been met with strong resistance from accounting firms.

The PCAOB is considering whether to limit the number of years an audit firm can work for the same client - an action that could break up some business relationships more than a century old. It also is considering forcing auditors to put their names on the audit reports attached to companies' financial statements.

Further, Doty has been fighting for the ability to inspect overseas accounting firms, especially in China where they have denied U.S. regulators access to documents despite a rash of accounting scandals at U.S.-listed companies based in China.

Doty may face questions on some of these controversial policy areas in addition to the PCAOB's 2012 budget request, according to people familiar with the matter. For 2012, the PCAOB is requesting approval of a $227.7 million budget, which is up from its 2011 budget of $204.4 million.

Its budget is not funded with taxpayer money, but through fees imposed on public companies and broker-dealers. However, the SEC must sign off on it.

Those who know Doty or who are familiar with his tenure at the PCAOB so far say they expect he will do well when he presents the PCAOB's budget request before the SEC.

"Chairman Doty is a veteran securities lawyer and is well respected on both sides of the aisle," said Bradley J. Bondi, a partner at Cadwalader, Wickersham & Taft LLP and former SEC attorney.

Created by the Sarbanes-Oxley Act of 2002, the PCAOB has the power to impose rules and to inspect and fine accounting firms, including the Big Four accounting firms: Ernst & Young LLP, KPMG, PricewaterhouseCoopers and Deloitte & Touche LLP.

RARE MEETING

Wednesday's meeting will mark only the fifth time the SEC has met in public to vote on the PCAOB's budget since the board was established. In most years, SEC commissioners have treated the budget approval as a formality and voted on it behind closed doors without any public debate.

The last time the SEC met publicly to discuss the PCAOB's budget was in December 2008, the same month that Bernard Madoff's Ponzi scheme came to light and the U.S. government was still grappling with a response to the financial crisis.

The first open meeting on the PCAOB budget was held at the request of SEC Republican commissioners Cynthia Glassman and Paul Atkins. Over the years, Atkins was often critical of the high salaries paid to the PCAOB chairman and its members.

According to PCAOB records, the 2011 salary for the chairman was $672,676 while members made $546,891. Salaries have remained flat since 2009. As a comparison, SEC Chairman Mary Schapiro's 2012 salary is $165,300.

This time, the SEC's newest commissioner Dan Gallagher, a Republican who once worked for Atkins, is the one calling for a public review of the PCAOB's budget.

"This meeting adds sunlight to the PCAOB budget process," Gallagher said in a statement provided to Reuters. "It is no different in kind to the congressional hearings at which Congress asks the SEC and other federal agencies about their budget and spending priorities each year. Indeed, our public meeting on Wednesday is the only mechanism by which the public is assured that the SEC is properly exercising its oversight of the PCAOB."

Atkins said in an interview he is glad to see the SEC is getting back to holding public meetings on the PCAOB budget, and urged commissioners to ask questions about salaries, plans for how they will use the funds, policy and enforcement matters, among other things.

"Organizations usually love to try to gloss over the difficult issues," Atkins said.

Atkins added that he feels the SEC has "neglected its duty" in recent years to more closely scrutinize the PCAOB's spending, but Mark Olson, a former PCAOB chairman who has in the past participated in public SEC meetings over the budget, said the lack of a public meeting in recent years is understandable.

"I think the SEC believed they had bigger fish to fry, especially in the post-Madoff environment," said Olson, now a co-chairman of Treliant Risk Advisors. "I think Rome was burning all around them and...contrary to back in the Sarbanes-Oxley days, the PCAOB and audit standards in general were not the same priorities."

(Reporting By Sarah N. Lynch; additional reporting by Dena Aubin in New York; editing by Carol Bishopric)