As the SEC is getting close to filling all five seats of the Public Company Accounting Oversight Board (PCAOB), two former commission officials urged Chair Gary Gensler to appoint only the most-highly qualified individuals as many candidates vie to land one of the coveted, high-paying jobs.
Historically, there has always been behind-the-scenes lobbying during the appointment process, but the former officials are especially worried now that giving in to political pressure would end up hurting shareholders.
“As you seek candidates to fill the PCAOB Board positions, we would encourage you to consider that the PCAOB will only be successful if the individuals chosen by the SEC have a demonstrated track record of serving and putting the interests of investors in the US capital markets first and foremost,” former SEC chief accountant Lynn Turner and former acting chief accountant and deputy chief accountant Jane Adams wrote in a September 17, 2021, letter to Gensler.
“We are concerned about the PCAOB,” they wrote. “Politicization of the selection process and patronage appointments are a threat to investor confidence.”
Previous Patronage Appointments
The letter comes amid Gensler’s efforts to take the PCAOB in a different direction after investors complained that former chairman William Duhnke led the board astray from its mission and became lenient with auditors, putting shareholders at unnecessary risk.
Duhnke was a long-time aide to influential Republican Senator Richard Shelby when he was tapped to head up the PCAOB at the end of 2017 by the SEC when Jay Clayton, a Trump appointee, ran the agency. The Trump administration largely pursued a deregulatory agenda. Gensler, President Biden’s appointee, is set to reverse course.
Some criticized what they saw as political appointments when Clayton put not only Duhnke in charge of the PCAOB but also replaced all other members at the time.
Moreover, the SEC under Clayton denied a second term in October 2019 for Kathleen Hamm, one of the two strong investor advocates on the board at the time. She reportedly clashed over efforts to eliminate or scale back the board’s Investor Advisory Group (IAG). Even the powerful Council of Institutional Investors (CII) was unsuccessful in urging Clayton to grant Hamm a second term.
The other investor voice, Jay Brown, publicly criticized the board for ignoring investor views during his tenure. He stepped down early in the year because his wife, SEC Commissioner Allison Herren Lee, served as acting chair until Gensler was confirmed by the Senate.
Investors criticized that the board loosened auditor independence rules without any due process, did not hold advisory meetings in the past few years, yet unanimously voted to form a new advisory group, abolishing former advisory panels—Standing Advisory Group and IAG.
The new Standards Advisory Group charter provided the auditing profession a seat at the table for nomination of some of the members. No other outside group got such privilege. After Gensler fired Duhnke, the acting chair of the PCAOB hit the brakes on the new group.
Unlike the SEC, which has a tripartite mission to also consider capital formation and maintain orderly markets, investor protection is the sole mission of the PCAOB, which was established by the Sarbanes-Oxley Act of 2002 in response to accounting scandals at companies like Enron and WorldCom. Their auditor, now-defunct Arthur Andersen, signed off on their cooked books, making the public distrust the accounting and auditing profession.
Voting PCAOB Members are Well Compensated
As part of its oversight activities, the SEC appoints board members. The commission must also approve any major PCAOB audit standards and its yearly budget before they become effective.
One of the most important functions of the board—aside from writing audit standards that accountants must follow when they audit the financial statements of public company clients—is inspecting auditors to make sure the audit is done properly so investors can have confidence in the financial reporting of companies.
A key lure of the PCAOB member job has been the high pay, and investor protection advocates want to make sure that those who get the job are not there just for the compensation.
Pay for board chair is about $673,000 a year, and other members are paid almost $547,000.
“The compensation levels established by Congress in the creation of the PCAOB were intended to match the compensation these qualified individuals would command in the private sector given their recognized stature and reputations,” Turner and Adams wrote. “These salaries exist to entice exceptional individuals to join the PCAOB and provide outstanding efforts at overseeing a vitally important function for investors and the US capital markets. It would be disappointing to see PCAOB members chosen whose qualifications did not match the intent in establishing the PCAOB’s compensation levels.”
They noted that one of the first PCAOB members was William McDonough, who previously served as president and CEO of the Federal Reserve Bank of New York for 10 years. In their view, McDonough and his fellow board members were “excellent” examples of who should lead the board today.
Turner and Adams attached an appendix to the letter, describing the intent of Sarbanes-Oxley with respect to PCAOB members.
Gensler is well-versed in Sarbanes-Oxley as he was a senior adviser to Sen. Paul Sarbanes in writing the law two decades ago.
“Board candidates must be sufficiently experienced, competent, and demonstrated leaders with strategic vision,” Turner and Adams wrote. “The members selected for the PCAOB must clearly understand that their obligations… are to act in the best interest of investors and to ensure they are afforded necessary protections.”
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