More than four months after SEC Chair Gary Gensler said he would seek to fill all five voting members of the Public Company Accounting Oversight Board (PCAOB), the commission has yet to announce new board members as of October 21, 2021, afternoon. And this inaction is likely to impact the board’s functions.
As of October 1, Acting Chair Duane DesParte has been serving as the only member at the PCAOB. But some have noted that the federal securities laws require the PCAOB to approve its 2022 budget by November 30, 2021.
“I think that would probably require at least three board members, although as far as I know that issue has never come up before,” said former PCAOB acting chair Daniel Goelzer, who previously served as SEC general counsel.
“I would assume the SEC will make the appointments well before November 30,” said Goelzer, who was a founding PCAOB member two decades ago.
As part of its oversight activities, the SEC names the board members and must approve the board’s yearly budget and any audit standards the board writes before they become effective. The current limbo comes as Gensler in early June fired then-PCAOB Chairman William Duhnke and said he would seek to fill all seats.
Then on October 1, PCAOB members Rebekah Goshorn Jurata and Megan Zietsman stepped down.
In removing Duhnke, a former Republican staffer in the Senate, Gensler said he wanted to take the board in a different direction. Many investor advocates and some Democrats on the Hill said the PCAOB under Duhnke’s tenure had strayed from its sole mission of protecting investors and promoting the public interest.
At the time in June, one seat had already been vacant since late January when Jay Brown stepped down as his wife, SEC Commissioner Allison Herren Lee, became acting chair and served in that capacity until Gensler was sworn in mid-April.
Brown late into his tenure had also been critical of the board, saying that it had been ignoring investor views even as it pursued an agenda that favored the auditing profession.
“The PCAOB has an opportunity to live up to Congress’s vision in the Sarbanes-Oxley Act,” SEC Chair Gensler said in a statement in June.
The Sarbanes-Oxley Act of 2002 established the PCAOB to supervise accounting firms that audit publicly listed companies in order to prevent accounting scandals that toppled Enron and WorldCom and cost investors an estimated $85 billion two decades ago.
Historically, the PCAOB has voted on its yearly budget along with its five-year strategic plan. Once the board members vote to approve it, the PCAOB’s budget is sent to the SEC for approval.
For example, the SEC in 2020 approved the PCAOB’s $287.3 million budget in mid-December. The board collects accounting support fees from public companies and broker-dealers to fund its operations and supervise public accounting firms. Thus, there is close scrutiny surrounding its budget.
SEC rules have a timetable for preparing and submitting the PCAOB budget.
Before March 15, the PCAOB provides a narrative of its program and outlook for the budget year. Then the SEC provides general budgetary guidance to the board by April 30.
The PCAOB then submits a preliminary budget for SEC review by July 31. From August to October, there is consultation between the SEC and the PCAOB.
Then by October 31, the commission gives back the budget to the PCAOB with proposed revisions. The board must adopt its budget and submit it along with justification to the SEC by November 30. The commission would vote on it by December 23.
“In practical terms, the new group won’t have much flexibility to change next year’s budget because it will already have been reviewed in draft and commented on by the SEC,” Goelzer said.
In the meantime, it is less clear about when the PCAOB must adopt its strategic plan even though it has been the practice for the board to adopt the budget and the plan together.
“With a new board coming in, I would imagine the plan will be thoroughly revised, but probably sometime next year,” Goelzer said.
SEC rules say: “Strategic plan means the PCAOB’s overarching plan for accomplishing its strategic goals, including forecasts for the current and four following years; estimates of the effect that reasonably foreseeable changes impacting the auditing profession and securities markets could have on program levels; and a discussion of the impact that program levels and changes in methods of program delivery, including advances in technology, could have on program operations and administration.”
The SEC did not immediately respond to a request for comment.
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