I don’t know very much about the federal budget process, but I do know that any budget proposed by the White House – regardless of its occupant – isn’t worth spending time on, and that by the time the budget is passed, it often looks nothing like the original proposal.
Still, I am intrigued by one item in the 2021 budget proposed by the White House – specifically, the effective elimination of the Public Company Accounting Oversight Board by merging it into the SEC.
I’ve never been a huge fan of the PCAOB. For starters, the legislation that created it – the Sarbanes-Oxley Act – gave it a peculiar charter that limited its influence and its ability to change things that presumably needed changing. Perhaps as a consequence, the PCAOB has often struck me as an agency whose mission was developing solutions to nonexistent (or at least obscure) problems and whose members and staff were excessively sensitive to any sort of pushback, starting with overt hostility if anyone referred to the then-new PCAOB as “P-COB.”
- Some years ago I attended a program for audit committee chairs. (I was there to discuss effective disclosure.) Part of the program involved some PCAOB members and staff discussing quantitative metrics by which audit committees could assess the quality of the audits of their companies. When the assembled chairs said this was unnecessary or worse, the PCAOB folks became rather defensive, stating, among other things, that they were not really developing quantitative tests of audit quality (despite the fact that the metrics seemed to me to be doing precisely that) and that if there was opposition to the approach they would drop the matter. (FYI – government agencies are not known to drop matters after several years of study and several millions of dollars of expenditures.)
- When the PCAOB overhauled the “standard” audit report a few years later, a number of commentators (myself among them) suggested that the overhaul proposal would eliminate the “pass-fail” approach of the standard audit report and would make it harder for investors to understand what audits do – and, more important, what they do not do. Again, pushback and not a little hostility.
And the PCAOB has not been without a number of self-made challenges, including the leak of confidential information, the failed crusade for mandatory auditor rotation, severe criticism of the process by which the PCAOB conducts and deals with the results of auditor inspections, and so on.
I don’t for a moment dispute the ability and integrity of the PCAOB members and staff; like their counterparts at the SEC, they take their responsibilities seriously and work hard. However, in the absence of a clear mission and a better mandate, it’s not clear to me that the PCAOB has accomplished much that wouldn’t have been accomplished anyway – perhaps through the oversight of the SEC rather than the creation of a new and sort-of independent agency.
So, while I think it is highly doubtful that this aspect of the budget proposal will move forward – after all, merging the PCAOB into the SEC would require changes to SOX that seem very unlikely – I am intrigued by this not-so-modest proposal.