here is a lot of talk these days about a new regulatory and self-regulatory structure for the accounting profession. SEC Chairman Arthur Levitt recently gave a speech at New York University in which he spoke of the importance of the Public Oversight Board’s receiving greater authority to oversee parts of the profession.
This is consistent with my conviction that from its inception the POB had a broader responsibility than simply overseeing the peer review program. I have long felt, and expressed in its annual reports, that the board could not abide a situation in which the peer review program was a sterling success but other elements were eroding the integrity of audits. So the board has on more than one occasion spoken out with regard to matters that go beyond its technical jurisdiction. I think it is a credit to the profession that this has been done without protest. In many instances, the profession has urged the board to undertake such special chores. An example was the request the POB received several years ago from the SEC practice section of the AICPA division for CPA firms to respond to the charges made by the SEC chief accountant that the profession, particularly firms that audited publicly held companies, lacked independence. The Advisory Panel on Auditor Independence, chaired by Donald J. Kirk, studied the matter. Its report was not intended to adjudicate the charges of the chief accountant; rather, it addressed means by which the independence of auditors might be further assured. That, in my estimation, led to a lot of the conversation concerning audit committees, culminating in the reports of the Panel on Audit Effectiveness (the blue ribbon panel) and the similarly named body created by the National Association of Corporate Directors, which I had the honor of chairing.
In his recent speech, Chairman Levitt said, “Indeed, more effective oversight must be brought to bear on the AICPA, which seems unable to discipline its members for violations of its own standards of professional conduct.” He went on to say, “In my time at the SEC I have come to appreciate the important role played by an independent oversight program. But I am also aware of its limitations. However, in the last few months a real opportunity has emerged to give the POB the independence and the freedom to fully discharge its public responsibilities, unhindered by special interests.”
Indeed, an opportunity has emerged for the POB to add to its responsibilities and I hope the public will benefit. However, I must say that to my mind the board never has lacked independence or the freedom to fully discharge its responsibilities and never has been hindered by special interests.
I think it is timely and beneficial for the POB to have expanded its oversight of the AICPA’s ethics activities and auditing standards board. However, I think that any reform that would give the POB line responsibility as contrasted with its current oversight responsibility would be a terrible mistake. It would require an expansion of the board and a significant increase in staff.
Some, I am told, including members of the panel which the POB created at the behest of Chairman Levitt, entertain the notion that the board should be established statutorily and given powers to do things it cannot currently do legally; I have fought that. I was very active in making sure the provision was not in the final bill submitted by Senator Christopher Dodd (D-Conn.).
A former SEC commissioner spoke of the desirability of a statutorily based self-regulatory organization. That was discussed in the POB publication In the Public Interest in 1993, and I thought we made a very persuasive case against such a statutorily empowered organization. While the board has sometimes been handicapped by its lack of statutory power, the SEC has never been found wanting in its power to punish wrongdoers in the accounting arena.
E ven though self-regulation has failed in some respects, as practiced by the POB it has been a huge success, and to refashion the board into something it was never intended to be, and which it is not designed to be, would be another defeat for self-regulation. I am a staunch supporter of the notion that self-regulation, without the encumbrance of statutory provisions, can work and has worked. So I hope the blue ribbon panel concludes that any sort of statutory tinkering with the POB would be a mistake and hope the SEC agrees.
This is not a new idea. It first surfaced in a proposal by Joseph E. Connor, then the head of Price Waterhouse, who perceived it as a possible trade-off to avoid draconian legislation against the profession. As I say, it has resurfaced from time to time since then and, happily, in all cases it has been turned back.
I do not think the constitution of the board should be changed. Chairman Levitt has been an enthusiastic supporter of the idea that most regulatory and self-regulatory bodies should have a majority of public members. There is no need to tinker with the POB by laying down regulatory or statutory standards for membership; that would, in my estimation, be another sharp setback for self-regulation.
The last two appointments to the POB were men whose careers included a period of practice in major firms. Board members debated very carefully whether those appointments would be inconsistent with our charter. We debated among ourselves and also consulted with people in and out of the profession on whether their presence on the board would be inconsistent with the charter’s implication that the board be primarily a lay board and retain its reputation for independence. We determined the candidates would be valuable members with sufficient distance from active practice to be objective and independent. So it can rightfully be said, I think, that the POB continues to be made up entirely of lay people, some of whom had accounting activity in their backgrounds. When this matter comes up for decision, I hope the historic value of the POB will be recognized and possibly its jurisdiction extended, but for heaven’s sake, leave it a self-regulatory body free of statutory controls and free of statutory requirements for membership.
We can learn a lesson from the manner in which the United Kingdom has dealt with takeovers and mergers. The body that regulates those matters is truly a self-regulatory organization and, if you look at the results of the regulation of mergers, counteroffers and takeovers as contrasted with ours, you will conclude, as many commentators have, that the U.K. system exceeds ours in flexibility and effectiveness.
I close with an admonition: Build on the success of the POB but recognize that it is a self-regulatory organization and if it is to survive and be effective, it should be left as such.