In Washington, they often say that personnel is policy. When the president appoints someone to lead and staff a department, agency or board, that is often the surest way for him to control it.
By that rule of thumb, what is happening at the Public Company Accounting Oversight Board — the body tasked with auditing the auditors — should alarm the investing public and anyone who cares about objective and experienced oversight of the audit profession.
President Trump’s appointed chairman of the Securities and Exchange Commission, Jay Clayton, this month announced that he has replaced a well-regarded and experienced member of the accounting board, Kathleen Hamm, with Rebekah Goshorn Jurata, a policy aide and Republican political regular who had been serving on Mr. Trump’s National Economic Council.
In addition, Mr. Clayton has placed S.E.C. Commissioner Hester Peirce, a regulation skeptic, in charge of coordination efforts with the board — a signal that the S.E.C. is seeking to pull it into its efforts to weaken requirements for audits of internal controls at public companies. These requirements have proved to be an effective bulwark against sloppiness and fraud, saving the investing public hundreds of millions of dollars.
In these two moves, Chairman Clayton demonstrates far too much political deference to the White House.
The P.C.A.O.B.’s work deserves to be overseen by independent experts — the stakes are too great to have even one seat on the board occupied by someone who lacks the requisite experience or insight.
For example, all five board members should have direct experience with the audit process — whether as auditors themselves or as members of an audit committee — or meaningful work drafting and rolling out securities regulation. Ms. Jurata’s qualifications are chiefly political. Ms. Hamm, the commissioner she will replace, had not only the requisite experience for the role but also significant understanding of cybersecurity issues — an emerging and critical area of weakness in our nation’s securities regulation. Now that portfolio may go unfilled.
As with other independent agencies and functions within the federal government, even politically appointed leaders like Chairman Clayton must always weigh political loyalties against the mission of the agency they are sworn to lead.
In the case of the P.C.A.O.B., this is a relatively little-known agency tasked with an awesome responsibility: to bring some measure of accountability to a profession whose work is not only at the core of our free market system but also requires oversight and correction. After all, the Big Four audit firms still make mistakes — the deficiency rate of their audits inspected by the P.C.A.O.B. is roughly 30 percent, according to accounting board figures reviewed by a former S.E.C. chief accountant, Lynn Turner.
Remember, the P.C.A.O.B. was set up in the wake of the Enron and WorldCom auditing disasters. Before the board’s creation in the Sarbanes-Oxley Act of 2002, there was little oversight of the audit profession at all. Auditors fought its creation and settled for it as an alternative to outright government oversight of the profession. The P.C.A.O.B. is a hybrid: It is a private-sector, self-funded (through fees paid by audited companies) nonprofit. And in the end, the S.E.C. has to approve any regulations approved by the accounting board.
That’s a lot of political oversight for a nonpolitical board, and even so, the auditing profession has sought to check the P.C.A.O.B.’s powers, as it did in 2012, as the board’s chairman at the time, James Doty, cited auditor quality problems following the 2007-09 financial crisis.
Chairman Clayton of the S.E.C. is weakening the accounting board at a particularly critical time: Even sophisticated venture capital and private equity investors are regularly surprised by the shoddy practices at pre-I.P.O. companies they oversee closely, like WeWork. What chance do ordinary investors have if auditor quality is not checked closely?
The P.C.A.O.B. is the only body that has the power to force auditors to explain their work and justify their findings. In our market system, investors have to trust that the independent auditor is truly independent — and the accounting board must enforce that standard.
Yet the P.C.A.O.B. is doing less oversight and inspection work than it once did, and key positions at the agency are unfilled. Morale is reportedly low.
And then there’s the more prosaic but no less important work of the board. Members of the auditing profession would love nothing more than to see their P.C.A.O.B. audit quality inspections get a little softer and more deferential. They wouldn’t mind having a friendlier ear on the board when it comes to patching up the holes that the P.C.A.O.B.’s inspectors expose — what is called the remediation process. They would love to have a solid majority of board members ready to vote on any new carve-out of audit requirements for companies that have a good story to tell (except when it comes to their income statements).
In short, what’s at risk isn’t a specific regulatory function of the P.C.A.O.B.; it’s the independence and the credibility of the board and its staff as a whole. If the Trump White House’s goal is to strip the P.C.A.O.B. of its power, it doesn’t have to write new rules or pass new laws. It has only to nominate board members who don’t want to exercise the power they have. That’s all it takes — and I worry it’s happening right before our very eyes.
Mr. Levitt was chairman of the Securities and Exchange Commission from 1993 to 2001.
The Times is committed to publishing a diversity of letters to the editor. We’d like to hear what you think about this or any of our articles. Here are some tips. And here’s our email: [email protected].
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Home » Analysis & Comment » Opinion | The S.E.C.’s Clayton Turns Oversight Partisan
Opinion | The S.E.C.’s Clayton Turns Oversight Partisan
In Washington, they often say that personnel is policy. When the president appoints someone to lead and staff a department, agency or board, that is often the surest way for him to control it.
By that rule of thumb, what is happening at the Public Company Accounting Oversight Board — the body tasked with auditing the auditors — should alarm the investing public and anyone who cares about objective and experienced oversight of the audit profession.
President Trump’s appointed chairman of the Securities and Exchange Commission, Jay Clayton, this month announced that he has replaced a well-regarded and experienced member of the accounting board, Kathleen Hamm, with Rebekah Goshorn Jurata, a policy aide and Republican political regular who had been serving on Mr. Trump’s National Economic Council.
In addition, Mr. Clayton has placed S.E.C. Commissioner Hester Peirce, a regulation skeptic, in charge of coordination efforts with the board — a signal that the S.E.C. is seeking to pull it into its efforts to weaken requirements for audits of internal controls at public companies. These requirements have proved to be an effective bulwark against sloppiness and fraud, saving the investing public hundreds of millions of dollars.
In these two moves, Chairman Clayton demonstrates far too much political deference to the White House.
The P.C.A.O.B.’s work deserves to be overseen by independent experts — the stakes are too great to have even one seat on the board occupied by someone who lacks the requisite experience or insight.
For example, all five board members should have direct experience with the audit process — whether as auditors themselves or as members of an audit committee — or meaningful work drafting and rolling out securities regulation. Ms. Jurata’s qualifications are chiefly political. Ms. Hamm, the commissioner she will replace, had not only the requisite experience for the role but also significant understanding of cybersecurity issues — an emerging and critical area of weakness in our nation’s securities regulation. Now that portfolio may go unfilled.
As with other independent agencies and functions within the federal government, even politically appointed leaders like Chairman Clayton must always weigh political loyalties against the mission of the agency they are sworn to lead.
In the case of the P.C.A.O.B., this is a relatively little-known agency tasked with an awesome responsibility: to bring some measure of accountability to a profession whose work is not only at the core of our free market system but also requires oversight and correction. After all, the Big Four audit firms still make mistakes — the deficiency rate of their audits inspected by the P.C.A.O.B. is roughly 30 percent, according to accounting board figures reviewed by a former S.E.C. chief accountant, Lynn Turner.
Remember, the P.C.A.O.B. was set up in the wake of the Enron and WorldCom auditing disasters. Before the board’s creation in the Sarbanes-Oxley Act of 2002, there was little oversight of the audit profession at all. Auditors fought its creation and settled for it as an alternative to outright government oversight of the profession. The P.C.A.O.B. is a hybrid: It is a private-sector, self-funded (through fees paid by audited companies) nonprofit. And in the end, the S.E.C. has to approve any regulations approved by the accounting board.
That’s a lot of political oversight for a nonpolitical board, and even so, the auditing profession has sought to check the P.C.A.O.B.’s powers, as it did in 2012, as the board’s chairman at the time, James Doty, cited auditor quality problems following the 2007-09 financial crisis.
Chairman Clayton of the S.E.C. is weakening the accounting board at a particularly critical time: Even sophisticated venture capital and private equity investors are regularly surprised by the shoddy practices at pre-I.P.O. companies they oversee closely, like WeWork. What chance do ordinary investors have if auditor quality is not checked closely?
The P.C.A.O.B. is the only body that has the power to force auditors to explain their work and justify their findings. In our market system, investors have to trust that the independent auditor is truly independent — and the accounting board must enforce that standard.
Yet the P.C.A.O.B. is doing less oversight and inspection work than it once did, and key positions at the agency are unfilled. Morale is reportedly low.
And then there’s the more prosaic but no less important work of the board. Members of the auditing profession would love nothing more than to see their P.C.A.O.B. audit quality inspections get a little softer and more deferential. They wouldn’t mind having a friendlier ear on the board when it comes to patching up the holes that the P.C.A.O.B.’s inspectors expose — what is called the remediation process. They would love to have a solid majority of board members ready to vote on any new carve-out of audit requirements for companies that have a good story to tell (except when it comes to their income statements).
In short, what’s at risk isn’t a specific regulatory function of the P.C.A.O.B.; it’s the independence and the credibility of the board and its staff as a whole. If the Trump White House’s goal is to strip the P.C.A.O.B. of its power, it doesn’t have to write new rules or pass new laws. It has only to nominate board members who don’t want to exercise the power they have. That’s all it takes — and I worry it’s happening right before our very eyes.
Mr. Levitt was chairman of the Securities and Exchange Commission from 1993 to 2001.
The Times is committed to publishing a diversity of letters to the editor. We’d like to hear what you think about this or any of our articles. Here are some tips. And here’s our email: [email protected].
Follow The New York Times Opinion section on Facebook, Twitter (@NYTopinion) and Instagram.
Source: Read Full Article