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What’s the Next Move in This PCAOB Situation?

Jonathan Weil over at Bloomberg has a new column up today and he is less enthusiastic about the Supreme Court decision in FEF v. PCAOB than say, everyone else.

JW is mostly wondering why we should keep having an “independent” PCAOB inside the SEC since the board members will now be at the mercy of the towing the political line inside the Commission, “While the court’s decision may be sound constitutionally under the separation of powers, it probably doesn’t make for good public policy when it comes to regulating auditors. If the board in substance will be nothing more than a division of the SEC, it’s hard to justify why it shouldn’t be one in form, too.”

Maybe he’s right? The SEC is a shrewd political agency just like the rest of the machine so what good would it do to keep the “independent body” independent when the board members could be thrown out on their asses if they don’t tow the political line? If an auditing standard doesn’t sit well with the Big 4, et al., they will put pressure on the necessary people to dilute said standard, making the PCAOB even more impotent:

Ideally, the one PCAOB function that should be largely free from government interference is the responsibility for setting auditing standards, although it wasn’t that way in practice even before the court’s ruling.

The SEC requires that accounting standards, for instance, be set by an independent body. That’s the Financial Accounting Standards Board, whose members are picked by a private, nonprofit foundation. Auditing standards should get similar treatment. Both processes need to be insulated from political meddling as much as possible to ensure they result in fair and objective standards based on expert analysis.

You might see where this is going. Weil thinks the PCAOB should be scrapped altogether and re-done, “this neutered watchdog won’t be growing back what it just lost. Create a foundation independent of the accounting industry to oversee a new private-sector board that would set U.S. auditing standards. And put the PCAOB’s other units inside the SEC, along with the fees the board now collects to fund their budgets.”

Matt Kelly, Editor-in-Chief of Compliance Week isn’t sold. He wrote in an email to GC, “Strictly from an ‘org chart’ perspective, of course it makes sense to have the PCAOB function as a division within the SEC— but Washington functions from a political perspective. And politically speaking, why would the SEC want the extra headache of running the PCAOB, too?”

And God knows the SEC doesn’t need more bad press, plus we’d likely have to throw tax dollars at the problem. Kelly continues, “[I]f you do bring the PCAOB under the SEC umbrella, you lose its self-funding capacity (I assume; you’d certainly need to address that somehow), you get closer to responsibility for the risk of an audit failure, and you risk more wrath from the audit firms lobbying Congress if you propose tighter oversight.”

Speaking of audit failures, Weil doesn’t miss those, “For all the PCAOB’s efforts, we still had what seemingly must have been massive audit failures at Ernst & Young, which audited Lehman Brothers; PricewaterhouseCoopers, which audited Freddie Mac; Deloitte, which audited Fannie Mae; and KPMG, which audited Citigroup.”

Imagine the SEC taking the blame for all that as well as Madoff, Stanford, et al.? There’d be public hangings (which no doubt would please some). Unfortunately, the solution as Kelly sees it, has been lost, “I think the ideal solution would be to give the SEC self-funding and then put the PCAOB under its structure—but Congress, in its wisdom, chose not to do that. That leaves them as two bureaucratic beasts sufficiently different in structure that you can’t just squeeze them together, and politically it makes no sense at all.”

Neutered Watchdog Dreams of Its Missing Parts [Jonathan Weil/Bloomberg]