Tuesday, March 15, 2016

SEC Approves PCAOB’s Budget in a Split Vote

By Jacquelyn Lumb

The SEC approved the PCAOB’s 2016 budget and accounting support fee by a two-to-one vote, with Commissioner Michael Piwowar casting a vote in opposition based on the 12 percent increase in the fee paid by registrants and what he sees as a mountain of escalating costs over the next five years. He said the Board should have proposed a more modest budget. Chair Mary Jo White and Commissioner Kara Stein voted to approve the $257.7 million budget as recommended by the SEC’s Office of the Chief Accountant and the Office of Financial Management.

White said the Board must have sufficient funds to fulfill its mission, but also encouraged the Board to look at funding and expenses in the coming year, including compensation, to identify potential savings and efficiencies that allow the Board to fulfill its mission while assuring a reasonable accounting support fee.

Chief Accountant James Schnurr, in addition to recommending that the Commission approve the budget, listed a number of issues on which the Commission should direct the Board to report. These areas included timely updates on the Board’s standard setting progress, updates on the activities of the Center for Economic Analysis, and a status report on its Internet technology program.

In his presentation to the Commission, PCAOB Chair James Doty reported that audit firms now generally support the Board’s findings and work to address the root causes of any deficiencies that are identified during the inspection process. However, given the SEC’s recent enforcement actions, he emphasized the importance of remaining vigilant. For example, he said pressures to cut corners remain a concern, and the use of unaudited and non-GAAP metrics may be a warning sign. He also cited examples where companies dismiss auditors after findings of material weaknesses in internal controls with no adverse market reaction, which raises the question of whether the pass/fail audit has become a commodity that investors no longer value.

Doty reported that based on what the Board has learned from its inspectors and its economists, it is exploring ways to introduce an element of randomization into its inspections. The inspections may be even more effective if they are less predictable, he explained.

The Board continues to consider the appropriate course of action with respect to registered firms based in China where inspectors have no access to conduct inspections. Doty said the recent financial volatility in China underscores the importance of protecting investors. He added that the Board brings attention to where the risks reside with respect to countries that do not permit access due to local laws or policies.

Stein raised concerns about the growing difference between registrants’ advertised returns and their earnings as reported under GAAP. She wondered whether these supplemental measures are driving investment decisions, and if they are, she said it is a trend on which regulators should focus. She also asked about the status of the Board’s potential revisions to the auditor’s reporting model. Doty said he expects a new proposal to be out in May.

In his dissent, Piwowar said the supporting account fee is a tax and the Commission is the only safeguard with respect to its imposition on companies and broker-dealers. Doty noted that the support fee has increased an average of 4.6 percent since he came to the Board, with one “bulge,” which he doesn’t expect to recur.

Piwowar also criticized a provision in the budget for increasing Board compensation by providing lump sum merit pay in lieu of a higher base salary, but Doty assured him the merit pay is not intended for Board members, but for the staff to reward significant contributions. It will not go toward Board members’ compensation, he advised.