Clash Over Accounting Oversight
The head of an accounting industry oversight panel complained Wednesday that federal regulators are letting Big Five accounting firms weaken the panel’s auditor-independence review.
Charles A. Bowsher, chairman of the Public Oversight Board, said in an interview that his board was “not getting the leadership we needed” from the Securities and Exchange Commission in fighting what he regards as stalling tactics by the industry. The POB represents the public in accounting matters.
An SEC spokeswoman denied the charge and said the agency is moving as quickly as it can with needed reforms.
Bowsher detailed his complaints in a 16-page letter to John M. Morrissey, the SEC’s deputy chief accountant, and Robert J. Kueppers, a Deloitte & Touche partner who chairs an American Institute of Certified Public Accountants committee involved in the issue. Bowsher made the letter public Wednesday.
The letter is the latest volley in an ongoing clash between Bowsher, former head of the General Accounting Office, Congress’ investigative arm, and SEC Chairman Harvey Pitt over how to reform the accounting industry in the wake of the Enron Corp. implosion.
The five-member oversight board voted unanimously in January to disband by the end of March, citing the SEC’s failure to consult the board before Pitt issued recommendations for reforming the oversight system. Although it is disbanding, the POB has presented a plan to the commission for the completion of its auditor-independence review.
Bowsher has warned that the new oversight system could be dominated by the Big Five: Andersen, Deloitte & Touche, Ernst & Young, KPMG and PricewaterhouseCoopers.
Pitt, for his part, believes the POB’s structure is faulty because it receives all its funding from the American Institute of Certified Public Accountants, the main industry trade group. Still, he tried unsuccessfully to talk the board out of disbanding.
The POB review dates to January 2000, when the SEC announced that its yearlong investigation of PricewaterhouseCoopers had disclosed more than 8,000 violations of SEC auditor-independence rules, such as partners having direct investments in firms they audit.
The SEC asked Bowsher’s panel to follow up with a sweeping review of the Big Five’s compliance with independence requirements. The review would evaluate the firms’ policies and systems for reducing conflicts of interest between auditors and the public companies whose financial reports they certify.
The issue has drawn added scrutiny because of the Enron scandal. Critics have accused Enron’s auditor, Andersen, of lax supervision of the energy trader’s practices.
Five months after the POB began its review, it was halted when the AICPA cut off money for the review.
Then-SEC Chairman Arthur Levitt called the action “a significant setback to self-regulation and independent oversight.”
In June 2000, the commission accepted some industry-proposed modifications but also called on the accounting firms to cooperate with the oversight board’s review. The funding was restored, but the industry has failed to provide requested documents and otherwise delayed the probe over issues that Bowsher regards as specious, he said.
For example, he said, Big Five firms asked the POB to suspend its review while they responded to other independence queries from the SEC. They also raised concerns about confidentiality, leading to prolonged negotiations that Bowsher considered a delay tactic.
Bowsher said he was further alarmed by a Feb. 20 letter in which the SEC’s Morrissey asked the Big Five firms to propose an alternative approach for completing the review, in light of the POB’s decision to disband at the end of this month.
He also complained that the commission favors an industry proposal to keep certain aspects of the review confidential.
Despite the delays, the oversight board has produced a detailed plan for completing the review, and Bowsher urged the SEC to adopt this plan rather than an industry-approved alternative. He also recommended that the commission appoint an independent entity to carry out the work.
“We appreciate his comments, but this [review process] is moving full speed ahead,” SEC spokeswoman Christi Harlan said Wednesday night.
Bowsher’s complaints about industry foot-dragging “are between the POB and the firms,” she said.
“We agree that the reviews should go forward,” Kueppers said in a statement Wednesday night responding to Bowsher’s letter. “Now that the POB has reached their decision to disband, we are working diligently to finalize an approach that makes sense and is in the public interest.”
Lorraine Horton, an accounting professor at the University of Rhode Island who has followed the recent controversy, said, “I’m very concerned that the SEC seems to be bowing down to the Big Five at every turn.”
