Oversight Board Calls For Audit Watchdog

In one of its final acts before disbanding, an accounting oversight board Tuesday called on Congress to create an independently funded watchdog agency that would have the power to set accounting standards and punish auditors for wrongdoing.

The proposal by the Public Oversight Board--a private-sector panel created in 1977 to help oversee the accounting industry--presents a challenge to Securities and Exchange Commission Chairman Harvey L. Pitt’s own reform package, which seeks an oversight board with fewer responsibilities and greater industry involvement.

In January, angry board members voted to disband by the end of March after Pitt unveiled his set of accounting reforms, which came in response to the collapse of energy giant Enron Corp. Board members said Pitt undercut their authority and rendered the board irrelevant by failing to consult with members about his proposal.

Under the board’s rival proposal, a newly created Independent Institute of Accountancy would consolidate all rule-making and enforcement powers into a single agency, operating under SEC supervision.

Charles A. Bowsher, chairman of the Public Oversight Board, told Senate Banking Committee members Tuesday that such an entity would be more independent and effective than the oversight board proposed by Pitt, which he said would be dominated by major accounting firms and focused chiefly on disciplinary actions and enforcement.

The board hopes to see its plan introduced as a Senate bill in coming weeks, but Bowsher would not comment on possible sponsors.

“I’ve come to the conclusion that the voluntary self-regulatory program needs to be replaced because it has failed to keep pace with challenges faced by the profession,” Bowsher told lawmakers. “More troubling is the resistance of the profession’s trade association, the AICPA [American Institute of Certified Public Accountants], and several of the Big Five firms to major reform.”

A spokesman for the trade group said Tuesday that it was reviewing the board’s plan and had no comment.

The organization recently launched an advertising and lobbying campaign to combat calls for sweeping new rules on accounting firms. The accounting industry has been rocked in recent months by the failure of Enron and Global Crossing Ltd., both of which collapsed amid accusations of accounting manipulations.

An SEC spokeswoman cautioned that Pitt has not completed his reform package. “We’re still listening to ideas,” SEC spokeswoman Christi Harlan said. “We don’t have a formal proposal yet.”

Pitt’s next opportunity to lay out the details for his reform plan could come as soon as Thursday, when he is scheduled to appear before the same Senate committee.

Harlan stressed that Pitt did not intend to offend the board when he announced an outline of his reform ideas on Jan. 17. “We were announcing the beginning of process,” Harlan said. “It was not a matter of cutting them out.”

Bowsher said a key distinction between his plan and Pitt’s is that the new oversight board would be independent of the Big Five accounting firms.

The Independent Institute of Accountancy would be led by a seven-member board appointed by various government agencies, including the SEC and Federal Reserve Board. Big Five accounting firms and the American Institute for Certified Public Accountants would have no representatives on the board.

Under Pitt’s preliminary plan, the oversight board would include several accounting industry representatives, though a majority of members would be independent.

Unlike Pitt’s plan, the Independent Institute of Accountancy also would be charged with setting accounting standards by bringing the Financial Accounting Standards Board under its control.

“It achieves the streamlining of what commentators like to call the alphabet soup of governance,” said Aulana L. Peters, a member of the Public Oversight Board.

Both Pitt’s plan and the one proposed by the board would give a new oversight board the power to subpoena documents from accounting firms and both call for replacement of the peer-review system, in which accounting firms check the work of their rivals every three years. Under that system, no Big Five firm has ever been cited for problems.

Instead, both Pitt and the board want a new oversight board to supervise such reviews. The plan Bowsher outlined would mandate annual reviews of large accounting firms.

Bowsher said the board probably would have an annual budget of about $100 million, which he said would be raised by levying fees on accounting corporations based upon their size. He said such fees would be a tiny fraction of their total revenues.

“If it buys them credibility [for their financial statements], it would be very cheap,” Bowsher said.

The board proposes exempting small businesses if the rules prove too costly or burdensome.

Independent funding is key for the oversight board, Bowsher said. He noted that in May 2000 major accounting firms, which had been funding the board, refused to pay for special accounting reviews that had been sought by the SEC.

Sen. Paul S. Sarbanes (D-Md.) said the current funding system required the board to “go around with a tin cup in hand” asking for money from the entities it is charged with overseeing.

“It’s clear that voluntary [programs] don’t work,” Sarbanes said.