Securities and Exchange Commission:

Actions Needed to Improve Public Company Accounting Oversight Board Selection Process

GAO-03-339: Published: Dec 19, 2002. Publicly Released: Dec 19, 2002.

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The Sarbanes-Oxley Act of 2002 created, among other things, the Public Company Accounting Oversight Board (PCAOB) to oversee audits of public companies. A divided Securities and Exchange Commission (SEC) appointed the first PCAOB on October 25, 2002. Amid allegations that the SEC Chairman withheld relevant information from the other Commissioners concerning the suitability of the newly appointed PCAOB chairman, GAO was asked to examine SEC's selection process; determine whether the SEC Chairman withheld information from other Commissioners; determine what vetting of candidates took place; and identify what actions led to breakdowns in the process.

SEC faced significant challenges in vetting and appointing five members to the newly created PCAOB within 90 days. The SEC Chairman, who had overall responsibility for the appointment process, initially, envisioned a process primarily driven by SEC staff. He asked the Chief Accountant to take the lead in selecting and the General Counsel in vetting PCAOB members. However, this approach was not fully understood or endorsed by the other Commissioners. The overall process that emerged was neither consistent nor effective and changed and evolved over time. Several factors contributed to the eventual breakdown of SEC's selection and vetting process, including the inability of the Commissioners to reach agreement on a formalized process that defined the roles to be played by the Commissioners and staff; insufficient communication between SEC staff and Commissioners; and the lack of articulated selection criteria beyond general criteria provided by the act. Finally, inability to choose a final slate of candidates until the eve of the Commission's vote resulted in the appointment of PCAOB members who had not been fully vetted. On the day of the October 25 vote, the Chief Accountant became aware of information concerning Judge William Webster, who was slated to be the chairman of the PCAOB, and his role as the former chairman of the audit committee of a small company--U.S. Technologies, Inc. However, based on his review of available information, his experience as an auditor, Judge Webster's prominence and reputation, and the fact that additional vetting would occur post-appointment, the Chief Accountant deemed that the information would not affect Judge Webster's nomination. He thus decided not to share the information concerning Judge Webster's role at U.S. Technologies with the SEC Chairman, the other Commissioners, or the General Counsel. As Judge Webster's appointment illustrates, the five individuals chosen for the PCAOB were not systematically vetted prior to appointment. After the selection process broke down in early October when the Commission was unable to agree on a consensus candidate for chairman, the General Counsel was forced to initiate the vetting process on a post-appointment basis, a fact which the Commission was made aware of before the October 25 vote. At the time of our review, the vetting process was still ongoing.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: SEC's new procedures include selection criteria to be used in selecting PCAOB members and vetting in advance of appointment.

    Recommendation: Much can be done to improve the selection and vetting process. Before any additional members are appointed to the PCAOB, especially the chairman, the Commission should determine what candidate information should be documented, analyzed, and shared among the Commission and staff.

    Agency Affected: United States Securities and Exchange Commission

  2. Status: Closed - Implemented

    Comments: SEC's new procedures includes vetting prior to appointment to the Board by the Commission.

    Recommendation: Much can be done to improve the selection and vetting process. Before any additional members are appointed to the PCAOB, especially the chairman, the Commission should develop a vetting process that ensures that before an applicant is brought to the Commission for serious consideration, certain minimum background and reference checks are performed to ensure that the individual has no potential legal or ethical impairments and ensure that the vetting process is completed before the Commission votes to appoint members to the PCAOB.

    Agency Affected: United States Securities and Exchange Commission

  3. Status: Closed - Implemented

    Comments: SEC adopted guidance on nominating PCAOB board members, which included specific selection criteria that could be considered.

    Recommendation: Much can be done to improve the selection and vetting process. Before any additional members are appointed to the PCAOB, especially the chairman, the Commission should develop agreed-upon, detailed selection criteria for PCAOB members and the chairman that fully embrace the principles articulated in the Sarbanes-Oxley Act of 2002.

    Agency Affected: United States Securities and Exchange Commission

  4. Status: Closed - Implemented

    Comments: Following the issuance of GAO's report, SEC issued new guidelines for the selection and appointment of a new chairman to the Public Company Oversight Board. These new procedures included completing the background investigation before appointing the nominee as chairman to the Board.

    Recommendation: Much can be done to improve the selection and vetting process. Before any additional members are appointed to the Public Company Accounting Oversight Board (PCAOB), especially the chairman, the Commission should reach agreement and document the process to be followed, the sequence and timing of key steps, and the roles to be played by the Commission and the staff in the selection and vetting of candidates.

    Agency Affected: United States Securities and Exchange Commission

  5. Status: Closed - Not Implemented

    Comments: SEC's process requires that potential nominees undergo preliminary background checks prior to being interview by the Commission.

    Recommendation: The SEC Chairman should direct staff involved in the PCAOB selection process to make greater use of available technology to conduct necessary background checks and to generate sufficient details on the qualifications of potential applicants so that the Commission can make informed decisions on the fitness of potential applicants to be PCAOB members.

    Agency Affected: United States Securities and Exchange Commission

 

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