Today, January 22,
2002, we happened across a New York Times business diary item
that dated to Sunday, November 25, 2001 about the Public
Oversight Board, the accounting industry's watchdog group.
At that time, the Board was meeting to consider 'whether reviews
of audits being conducted by accounting firms adequately safeguard
the public interest.'
Curiosity aroused,
I next found the letter from Rep. John Dingell of Michigan written
to the chairman of the Public Oversight Board, Charles Bowsher.
Note that not quite a year ago, the Board, founded in 1977, announced
agreement on a
"Charter aimed
at strengthening and broadening its oversight of the auditing
profession's self-regulatory programs and standard setting processes.
The POB and the AICPA have formally approved the Charter after
extensive discussions between both organizations, the SEC Practice
Section, the large auditing firms and the SEC.
This is an important
milestone in the history of the self-regulatory system of the
accounting profession."
Finally, in the form
of an announcement released on January 20th, 2002, the board's
denouement is laid out, or could it be that POB will be heard
from in subsequent Enron hearings and reports?
"About the
POB
The Public Oversight
Board (POB) is the cornerstone of the self-regulatory system that
oversees the accounting profession in the United States. The POB
exists to help assure regulators, investors and the public at
large that audited financial statements of public corporations
can be relied upon to provide an accurate picture of the financial
health of those companies.
The POB was created
in 1977 as an independent private sector body charged with overseeing
and reporting on the programs of the SEC Practice Section (SECPS),
also created in 1977 by the American Institute of Certified Public
Accountants. The SECPS is composed of accounting firms that audit
the financial statements of some 17,000 public corporations that
file reports with the Securities and Exchange Commission. The
SECPS establishes quality control requirements for member firms.
In this regard, it requires that each member firm undergo peer
review every three years. It also reviews allegations of audit
failure to determine if there is any breakdown in a firm's quality
control system.
In February of 2001,
a Charter for the POB was announced which strengthens and broadens
the Board's oversight of the accounting profession. The Charter
authorizes the POB to oversee not only the SEC Practice Section,
but also the Auditing Standards Board and the Independence Standards
Board.
Funded by dues paid
by SECPS members, the POB is autonomous. The five board members
represent a broad spectrum of business, professional, regulatory,
and legislative experience. Its independence is assured by the
power to set its own budget, establish its own operating procedures,
and appoint its own members, chairperson, and staff.
© 2002 Public Oversight
Board"
"November
16, 2001
Mr. Charles A. Bowsher
Chairman Public Oversight Board
One Station Place
Stanford, Connecticut 06902
Dear Mr. Bowsher: The
Public Oversight Board (POB) was created in 1977 to serve as an
independent private-sector body that would represent the interests
of the public through its oversight of the accounting profession
and the profession’s self-governance structure. The POB’s Web
page says that it exists "to help assure regulators, investors
and the public at large that audited financial statements of public
corporations can be relied upon to provide an accurate picture
of the financial health of those companies." Maintaining the POB’s
credibility with the investing public therefore is vital to the
integrity of both the accounting profession and the U.S. capital
markets.
To that end, the POB
adopted a Charter in February 2001 that substantially increased
the POB’s staff and budgetary resources and expanded its oversight
responsibilities and authorities. Title VII of the POB Charter
provides that the POB shall have oversight authority with respect
to the SEC Practice Section (SECPS), and that the staff of the
POB shall oversee all peer reviews, quality control inquiries
and other matters relating to the quality of audits of the SECPS
member firms. Title VIII authorizes the POB to conduct oversight
reviews and to undertake other projects and actions on matters
covered by the POB’s activities that the POB deems appropriate
to protect the public interest.
Accordingly, and for
the reasons discussed below, I am writing to request that the
POB conduct an oversight review or special investigation of Arthur
Andersen LLP.
Virtually all U.S.
accounting firms that audit publicly held companies belong to
the SECPS and are required to abide by its membership requirements.
Peer review of member firms’ accounting and auditing practices
is one of the Section’s membership requirements. The purpose of
peer review is to provide assurance to the public and the reviewed
firm that an effective quality control system has been established
and maintained to provide reasonable assurance of compliance with
professional standards. However, since this process was put
in place in 1978, there has never been a qualified report issued
by one Big Five accounting firm against another at the end of
any peer review.
I understand that Deloitte
& Touche (DT) is currently conducting the triennial peer review
of Andersen. Andersen is paying DT a lot of money to conduct their
peer review--typically these reviews cost around two million dollars.
At the same time, the Enron Corp. Form 8-K, filed with the Securities
and Exchange Commission on November 8, 2001, discloses that DT
also has been retained by outside counsel to a Special Committee
of Enron’s Board of Directors to provide accounting advice in
connection with the Special Committee’s "independent" review of
the odious related party transactions, their financial impact
on Enron, and Andersen’s audit (enclosure). This raises at least
two questions:
1. Do DT’s dual roles
create a conflict of interest: if DT finds numerous problems on
Enron, will DT try to "whitewash" or reconcile them in order to
be able to issue a clean peer review report?
2. Because DT is being
paid handsomely by Andersen to do its peer review, how will this
influence, if at all, DT’s "independent" judgment on Andersen’s
work on Enron?
Given the appearance
of conflicts of interest, the public record to date regarding
allegations of professional malpractice or worse by Andersen in
both the Waste Management fraud and the evolving Enron Corp. accounting
debacle, as well as the considerable damage to investors, there
appears to be little reason for the public to have faith in Andersen
or the peer review process. I expect that you will use your new
authorities to restore public confidence in both the Board and
the profession. The best accounting standards in the world are
meaningless if the accounting and auditing processes are so inept
or corrupt that they produce unreliable numbers and untruthful
reporting. As securities expert Alan B. Levenson noted at yesterday’s
SEC Historical Society Major Issues Conference: "Investor protection
must trump self-interest."
I request that POB’s
investigation or review include adequate, transparent, and public
disclosure of all significant issues identified, and that it be
followed by timely follow-up by POB to review Andersen’s corrective
actions to address the problems identified. Please provide me
with a report on this matter which should include the results
of any peer reviews that were conducted on Andersen during the
periods relevant to the Waste Management and Enron Corp. matters.
Thank you for your
cooperation and attention to my request. I look forward to reviewing
your report.
Sincerely,
JOHN D. DINGELL RANKING
MEMBER
Enclosure cc: The Honorable
W. J. "Billy" Tauzin, Chairman Committee on Energy and Commerce
etc."
"Public Oversight
Board
News Resolution
Passed by the Public Oversight Board on January 20, 2002
Be it resolved, after
due consideration of the importance of effective self-regulation
as one aspect of the oversight of the accounting profession, but
with recognition of the obstacles to achieving this goal which
have been encountered in recent years, and given the proposal
of the SEC in consultation with the AICPA and the SEC Practice
Section Executive Committee, without input from the Public Oversight
Board, to reorganize the self-regulatory structure, the POB intends
to terminate its existence pursuant to Section IX of the POB Charter
no later than March 31, 2002.
The March 31 date is
selected to provide time needed for coordination with the SEC
Practice Section and for transitioning important tasks now underway,
such as monitoring the implementation of the recommendations of
the Panel on Audit Effectiveness; overseeing the Auditing Standards
Board, the SEC Practice Section, the Peer Review Committee and
the Quality Control Inquiry Committee; conducting the special
independence reviews of the Big 5 accounting firms; and, based
upon the POB’s more than 20 years’ experience, offering suggestions
as to how the existing self-regulatory structure, now rendered
largely ineffectual, might be substantially strengthened. The
members of the POB believe that its professional staff can be
a continuing resource beyond March 31 in assisting in the creation
of a new and effective self-regulatory regime.
© 2002 Public Oversight
Board"
But, but... POB, we
hardly knew ye!
—Tam Gray
