CAQ Weighs In on PCAOB Supreme Court Case

On December 7th, the U.S. Supreme Court heard opening arguments in a case debating the constitutionality of the Public Company Oversight Board (PCAOB). In advance of the case, the CAQ submitted to the Supreme Court an amicus brief in support of the PCAOB. The CAQ’s friend-of-the-court brief does not address the constitutional questions raised in the case, but rather provides context to help the Court understand the PCAOB’s role in achieving the goals Congress embodied in the Sarbanes-Oxley Act, from the perspective of the profession the PCAOB regulates.

“At a time of market and financial upheaval, overturning the established system of regulation will exacerbate investors’ fears about the integrity of capital markets, and interfere with the ongoing work of regulation,” the brief stated. “Were the Court to find the PCAOB as established to be constitutionally impermissible, the uncertainty surrounding the effect of past regulations, and the question of what form future regulation would take, would have negative consequences for investors, the profession, and the markets generally.”

Oversight of the public company auditing profession through the creation of the PCAOB was a key provision of the Sarbanes-Oxley Act of 2002 (SOX) and has helped restore investor confidence in the capital markets. According to a CAQ survey done in conjunction with the 5th anniversary of the passage of SOX, 79% of investors surveyed said that the changes brought about by SOX gave them more confidence in audited financial information.

In a Dow Jones story about the case, CAQ Executive Director Cindy Fornelli said of the public company auditing profession’s regulator, “I do think the market and investors benefit from having this oversight structure.”

The Court is expected to issue a ruling on the PCAOB’s constitutionality in Spring 2010.

II. CAQ Asks Congress to Preserve Key Sarbanes-Oxley Provision.

The CAQ recently sent letters to Senate and House leaders expressing support for the Sarbanes-Oxley Act of 2002 (SOX) and urging them to resist efforts to roll back a key investor protection provision in the law.

In a December 2nd letter to Senate Banking Committee leadership, the CAQ asked the Committee to resist efforts to exempt small businesses from compliance with Section 404(b) of SOX. “If, as proposed by some members of the House of Representatives, Congress agrees to a permanent waiver for small companies, there may be little independent scrutiny of financial reporting safeguards at an estimated 6,000 small companies,” Cindy Fornelli wrote in the letter. “Reporting under Section 404 provides investors with meaningful information regarding a company’s internal control over financial reporting (ICFR).”

The CAQ wrote a December 8th letter to Representatives Barney Frank, Paul Kanjorski, John Sarbanes and Steve Cohen, regarding their efforts to remove from the Consumer Protection Act language exempting small public companies from compliance with Section 404(b) of the Sarbanes-Oxley Act of 2002. “As representatives of the auditing profession, the Center for Audit Quality (CAQ) commends you for your continued support of Section 404(b) of the Sarbanes-Oxley Act (SOX), which requires an independent audit of a company’s assessment of its internal controls over financial reporting (ICFR),” Cindy Fornelli stated. “We understand you are contemplating an amendment that would preserve the potential application of this important investor protection to public companies of all sizes. We support such efforts.”

III. Cindy Fornelli Discusses Accounting Standard-Setting Independence in Conference Call with Reporters.

On November 16, Executive Director Cindy Fornelli and CAQ Governing Board Co-Vice Chair Barry Melancon, President and CEO of the American Institute of CPAs, held a teleconference with reporters to discuss the importance of maintaining the independent accounting standard-setting process. The media teleconference was held in response to proposals in the House Financial Services Committee that would realign the oversight of the Financial Accounting Standards Board (FASB) from the U.S. Securities and Exchange Commission (SEC) to within the structure of systemic risk.

“Financial and auditing standards are for the benefit of investors so that they can get the information that they need so that they can make valid investment decisions,” said Fornelli. “The SEC acts as an investor advocate and is the right oversight party for helping the FASB maintain independent standard setting. Having financial and banking regulators be part of that process and basically have veto power over the standards is really not a good model for our system. Particularly in this time of financial crisis, it is a bit ironic that we would be talking about watering down the process that’s designed to protect investors.”

Ultimately, the amendment’s authors were persuaded to alter their proposal so that the Oversight Council can recommend – but not demand – changes to the accounting standards.