Unless you've spent the last five days preparing your liver for tomorrow's holiday you probably heard something about the Supreme Court's ruling on the ObamaCare. The decision will be discussed for years to come by legal scholars for its complexities, by partisans who can't win or lose gracefully, and by U.S. citizens who still can't believe that a Kenyan Muslim could become President and take away all our freedom.
ANYWAY, it seems appropriate that we bring up another Supreme Court ruling that had a more direct relation to the accounting profession. Of course I'm talking about the decision in Free Enterprise Fund v. PCAOB. The case was argued before the court back in December of 2009 and the 5-4 decision was handed down in June. It found that because the President could not remove Board Members at will, their method of appointment was unconstitutional. However, the creation of the PCAOB and the other regulations within the legislation were upheld and auditors everywhere continued on in misery as if nothing had happened.
But technically, it was a win for Free Enterprise Fund and Beckstead and Watts, the obscure firm that picked up the torch for jilted small CPA firms that served SEC clients everywhere. Somewhat recently, Brad Beckstead, one of the namesakes of the firm, reached out to us to take issue with our tongue-in-cheek characterization of B&W. Because we're not total meanies, we offered Mr. Beckstead the opportunity to tell his side of the story and he took us up on it. The following is a little Q&A we did with B^2 over email.
Going Concern: What have you been up to since the decision in Free Enterprise Fund v. PCAOB?
Brad Beckstead: I have continued to be involved in audits of public companies as audit partner and SOX specialist at LL Bradford & Co., CPA's, in Las Vegas, NV. In addition to audit services, I continue to consult with public companies on the design and implementation of their internal controls and corporate governance as they strive to be compliant with Section 404a of the Sarbanes-Oxley Act, which requires management of public companies to assess and opine on the effectiveness of their internal controls. I have written a book on how internal controls and corporate governance can add value to small public companies. I know it's ironic considering I fought for SOX relief for small business, but I believe small business should adopt standards because the free market will award them for doing so, not because they are forced by regulation to do so.
GC: What were the motives you had for joining the lawsuit with Free Enterprise Fund?
BB: The primary motives I had in joining the lawsuit were two-fold: 1) I agreed with the Free Enterprise Fund's contention that the provision of the SOX Act that said that PCAOB board members could only be removed "for cause" violated the Appointments Clause of the Constitution, and 2) I hoped that the outcome of the lawsuit would force Congress to reconsider exempting small business issuers from being required to comply with the Act, and smaller auditing firms from the burdensome regulatory environment of PCAOB oversight. In the end, Congress included in the Dodd-Frank Act, an exemption for smaller company issuers to not be required to comply with Section 404b of the Act, a move which I feel was motivated in part by the "negative effects of over-regulation on small business" platform which I promoted every time I was interviewed by the press for the case.
GC: Were the results of the case what you wanted? Many people didn't see this as real blow to the PCAOB and several were pleased that it was allowed to stay in place to continue its inspections.
BB: The primary goal of bringing the SOX Act in line with the Constitution was achieved through our victory before the Supreme Court. If you research the logging industry and the challenges they are having with a regulatory oversight board that is filled with foreign nationals, you will see that our case has a direct positive impact on their lawsuit against that foreign regulatory board that has no accountability to the American people. Our case has set the precedence by which future regulatory boards are created and held accountable to the citizens of the US through the Executive Branch, which is how the Constitution was designed. It is true that we had hoped for the SOX Act to be remanded back to Congress so the small business community could lobby for relief, and to that end, the results were disappointing. However, as I said above, I believe Congress is finding other ways to provide some relief to small business by adding addendums to other Acts (e.g. Dodd-Frank and the JOBS Acts).
GC: Looking back on the process and everything that preceded it, do you see any value-add in the Sarbanes-Oxley legislation, (i.e. PCAOB or anything else)?
BB: I fully understand why the SOX Act was created in response to the Enron and Worldcom debacles (as well as others). I also agree that the Act should continue to be applied to large corporations and auditors who have the financial and personnel resources to comply, and who are accountable to institutional investors with huge investment dollars at stake. However, I believe the Act to be a barrier to entry for small startup companies, and consequently destructive to our country's ability to lead the world through innovation. Once we lose our innovative edge and entrepreneurial spirit, we become subject to the other world economies, like China and India, and their abilities to dominate the global economy by demand and shear population numbers. You simply have to look at the historical prices of commodities such as steel, oil, and corn to understand how prices have risen just by the increase in demand from China as [their] economic growth has surpassed the US. To conclude this point, I see value-add to large institutional investors, but I see value-loss to innovation and entrepreneurship. Legislating a risk-free society is causing us to lose our competitive edge on the world stage.
GC: Do you think the auditing profession can regulate itself?
BB: No. I think we should all be employed by the government (PCAOB) since they know how to conduct a perfect audit, and continually remind us of that fact every time they subject us to inspection. We would all conduct our audits differently if we didn't have to worry about the pressures of every day business such as meeting client filing deadlines, making payroll, collecting fees from our clients, attracting quality staff, and investing in staff training. Being employees of the government would remove all of these pressures and enable us to do our job without consequence to our paycheck, which is the same field the PCAOB regulators are playing on when they conduct their inspections. Job perfection can be attained 100% of the time when enough time and resources are devoted to the project without consequence of losing a client or being unprofitable. You may think I'm being sarcastic with this response, but I'm dead serious. Why do they set us (i.e. small audit firms) up to fail with audit and regulatory standards that are difficult or nearly impossible to achieve given the accounting knowledge-base and experience of 99% of our clients? There should be some allowance made for this simple fact.