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More Twists in the Race to Be The Next PCAOB Chairman

Posted on by Caleb Newquist

John White, a prominent lawyer with Cravath, Swaine & Moore, sits on the PCAOB's Standing Advisory Group. His wife, Mary Jo, chairs the SEC. She, along with the other commissioners, will choose the next PCAOB chair. Some people don't like how that looks:

The Center for Effective Government, an advocacy group, said White should step aside because her husband, John White, sits on an official advisory group to the audit board. While the position is unpaid, it gives John White regular access to top PCAOB officials. His law firm, Cravath, Swaine & Moore, highlights the role in marketing materials.

“The White family has to deal with this conflict,” said Jeff Hauser, who runs the Revolving Door Project at the Washington-based center that promotes government transparency and accountability. “It makes Mary Jo White’s role choosing PCAOB officials problematic.”

Fun facts about John White: He graduated from UVA with honors in accounting and he's an Elijah Watts Sells winner. He also spent some time serving on the Financial Accounting Standards Advisory Council (FASAC). I don't think anyone would make bones about his qualifications to be on the SAG.

However! The Whites have been criticized a lot for the conflicts between them. MJW has recused herself from a lot of SEC enforcement investigations due to her husband's work at Cravath. Back in February, The New York Times counted four dozen cases since she became chair.

And now we have this PCAOB chair appointment. Current chair Jim Doty wants another term and has a slew of people pulling for him. It wouldn't be a stretch to say that the U.S. Chamber of Commerce would prefer someone else like, say, the top Republican Staff Member on the Senate Banking Committee who, by the way, has already been recommended by his boss, Banking Committee Chairman Senator Richard Shelby. Who knows! Maybe they (and the audit firms) prefer anyone other than Doty, including Lewis Ferguson, a current board member who's also been whispered as a candidate.

If MJW has already made up her mind to re-appoint Doty then that would make this whole identifying "interested and qualified candidates" a ruse and kinda fun, especially because it would irk the Chamber even more. If a new chair ascends and he is more sympathetic to the whims of banks and audit firms, well, that might be fun, too. But probably not for the Whites.

SEC Chair Faces New Conflict Claims Over Husband’s Legal Work [Bloomberg]

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Deloitte Manages to Tone Down Its Response to This Year’s PCAOB Inspection Report

The PCAOB has released its 2009 Inspection Report for Deloitte and out of 73 audits inspected, 15 deficiencies were cited in this year’s review.

The Board writes that deficiencies are “failures by the Firm to identify or appropriately address errors in the issuer’s application of GAAP, including, in some cases, erikely to be material to the issuer’s financial statements. In addition, the deficiencies included failures by the Firm to perform, or to perform sufficiently, certain necessary audit procedures.”


Issues cited by the PCAOB in the report included goodwill impairment, deferred tax assets, inventory valuation, a failure to identify a “departure from GAAP,” among others. The Big 4 Blog rightly notes that this is the first time that the PCAOB has provided the sample size of the inspections which allows for some surprising error rates:

The error rate in this situation is quite high, almost one of every five audits has errors. Obviously, Deloitte performs thousands of audit each year and extrapolating from a small sample is quite dangerous, nonetheless, even at half of 20%, the natural conclusion is that one in ten audits has an error, and would have gone unnoticed had not the PCAOB done a good post-audit on the audit.

You could really make a fuss about what auditors did and did not do but the fact remains, audits are never perfect. Some are just more unperfect than others. What’s especially interesting is how Deloitte’s attitude has changed with regards to the PCAOB’s findings as compared to last year.

In last year’s inspection report, the Board cited seven audit deficiencies which resulted in a three page letter from Deloitte that, in no uncertain terms, told the PCAOB to get bent and keep their Monday Morning QBing to themselves. This was about as an aggressive of a response from an accounting firm as we had seen so it was definitely a surprise to see a firm lose their cool.

This year, despite the fact that Deloitte was cited for over twice as many deficiencies, the firm is considerably less defensive (read: boring) and put together a concise one page response to the Board’s findings that included the following:

“We have evaluated the matters identified by the Board’s inspection team for each of the Issuer audits described in Part I of the Draft Report and have taken actions as appropriate in accordance with D&T’s policies and PCAOB standards.”

It’s nice to see the firm playing nice with their regulator this year but we’re curious as to how the change in attitude came about. We hope that at least one of the remaining Big 4 will include a little more color in their response.

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PCAOB Inspection of Deloitte Audit – 20% Error Rate?? [Big 4 Blog]
Audit Deficiencies at Deloitte [WSJ]

PCAOB, Possibly Fed Up with China’s Stonewalling, Goes After Some Low-Hanging Fruit

The Public Company Accounting Oversight Board today announced a cooperative agreement with the Financial Supervisory Authority of Norway for the oversight of audit work performed by public accounting firms that practice in the two regulators’ respective jurisdictions. “With this agreement, Norway’s FSA and the PCAOB are joining forces to improve audit quality and protect investors,” said PCAOB Chairman James R. Doty. “I am pleased that the PCAOB is continuing to make progress in overcoming the obstacles that have in the past prevented PCAOB inspections in Europe.” [PCAOB]