August 19, 2018

The Trump Administration Will Drain the PCAOB Swamp

The election of Donald Trump is likely to transform the Public Company Accounting Oversight Board (PCAOB). While the PCAOB is technically a non-partisan private regulator, it will not likely escape Trump’s commitment to drain the swamp.

Jim Doty’s term as PCAOB chairman expired in October of 2015. The PCAOB chairman is nominated by the SEC Chair, currently Mary Jo White.  White has not acted on her responsibility to either reappoint Doty or select someone else, citing two empty seats on the five-member commission. The two nominees put forth by President Obama have been hung up in the Senate Banking Committee. 

White also came under criticism for a conflict of interest since her husband served on the PCAOB’s Standing Advisory Group. Perhaps White was just listening to Mitch McConnell and deciding that her successor should make the call. Traditionally, the chairman of the SEC resigns with the inauguration of a new president.

The PCAOB has been controversial under Doty. To the delight of many investors, Doty has led the PCAOB to be tough on auditors, pushing through new rules and tough inspections making him unpopular with the profession and the business community. The US Chamber of Commerce complained to the SEC about the PCAOB saying it was imposing new burdens on business.  Finally, the PCAOB's relationship with the SEC deteriorated into open conflict between Doty and former SEC Chief Accountant James Schnurr and former Deputy Chief Accountant Brian Croteau.  The SEC put Croteau (and his recent replacement Marc Panucci) in charge of PCOAB oversight and I am sure Doty thought he should report directly to the SEC chairperson, not a lower level functionary.

While many investors and academics supported Doty’s reappointment, the opposition from the profession and the US Chamber of Commerce supported William Duhnke, the top Republican staff member on the Senate Banking Committee. PCAOB member Lew Ferguson was also floated as a potential replacement for Doty.

I doubt Trump even knows that the PCAOB exists and will probably not pay attention to who becomes SEC Chairperson. His transition team has assigned former SEC commissioner Paul Atkins to deal with the independent financial regulators. Atkins testified against the SEC in its case against the Big 4 in China, and in public comments has been critical of the PCAOB.  I think it is safe to say he will be looking for regulators with a lighter touch.

I expect we will see a new SEC Chairperson soon, and that chairperson will be much more business friendly and a lot less investor friendly. That bodes poorly for Doty, who I expect will be replaced by someone (perhaps William Duhnke) who will first agree to take the teeth out of the PCAOB. 

I think Trump should consider going a step further to fix the dysfunctional relationship between the PCAOB and the SEC. If I were him I would ask Congress to get rid of the PCAOB.  I’d transfer the inspections function to a new Office of the Chief Auditor at the SEC, a position at the same level as the Office of the Chief Accountant. Standard setting should go back to the AICPA. The SEC already has an enforcement team. PCAOB staffers and board members will object, since the PCAOB is not subject to federal salary scales. With a salary over $670,000, Doty is perhaps the highest paid bureaucrat in Washington, and if you are going to drain the swamp, that might be a good place to start.

Paul Gillis, PhD, CPA is a professor at Peking University in Beijing, a former PwC partner and a former member of the PCAOB’s Standing Advisory Group.

Related articles

SHOCKER: Doesn’t Appear that Stanford Auditors were Doing Any Auditing

allen-stanford_1018295c.jpgLast week’s indictment of Allen Stanford has brought up the always popular question when fraud, occurs: “Who are the auditors that were asleep at the wheel of this disaster?”
Well, in this case, the auditors were a local UK two-person shop, CAS Hewlett, which must be Queen’s English for Friehling & Horowitz.
It doesn’t appear that CAS Hewlett has a website, but they’ve been doing the Stanford “audits” for at least 10 years, so obv they’re legit. PwC and KPMG both have offices on Antigua but Stanford preferred to stay with its “trusted firm”. Totally understandable.
And the best part? The founder of the firm, Charlesworth “Shelly” Hewlett died in January, approximately a month before the story broke on the Ponz de Stanford.
This all adds up to who-the-fuck-knows if audits were even occurring and for us to speculate if Shelly needed to get got because Stan knew that the poo and fan were coming together. Just sayin’.

Madoff Feeders Getting Some Unwanted Attention

The SEC, feeling confident these days, has filed a complaint against Cohmad Securities Corporation and its Chairman, Chief Operating Officer, and one of the brokers, saying they “actively marketed Madoff investments while ‘knowingly or recklessly disregarding facts indicating that Madoff was operating a fraud.'”
Call us Captain Obv but that sounds like they were either dumb or in on the scam. Either way, they can’t be too psyched about it.
An additional complaint has been filed by the SEC against Stanley Chais, an investment adviser who put all of the assets he oversaw into casa de Madoff.
Irving Picard, who might have the most thankless job in America, also sued both Cohmad and Chais, because, you know, a few people want their money back. The trustee’s complaint against Cohmad spells it out:

The trustee’s lawsuit asserted that fees paid to Cohmad by Mr. Madoff were based on records showing the actual cash status of customer accounts — the amounts invested and withdrawn — without including the fictional profits shown in the statements provided to customers. When a customer’s withdrawals exceeded the cash invested, Cohmad’s employees no longer earned fees from that account — even though the customer’s statements still showed a substantial balance, according to the lawsuit.

This arrangement indicated that Cohmad and its representatives knew about the Ponzi scheme and knew that the profits investors were allegedly earning were bogus, according to the trustee’s complaint.

Good luck explaining that.

Brokerage Firm and 4 Others Sued in Madoff Case
[New York Times]