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.