“It was enormously frustrating because every article in the first six months, maybe year started out, ‘Beset by scandal, the PCAOB….’ None of us who were working hard to establish the organization had been involved in any ethical lapse or scandal, but the press could not resist the irony that this organization that had been formed to promote ethics and integrity itself had a rocky start.”
~ J. Gordon Seymour, former PCAOB General Counsel
Created in response to a wave of corporate scandals, the PCAOB became embroiled in one of its own during the appointment of its first Board members. The process ended with the resignation of the first Chairman along with the two SEC officials who had marshaled the nominations before the PCAOB even opened its doors. Early PCAOB staffers bristled at press accounts of the “chaos and controversy,” “appointment debacle,” and “rudderless” PCAOB, particularly when a General Accounting Office report squarely laid the blame on a flawed SEC process that was “neither consistent nor effective and changed and evolved over time.” (1)
The signing of the Sarbanes-Oxley Act set into motion a series of formidable deadlines, among the first of which gave the Commission 90 days, or until Oct. 28, 2002, to name the PCAOB’s five-member Board. Not having appointed such a body since the 1975 establishment of the Municipal Securities Rulemaking Board, the Commission did not have an up-to-date procedure for selecting or vetting regulators. (2)
The day after the Act was signed, the SEC issued a call for nominations for persons “of the highest integrity and dedication to the public good,”’ (3) eventually receiving close to 450 names for the five Board slots. (4) Hoping to find someone who could confer instant credibility on the PCAOB, SEC Chair Harvey Pitt lobbied Paul A. Volcker, former head of the Federal Reserve System, to serve as Chairman. He declined, not wishing to make the full-time commitment the Act required. (5) Next, John H. Biggs, a former TIAA-CREF CEO with a reputation as a shareholder activist, was approached by Pitt and then sidelined by some Republican lawmakers and other Commissioners in favor of former federal judge, CIA and FBI Director William H. Webster. (6)
Rapidly facing the Oct. 28, 2002, deadline, the SEC decided to fully vet members after their appointments. In a sharply divided, unusually vitriolic meeting, the Commission approved Webster in a 3 to 2 vote. Separately, four other Board members were approved 4 to 1 with Commissioner Harvey Goldschmidt voting against the entire slate to protest what he believed was an “inept and seriously flawed process.” A week later, the New York Times broke the story that Webster had served as the chairman of the audit committee of U.S. Technologies Inc., a small public company facing fraud charges. (7) Webster had revealed his role at the failing company to Pitt and SEC Chief Accountant Robert Herdman. Herdman soon discovered additional information including that the company had dismissed its external auditor, but he did not share the facts with the Chairman or the rest of the SEC Commissioners before the vote. (8)
A political firestorm was unleashed against the SEC chairman, spurring three separate investigations into his handling of the PCAOB selection process. Within days, Pitt and Herdman had resigned for their roles in the appointment. The SEC also opened an investigation into Webster’s work for the now insolvent U.S. Technologies; he was eventually cleared of any wrongdoing. But on Nov. 11, 2002, Webster also resigned stating “my continued presence on the Board will only generate more distractions which will not be helpful to the important mission of the Board.”
Meanwhile post-appointment vetting continued on the remaining Board members including Charles D. Niemeier, the chief accountant of the SEC Enforcement Division and Co-Chair of the SEC’s Financial Fraud Task Force. He laughingly admits that he was approached by Chairman Pitt to serve on a B-list slate, if Pitt couldn’t get his top choices approved.
Under the Act, only two CPAs are allowed to serve on the Board. The other CPA slot was filled by Daniel L Goelzer, a securities lawyer and former General Counsel to the SEC, who had briefly worked as an accountant before attending law school. A former colleague of Harvey Pitt’s, he was “rather surprised” when he got the call from Herdman to interview for the PCAOB.
Kayla J. Gillan, the former General Counsel for the California Public Employees’ Retirement System, was also named to the Board. Viewed as a corporate governance expert, her candidacy was advanced by labor supporters and investor advocates.
Former nine-term Ohio Congressman, investment banker, and healthcare lobbyist Willis (Bill) Gradison was also selected for the Board. Gradison had been closely watching the SOX legislation and called his old friend Rep. Mike Oxley (R-Ohio) after its passage to register his interest in serving.
Before his resignation, Webster had scheduled a Nov. 13, 2002, organizational meeting to start the work of launching the PCAOB within the Act’s tight timeframes. He attended, but did not participate. The other four Board members divided initial operational tasks and met once again without Webster to get the agency up and running.
Bill Gradison and Dan Goelzer sought commercial space for a New York City office and a Washington, D.C., headquarters. Board members had to pay routine expenses with their personal funds before a $20 million advance from the U.S. Treasury arrived.
“I remember signing a lease for the K Street space before we had our funding in place and telling my wife, 'it's very possible we will be broke for the rest of our lives if this falls through,'” recalled Charley Niemeier.
Ironically, they leased the recently vacated D.C. offices of Arthur Andersen. Dangling nameplates, note-scribbled white boards, and scattered shred bins were an eerie reminder that the previous occupants had departed quickly.
Kayla Gillan turned her attention to the constituent documents and bylaws, getting a Human Resources infrastructure in place and developing the PCAOB’s corporate identity. Seeking a logo that was conservative, credible and authoritative, the four Board members settled on a maroon rectangle of block letters to differentiate it from the SEC’s blue seal. Niemeier focused on recruiting senior staff, finding it infinitely easier to attract attorneys interested in creating new rules for a new organization than hiring accountants willing to work for an entity with no history or established rules.
The four Board members also began debating a myriad of conceptual questions that would fundamentally shape the PCAOB, from who would write standards to how inspections would be structured, all before the entity had any funding or their official appointments had begun.
(1) General Accounting Office, “Securities and Exchange Commission: Actions Needed to Improve Public Company Accounting Board Selection Process,” GAO-03-339, December 2002. Overview.
(3) SEC Press Release, “Statement of the Commission Regarding the Public Company Accounting Oversight Board,” 2002-118, Aug. 1, 2002.
(4) SEC Press Release, “Commission Announces Founding Members of the Public Company Accounting Oversight Board,” 2002-153, Oct. 25, 2002.
(5) General Accounting Office, “Securities and Exchange Commission: Actions Needed to Improve Public Company Accounting Board Selection Process,” GAO-03-339, December 2002.
(6) CFO, Pitt Stop: Commission Chairman Stepping Down by Stephen Taub, Nov. 2, 2002.
(7) New York Times, “Audit Overseer Cited Problems in Previous Post,” by Stephen Labaton, Oct. 31, 2002.
(8) General Accounting Office, “Securities and Exchange Commission: Actions Needed to Improve Public Company Accounting Board Selection Process,” GAO-03-339, December 2002, pages 15-16.
Daniel Goelzer, a founding board member of the Public Company Accounting Oversight Board (PCAOB), is interviewed by Lucy Harvey, curator of the gallery on the early history of the PCAOB. In the interview, Mr. Goelzer discusses his role leading up to and serving as a founding board member as well as the major issues faced by the organization, including: standard-setting and the role of the Standards Advisory Group, or SAG; SOX Section 404(b) related to internal controls mandates; inspections and enforcement in the US and abroad, the Supreme Court case related to the PCAOB’s Constitutionality; the Dodd-Frank Act and PCAOB’s authority to audit broker-dealers.
Charles Niemeier, a partner at Williams and Connolly LLP, previously served with the SEC’s Division of Enforcement as the co-head of the Financial Fraud Task Force and as Chief Accountant for the Division. Upon adoption of the Sarbanes-Oxley Act of 2002, he was appointed a founding board member of the Public Company Accounting Oversight Board, serving as the Board’s first Acting Chair. Mr. Niemeier received his B.B.A. at Baylor University and his JD at Georgetown University Law Center.
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