PCAOB Feels Budget Pinch; Fees to Rise

Public companies should expect to pay 9 percent more in fees next year to help keep the Public Company Accounting Oversight Board afloat, according to its budget proposal for next year.

The final budget must still be approved by the Securities and Exchange Commission, which has power of the purse over the PCAOB. But the Board has planned for a budget of $144.6 million, up 6 percent from last year. The accounting support fee that would be assessed to public companies to support the PCAOB would rise from $123 million in 2007 to $134.5 million in 2008. The fee assessment is allocated to public companies according to their market capitalizations.

During a meeting to review and adopt the budget, some PCAOB members complained about the budget-setting process and continued constraints on efforts to grow. They worried that the amount ultimately may not be enough to cover the full scope of its mandate under the Sarbanes-Oxley Act to police accounting firms.

The Board is charged with monitoring more than 1,800 public accounting firms registered to audit public companies, including some 830 firms outside the United States. A handful of firms with more than 100 public company audit clients must be inspected annually. Those with at least one public company client must be inspected at least once every three years.

The SEC issued new rules for the budgeting process in 2006 intended to establish more formality and routine to budget-setting at the PCAOB. The process provides for plenty of interaction SEC staff prior to PCAOB’s final adoption of its budget.

Under the 2008 budget, the total headcount at the PCAOB is expected to reach 507, with 260 staffers added to inspections and registrations. Enforcement staff consists of 25 attorneys and accountants. The Board has allowed for continued hiring in the past several years’ budgets, but hiring has been stymied by a tight market for audit talent.

As a result, the Board has tended to leave money on the table the past few years, carrying it into the following year’s request. For 2007, for example, the Board expects to spend $127.5 million, which is $8.9 million less than it projected for the year. The 2008 budget calls for more new hiring, but at a slower pace than prior years’ budgets allowed.

Niemeier

Board member Charles Niemeier aired some frustration. “For the first time in our history, and before we accomplish what is necessary to fulfill our statutory mandate, the budget will constrain our staffing,” Niemeier said. “I don’t believe that constraint is called for … Although we’ve finally seen some softening in the employment market for experienced accountants in the past two months, the proposed budget for 2008 only provides for hiring eight more inspectors.”

Board member Kayla Gillan noted that the PCAOB staff is getting better at budgeting, but numerous hard-to-predict values have made the 2008 budget especially challenging. “This is a tight budget,” she said. “It feels different to me than it has felt in the past. If everything goes the way we want it to, for the first time our constraints on hiring will not be because we can’t find competent and good people willing to work for us, but in fact we may have to say no.”

Depending on how certain events play out in 2008, Gillan said, the $144.5 million budgeted may not be enough. “There’s the possibility if all these variables align themselves in one direction, we may need to seek supplemental funding in the middle of the year to meet our statutory obligations,” she said. “Should such a thing occur, I’m sure the Board will have the strength to do what it needs to do to secure supplemental funding.”

Goelzer

Board member Daniel Goelzer noted, for example, that the PCAOB is required by the SEC to register dealer-brokers by early 2009. Yet in questioning PCAOB staff, he learned the 2008 budget makes no provision for the resources necessary to meet that requirement. A PCAOB staffer told Goelzer that’s largely because the SEC is expected to waive the requirement for at least another year. Goelzer described the 2008 budget as a “frustrating and painful process.”

Chairman Mark Olson acknowledged the tension. The Board has taken heat in the past for a slow inspection process and drawn-out inspection reporting. More recently, questions are surfacing about the limited number and nature of enforcement actions the Board has taken so far. Since its inception five years ago, the PCAOB has delivered fewer than a dozen enforcement actions, focused on tiny audit firms, during a period when the market experienced record numbers of restatements.

Olson

“In past years, our inspections division and our other divisions that seek to hire experienced accountants have fallen short of their hiring goals,” he said. “As a result, we have had to make do with the resources we have. This often requires that we make trade-offs in how we allocate resources and heightens the risk that we cannot fulfill our mandate as we intend.”

Yet Olson remained confident in the 2008 figures. “While this budget takes a very conservative approach to funding, I believe it should be adequate to support our 2008 initiatives,” he said.

Niemeier, however, labeled the budget process “disturbing.”

“From my perspective as a board member, between the internal development process and external negotiations with the SEC, it has not adequately provided for board involvement,” he said. “It’s obvious we need the staff that will be funded by this budget. In fact, we need more … I do have misgivings about the process by which [the budget] was reached and I hope in the future we will find a better way.”

Gillan noted that since her term is due to expire soon, she won’t necessarily be a member of the Board if or when it should find itself facing a shortfall in 2008. But she promised to remain involved. “I will continue to be a passionate observer and I will hold your feet to the fire,” she said.