The evidence that SEC Chairman Mary Jo White needs to go becomes more overwhelming with every passing day.
One brewing scandal which has not gotten the attention it warrants is over the selection of the next chairman of the Public Company Accounting Oversight Board, which oversees auditors. Enron and Lehman’s Repo 105 accounting dodge are proof in and of themselves of the importance of having tough accounting standards.
The current chairman of the PCAOB, John Doty, is widely seen as doing a good job despite the anti-regulatory bent of the times, and would like to stay in his post when his term ends this October. I heard that Mary Jo White had the knives out for him when I was in DC in early May, but wasn’t sure what I could say about it (“Mary Jo White Plans to do Something Bad” is almost a dog-bites-man story).
But as Francine McKeenna describes in a MarketWatch story, Mary Jo White’s conflicts, as well as her corporate cronyistic reasons for seeking to replace Doty have turned the pending appointment of the PCAOB chairman into an ugly fight, with no less that Columbia law professor John Coffee, the dean of the securities law bar, calling out Mary Jo White’s conduct in unusually blunt terms.
The reason the PCAOB matters is that it was created as part of Sarbanes Oxley, meaning in the wake of Enron and other accounting scandals in the early 2000s. Sarbanes Oxley stipulated that all firms that audited public companies had to register with the PCAOB and be subject to its supervision, which includes not just rules combatting fraud but also professional standards. As Coffee stressed, the ability to set professional standards gives the PCAOB further reach than the SEC. But the PCAOB in turn is subject to SEC oversight. And Mary Jo White put Doty’s reappointment in doubt by telling an industry group on September 9 that the SEC was looking at outside candidates to head the regulator.
And as we’ll discuss shortly, Mary Jo White, who is leading the charge against Doty, has a conflict of interest serious enough that she is facing demands to recuse herself from the PCAOB decision.
The apparent reason for Mary Jo White’s plan to install a PCAOB head that would take a more permissive stand toward accounting regulations is that the SEC is engaged in a turf war with the PCAOB. The SEC’s Chief Accountant, who appears to see its job as protecting auditors, as opposed to the integrity of financial statements, wants to keep the PCAOB from showing it up as a captured regulator, which has taken place as a result of Doty’s efforts as chairman. As Coffee wrote in a New York Law Journal article last week, Backstabbing in Washington: The Curious Case of the PCAOB:
Washington is a strange town! The more you succeed, the more you attract enemies. If you outperform all prior occupants of your office, behave like a model gentleman, and achieve what no one thought possible, that will make you a political target, and, worse yet, attract the neurotic envy of all those you have outshone. If one individual among all U.S. financial regulators has earned world-wide respect in recent years—both for his brains and diplomacy—it has been James R. Doty, Chair of the Public Company Accounting Oversight Board (PCAOB).1 Guess what that means?
Yes, no good deed goes unpunished in contemporary Washington….
Recall Cinderella’s two step-sisters. Drab and mediocre, they were still consumed by envy for Cinderella, while somehow convinced of their own superiority and hopeful that they could land Prince Charming for themselves. Once, the Office of the Chief Accountant at the SEC was a prestigious position, staffed by eminent persons (such as Sandy Burton, who later became Dean of Columbia Business School). Burton was one of several SEC Chief Accountants who fought notable battles against “pooling of interests” and other accounting shenanigans. But that was long ago. More recently, the Office of the Chief Accountant has been upstaged by the PCAOB, which negotiates agreements with foreign regulators, issues auditing standards, hires world-class economists (such as Luigi Zingales) as their advisors, and generally gets all the publicity. This has not gone unnoticed at the Chief Accountant’s office, which would like to view the PCAOB as merely a subordinate vassal agency. But the media knows better and can distinguish stars from step-sisters. The current Chief Accountant, James Schurr, is a retired Deloitte partner who seems to have taken the protection of the industry as his priority. He has publicly criticized Doty and the PCAOB as “too focused on its disclosure effort and not enough on … the nuts and bolts of conducting audits.”11 That is silly but revealing in its attitude. The PCAOB actually conducted a record number of examinations in 2014 and brought an increased number of enforcement proceedings (including against partners at major Big Four firms). But unlike the SEC, the PCAOB by statute cannot disclose who it is suing or for what—until all appeals are exhausted or a settlement reached. Thus, it cannot brag or celebrate its achievements.
Coffee’s article, which I strongly encourage you to read in full, discusses some of Doty’s important accomplishments, along with how initiatives he has underway would suffer or be dismantled. One important one is to have the audit partner sign the audit in his own name along with the firm name, as is now required in the UK. Who can be opposed to more individual accountability? Coffee tells us the SEC opposes this change. Similarly, in the UK, some companies are now subject to more extensive disclosure requirements, and most of those companies are voluntarily providing even more information. As Coffee stresses, “Audit firms in the U.K. are competing to innovate and improve the quality and usefulness of their report.” Doty similarly wants to have more informative audit reports and more experimentation in how to present information to investors.
And while Coffee’s salvo in support of Doty is the most forceful to date, he’s far from alone. We’ve attached a letter written in support of Doty’s reappointment. Please look not only at the summary of Doty’s achievements, but also at the names of the signatories, all highly qualified to judge Doty’s accomplishments, and representing a broad range of political positions, from former Fed chairman, Paul Volcker, former SEC chairmen Richard Breeden and Arthur Levitt and former SEC Chief Accountant Schueltze through Vanguard’s John Bogle and Princeton’s Burton Malkiel, to the AFL-CIO’s former TARP Congressional Oversight Panel Director Damon Silvers.
So what has the SEC done? Aside from making clear that it wanted Doty out months ago (since I heard about the plan back in May, it was clearly well known, as confirmed by the fact that the all-star letter in support of Doty was sent to SEC commissioners before Mary Jo White made it clear she was keen to show Doty the door), its ethics panel made a decision on a Mary Jo White conflict relative to the PCOAB that many outsiders view with skepticism. From McKenna:
The conflict has existed since April 2013, when Mary Jo White became head of the agency. John White [her husband] has served on the PCAOB advisory committee continuously since he was at the SEC between 2006 and 2008.
He did resign as an equity partner at Cravath when his wife took the chairwoman’s job, since Cravath is a top white-collar and corporate defense firm that represents clients at the SEC frequently. Mary Jo White has recused herself from weighing in or voting on SEC cases when her husband’s firm is involved…
The Bloomberg report [that called out this conflict] cited the Center for Effective Government, an advocacy group, calling for White to step aside from the selection of the next PCAOB chairman.
And in a de facto admission that the White’s overlapping relationships with the PCAOB do not pass the optics test, McKenna reported that Cravath scrubbed references to John White’s relationship with the PCAOB the day after the Bloomberg story appeared.
We see again and again that whenever there is a conflict between private profit and public interest, Mary Jo White can be relied upon to sell out the public, even when her decision is clearly at odds with long-standing SEC policies and practices. The fact that so many former SEC officials are standing with Doty against Mary Jo White (and her husband) is damning. I hope you’ll circulate this post widely to continue to get the word out as to how disastrous an SEC chairman Mary Jo White has proven to be.