SEC Strategies Evolved in Response to Major Events Leading to the Appointment of PCAOB Members

Faced with appointing five members to the newly created PCAOB in 90 days, SEC lacked a formalized and tested process that documented the roles to be played by the Commissioners and staff. The SEC Chairman initially asked the Chief Accountant to take the lead in identifying potential PCAOB members; however, the other Commissioners never fully endorsed this approach. On October 31, allegations emerged that the SEC Chairman, before the October 25 vote, withheld from his fellow Commissioners material information about Judge Webster’s role at U.S. Technologies, which was relevant to the appointment of Judge Webster as chairman of the PCAOB. No one who attended the meeting contacted SEC’s General Counsel, who was responsible for vetting PCAOB candidates. According to the SEC Chairman, he knew that Judge Webster was the former chairman of the audit committee of the board of directors of U.S. Technologies before the October 25 vote. The review process was still ongoing at the time of our review. Several Factors Contributed to the Breakdown of SEC’s Selection and Vetting Process

Although SEC lacked a documented and formalized selection and vetting process for nominees, several factors contributed to the eventual breakdown of the Commission’s ability to select a slate of nominees that could be unanimously appointed. Lack of Pre-Appointment Background Checks and Vetting Exposed Process to Risk

As previously mentioned, after the Commission was unable to appoint a consensus candidate for PCAOB chairman by the end of September, the Office of the General Counsel was forced to vet the final slate post- appointment. As a result, the process changed and evolved over time and was neither consistent nor effective. Based on the factors previously discussed including his experience as an auditor, his knowledge of Judge Webster’s long and prominent record of public service, and an understanding that additional vetting would take place post-appointment, the Chief Accountant concluded that this matter did not raise a concern and decided that it was not necessary to inform the Chairman, the other Commissioners, or the Office of the General Counsel of these issues. Further, in our view, the information concerning Judge Webster’s role as chairman of the audit committee of the board of directors of a company that had dismissed its external auditor after the auditor had found material internal control weaknesses should have been shared by the Chief Accountant with the SEC Chairman and other Commissioners prior to the vote. Before any additional members are appointed to the PCAOB, especially the chairman, we recommend that the Commission reach agreement and document the process to be followed, the sequence and timing of key steps, and the roles to be played by the Commission and the staff in the selection and vetting of candidates;   develop agreed-upon, detailed selection criteria for PCAOB members and the chairman that fully embrace the principles articulated in the Sarbanes- Oxley Act of 2002;   develop a vetting process that ensures that before an applicant is brought to the Commission for serious consideration, certain minimum background and reference checks are performed to ensure that the individual has no potential legal or ethical impairments and ensure that the vetting process is completed before the Commission votes to appoint members to the PCAOB; and   determine what candidate information should be documented, analyzed, and shared among the Commission and staff.
Why GAO Did This Study

The Sarbanes-Oxley Act of 2002 created, among other things, the Public Company Accounting Oversight Board (PCAOB) to oversee audits of public companies. A divided Securities and Exchange Commission (SEC) appointed the first PCAOB on October 25, 2002. Amid allegations that the SEC Chairman withheld relevant information from the other Commissioners concerning the suitability of the newly appointed PCAOB chairman, GAO was asked to examine SEC's selection process; determine whether the SEC Chairman withheld information from other Commissioners; determine what vetting of candidates took place; and identify what actions led to breakdowns in the process.

What GAO Found

SEC faced significant challenges in vetting and appointing five members to the newly created PCAOB within 90 days. The SEC Chairman, who had overall responsibility for the appointment process, initially, envisioned a process primarily driven by SEC staff. He asked the Chief Accountant to take the lead in selecting and the General Counsel in vetting PCAOB members. However, this approach was not fully understood or endorsed by the other Commissioners. The overall process that emerged was neither consistent nor effective and changed and evolved over time. Several factors contributed to the eventual breakdown of SEC's selection and vetting process, including the inability of the Commissioners to reach agreement on a formalized process that defined the roles to be played by the Commissioners and staff; insufficient communication between SEC staff and Commissioners; and the lack of articulated selection criteria beyond general criteria provided by the act. Finally, inability to choose a final slate of candidates until the eve of the Commission's vote resulted in the appointment of PCAOB members who had not been fully vetted. On the day of the October 25 vote, the Chief Accountant became aware of information concerning Judge William Webster, who was slated to be the chairman of the PCAOB, and his role as the former chairman of the audit committee of a small company--U.S. Technologies, Inc. However, based on his review of available information, his experience as an auditor, Judge Webster's prominence and reputation, and the fact that additional vetting would occur post-appointment, the Chief Accountant deemed that the information would not affect Judge Webster's nomination. He thus decided not to share the information concerning Judge Webster's role at U.S. Technologies with the SEC Chairman, the other Commissioners, or the General Counsel. As Judge Webster's appointment illustrates, the five individuals chosen for the PCAOB were not systematically vetted prior to appointment. After the selection process broke down in early October when the Commission was unable to agree on a consensus candidate for chairman, the General Counsel was forced to initiate the vetting process on a post-appointment basis, a fact which the Commission was made aware of before the October 25 vote. At the time of our review, the vetting process was still ongoing.