Extended (Board)walk: Should the PCAOB Permit More CPA Elections?

At the turn of the 21st century, WorldCom and Enron accounting scandals threatened the sanctity of the once prideful “self-regulating” world of financial reporting, but as the German philosopher Friedrich Nietzsche once wrote, “out of chaos, comes order.” Enter Sarbanes-Oxley.

The Sarbanes Oxley Act of 2002, among many other legislative additions, created the Public Company Accounting Oversight Board (PCAOB). The PCAOB sought to oversee the audits of public companies in order to protect the investors and the public interest by promoting informative, accurate, and independent audit reports. The board was designed to be comprised of five members appointed by the Securities and Exchange Commission (SEC), serving staggered five year terms. Two board members, and only two, were to be Certified Public Accountants (CPAs). If the PCAOB Chairman was a CPA, he or she must not have been a practicing CPA for at least five years prior to being appointed to the board.

Currently, with the recent departure of board member Jay Hanson, the PCAOB has only one sitting board member that is an active CPA, Jeanette Franzel. At the recent 36th Annual SEC and Financial Reporting Institute Conference hosted by the University of Southern California, Franzel spoke of the need for more board members with financial and accounting experience necessary to navigate the convoluted world of modern day financial reporting. Such a statement calls into question whether the independence driven rule of Sarbanes-Oxley (limiting the board to two CPA’s) could be hindering the credibility of the organization it itself created.

Implementation of the FASB’s accounting standards updates (Financial Instruments - Credit Losses (Topic 326); Leases (Topic 842); Revenue from Contracts with Customers (Topic 606)) require increased judgement by preparers and a better understanding of the issues by board members. It is time for the PCAOB to better balance the need for a CPA’s knowledge and experience on the board without compromising on the need for complete independence and objectivity. The board should permit additional CPAs that have been out of public practice for a determined period of time. It is time to consider amending the PCAOB’s requirements and permit additional CPAs to serve as board members.