February 6, 2012

SEC Names GAO Auditor to PCAOB Board - But Aguilar Dissents!

On Friday, the SEC announced that it had replaced outgoing PCAOB board member Dan Goelzer (the last remaining "founding" board member) with Jeanette Franzel, who currently "leads all aspects of GAO's financial audit oversight of the U.S. federal government." The SEC's press release included welcomes from Chair Schapiro and Chief Accountant Kroeker. But in the first of its kind, as noted in this Reuters article, SEC Commissioner Luis Aguilar issued the following separate dissent:

Today, the Commission has failed to fulfill its legal obligation. It has appointed a member to the Public Company Accounting Oversight Board ("PCAOB") who has no demonstrable record of investor advocacy. Thus, the Commission has failed to satisfy its basic statutory mandate to appoint an individual who, among other factors, has "a demonstrated commitment to the interests of investors. Accordingly, I do not support and must respectfully dissent for the reasons outlined below.

Congress established the PCAOB in response to scandalous audit failures, like Enron and WorldCom, that cost investors billions. In doing so, Congress entrusted this Commission with the significant responsibility of appointing the members of the PCAOB. In exercising this responsibility, the Commission is required to abide by the statutory criteria to appoint individuals "who have a demonstrated commitment to the interests of investors."

My objection to this appointment is based on the fact that the Commission must appoint individuals who have "demonstrated commitment to the interests of investors." This is not the case here. Although the appointee is an experienced government auditor, and I appreciate her years of service, there is nothing in the evidentiary record that reflects a commitment to the interests of investors, or a history of advocacy for investor rights. I believe the Commission is bound to appoint an individual whose actions, public statements, and reputation demonstrate a clear and steadfast advocacy of the rights and interests of investors.

In reaching this decision, I considered many factors in the evidentiary record, including the professional biographies of each of the finalists for this position, my own interviews with the candidates, and the candidates' published writings and remarks. I also considered the many letters received by the Commission from investors, respected members of the accounting profession and academic community, members of Congress, and others who supported the appointment of an investor advocate.

I also reviewed comment letters previously submitted to the PCAOB by the finalists for this position. In that connection, I was struck that not once in any of the four letters signed by today's appointee, discussing topics such as the engagement quality review and risk assessment, was there any mention of the interests of investors. In fact, the word "investor" was not mentioned.

This appointment is being made at a critical time for the PCAOB. There is much at stake. The recent financial crisis exposed an auditing process that continues to be seriously flawed. In response, the Board has embarked on various projects to enhance the relevance, credibility and transparency of audits, including important initiatives on auditor independence, audit transparency, and the auditor reporting model. The success of these projects will require a Board fully committed to investors as the owners of public companies, the providers of capital, and the primary beneficiaries of financial statements.

I believe that the Commission has failed to meet its obligation to appoint an individual with "a demonstrated commitment to the interests of investors. Unfortunately, as a result, I am forced to dissent.

Carlyle Drops Forced-Arbitration Clause In IPO

After heavy criticism - as noted in this WSJ article - the Carlyle Group abandoned a plan to ban shareholders from filing class-action lawsuits, a plan that could have delayed the private-equity firm's IPO. Here is my blog from two weeks ago noting the criticism.

More on our "Proxy Season Blog"

We continue to post new items regularly on our "Proxy Season Blog" for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

- A Closer Look at Proxy Access Proposals
- Should Annual Meetings Be Held Less Often?
- A Tipping Point for Social and Environmental Issues?
- Survey on Shareholder Proposals
- 2011 Proxy Season Review: United Kingdom

- Broc Romanek