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The SEC has scheduled an open meeting for next Wednesday to “discuss” the PCAOB’s internal controls auditing standard (AS #5) and the SEC’s own management report proposal. Based on the wording of the SEC’s announcement, it doesn’t seem like they will adopt anything – rather, the Commissioners and Staff will discuss the comment letters received to date (including the oft-mentioned alignment of the PCAOB’s and SEC’s proposals) and approaches available to the SEC. The SEC seems “on plan” to adopt something by May.

Maybe my memory is foggy, but I don’t recall an open Commission meeting being held during which rules were not being proposed or adopted. In the past, these were fairly scripted affairs (but not as much over the past several years) and a discussion like this one would be conducted behind closed doors. Maybe its driven by a desire to ensure the standards are harmonized without treading on some “government in sunshine” restrictions about the SEC’s dealings with the PCAOB…

The FASB’s Appointment Process

Yesterday’s WSJ included this article on recent changes to the selection process used to select members of the board of trustees for the Financial Accounting Foundation (FAF) and the Financial Accounting Standards Board (FASB). The article recounts the back and forth between the SEC and the FAF over how much power the SEC should have regarding the selection process at the FASB.

You might recall that Section 108 of Sarbanes-Oxley gave oversight power to the SEC over the FASB – and the SEC outlined its role in a 2003 policy statement. In that statement, the SEC said that, given its oversight responsibilities, the FASB should give the SEC “timely notice of, and discuss with the Commission” its intention to appoint new members. According to the article, “timely notice” became an issue for the SEC in recents months and an agreement reached this month defines “timely” as generally 45 days but not less than 30 days before the FAF nominates members to its board or FASB members.

Critics of the SEC’s oversight power worry that the SEC could hold reappointment over the heads of FASB or FAF members while important votes are being considered. They also point to the fairly recent experience at the PCAOB, where some appointments by the SEC were not made very timely (and eventually made when votes on significant issues were on the table).

A Closer Look: SEC Chief Accountant Conrad Hewitt

Yesterday, the Washington Post ran this interesting article about relatively new SEC Chief Accountant Conrad Hewitt.

E&Y Censured Over Independence (Again)

On Monday, the SEC announced a $1.5 million settlement with Ernst & Young relating to alleged independence violations for its work at two clients, AIG and PNC Financial, in 2001. You might recall that E&Y had been censured just a few years ago for its PeopleSoft audit because E&Y’s consulting arm profited from recommending PeopleSoft software to customers.

Here are some thoughts from Lynn Turner: “Some in the auditing profession argue investors should rely on an audit firm itself to assess its independence and put in place safeguards if it is questioned. The three cases cited in this WSJ article regarding E&Y in recent years strongly arues against any such approach. Interestingly enough, in April 2001, the partner then in charge of the E&Y national office declined a request to meet with the SEC staff to discuss progress that E&Y was making in instituting a system to ensure its independence on a global basis, citing he did not need anyone at the SEC telling him what the independence rules were. (The other 7 largest firms accepted such an invitation).

It is also interesting an E&Y partner is a leader of the current effort to obtain what is in essence, an indemnification of auditors by their clients. Certainly, these are matters of concern for investors and audit committees.”