PCAOB Members Approve Proposed Budget, With Reservations

By:
Chris Gaetano
Published Date:
Nov 17, 2016
Cash

While the Public Company Accounting Oversight Board (PCAOB) approved its proposed budget of $268.5 million, 4.2 percent higher than last year's, several members expressed reservations, not so much because they're opposed to more money but because they felt there needs to be more study on the effectiveness on the programs and operations on which that money is spent. 

The PCAOB budget, which must be approved by the Securities and Exchange Commission, passed by a 4-1 vote, with board member Jay D. Hanson being the sole dissenter. Hanson was uncomfortable with the board setting what he called a new high-water mark. He pointed out that even though the proposal itself is 4.2 percent higher than last year, it's 6.2 percent higher than what the PCAOB actually expects to spend this year. Part of this increase is that the proposed budget calls for 30 additional staff members. Hanson pointed out that staff levels at the PCAOB have increased dramatically over the past five years, when only 600 people worked for the board; the proposed 2017 headcount of 876, he said, would represent a 46 percent increase.

"Before we support further growth in headcount, we should take a close look at our current staffing levels, staff utilization and mix of activities. For that reason, I would have preferred that the 2017 budget not include an increase of the existing headcount at the end of 2016, and I question whether an increase of 30 staff above our average level in 2016 is necessary," said Hanson in his opening remarks. 

He also expressed concern over the growth of the Economic Risk and Analysis program area, which would increase by 17 percent under the proposed budget. While Hanson reiterated his support for stronger economic analysis in standard setting, he said the board has still not reached consensus on the appropriate scope of the program, and has not examined whether further efficiencies can be gained there. 

"In light of limited resources, I believe we should have taken a closer look at whether the return on investment on some of these activities – particularly in the area of academic research – is appropriate, including whether there are other, less resource intensive ways to foster the research," said Hanson. 

Even those who supported the budget did so hesitantly, for many of the same reasons Hanson brought up. For instance, while board member Jeanette Franzel voted in favor of the proposed budget, in her opening remarks she said she only did so with "great reluctance." She, too, was concerned that there has not been enough meaningful evaluation of program priorities and operations, or of the base starting point for the proposed 2017 budget. 

"As an organization, however, we have already passed the point where we need to evaluate our progress and approaches to make any adjustments needed to help ensure that PCAOB effectively achieves its mission with good stewardship of its resources. I believe that we should hold the line on our budget until we conduct a fundamental review of PCAOB resources, program operations, and overall staffing," said Franzel in her opening remarks. 

Board member Lewis Ferguson, similarly, voted for the proposed budget with what he said are misgivings. He acknowledged that the board's responsibilities have expanded over the years, for example by being made responsible for broker-dealer audits as part of the Dodd-Frank Act. Despite this, he felt there needed to be more analysis over how effectively the money it already has is being spent. 

"The need for additional resources is best demonstrated when it is supported by periodic baseline analysis to determine the efficiency and effectiveness of existing operations, including an examination of staffing levels and resources allocation. Before seeking additional resources, the Board needs to be confident that its existing resources are fully and efficiently utilized and that needed tasks cannot be accomplished without greater resources," he said. 

He suggested an analysis of staffing levels and employee allocation within and among divisions and offices, as well as a clear and coherent compensation philosophy, saying that only with an understanding of current PCAOB operations can the board effectiveless assess the resources it needs to carry out its mission. This type of analysis, he said, doesn't need to be conducted every year, but should be undertaken periodically and, at the very least, be part of this budget process. 

Chair James R. Doty, as well as board member Steven B. Harris, were more sanguine about the proposed budget. While Doty acknowledged that the proposed budget was 4 percent higher than last year, he said this was not a growth budget. 

"The 4 percent dollar increase over the 2016 Budget reflects the full-year cost of
recent hires; rent payments, standard annual benefit and compensation adjustments
and other administrative expenses. The increase also reflects mission-critical increases in information technology and travel for inspections. On the other hand, some cost categories are decreasing, reflecting savings and efficiencies we’ve achieved with experience," he said. 

He also said that the board is going to be inspecting in more jurisdictions than ever before, and will be facing growing enforcement challenges that undermine investor confidence. He noted that there are persistent inspection findings of significant audit deficiencies too. 

With the proposed budget's approval, it now goes to the SEC for evaluation. 

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