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. Last Updated: 07/27/2016

New SEC Plan Resembles Old

The U.S. Securities and Exchange Commission was set to vote Thursday on a new oversight system for corporate auditors that has much in common with the old system discredited by the collapse of Enron Corp.

The new structure, to be called the Public Accountability Board, would have the power to discipline auditors of publicly traded companies, review the work of audit firms and set the standards by which auditors do their jobs. While only three of the nine members could be accounting professionals, accounting firms would continue to play a major role in reviewing the industry.

In the short term and possibly permanently, the new board would probably delegate responsibility for setting auditing standards to the accounting industry group that currently sets such standards, the American Institute of Certified Public Accountants, SEC officials said Wednesday.

The plan is largely the brainchild of SEC chairman Harvey Pitt, a former attorney for the accounting industry. It is a key element in the U.S. government's effort to shore up investor confidence rattled by Enron's bankruptcy and a continuing barrage of reports about accounting missteps by major corporations.

The proposed board "will create for the first time in this country's history a vigorous regulatory oversight of the accounting profession that is independent, transparent, effective and swift," Pitt said Wednesday through an aide.

But some experts said the new board offers little if any improvement over the current system.

"This looks like more of the same," said Peg O'Hara, managing director of the Council of Institutional Investors, a trade group for large pension funds. "We prefer legislation to an industry-dominated structure. What have we had? The industry policing itself, and that hasn't worked."

"I think the big firms will basically control" the board the SEC is proposing, said Charles Bowsher, who headed the industry-sponsored Public Oversight Board that the SEC is seeking to replace. Bowsher said the industry representatives, though a minority, could still dominate the board because they would have the resources of the accounting industry at their disposal. He said that "over the years they got more and more control over" the old system.

While many members of Congress are seeking to create a new system through legislation, such as a bill advanced this week by the Senate Banking Committee, Pitt and the administration favor SEC action under existing law.

If approved, as SEC officials expect, the plan would undergo a 60 day comment period before taking effect by the end of the year. The SEC plan would be in force if Congress cannot agree on reforms.

Although the Senate bill calls for the SEC to appoint the members of a new oversight board for auditors, the SEC would rely on private-sector groups, such as the accounting industry, to create a board following a framework prescribed by the agency. The SEC would have the power to reverse board actions and remove board members.

Companies listed on the stock markets and the accounting firms that audit them would be required to submit to such a board's authority and contribute to its funding.

The SEC's plan would replace the industry's current peer-review system, in which accounting firms' auditing procedures are periodically evaluated by rival firms.

Pitt said in a recent interview that that system "doesn't inspire a great deal of confidence as far as I'm concerned." Pitt described it as "You watch my back, I'll watch yours."

According to the SEC, the proposed oversight board would supervise future reviews but could farm out much of its work to accounting firms. "Those are incremental steps from the process that exists today," said Samuel Burke, an official in the SEC's office of the chief accountant.

No major accounting firm has ever failed such a review. Deloitte & Touche gave Enron's auditor, Arthur Andersen LLP, a passing grade late last year even though it found some persistent shortcomings.