The PCAOB and tax services.

• Author: Goelzer, Daniel L.
• Position: Public Company Accounting Oversight Board

1. Introduction

   With surprisingly little debate, and in the space of only a few weeks during June and July of last year, Congress changed the legal and regulatory framework in which U.S. public companies operate. On July 30th, when President Bush signed the Sarbanes-Oxley Act of 2002, he described it as "the most far-reaching reform of American business practices since the time of Franklin D. Roosevelt."

   I think that is an accurate assessment. The legislation resolves issues that have been debated since the federal securities laws were originally enacted back in the 1930s, including such controversial questions as--

   * Should the auditing profession be subject to formal oversight?

   * What personal responsibility--and liability--should senior management and corporate directors have for the accuracy of the financial statements in SEC filings?

   * What is the proper relationship between the board, the audit committee, management, and the company's auditor?

   The center-piece of the Sarbanes-Oxley Act is the creation of a new organization--the Public Company Accounting Oversight Board. This morning, I wish to describe the Board's responsibilities and how it will affect public companies and their auditors. One aspect of the Board's work that may have special effect on those in this room is whether the Board will use its authority to establish ethics and independence standards for public accounting firms to limit tax services. I want to share some thoughts about that question. Of course, the views I express are solely my own and not necessarily those of the Board or any of its other members.

2. How Did We Get to Where We Are?

   The Sarbanes-Oxley Act transforms the accounting profession from one principally subject to voluntary self-regulation to one that is the focal point of a new federal oversight structure. How did this occur?

   Sebastian Junger's recent bestseller introduced into our language the phrase "a perfect storm" to describe some rare combination of factors that lead to an unprecedented event. The enactment of the Sarbanes-Oxley Act was the result of "a perfect storm." We could talk all morning about the factors that led to the Sarbanes-Oxley Act.

   One was the loss of public confidence in financial reporting. There was a series of high profile cases, corporate failures, and SEC investigations that called into question public company financial reporting. Enron and WorldCom were the most prominent examples. But, there was a long litany of other well-known companies that were either the targets of SEC financial reporting cases or had announced that they were under investigation--Adelphia, Xerox, Waste Management, Microsoft, Tyco, and AOL, to name only a few. Last fall, an SEC official stated that, since October of 2001, the Commission had opened 122 financial reporting investigations--a record for that period of time.

   A second, closely-related factor was the loss of public confidence in the auditing profession. The Arthur Andersen verdict and the break up of that firm were the most dramatic contributors to that loss. But in every case in which public company financial reporting was an issue, the question inevitably arose, "Where were the auditors?" Bills to impose more direct regulation of the auditing profession had been percolating through Congress for years. The crisis in confidence in financial reporting made that a reality.

   A final factor was the loss of something even more politically potent than a loss of public confidence--the loss of the public's money. Between the middle of April 2002 and July 14, when the Senate took action on its version of the Sarbanes-Oxley legislation, the market--as measured by the Dow Jones Industrial Average--lost 16 percent of its value. Congress was hearing from its constituents that their savings (particularly their retirement savings) were evaporating and many viewed the financial reporting scandals as part of the cause.

   How did Congress react? By June of last year, the legislators were debating how, not whether, to regulate the accounting profession and to restricted non-audit services. By mid-July, that same bill contained a panoply of new provisions touching on many different aspects of corporate governance and corporate financial reporting. The expanded bill passed Congress with only three negative votes.

3. The Role of the PCAOB

   A comprehensive review of the provisions of the Sarbanes-Oxley Act would occupy most of the morning. Instead, I want to focus just one aspect--Title I, which creates the Public Company Accounting Oversight Board.

   The Act established the Board to oversee audits that are required by the securities laws. The statute provides that the Board's mandate is to protect the interests of investors and to further the public interest in the preparation of informative, accurate, and independent audit reports for companies the securities of which are held by public investors.

   The Board is a not a government agency, and its members and employees are not government employees. Instead, it is a private, non-profit...