The Public Company Accounting Oversight Board (PCAOB) appoints an advisory group known as the Standing Advisory Group (SAG) to provide input on the relevance and appropriateness of its standard-setting agenda. Throughout the year, the PCAOB convenes meetings where the SAG opines on the direction of authoritative guidance on behalf of constituent groups. Our descriptive study provides an overview of the SAG's composition and role in standard-setting and succinctly describes the group members' professional experience since its inception in 2004. Specifically, we examine to what extent the PCAOB assembles the advisory group in consideration of the requirements of the Federal Advisory Committee Act of 1972 (FACA), which mandates appropriate constituent representation on governmental advisory boards. We find that although the PCAOB is not required to meet the requirements of the FACA, the SAG appears to represent an appropriate level and variety of professional experience consistent with other governmental advisory boards.
Data Availability: Publicly available.
The Public Company Accounting Oversight Board (PCAOB; the Board) utilizes an advisory group known as the Standing Advisory Group (SAG) to aid in developing its rulemaking agenda (PCAOB 2003). The American Institute of Certified Public Accountants (AICPA) suggests that the SAG's “purpose is to advise the PCAOB on the establishment of auditing and related practice standards. The SAG is composed of highly qualified persons representing the auditing profession, public companies, investors, and others” (AICPA 2017). However, while the SAG serves as the primary professional assembly to review and discuss issues the PCAOB explores when considering auditing standards, little is known about the advisory group's composition and professional experience since its inception.
To impart a positive influence in regulation, research suggests that the SAG should provide the Board with an independent, competent, and considerate perspective in helping shape the agency's regulatory policies; at the same time, the Board should also give appropriate respect to the SAG's advice while ensuring that the SAG is comprised of the aforementioned attributes (Ashford 1984). To do so, the Board may consider voluntarily adhering to federal legislation that promotes these attributes in the relationship. As noted by Palmrose (2013), while the Securities and Exchange Commission (SEC) and other government agencies are required to follow several federal laws providing oversight on advisory committees, the Sarbanes-Oxley Act of 2002 (SOX) did not extend the federal mandates to the PCAOB. Of these federal laws, the Federal Advisory Committee Act (FACA; the Act) serves as the legal footing in determining how federal advisory committees should operate (GSA 2017). If followed, the guidelines of the FACA provide protection for the public's interest in public company auditing regulation by overseeing the solicitation of policy advice from advisory committees (Palmrose 2013). The Act accomplishes this feat by limiting strong exertion of influence from partial constituencies in the shaping of regulatory policy. Palmrose (2013) suggests that the Board would benefit greatly from giving specific attention to the principles pronounced in the Act when attempting to assemble the SAG.1
Scant academic research exists to address the formation of the PCAOB's regulations; in particular, a gap in the accounting literature exists surrounding the political nature of professional audit standard-setting (Kothari, Ramanna, and Skinner 2010; Malsch and Salterio 2015). In an effort to describe the demographic composition of the advisory group, we explore the following research questions: First, what level of professional acumen have the members of the PCAOB's SAG possessed since its inception? And second, has the composition of the SAG membership exhibited consistent balance over time, as would be required under the FACA if the PCAOB were subject to the Act? Using publicly available data, we assess and document the experience of all PCAOB SAG members on an annual basis from 2004 through 2017. We then partition SAG member experience into four professional experience areas: regulatory, accounting, investment, and other experience. Next, in an effort to address whether and to what extent the PCAOB adheres to the requirements of the FACA, we further classify experience in relationship to the three tenets of fair balance established by Ashford (1984).
Our findings suggest that the PCAOB appears to construct its advisory committee with an assorted range of competent, disciplined, non-allegiant professionals. Specifically, we note the SAG perennially presents the Board with advice stemming from a membership base possessing an array of technical expertise, inclusive of a multitude of viewpoints with constrained organizational bias. To that end, we believe our study makes the following contributions to the accounting standard-setting literature. We explore the structure of the special advisory group that advises the PCAOB on its regulatory endeavors. Further, our findings support that the SAG appears to possess the requisite expertise needed by the PCAOB to promulgate effective regulation. Finally, our research offers an understanding relative to the PCAOB's compliance with a federal law to which most, if not all, other federal agencies must adhere. We believe our analysis fills a gap in the current literature through a unique, contextualized view of the PCAOB's chief advisor group since its inception.
II. PRIOR LITERATURE AND BACKGROUND
The Standing Advisory Group
Through the passage of SOX, the federal government charged the PCAOB with protecting the public's interest in the United States (U.S.) capital market system by strengthening the financial statement audits of publicly-traded companies (Franzel 2014). As stated by Commissioner Luis A. Aguilar, Congress established the PCAOB “to protect the interest of investors and the public interest” (Aguilar 2013).2 Research suggests that an advisory committee is comprised of organizational constituents who are appointed to provide specific perspectives and related advice in an effort to positively influence decision making in the public's interest, at little cost to the government agency (Ashford 1984). The chief special advisory group of the PCAOB, the SAG, is tasked with providing requisite knowledge and professional acumen to aid the regulator in enacting efficient and effective regulation.3
Amid apprehension that advisory committees were exerting undue influence over governmental agencies, Congress enacted the FACA in 1972. The Act was intended to protect the public interest by providing information concerning the purpose, composition, and undertakings of special advisory committees relative to standard-setting within the federal government (Ashford 1984; Croley and Funk 1997). Among other requirements, the Act mandates that advisory committees establish “balanced” membership with respect to constituent viewpoints, duties, and advice.
FACA Fair Balance
The PCAOB maintains that the SAG members possess well-rounded expertise in one or more of the following areas: accounting, auditing, corporate finance, corporate governance, investing in public companies, or other areas that the Board deems to be relevant to professional practice standards (PCAOB 2003). The SAG cohort is a collection of business executives, accounting professionals, academics, and representatives of peer regulators who meet frequently, two to three times annually, to opine on current issues in the audit environment and facilitate development of auditing and professional practice standards (PCAOB 2017a).4
As mentioned above, the FACA defines the operation of federal advisory committees (GSA 2017). According to the Act, government agencies “shall prescribe administrative guidelines and management controls applicable to advisory committees, and, to the maximum extent feasible, provide advice, assistance, and guidance to advisory committees to improve their performance” (U.S. House of Representatives 1997). Ashford (1984) suggests that the fair balance statute has five main goals: robust participation, avoidance of saturation from any specific demographic, inclusion of all constituent groups, inclusion of “non-experts,” and preclusion of domination from biased, private concerns. Ashford (1984) further contends that the mandate can be accomplished by appointing a committee with a balance of competence, discipline, and allegiance. Regarding competence, Ashford (1984) advocates that technical expertise with requisite differences in policy and political matters is the prevailing objective to achieve balance. As a lack of balance can cause deficient consideration of all constituent perspectives, agencies should appoint a host of concerned constituents with wide-ranging viewpoints from varied disciplines. All inherent biases stemming from political and institutional backdrops should be fairly represented on the committee to restrict any categorical bias toward private interests (Ashford 1984). The current study examines whether the composition of SAG membership reflects these criteria.
III. METHODOLOGY AND FINDINGS
We employ the use of content analysis over SAG members' biographical information to explain the experience composition of the advisory group since its inception. First, we obtain a listing of all SAG members on the PCAOB's website for each year of the Board's existence since 2004.5 Next, we extract all biographical information and determine each individual SAG member's professional experience. We then partition SAG members' experience among the following four professional experience areas: regulatory, accounting, investment, and other experience.6
Regarding regulatory experience, we include experience at the following organizations: the AICPA, the Committee of Sponsoring Organizations (COSO), the Financial Accounting Standards Board (FASB), the International Auditing and Assurance Standards Board (IAASB), the International Accounting Standards Board (IASB), the SEC, and the U.S. Department of the Treasury (U.S. Treasury). For accounting experience, we include experience at the following entities: Big 4 public accounting firm, Non-Big 4 public accounting firm, and public companies (excluding publicly-traded investment firms). In addition to examining Big 4 and Non-Big 4 experience, we denote Big 4 partners and Non-Big 4 partners for clarity. For investment experience, we include employment by a state-funded pension plan or institutional investment firm. For the other experience category, we include members with experience in the following areas: academe, Center for Audit Quality (CAQ), Chief Accounting Officer (CAO), and National Association of State Boards of Accountancy (NASBA). Additionally, we include the number of members possessing a law degree and the number of members with the Certified Public Accountant (CPA) or Chartered Financial Analyst (CFA) designations in the other experience category.7
SAG Member Professional Acumen
Due to the PCAOB's role as a regulator, standard-setting experience from other accounting regulatory bodies on the SAG is arguably the most important with respect to protecting the public interest. We note varied experience involved in the SAG from the PCAOB's peer regulators. For example, the SAG has benefitted from AICPA experience annually, with the exception of 2007 to 2011 (9 of 14 years overall), including three years where the chair of the organization was a member (2012 to 2014). Further, COSO experience has maintained a presence for 12 of 14 years, where the chair was involved in the SAG from 2012 to 2016. Experience from the PCAOB's peer accounting regulator in the U.S., the FASB, has been prevalent on the SAG since 2008 (10 of 14 years overall), with a high of six members with FASB experience in 2012, 2013, and 2016.
We note the SAG members have possessed experience from the international regulators, the IAASB, from 2004 until 2007 and then from 2012 through 2017 (9 of 14 years overall) and the IASB, in 8 of 14 years overall; however, no member has held this particular expertise on the SAG in the last four years. Since 2012, at least two members of the SAG have possessed expertise from the U.S. Treasury and at least four members have had significant experience with the SEC. Additionally, the Chairman of the SEC was a member of the SAG during 2013, 2014, 2015, and 2017.9
We find that members of the SAG have possessed some form of accounting expertise, including both public accounting and public companies, each year since the group's inception. Specific to public accounting's vast representation on the SAG, we find that the SAG has included members with Big 4 experience (Deloitte, Ernst & Young, KPMG, and PwC, as well as Arthur Andersen) and, to a lesser extent, Non-Big 4 experience every year. Since inception, the SAG has included at least 11 former or current Big 4 employees, with a high of 24 in 2012. Further, a Big 4 partner (current or former) has been present on the SAG annually since 2004, with a high of seventeen current or former partners on the SAG in 2012. Regarding Non-Big 4 experience, the SAG has benefitted from the experience of at least two members annually (with a high of eight in 2014) and Non-Big 4 partners consecutively since 2009, with a high of six from 2012 to 2014. Related to publicly-traded companies, we note the SAG maintains an average of nine members with this specific experience on an annual basis.
Relating to investment experience, the SAG has held active representation annually from 2004 through 2017 from a variety of state pension funds (most notably CalPERS and WisconsinPERS). The SAG has also benefited from the experience of institutional investors each year, which includes experience from institutions such as BlackRock, Merrill Lynch, and TIIA-CREF.
SAG members possessing a law degree have been part of the group consecutively since 2004. We also note members with CAO experience annually, reaching a high of four members in 2009 and 2010. Further, academicians have held annual appointments on the SAG (reaching a high of four in 2004, 2005, and 2016 as well as at least three in each of the last four years). Experience from the CAQ (founded in 2007) has also been present on the SAG since 2010 with a high of four members in 2015 and 2016.
FACA Fair Balance Requirements
In an effort to further address whether and to what extent the PCAOB adheres to the requirements of FACA, we further explore experience in relationship to the PCAOB's finalized auditing standards (AS), where we examine the SAG's composition with respect to the duration of the standard-setting process for each standard. For purposes of our discussion, we focus on the PCAOB's last four finalized auditing standards (AS No. 16, AS No. 17, AS No. 18, and AS No. 19); however, we include all finalized auditing standards in Table 2.10 As a result of restricting our discussion on the last four finalized auditing standards, we cover the SAG's experience and balance for the years 2010–2017. We choose to emphasize these PCAOB auditing standards to allow time for the PCAOB to develop a consistent approach to the nomination and selection process as well as foster some continuity for the SAG.
As depicted in Table 2, we arrange SAG member experience in a fashion that best represents balance among the attributes of competence, discipline, and allegiance. As discussed above, Ashford (1984) advocates that special advisory groups achieve a balance of competencies by representing an array of technical expertise among their members. Relative to expertise in standard-setting, we slate six organizational experience attributes for competence balance: the AICPA, COSO, the FASB, the IAASB, the IASB, and the NASBA. The AICPA is the progenitor of audit standard-setting in the U.S. and continues to produce audit regulation for privately-held companies. Further, COSO has played an instrumental role in the development of internal audit policies and procedures while the IAASB promulgates international public company auditing regulation. Experience with the FASB and IASB impart financial accounting standard-setting expertise on both the domestic and international fronts. Lastly, the NASBA has an interest in vetting the professional standards for which the state boards are responsible for enforcing.
Table 2, Panel A presents the fair balance related to competence as measured by the AICPA, COSO, FASB, IAASB, IASB, and NASBA memberships. Concerning AS No. 16 (AS 1301), we find robust experience from the COSO, FASB, IASB, and NASBA (PCAOB 2012). Relative to AS Nos. 17 (AS 2701) and 18 (AS 2410), we note robust participation in all areas from 2011 through 2014, when AS No. 18 was finalized by the PCAOB. Regarding AS No. 19 (AS 3101), we find mostly full participation from four of six members from inception to finalization of the standard, with the exceptions belonging to the IASB and NASBA (PCAOB 2017b).
With regard to accounting regulation, we first consider that the two precepts of expertise and perspective are naturally interwoven; however, in keeping with Ashford (1984)'s distinction, we note that discipline balance hinges on the ability of an agency to appoint a host of viewpoints ––inclusive of a variety of backgrounds and practices. In considering balance for discipline, as detailed in Table 2, Panel B, we group six experience attributes for SAG members: academe, Big 4, CAO, Non-Big 4, publicly-traded company, and law degree. We believe measuring the balance of discipline is appropriate within these experience parameters because they are inclusive of all accounting professionals that are most likely to represent differing philosophical viewpoints. We note robust discipline representation throughout the duration of standards AS Nos. 16 (AS 1301), 17 (AS 2701), 18 (AS 2410), and 19 (AS 3101).
Again, clear-cut organizational bias can produce regulation vested in private interests (Ashford 1984). Table 2, Panel C presents the fair balance related to allegiance. With regards to the PCAOB's special advisory group allegiances, we select six institutional experience attributes to examine balance, which includes experience as partners from the Big 4 and Non-Big 4 as well as current or former agents from the U.S. Treasury, the SEC, state pension funds, and institutional investors. Related to AS Nos. 16 (AS 1301), 17 (AS 2701), and 18 (AS 2410), we note fairly high levels of experience participation from each of the buckets, with the exception of the U.S. Treasury representative during AS No. 16 (AS 1301). We also note robust representation across all six areas during the relevant years of the formation of AS No. 19 (AS 3101), which is important because this auditing standard most likely represents the most highly contentious authoritative guidance the PCAOB has issued within the last decade.11
As discussed above, the PCAOB utilizes an advisory group known as the SAG to aid in developing its rulemaking agenda (PCAOB 2003). We believe examining the professional experience of the PCAOB's advisory group membership is integral to ascertaining whether the Board voluntarily follows important guidelines to protect the public's interest as well as determining the level of professional acumen the PCAOB has at its disposal in developing auditing regulations. Currently, no research exists that explores the profiles of the PCAOB's standard-setting advisory group. As such, our study provides an overview of the SAG and succinctly describes the group's professional experience. Further, our study considers whether and to what extent the PCAOB assembles the advisory group in consideration of the requirements set forth in the federal government's FACA statute, which mandates appropriate constituent representation on governmental advisory boards.
Achieving fair balance of committee members' experiences under the FACA is understandably a daunting task for any federal agency. Glover, Prawitt, and Taylor (2009) purport that a major obstacle in public company audit standard-setting relates to the PCAOB's reluctance to leverage the AICPA's rulemaking expertise. While this may be true at certain levels of the PCAOB's standard-setting agenda, our findings suggest that the Board does, in fact, include a diverse continuum of competent, disciplined, non-allegiant professionals to aid in the development of its regulatory endeavors. The main implication of a diverse continuum is, presumably, better decision-making and advisory functions related to PCAOB activities. Consistent with this area of research, this study's main limitation includes the risk that publicly-available data will not capture all memberships and experience details. Therefore, the possibility remains that actual experience and membership by SAG members is understated in the study.
Given the importance and relevance of insight from special interest groups regarding accounting regulation, a host of ideas for future studies exists. Future research may consider the role of the SAG in the PCAOB's recent standard-setting projects (e.g., the Auditor's Reporting Model and Transparency/Form A.P.), the changing role of the SAG over time since its inception, the social networking implications related to past and current SAG members, or the role of the IAG. Overarching, the noted gap in the extant literature pertaining to how the PCAOB develops its auditing standards lends credence to the need for future research to address the standard-setting process in its entirety.
Of note, while the PCAOB employs an annual nomination and vetting process for SAG membership, participation is voluntary and cannot be delegated.
The public interest has been defined by the International Federation of Accountants (IFA) “as the net benefits derived for, and procedural rigor employed on behalf of, all society in relation to any action, decision, or policy” (IFA 2012). However, many scholars have pointed out that the term “public interest” is often vague and difficult to interpret (Nickell and Roberts 2014; Baker 2005; Neu and Graham 2005; Sikka, Willmott, and Lowe 1989).
The PCAOB also utilizes a second advisory group, the Investor Advisory Group (IAG) but to a lesser extent than the SAG. The IAG has historically met only eight times since its founding in 2010. Due to the IAG's limited activity as compared to the SAG's, we have chosen to focus exclusively on the SAG in this study.
We obtained this data from the PCAOB website, PCAOB annual reports, SAG meeting transcripts, SAG press releases, LinkedIn profiles, and applicable company websites related to individual SAG members.
Due to the nature of SAG members' experience, some overlap between the categories is evident.
Our data collection efforts did not yield significant instances of the Certified Internal Auditor (CIA), Certified Management Accountant (CMA) certification, or Governmental Accounting Standards Board (GASB) experience; as a consequence, we do not discuss these characteristics in the main analysis.
It is important to note that members serve three-year terms; as such, individual observations between years are not independent.
We note that the PCAOB has granted observer status to certain organizations (e.g., Department of Labor, Financial Industry Regulatory Authority [FINRA], and the Government Accountability Office [GAO]) over the life of the SAG. However, this access appears fluid as well as unofficial as it pertains to specific individuals and specific calendar years; as a result, it was not possible to gauge consistent participation from these groups through PCAOB acknowledgement alone.
The PCAOB does not reference “The Auditor's Reporting Model” standard in an official capacity as “AS No. 19.” However, for consistency with the numbering system of the Board's previously issued auditing standards, we refer to this standard as No. 19 (PCAOB codification 3101) in the study.
While representation with respect to fair balance of allegiance appears balanced in terms of years, representation from the Big 4 is considerably larger than their Non-Big 4 counterparts. However, it is important to acknowledge that the Big 4 perform the audits for approximate 91 percent of the SEC's 1,960 large accelerated filers and approximately 46 percent of the 6,167 total public registrants of the SEC (Audit Analytics 2018).
The authors wish to thank The University of Mississippi's John Jars Ely and Ball State University's Emily Mosier and Taylor Blevins for their respective assistance in data collection. We owe special thanks to Lisa Milici Gaynor (editor) and two anonymous reviewers. We gratefully acknowledge support from Bentley University's FAC grant as well as the helpful suggestions of Lori Shefchik Bhaskar, Erin Burrell Nickell, and Jay Thibodeau.
Editor's note: Accepted by Lisa Milici Gaynor.