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The Securities and Exchange Commission on Thursday voted to consider a proposal that would create a Public Accountability Board that would mark the end of self-regulation in the accounting industry. Expected to be created by the end of the year, the PAB would be a private sector-led but SEC-supervised entity that would either set or oversee the establishment of professional audit, quality control and ethics standards for auditors. In addition, the board would have the ability to discipline companies and individuals for deficiencies in any of those three areas. The PAB would have nine members. There are also competing congressional efforts to establish an accounting oversight board. The Senate Banking Committee approved a bill Tuesday in a 17-4 vote. The House passed its own reform bill in April. Both bills would create a five-member board. The SEC has said it does not want to wait until Congress passes legislation for a board to be created but said it would defer to any plan adopted by Congress. The SEC’s PAB would have no fewer than six of those members considered “public” — either investors or individuals who work for SEC-registered companies. The board would have no more than three members who are accountants or retired from the profession. They would be barred from voting on disciplinary matters. The board’s funding would come from membership fees paid by public companies and accounting firms, which must subject themselves to the PAB’s authority or be banished from the industry. “Our proposal will help restore investor faith by ensuring strong and effective regulation of the accounting profession,” SEC Chairman Harvey Pitt said Thursday. “In putting forth this proposal, we begin a process that ensures real change before year’s end.” But the SEC board’s formation isn’t without controversy. For one thing, the PAB could permit auditing standards to be delegated to the American Institute of Certified Public Accountants, the profession’s trade group that operated the now defunct regulatory body known as the Public Oversight Board. In addition, the PAB proposal would permit the establishment of competing boards. The SEC will put the rules out for a 60-day comment period. While the New York Stock Exchange and the Securities Industry Association have thrown their support behind the creation of the PAB, some accountants are skittish. Bruce Rosen, partner in charge of New York-based Eisner’s audit practice, said he has concerns about the PAB’s membership. He wonders how a board dominated by the public would have the know-how to regulate accounting firms. “The SEC is going to give the board a lot more power than the old Public Oversight Board ever had,” Rosen said. “The question is how they will use that power. I’m really concerned that they won’t have an understanding of the profession.” The Senate bill approved Tuesday is significantly more stringent in its proposals to police the accounting industry than the House’s legislation, but both have provisions vastly different from the SEC’s proposal. For example, both bills create a five-member board. The Senate’s measure requires that three of the five members be from outside the accounting industry. The SEC’s PAB would conduct its disciplinary proceedings publicly, while any board created by the Senate bill would not. The House-created board, meanwhile, would have two members in the accounting profession, two directors that have not been accountants for the past two years and one member that has never been a practicing accountant. The next phase of the SEC’s accounting-related rulemaking is a proposal related to auditor independence, said Robert K. Herdman, the SEC’s chief accountant. The rule would address requirements related to audit committees, audit partner compensation and the adequacy of the SEC’s current independence rules adopted in 2000. Herdman said those rules should be finalized by mid-summer. �Copyright 2002, The Deal, LLC. All rights reserved.

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