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Atkins Advocates Tighter PCAOB Oversight

In remarks last month to the Federalist Society, SEC Commissioner Paul Atkins discussed what he sees as the SEC taking "too light a hand" in the drafting of the PCAOB's standards. Atkins said it is incumbent on the SEC to ensure that the PCAOB does its job right in its revision of Auditing Standard No. 2, and to insist upon modifications if it is not satisfied with the result. This may require the use of the SEC's oversight powers, which Atkins characterized as "untried and somewhat unwieldy." His speech was posted on the SEC's Web site.

Once the PCAOB adopts a revised AS2, Atkins said the SEC must be vigilant to ensure that the PCAOB staff interprets it in a manner consistent with the spirit of the revisions. Atkins said the SEC abandoned plans for what he referred to as "Regulation PCAOB" which would have formalized the SEC's oversight powers. He explained that the PCAOB's former chairman, William McDonough, complained to then SEC Chairman William Donaldson that Regulation PCAOB would give the SEC staff undue authority over the Board's operations. Atkins said that McDonough compared the organizations' relationship to that of cousins, but Atkins suggested that more stringent oversight or more clear statutory language would define it as parent-child.

Atkins believes the SEC should have a structure in place to oversee PCAOB staff interpretations. The PCAOB intends to issue staff guidance which is not based on formal guidelines and is not subject to public input, according to Atkins. He cited, for example, the PCAOB's staff audit alert on accounting for option grants. Atkins said that a footnote in the alert appears to address the legality of options granting practices, which he believes is outside the PCAOB staff's purview. The SEC has no opportunity to change the guidance, he added, which is why he supports a formal structure to define the SEC's relationship with the PCAOB. Atkins said he looks forward to working with PCAOB Chairman Mark Olson on this and other initiatives.

Atkins also addressed the ongoing debate about the waiver of attorney/client privilege in connection with enforcement actions. The Department of Justice has come under criticism for its 2003 memorandum, issued at the height of the corporate and accounting scandals, that provided guidance on when to indict a corporation. Critics of the memorandum have said that the memo's purpose was to encourage cooperation, but it may also be used to coerce the production of protected information. The Department of Justice last year required all U.S. attorneys to adopt written waiver request procedures, according to Atkins, which generally require that waiver requests be approved by a U.S. attorney or a senior supervisor.

Atkins noted that the U.S. Sentencing Commission, which added waivers to its cooperation guidelines in 2004, recently voted to drop the condition as a factor in evaluating cooperation. The Department of Justice may soon reconsider its current policy given the calls for reform by the Senate Judiciary Committee and others, he said. Atkins added that, while the focus has been on the DOJ, the SEC has also received attention for its cooperation guidelines. He believes it is important for the SEC to review its staff's policies and procedures periodically to ensure that they are consistent with the Commission's standards.

The SEC's Seaboard report, which reflects the factors the SEC will consider when determining whether to credit a corporation for cooperation, does not list the waiver of privilege or work product protection as a factor, according to Atkins. The report only refers to waivers in a footnote to one of the listed factors. Atkins said he does not believe the SEC should view the waiver of privilege as a factor in giving credit for cooperation. He said it may be time to formally revisit the issue to clarify that a waiver will not affect the allegations or remedies.

The knowledge that internal investigations may not be privileged may undermine their usefulness, in Atkins' view. He said any demands made by staff examiners that broker-dealers or investment advisers waive their privilege is not based on the direct supervision of the Commission. Atkins would take a critical view of such requests and would question their appropriateness. It may be time to review internal policies and procedures related to staff requests for protected information, he added. Even if such requests are rarely made, Atkins raised the question of whether they should first be vetted by senior personnel such as the general counsel.