Restoring Public Trust in Accounting

An Interview with SEC Commissioner Harvey J. Goldschmid

By Tracey J. Niemotko

In Brief

Optimism at a Critical Juncture

SEC Commissioner Harvey J. Goldschmid, whose statements are often used as a touchstone in the accounting profession, talks about the SEC, the Sarbanes-Oxley Act, the Public Company Accounting Oversight Board (PCAOB), accounting reform, and the accounting profession’s future. Despite the PCAOB’s rough start, Commissioner Goldschmid sees a positive future for the board and its mission of restoring the public’s trust and confidence in accountants. He shares his view of the profession’s importance, as well as an assessment of the profession’s values.

Harvey J. Goldschmid, JD, has served as an SEC Commissioner since 2002. He is on leave from the Columbia University School of Law, where he has taught since 1970 and served as Dwight Professor of Law since 1984. Goldschmid previously served as SEC General Counsel, and in 2000 he served as Special Senior Advisor to then–SEC Chairman Arthur Levitt. He has written numerous publications on corporate, securities, and antitrust law, and has received several teaching awards, including Columbia Law School’s Willis L.M. Reese Award for Excellence in Teaching in both 1996 and 1997. Accounting professor Tracey J. Niemotko talked with Goldschmid about his tenure at the SEC and his views on the future of the profession and its oversight.

The CPA Journal: What were your greatest challenges in becoming an SEC Commissioner at such a turbulent time?
Harvey J. Goldschmid: From the day that I took office on July 31, 2002, the challenge that I felt most concerned about, and still do, is the basic job of restoring trust and confidence. The immediate demand was Sarbanes-Oxley—how to implement it, how to be faithful to its intent and spirit, and how to build upon it.

The most difficult time for me was during the John Biggs–Bill Webster controversy [over the PCAOB chairmanship], not only because I have the highest regard for both of them but because Bill Webster was an old friend.

[Then–SEC Chair] Harvey Pitt and I were working together to choose a chair for the PCAOB. We first went to Paul Volcker, who said he could not do it, and then to John Biggs. We indicated that we would both support Biggs. After a short period, John had met another commissioner who indicated support as well. John was in many ways the ideal potential chair: He had great talent and experience and was heavily involved in these issues; he also commanded enormous respect in every segment of the business and legal communities.

Then, for whatever reason, Harvey Pitt pulled away from him, which made life particularly difficult.

Bill Webster said that he would let his name go forward just a week or so before we had to take a vote. He is a terrific man, and no one has greater admiration or respect for Bill than I do. But these were not his issues. He had not been involved; this immensely complex area would be new to him. Particularly in the context of what appeared to be heavy pressure from the accounting profession against John Biggs, I believed it would be a tragic mistake to reject this superb man’s candidacy.

The Commission meeting on John, Bill, and the aftermath were very difficult for me on a personal level and also on an institutional level because I knew that the Commission would pay some price for the 3–2 vote. On the other hand, my sense is that we would have paid a much greater price if I had not dissented. In the end, of course, the Commission made things right by unanimously appointing Bill McDonough chair. Bill is a man of the highest quality and integrity.

The Sarbanes-Oxley Act

CPAJ: You have said that the Sarbanes-Oxley Act is the most important legislation for the accounting profession since the 1930s.What kind of an impact do you think it will have?
Sarbanes-Oxley is meant to take each part of the American economy, at least in the corporate and securities areas, and clean up problems that the 1990s and the early 2000s demonstrated were there. In the accounting area, for instance, my view is that there has been a serious problem with self-regulation. The disciplinary process does not work and the rulemaking process is imperfect, as is the peer review process in terms of quality controls. The provisions of Sarbanes-Oxley—and the PCAOB, which is the heart of Sarbanes-Oxley in many ways—give us the ability to move the accounting profession in the right direction. The PCAOB has serious disciplinary powers; more important, it has serious quality control powers and rule-making powers (e.g., for independence and auditing standards) that will make a large difference in terms of restoring credibility and luster to the accounting profession.

CPAJ: In your opinion, what aspects of the act have generated the most controversy?
Clearly, the Webster-Biggs situation created a lot of controversy, but that was a special case. My sense is that the new standards for the legal profession have created the most concern.

In many ways, what Congress did in section 307 of the Sarbanes-Oxley Act, in giving the SEC the power to establish professional conduct standards, is a dramatic turn. Until now, we have regulated the legal profession almost exclusively at the state level. State disciplinary authorities generally did not pay attention to the “reporting up” ideas that are now covered. Sarbanes-Oxley now says, as a matter of federal law—not state law—that lawyers are going to have to report material violations up to the highest level of the corporation. That is quite consistent with the past 30 years of corporate governance themes, as well as accountants’ obligations under section 10A of the Securities Exchange Act. It makes good sense to me, but it is controversial.

The step that we will probably take up in the fall is thinking about what happens in the very unusual circumstance where the independent directors on the board want to go forward with something that is going to create material harm to the corporation and involves financial fraud. The issue of “reporting out,” as it is termed, is even more controversial and emotional for lawyers. But I have no doubt that what we did in January in this area will be very useful and important, and we are now considering how much further to go.

There is another controversial aspect that is often in the shadows in terms of public dialogue, and that is the reach of Sarbanes-Oxley into the international arena. Corporations and accounting firms, whether domestic or foreign, are all treated the same way under Sarbanes-Oxley. The SEC was given some rule-making room, but it has created some fascinating territorial issues for us.

For instance, the audit committee is to be composed of independent directors, which would exclude employees. Yet in the German system, there are two-tiered boards, and about half the supervisory board may be made up of worker representatives. We would not generally consider company employees independent in the United States, but given the different corporate governance structure and the importance of co-determination to Germany, we decided to treat true employee representatives (i.e., not part of management) as disinterested, as having the ability to oversee the audit process and make honest and relatively independent judgments.

In the same way, Italy and Japan both have different ways of auditing, and we have taken those into account in making accommodations. The European Union, in particular, has been greatly concerned about their accountants having to register with the PCAOB. The PCAOB—I think wisely—said that non-U.S. accountants are going to have to register if they are doing work on U.S. public companies. But the PCAOB also provided for a longer registration period for foreign accountants, took account of foreign legal prohibitions, and has not yet specified the exact nature of the regulatory component for foreign accounting firms.

The PCAOB and the Profession

CPAJ: How effective do you think the PCAOB, under the leadership of William McDonough, will be in overseeing the auditing and financial reporting of public companies?
I am enormously optimistic about how effective the PCAOB will be. Bill McDonough is a superb man. He has a history of the highest effectiveness and credibility. The board’s four other members are just first rate and are working together extremely well. Charles Niemeier did an excellent job of leading the board. The PCAOB has had, from the time of his appointment as acting chair, all the powers to make a large difference. They are staffing up; this is a building process. But they have all the resources they need and are making wise staffing decisions. The PCAOB will make a large difference in a positive way for the accounting profession.

I think of accounting as one of the most honorable and decent professions, and I want to restore that image and that luster. If I were making a choice today, I suspect, I would become an accountant. More than ever, accounting today is an exciting—and critically important—profession.

Bill McDonough was the Commission’s unanimous choice; he met all our needs in terms of integrity, decency, and stature. At the SEC’s announcement ceremony for the PCAOB’s new chair, Bill said that he would feel good if, at the end of his time as chair, more people wanted to become accountants, and if the profession had the stature and respect that it deserved. And those were just the right thoughts. I am enormously optimistic about how things are going to work out.

CPAJ: What impact do you think this newly formed oversight board will have on the accounting profession?
I think that it can be awfully good. The accounting profession has suffered in ways that are unfortunate for everybody. There has been a dialogue going on for years. As SEC general counsel, in 1998 and 1999, I concluded that reform was necessary. Arthur Levitt was asking for changes that I thought were highly appropriate. There is now a public consensus that real change is needed. This is the chance to recapture the accounting profession’s high stature. Everyone who understands the issues agrees that good accounting is critical to the country’s economic future. I think that the PCAOB is going to help restore the accounting profession’s special place in our society.

Reestablishing Trust

CPAJ: Can the SEC successfully carry out its functions, given current budget restrictions?
With the new budget resources, I think we can. We have gone from a budget in fiscal 2002 of some $400-odd million to a budget for 2003 that is over $700 million. The budget that the President has proposed for the 2004 fiscal year is $842 million.

We will have to spend roughly $100 million a year on technology, in addition to what we are already doing. That will take us out of the paper world, and it will make economic and financial research on SEC databases enormously more productive and easier. New technology will also be very important to our enforcement efforts.

We will have the resources to pay decently—not high by private industry standards, but decently—by way of the pay parity provisions that now match SEC salaries to those of other financial regulators. We will be able to hire between 700 and 800 additional people. We have about 3,100 now, so the additional staff will make a large difference. Accountants in particular are greatly needed. The President recently signed a bill that allows us to hire accountants quickly, and that is a blessing. We need the highest-quality accountants, and more of them, at the SEC.

CPAJ: As an SEC Commissioner, how do you see your role in reestablishing confidence in the accounting and financial arena?
Well, in many ways I think that we have done the critical thing, which is to establish a first-rate accounting oversight board. Of course, we have to approve just about everything of consequence that they do, but my sense is that given the talent and decency of the people there, we will defer to them broadly. I am quite confident that balanced, effective accounting profession reform is now a long way toward being achieved.

CPAJ: Accounting students who will soon enter the job market are asking if accounting firms can continue to generate enough profit from accounting and auditing, given how much more lucrative consulting has become, and whether the government should make some effort to support adequate remuneration for traditional accounting services.
We’ve got to be careful that government does not try to ensure profits or to take away profits. We want markets to work. On the other hand, I do not have any doubt that accounting will be not only a fulfilling but also a lucrative place to be in the future. It is a critical function.

Indeed, it is a government-mandated function, in terms of the need for the certification of financial statements by independent public accountants. We need talented people, and it is only fair that they are paid well. I expect that the cost of auditing, particularly given the type of quality demands that are being made, will go up. There will be more work involved in the internal controls area. But that is all to the good. Markets dictating that more dollars be paid for auditing and accounting services will not create an economic problem in the country. The assurance that better auditing and accounting will give, assuming that there is higher quality, will be much more consequential in dollar terms. We know that the nation’s financial markets have fallen—not completely because of scandals, obviously, but the cost of this declining trust is great—and the relatively few extra dollars that will go into auditing and internal controls is a small price to pay for the gains in public confidence.

CPAJ: In your opinion, to what degree do personal ethics play a part in carrying out a professional or supervisory role?
They are basic. We can hire all kinds of bright minds, but human character is fundamental to making the whole system work. As a government official, this means the ability to wake up and say, “I want to do the right thing; I want this system to work.” In the private sector, it is so important to have the inner compass that says, “I know I have obligations to clients and others, but I want this to be fair, I want this to be decent, I want to do the right thing.” Often government must establish an appropriate regulatory framework, but personal decisions are also critical. They are basic to good government and a good corporate community.

CPAJ: In conclusion, are there any personal observations you would like to share with the accounting profession?
I think that it goes back to what I was saying earlier. Recent events have made it clear to everyone in our society that accounting is an immensely important profession. What is happening now in Washington will help the accounting profession regain the status and luster that it has traditionally enjoyed.

Editor’s Note: The views expressed in this article are those of Commissioner Goldschmid and do not necessarily reflect the views of the Commission, the other Commissioners, or the Commission staff.
Tracey J. Niemotko, JD, CPA, is an associate professor of accounting at the College of Mount Saint Vincent, Riverdale, N.Y. She can be reached at

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