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November 22, 2002

SRI Firms Caution Against a Wimpy Accounting Oversight Board
    by William Baue

Despite the distractions of the current Accounting Oversight Board debacle, SRI firms focus on what policies the board could adopt to support social and environmental issues.

SocialFunds.com -- The Sarbanes-Oxley Act mandated that the U.S. Securities and Exchange Commission (SEC) create the Public Company Accounting Oversight Board (PCAOB) to confront the kinds of accounting scams that have plagued corporate America recently. Ironically, the very formation of the board has resulted in a scandal to rival Enron and WorldCom, complete with the elements of deceit, questionable accounting, and multiple resignations. Instead of allowing the current debacle to shift attention from the matter at hand, members of the socially responsible investment (SRI) community advocate for a strong board that will consider social and environmental issues as material to their work.

The scandal surrounding the accounting oversight board came to a head at the October 25 SEC Open Commission Meeting to announce the board's members. SEC Commissioners Harvey Goldschmid and Roel Campos, both Democrats, voiced strong opposition to the appointment of former FBI and CIA head William Webster as chair instead of former TIAA-CREF head John Biggs, who was widely regarded as better qualified.

After informally offering Mr. Biggs the chair, Mr. Pitt inexplicably shifted his support to Mr. Webster. In his statement, Commissioner Goldschmid cited speculation that Mr. Pitt had buckled under influence from the accounting industry, which feared that Mr. Biggs would fill the position too effectively. At the meeting's end, Mr. Pitt protested this characterization, perhaps too much.

Within a week, newspapers revealed Mr. Pitt's failure to disclose to the White House and SEC Commissioners Mr. Webster's admission that he chaired the auditing board of U.S. Technologies, a company with questionable accounting practices. Mr. Pitt resigned in the wake of this revelation, and soon thereafter Mr. Webster followed suit, leaving the chair of the accounting oversight board vacant and the integrity of the board in question.

Title 1 of the Sarbanes-Oxley Act outlines the structure and duties of the accounting oversight board. Sarbanes-Oxley charged the board with numerous duties, including registering public accounting firms; establishing rules to govern auditing, quality control, ethics, and independence; inspecting accounting firms; and investigating, disciplining, and sanctioning auditing firms. Despite the precision of the act's language, it remains open to manipulation.

"Companies are already looking for loopholes in the Sarbanes-Oxley Act," said Citizens Funds Director of Social Research Diane Tod South. "For example, they are defining a wide variety of consulting services as 'audit-related.'"

Confronting such creative interpretation will test the accounting oversight board's resolve to enact its mission of weeding out such impropriety.

"The board needs to be a tough enforcer of the spirit of the law," Ms. South told SocialFunds.com. "A wimpy board will get trampled."

Calvert Group Director of Social Research Julie Gorte outlined what she believes to be the most important policies for the board to implement. These include strong, clear and meaningful guidelines for reporting intangible liabilities and assets, particularly regarding workforce practices, environment, product liability, reputational risk, and human rights; clear guidance on auditor independence; and guidance to best practices for corporate audit committees.

Ms. Gorte expounded on her first priority.

"One of the most pressing needs for the accounting oversight board, in our view, is to establish strong and enforceable standards on disclosure and materiality of social and environmental factors," Ms. Gorte told SocialFunds.com. "There is a growing body of evidence that many environmental matters can have profound material impacts on corporate value."

Corporate
Governance and Public Policy ArticlesMs. Gorte supported her point by citing a recent Environmental Protection Agency (EPA) report documenting that nearly three-quarters of publicly traded corporations violate the SEC's environmental debt accounting regulations, or compliance with Regulation S-K.

The answer to whether the accounting oversight board will address these issues will remain unclear until after the dust settleds surrounding the impropriety of the Webster appointment and the board finally gets to work policing accounting impropriety.

© SRI World Group, Inc. All Rights Reserved.

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