PCAOB's Primary Mission: Improving Confidence in Financial Reporting, The

CPA Journal, The, Jan 2008 by Kranacher, Mary-Jo

An Exclusive CPA Journal Interview with PCAOB Member Bill Gradison

Bill Gradison was appointed by the sec as a founding member of the Public Company Accounting Oversight Board (PCAOB), created by the Sarbanes-Oxley Act of 2002 (SOX). He was reappointed to a full five-year term in August 2004, and served as acting chairman from December 2005 until July 2006, when Mark W. Olson was appointed chairman.

Before joining the PCAOB, Gradison was a senior public policy counselor for a Washington, D.C., law firm. From 1993 to 1998, he served as president of the Health Insurance Association of America.

Gradison held elective office for more than 30 years. Before being elected to Congress from his hometown of Cincinnati, Ohio, he was a member of the City Council for 13 years, serving as vice mayor and mayor. During 18 years in Congress, from 1975 to 1993, Gradison was the ranking member of the House Budget Committee and the Health Subcommittee of the Committee on Ways and Means. He began his career in public service in 1953 as assistant to the under-secretary of the U.S. Treasury. He subsequently was assistant to the secretary of Health, Education and Welfare before returning to Cincinnati as a general partner in a New York Stock Exchange firm. He also served as chairman of the board of the Federal Home Loan Bank of Cincinnati.

When the PCAOB held a two-day forum, Auditing in the Small Business Environment, in New York City on October 22 and 23, 2007, he met with CPA Journal Editor-in-Chief Mary-Jo Kranacher to discuss a variety of issues facing the PCAOB and the accounting profession. His comments and statements below are Gradison's alone, and not those of the PCAOB, its staff, or other board members.

The CPA Journal: Your background is more political and legislative than accounting-related. How has that helped you at the PCAOB?

Bill Gradison: My background that's been most helpful to me at PCAOB isn't what I did in the public sector so much as what I did in the business world. Because of my years as a general partner of a small New York Stock Exchange firm, I'm accustomed to thinking about issues in terms of investors, smaller retail investors in particular. This is because, despite the growth of our institutional business, that wasn't how we got started, or how we built our reputation in the community. Of course, there have been dramatic changes since then, and now institutional investors dominate the market.

But operating under a statute that focuses on protecting investors-such as Sarbanes-Oxley-doesn't require much of a shift of emphasis in my thinking because that's basically what I did for a living. My work over the years has involved both the public and private sectors. I have found that people in the public sector generally don't have an in-depth understanding about how the private sector operates; and, similarly, people in the private sector lack an understanding of how decisions are made in the public sector.

I believe that a bridge is needed to help those two parts of our society work together in the public interest. The decision to locate the national platform of all this within 10 square miles centering on Constitution Avenue rather than in a center of commerce, business, finance, and industry creates a bit of a gap that has to be overcome.

Quantifying the Costs of Compliance

CPAJ: The U.S. Chamber of Commerce, which represents businesses and other organizations, has been lobbying to roll back some ofSarbanesOxley's provisions, including the deferral of the implementation of section 404 internal control requirements for small companies. Investors don't have quite as large a voice, it seems. How do you find that balance between market competition and investor protection?

Gradison: The PCAOB has an excellent relationship with the U.S. Chamber of Commerce. I've met from time to time with their senior officials and have also very consciously reached out to a number of business, labor, investor, auditor, and issuer organizations to make sure we understand their concerns, and to tell them what we're working on. It's perfectly understandable that, from an issuers' perspective, the costs imposed on them by Sarbanes-Oxley would be a concern. Although section 404 has been the focus of the expressions of concern, in many ways it goes deeper. From the PCAOB's perspective, its mission is not to make life easier for the management, or auditors of companies listed on the New York Stock Exchange.

The PCAOB was explicitly created to protect investors by improving the accuracy and reliability of financial reports. And although it would be good to be able to report that it was possible to do this and bring down costs at the same time, that simply is not the case. I assure you there has been no conscious effort to increase costs, but I think there is some evidence that before Sarbanes-Oxley-speaking specifically about internal controls over financial reporting-not a whole lot was going on in the audits of public companies. While the requirement to focus on internal controls goes back to 1977 in the Foreign Corrupt Practices Act, I think the challenge to both auditors and issuers-the larger issuers so far-of getting up to speed on internal control reporting and internal control auditing reflects the accumulated lack of effort put into internal controls pre-Sarbanes-Oxley.