This is the accessible text file for GAO report number GAO-03-339 
entitled 'Securities and Exchange Commission: Actions Needed to Improve 
Public Company Accounting Oversight Board Selection Process' which was 
released on December 19, 2002.



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Report to Congressional Requesters:



United States General Accounting Office:



GAO:



December 2002:



Securities and Exchange commission:



Actions Needed to Improve Public Company Accounting Oversight Board 

Selection Process:



Highlights of GAO-03-339, a report to the Chairman, Senate Banking, 

Housing, and Urban Affairs Committee; Ranking Minority Member, House 

Energy and Commerce Committee; and another House requester



Why GAO Did This Study:



The Sarbanes-Oxley Act of 2002 created, among other things, the 

Public 

Company Accounting Oversight Board (PCAOB) to oversee audits of 

public 

companies. A divided Securities and Exchange Commission (SEC) 

appointed 

the first PCAOB on October 25, 2002. Amid allegations that the SEC 

Chairman 

withheld relevant information from the other Commissioners 

concerning the 

suitability of the newly appointed PCAOB chairman, GAO was 

asked to examine 

SEC’s selection process; determine whether the SEC Chairman 

withheld 

information from other Commissioners; determine what vetting 

of candidates 

took place; and identify what actions led to breakdowns in 

the process.



What GAO Found:



SEC faced significant challenges in vetting and appointing 

five members 

to the newly created PCAOB within 90 days. The SEC Chairman, 

who had overall 

responsibility for the appointment process, initially, 

envisioned a process

primarily driven by SEC staff.  He asked the Chief Accountant 

to take the 

lead in selecting and the General Counsel in vetting PCAOB 

members. However, 

this approach was not fully understood or endorsed by the 

other 

Commissioners. The overall process that emerged was neither 

consistent nor 

effective and changed and evolved over time.



Several factors contributed to the eventual breakdown of 

SEC’s selection 

and vetting process, including the inability of the 

Commissioners to reach 

agreement on a formalized process that defined the roles to 

be played by 

the Commissioners and staff; insufficient communication 

between SEC staff 

and Commissioners; and the lack of articulated selection 

criteria beyond 

general criteria provided by the act. Finally, inability 

to choose a final 

slate of candidates until the eve of the Commission’s vote 

resulted in the 

appointment of PCAOB members who had not been fully vetted.



On the day of the October 25 vote, the Chief Accountant 

became aware of 

information concerning Judge William Webster, who was slated 

to be the chairman 

of the PCAOB, and his role as the former chairman of the 

audit committee of a 

small company—U.S. Technologies, Inc. However, based on his 

review of available 

information, his experience as an auditor, Judge Webster’s 

prominence and 

reputation, and the fact that additional vetting would occur 

post-appointment, 

the Chief Accountant deemed that the information would not 

affect Judge 

Webster’s nomination. He thus decided not to share the 

information concerning 

Judge Webster’s role at U.S. Technologies with the SEC 

Chairman, the other 

Commissioners, or the General Counsel.



As Judge Webster’s appointment illustrates, the five 

individuals chosen for 

the PCAOB were not systematically vetted prior to 

appointment. After the 

selection process broke down in early October when the 

Commission was unable 

to agree on a consensus candidate for chairman, the 

General Counsel was forced 

to initiate the vetting process on a post-appointment 

basis, a fact which the 

Commission was made aware of before the October 25 

vote. At the time of our

review, the vetting process was still ongoing.



What GAO Recommends:



GAO recommends that SEC define and reach agreement on a 

documented PCAOB 

appointment process; set selection criteria; develop a 

vetting process and 

complete necessary reviews before appointments; and make 

greater use of available 

technology to do background checks on candidates. While 

no written comments were 

provided, SEC generally agreed with the report’s 

recommendations.



www.gao.gov/cgi-bin/getrpt?GAO-03-339.



To view the full report, including the scope

and methodology, click on the link above.

For more information, contact Richard J. Hillman at 

(202) 512-8678 or 

hillmanr@gao.gov.



GAO-03-339:



Contents:



Letter:



Scope and Methodology:



Results in Brief:



Background:



SEC Strategies Evolved in Response to Major Events Leading to the 

Appointment of PCAOB Members:



Chief Accountant Did Not Inform the Commission of Issues at U.S. 

Technologies Prior to the Vote:



Vetting Process Was Initiated Post-Appointment:



Several Factors Contributed to the Breakdown of SEC’s Selection and 

Vetting Process:



Conclusions:



Recommendations for Executive Action:



Agency Comments:



Appendix I: Summary of Key Events Associated with the Selection of the 

Public Company Accounting Oversight Board:



Figure:



Figure 1: Detailed Analysis of the Office of the Chief Accountant’s 

Second Review of U.S. Technologies:



Abbreviations:



CPA:Certified Public Accountant

CRM: Contract Resource Management, Inc.

EDGAR: Electronic Data Gathering and Retrieval System

FAF: Financial Accounting Foundation

FASB: Financial Accounting Standards Board

FBI: Federal Bureau of Investigations

NRSI: Name Relationship Search Index

PCAOB: Public Company Accounting Oversight Board

RFQ: Request for Quotations

SEC: Securities and Exchange Commission

TIAA-CREF: Teachers Insurance and Annuity Association - College 

 Retirement Equities Fund:



United States General Accounting Office:



Washington, DC 20548:



December 19, 2002:



The Honorable Paul S. Sarbanes

Chairman, Committee on Banking,

 Housing, and Urban Affairs

United States Senate:



The Honorable John D. Dingell

Ranking Minority Member

Committee on Energy and Commerce

House of Representatives:



The Honorable Barney Frank

House of Representatives:



In response to the unexpected and rapid bankruptcies of large companies 

such as the Enron Corporation and WorldCom, Inc., concerns about the 

integrity and reliability of financial disclosures, and the adequacy of 

regulation and oversight of the accounting profession, the Sarbanes-

Oxley Act of 2002 was enacted into law on July 30, 2002. A cornerstone 

of this reform was the creation of the Public Company Accounting 

Oversight Board (PCAOB) to oversee the audits of public companies. The 

PCAOB was given broad powers to inspect the accounting firms performing 

those audits, set rules and standards for such audits, and impose 

meaningful sanctions if warranted. The act required the Securities and 

Exchange Commission (SEC) to appoint members to this independent, full-

time, five-member board by October 28, 2002, and to continue doing so 

as terms of office expired. On October 25, 2002, amid mounting 

controversy about who should be selected as chairman, a divided 

Commission appointed the first five PCAOB members.



On October 31, allegations emerged that the SEC Chairman had withheld 

relevant information from his fellow Commissioners concerning the newly 

appointed PCAOB chairman’s, Judge William H. Webster, involvement as 

the former chairman of the audit committee of the board of directors of 

U.S. Technologies, Inc., a small company. In response to these 

allegations, you asked that we thoroughly examine the process SEC used 

to select and vet nominees to the PCAOB. Our specific objectives were 

to (1) describe the process and significant events leading up to the 

Commission’s selection of the PCAOB’s first members, (2) determine what 

the SEC Chairman knew about the involvement of Judge Webster in U.S. 

Technologies and whether the Chairman withheld information from the 

other Commissioners prior to the Commission’s vote, (3) determine what 

vetting of appointees took place, and (4) identify any aspects of SEC’s 

selection and vetting process that contributed to the eventual 

breakdown in the process.



Scope and Methodology:



To describe the process and significant events leading up to the 

Commission’s selection of the PCAOB’s first members, to determine what 

the SEC Chairman knew about the involvement of Judge Webster in U.S. 

Technologies, and to determine whether the Chairman had withheld 

information from the other Commissioners prior to the Commission’s 

vote, we reviewed thousands of internal documents. These documents 

included plans, memorandums, and correspondence between and among the 

Chairman, the Commissioners, the SEC Chief Accountant, other SEC staff 

involved in the PCAOB selection process, and outside parties. We also 

used this information to corroborate and verify testimonial evidence 

collected through extensive interviews of the SEC Chairman; each 

Commissioner; the Chief Accountant; the General Counsel; the Chairman’s 

Chief of Staff; the PCAOB appointees; and John H. Biggs, who was among 

those considered for the PCAOB chairmanship. We also obtained 

information from staff in SEC’s Office of the Chief Accountant, the 

Office of the General Counsel, the Division of Enforcement, the 

Division of Corporation Finance, and the Office of the Chairman and 

others within and outside SEC. Finally, we were benefited greatly from 

technical support and assistance provided by staff in SEC’s Office of 

the Inspector General. We reviewed and used information collected and 

assembled by staff of the Office of the Inspector General throughout 

our review. A determination and assessment of the details of Judge 

Webster’s involvement in U.S. Technologies was beyond the scope of this 

review.



To determine what vetting of appointees took place, we reviewed the SEC 

Office of the General Counsel’s proposed vetting process for the PCAOB 

appointees and other relevant documentation. We also interviewed SEC’s 

General Counsel and the PCAOB appointees to obtain information about 

the types of information they provided prior to their appointment to 

the PCAOB. Likewise, to determine what aspects of SEC’s selection and 

vetting process contributed to the breakdown of the process, we 

attempted to identify other applicable appointment models to identify 

common elements of those models with which to compare the process 

followed by SEC in selecting and vetting PCAOB appointees. Finally, we 

obtained views from those we interviewed about recommended process 

improvements.



We conducted our work in New York, New York, and Washington, D.C., in 

November and December 2002 in accordance with generally accepted 

government auditing standards.



Results in Brief:



When the Sarbanes-Oxley Act of 2002 required SEC to appoint five 

members to the newly created PCAOB within 90 days, SEC in many ways 

faced a unique challenge. SEC had not played such a role since 1975 and 

did not have a formalized and tested process in place that clearly 

identified and documented the roles to be played by the Commissioners 

and staff.[Footnote 1] Initially, the Chairman asked the Chief 

Accountant to take the lead in identifying potential candidates for the 

PCAOB, but this approach was never fully endorsed by the other 

Commissioners.[Footnote 2] As the selection process evolved, the 

Commissioners became more involved than originally planned. A lack of 

consensus among the Commissioners, as well as a lack of staff direction 

and communication, resulted in SEC’s failure to appoint a slate of 

candidates that would elicit a unanimous vote. The staff’s initial plan 

was to have the slate determined by the end of September, which 

according to the General Counsel would have left time to conduct some 

limited vetting of the appointees before October 28. However, this 

strategy broke down when the Commission was unable to agree upon and 

attract a consensus candidate to serve as PCAOB chairman. As the 

statutory deadline approached, SEC was ultimately forced to appoint 

members to the PCAOB that had not been adequately vetted.



At the time of the Commission’s vote, the Chief Accountant did not 

inform the SEC Chairman or other Commissioners about certain matters 

concerning Judge Webster’s role as the former chairman of the audit 

committee of the board of directors of U.S. Technologies. Although the 

SEC Chairman was aware that Judge Webster had been the chairman of the 

audit committee and that the company was failing, he had previously 

been told that Judge Webster’s involvement in U.S. Technologies did not 

pose a problem. We found no evidence that the SEC Chairman was informed 

of any other information about the company’s history and Judge 

Webster’s role prior to the October 25 vote on the PCAOB candidates. 

Staff in the Office of the Chief Accountant did not review much of the 

relevant periodic filings containing information raising concerns about 

auditing-related issues at U.S. Technologies until the morning of the 

October 25 vote. Although information contained in these filings was 

reviewed by the Chief Accountant, on the basis of his review of 

available information, his experience as an auditor, his knowledge of 

Judge Webster’s previous federal service, and an understanding that 

additional vetting would occur post-appointment, the Chief Accountant 

concluded that this information did not have a bearing on Judge 

Webster’s suitability to be nominated to serve on the PCAOB. Therefore, 

the Chief Accountant did not share what he knew with the Chairman or 

the other Commissioners prior to the October 25 vote.



As the Judge Webster appointment illustrates, the five appointees were 

not systematically vetted prior to appointment to the PCAOB. The SEC 

Chairman and staff initially planned that the Office of the General 

Counsel would conduct some vetting prior to selection. In addition to 

administering certain details, the General Counsel was a resource for 

potential nominees who had questions about appointment to the PCAOB. 

However, after the selection process broke down in early October when 

the Commission was unable to agree on a consensus candidate for 

chairman, the General Counsel was forced to initiate the vetting 

process on a post-appointment basis. The Commission was made aware of 

this fact at the time of the October 25 vote. The vetting process was 

still ongoing at the time of our review.



SEC faced many challenges in selecting the first PCAOB and will not 

have to appoint five members in a 90-day time frame again. Nevertheless 

we found that SEC did not take steps that could have contributed to a 

more efficient selection process. First, it did not take sufficient 

steps to reach consensus on the process to be followed among the 

Commissioners and SEC staff before they appointed the PCAOB members. 

Second, SEC did not identify or systematically utilize any selection 

criteria beyond the broad criteria specified in the act to consider 

candidates for PCAOB membership. Thus, uncertainty existed about the 

composition of the PCAOB and views on the qualifications for board 

membership varied among the Commissioners and SEC staff. Finally, SEC 

did not develop and articulate a documented, public, or agreed-upon 

process for screening candidates before they were interviewed and 

appointed by the Commissioners; nor did the Commission and staff 

collectively determine how and what information would, and should, have 

been developed and passed along for their consideration as they 

deliberated about candidates.



Given the vitally important role of the PCAOB in addressing corporate 

oversight and investor protection concerns, we are making several 

recommendations in this report that are aimed at improving SEC’s PCAOB 

selection and vetting process prior to the appointment of any new PCAOB 

members. First, we recommend that the Commission reach agreement upon 

and document the process to be followed, the proper sequence and timing 

of key steps, and the roles to be played by the Commission and SEC 

staff in the selection and vetting of candidates. In so doing, we 

recommend that the Commission develop agreed-upon selection criteria 

for PCAOB members and chairman that embrace the intent of the act. We 

also recommend that the Commission develop a vetting process that 

ensures that before an applicant is brought to the Commission for 

serious consideration, certain minimum background checks are performed 

in connection with the individual and that the vetting process be 

completed before the Commission votes to appoint members to the PCAOB. 

Further, we recommend that SEC determine how such information on 

potential nominees should be documented, analyzed, and shared among the 

Commissioners and staff. Finally, we recommend that SEC make greater 

use of available technology to conduct necessary background checks that 

generate sufficient details about the qualifications of potential 

applicants so that the Commission can make both timely and informed 

decisions on the fitness of potential applicants for the PCAOB.



We requested comments on a draft of this report from all five SEC 

Commissioners, SEC’s General Counsel, SEC’s former Chief Accountant, 

the Chairman’s former Chief of Staff, and others at SEC involved in the 

selection and vetting process. In addition, we requested comments from 

Judge Webster and Mr. Biggs. Each of these parties provided only 

technical comments on the report’s contents, which were incorporated as 

appropriate. The Chairman and each of the other four Commissioners also 

told us that they generally agreed with the report’s recommendations.



Background:



The act specifies that the PCAOB is to consist of five, full-time 

members, with one being designated as the chairman. According to the 

act, each PCAOB member is to have a demonstrated commitment to the 

interests of investors and the public, an understanding of issuers’ 

financial disclosure requirements, and an understanding of the 

obligations of accountants with respect to the preparation of audit 

reports. The act also specifies that two, but no more than two, members 

be certified public accountants (CPA). PCAOB members generally are 

expected to serve 5-year terms. However, to establish staggered terms 

of office, the terms of office of the initial PCAOB expire in annual 

increments, ranging from 1 to 5 years, with the chairman serving a 5-

year term.



Although its activities are subject to SEC oversight and approval, the 

PCAOB is an independent board with sweeping powers and authority. It 

has the authority to:



* register public accounting firms that prepare audit reports for 

companies that issue securities to the public (issuers);



* establish rules for auditing, quality control, independence, and 

other standards relating to the preparation and issuance of audit 

reports for issuers;



* conduct inspections of registered public accounting firms and 

associated persons;



* conduct investigations and disciplinary proceedings and, where 

justified, impose appropriate sanctions upon registered public 

accounting firms and associated persons;



* perform other duties or functions determined necessary or appropriate 

to promote high, professional standards among public accounting firms 

and associated persons;



* enforce compliance with the act, the rules of the PCAOB, professional 

standards, and the securities laws relating to the preparation and 

issuance of audit reports by registered public accounting firms and 

associated persons; and:



* set the budget and manage the operations of the PCAOB and its staff.



The newly created PCAOB is to be structured as a nonprofit corporation 

that is funded by fees assessed on public companies. The act specifies 

that PCAOB members, employees, and agents are not considered employees 

of the federal government.



The act requires SEC to appoint PCAOB members and verify that the 

organization meets its statutory responsibilities. Specifically, the 

act requires that SEC, in consultation with the Chairman of the Board 

of Governors of the Federal Reserve System and the Secretary of the 

Treasury, appoint the initial five-member board within 90 days of the 

act’s passage--that is, by October 28, 2002. Within 270 days of 

enactment, SEC is to determine that the PCAOB has taken actions 

necessary to carry out its mission. These actions include hiring staff, 

proposing rules, and adopting initial and transitional auditing and 

other professional standards. Within 180 days of SEC’s determination 

that the PCAOB is meeting its statutory responsibilities, any public 

accounting firm that is not registered with the PCAOB may not 

participate in the preparation or issuance of any audit report for any 

public company that issues securities to the public.



SEC is an independent agency comprising five presidentially appointed 

commissioners, 4 divisions, and 18 offices. In total, SEC has 

approximately 3,100 staff. SEC is headquartered in Washington, D.C., 

and it has 11 regional and district offices throughout the country. To 

ensure that the Commission remains nonpartisan, no more than three 

commissioners may belong to the same political party. The President 

also designates one of the commissioners as chairman, the SEC’s top 

executive. The commissioners meet to discuss and resolve a variety of 

issues that staff bring to their attention. At these meetings, the 

commissioners interpret federal securities laws, amend existing rules, 

propose new rules to address changing market conditions, and/or take 

action to enforce rules and laws. These meetings are open to the public 

and the news media, unless the discussion pertains to confidential 

subjects such as whether to begin an enforcement investigation.



SEC Strategies Evolved in Response to Major Events Leading to the 

Appointment of PCAOB Members:



Faced with appointing five members to the newly created PCAOB in 90 

days, SEC lacked a formalized and tested process that documented the 

roles to be played by the Commissioners and staff. The SEC Chairman 

initially asked the Chief Accountant to take the lead in identifying 

potential PCAOB members; however, the other Commissioners never fully 

endorsed this approach. A lack of consensus among the Commissioners and 

a lack of staff direction and communication resulted in SEC’s failure 

to find a slate of candidates that would elicit a unanimous vote from 

the Commission. Moreover, these events ultimately resulted in SEC 

appointing members to the PCAOB that had not been fully vetted.



Initial Strategy for the Selection and Vetting Process:



In requiring SEC to appoint members to the PCAOB within 90 days, the 

act posed a unique challenge for SEC. SEC had not in recent history 

conducted a similar selection process; therefore, it lacked formalized 

and tested procedures that were familiar to the Commissioners and SEC 

staff. The actual process used to appoint PCAOB members was not 

documented and evolved as the statutory deadline for appointing members 

approached. Upon passage of the act, the Chairman designated the SEC’s 

Chief Accountant to lead the search for and identification of PCAOB 

nominees, with assistance from the General Counsel, who was assigned to 

vet the candidates. The Chief Accountant began identifying potential 

candidates for the PCAOB from a wide range of sources, including 

current and prior Commissioners, Members of Congress, government 

officials, regulatory organizations, trade associations, and industry 

leaders. SEC also solicited input from the public through an August 1, 

2002, release asking for nominations and applicants willing to serve on 

the PCAOB.[Footnote 3] As required by the act, early in the process, 

the SEC Chairman began to consult with the Chairman of the Board of 

Governors of the Federal Reserve System and the Secretary of the 

Treasury to obtain their input and suggestions for potential PCAOB 

candidates.



Early in the selection process, the SEC Chairman’s goal was to find an 

outstanding candidate as chairman, an individual of great stature who 

could reassure investors and receive unanimous support from the 

Commission. The SEC Chairman initially planned that he, along with a 

Democratic Commissioner and the Chief Accountant, would approach 

candidates for the chairmanship. The Chairman said that he believed 

this would help make the process bipartisan. The SEC Chairman wanted 

the Chief Accountant to participate because he was the person within 

SEC who would have the most contact with the PCAOB chairman; therefore, 

he needed to be comfortable with the selection. However, at least one 

Commissioner told us that the reason for this approach was neither 

communicated to him nor fully understood by him.



Given that the nominees were being considered for service on a board 

that was designed to help restore investor confidence in financial 

reporting systems and to clean up perceived problems in the accounting 

profession, the SEC Chairman said that the PCAOB, and thus each of its 

members, must be beyond reproach. To achieve that end, the Chairman 

asked the General Counsel to vet nominees and, at a minimum, identify 

any significant potential problems or conflicts, real or perceived, 

involving accounting and other related issues. The General Counsel said 

that he saw his role as working with the Office of the Chief Accountant 

to develop an application to collect financial and background 

information from appointees, to select a contractor to conduct 

background checks on the appointees, and to identify other steps to vet 

the slate of candidates selected by the Commission. The staff initially 

planned to have the slate of potential PCAOB candidates determined by 

the end of September, which the General Counsel thought would have 

provided time to do at least some vetting of the appointees before the 

October 28 deadline. It is unclear whether the other Commissioners were 

informed of or fully endorsed this plan; some of the Commissioners 

wanted more involvement in the process and thought it best for each 

Commissioner independently to do due diligence on potential candidates. 

This selection strategy broke down when the Commissioners, lacking a 

documented and formalized process, were unable to agree upon and follow 

a strategy to identify, vet, and select members to the PCAOB and 

attract a consensus candidate to serve as chairman.



Major Events Leading to the Appointment of the First PCAOB:



In August 2002, according to those involved in the process, Paul A. 

Volcker, the former Chairman of the Board of Governors of the Federal 

Reserve System, emerged as the consensus choice for PCAOB chairman. The 

SEC Chairman, a Democratic Commissioner, and the Chief Accountant tried 

throughout August to persuade Mr. Volcker to consider serving as PCAOB 

chairman. The SEC Chairman also asked the Secretary of the Treasury, 

the Chairman of the Board of Governors of the Federal Reserve System, 

and others to assist him in persuading Mr. Volcker. In early September, 

Mr. Volcker declined to be considered for appointment, in part because 

the full-time nature of the position required him to give up outside 

interests that were important to him. In September, the SEC Chairman, 

the Democratic Commissioner, and the Chief Accountant shifted their 

focus to Mr. Biggs, the retiring Chief Executive Officer of Teachers 

Insurance and Annuity Association - College Retirement Equities Fund 

(TIAA-CREF).



On September 11, the Chairman, the Democratic Commissioner, and the 

Chief Accountant met with Mr. Biggs to discuss his interest in serving 

on the PCAOB. According to those involved, the purpose of the meeting 

was to persuade Mr. Biggs to agree to be considered for the 

chairmanship of the PCAOB. At this meeting, the Chairman and the 

Democratic Commissioner in attendance told Mr. Biggs that he would have 

their support. However, the SEC Chairman also stated that his final 

decision would rest in what he hoped would be a unanimous decision by 

the Commission. Mr. Biggs said that he told the SEC Chairman that he 

would only serve on the PCAOB if he were appointed its chairman. The 

following week, Mr. Biggs called the Chairman and the Chief Accountant 

to say that he was willing to be considered. On September 24, Mr. Biggs 

met with a third Commissioner who also gave his support, thereby giving 

Mr. Biggs enough votes for a majority. Mr. Biggs subsequently met with 

the remaining two Commissioners and other SEC staff on September 27. 

For the Chairman, support of Mr. Biggs was contingent upon another 

specific individual being appointed to the PCAOB. Therefore, when one 

of the Commissioners informed the Chairman (around Sept. 27) that 

another Commissioner might not be willing to support that individual, 

the Chairman became less willing to support Mr. Biggs.



The SEC Chairman continued to discuss throughout September other 

candidates who could potentially serve as chairman or members of the 

PCAOB. Although potential appointees to the PCAOB had been the subject 

of ongoing media speculation, on October 1, a newspaper article 

indicated that Mr. Biggs had “agreed to be the first head of a new 

regulatory oversight board for the accounting profession.”[Footnote 4] 

According to those we interviewed, this article upset some of the 

Commissioners because it said that the job had been offered to Mr. 

Biggs. Some of the Commissioners said that the article made them feel 

that their vote was irrelevant to the selection of the chairman. The 

SEC Chairman telephoned Mr. Biggs on October 2 and informed him that 

the October 1 article had “complicated things” and threatened the 

Chairman’s desire to achieve a unanimous vote. Although the article 

reported that Mr. Biggs declined to be interviewed, the article, 

together with a subsequent article that appeared on October 4, led some 

of the Commissioners to believe that Mr. Biggs was the source of the 

information included in the articles, directly or indirectly.[Footnote 

5] As a result, some of the Commissioners raised serious questions 

about Mr. Biggs’s independence, judgment, and ability to effectively 

work on the PCAOB. At this point, the Commission became divided, with 

at least one Commissioner willing to support only Mr. Biggs as the 

chairman and others who strongly opposed Mr. Biggs’s nomination as 

chairman.



SEC’s Chairman and Chief Accountant said that they originally planned 

for the Commissioners to meet with only about five to seven PCAOB 

candidates, who would be identified by the Chief Accountant. Again, 

this approach was not communicated to or endorsed by all of the 

Commissioners. Therefore, in late September, with time running out and 

little progress made in selecting candidates, the selection process 

changed. At the urging of one of the Commissioners, the Chief 

Accountant and each of the Commissioners began to interview candidates. 

In total, each Commissioner interviewed about 25 candidates for the 

PCAOB from late September to October. Although the SEC Chairman and the 

Chief Accountant were considering a number of candidates, Judge 

Webster, former Director of the Federal Bureau of Investigation (FBI) 

and the Central Intelligence Agency, emerged as a leading candidate for 

PCAOB chairman. Although his name had surfaced in early August along 

with others, he was not seriously pursued at that time. According to 

Judge Webster, the SEC Chairman first contacted him on September 27 

about considering a position on the PCAOB and later sent him some 

background material. On October 15, Judge Webster met with the SEC 

Chairman, the Chief Accountant, and the SEC Chairman’s Chief of Staff, 

who urged Judge Webster to consider serving as PCAOB chairman. They 

discussed a number of items at this meeting. At some point during the 

meeting, the Chairman said that there was one reason for Judge Webster 

not to consider the position, which was that Judge Webster’s nomination 

would be criticized by some and that he could be attacked in the media. 

According to those in attendance, Judge Webster said that he had been 

confirmed by the Senate for other federal posts on five occasions and 

nothing in his past would pose a problem. He added that people might 

make something out of the fact that he was the former chairman of the 

audit committee of the board of directors of U.S. Technologies, a 

company that he described as on the brink of failure. According to 

Judge Webster, he also asked the SEC officials at that meeting to check 

SEC’s records to see if they indicated any problems relating to U.S. 

Technologies. As discussed in detail in the next section, an initial 

review of this matter conducted by staff in SEC’s Office of the Chief 

Accountant did not reveal, in the Chief Accountant’s opinion, any 

disqualifying problems involving Judge Webster’s role in the company. 

Based on the information he obtained, the Chief Accountant passed along 

information to the Chief of Staff, indicating that there was no problem 

with Judge Webster’s involvement in U.S. Technologies. The Chief of 

Staff communicated that message to the SEC Chairman. Neither the 

information provided by Judge Webster nor collected by the Chief 

Accountant was provided to SEC’s General Counsel for vetting purposes.



On October 21, Judge Webster met with the SEC Chairman and the Chief 

Accountant to discuss the position further. According to Judge Webster, 

the Chief Accountant and the SEC Chairman independently told Judge 

Webster on October 22 or 23 that his involvement with U.S. Technologies 

would not be a problem. Judge Webster also spoke, in person or on the 

telephone, with the other Commissioners and the General Counsel on or 

around October 22, but U.S. Technologies was not mentioned or 

discussed. Late in the afternoon of October 23, Judge Webster agreed to 

have his name considered for PCAOB chairman. The SEC Chairman and the 

Chief Accountant finalized the choices for the other members of the 

PCAOB and developed a five-member slate on October 24. On that day, in 

part due to concerns about a leak to the press, the draft slate was not 

shared with the full Commission. However, the Secretary of the Treasury 

and the Chairman of the Board of Governors of the Federal Reserve 

System were informed of the draft slate on October 24, and at the 

request of the SEC Chairman, they signed a joint letter endorsing Judge 

Webster and the other members on the slate.



There was additional research into Judge Webster’s involvement with 

U.S. Technologies after Judge Webster agreed to have his name submitted 

for consideration on October 23. On October 24, the Chief Accountant 

received a draft newspaper article, which mentioned that Judge Webster 

had served on the board of directors of several companies, including 

U.S. Technologies. This prompted the Chief Accountant to ask one of his 

staff to do some additional follow up on any open or closed enforcement 

activity concerning U.S. Technologies. This review also included a 

review of certain corporate disclosures filed with SEC by U.S. 

Technologies, including documents indicating that the company had 

dismissed its external auditor a month after material internal control 

weaknesses were reported. The Chief Accountant received this 

information on the morning of October 25, a few hours before the 

scheduled open meeting of the Commission. Again as discussed in detail 

in the next section, in the opinion of the Chief Accountant, this 

review revealed nothing that would have disqualified Judge Webster as a 

nominee. Therefore, the Chief Accountant did not pass on any 

information about U.S. Technologies or Judge Webster’s role to the SEC 

Chairman or the other Commissioners to consider prior to their vote to 

appoint members to the PCAOB. He also did not share this information 

with the General Counsel.



The SEC Chairman said that he and the Commissioners had planned to vote 

seriatim--whereby the slate of nominees would be passed among the 

Commissioners for signature--on Thursday, October 24, rather than 

holding an open Commission meeting. However, on October 23, one of the 

Commissioners requested an open meeting. On the morning of the October 

25 vote, the Office of the Chief Accountant provided the Commissioners 

with the slate of names for the PCAOB and formally notified them that 

vetting would occur post-appointment. At the open meeting, one 

Commissioner voted against all of the board nominees, stating that the 

selection process was inept and seriously flawed. Another Commissioner 

voted against Judge Webster, stating that he was not as qualified for 

the post as Mr. Biggs, but voted in favor of the remaining slate. The 

SEC Chairman and the remaining two Commissioners voted in favor of the 

slate of five. Judge Webster therefore was approved by a vote of three 

to two, and the remaining PCAOB nominees were approved by a vote of 

four to one.



Staff in the Office of the Chief Accountant continued to research 

matters associated with U.S. Technologies from the morning of the vote 

into the week of October 28. On October 31, allegations emerged that 

the SEC Chairman, before the October 25 vote, withheld from his fellow 

Commissioners material information about Judge Webster’s role at U.S. 

Technologies, which was relevant to the appointment of Judge Webster as 

chairman of the PCAOB.[Footnote 6] Later that same day, the SEC 

Chairman and another Commissioner separately called the SEC Inspector 

General to investigate these allegations. The SEC Chairman also asked 

the SEC Office of the General Counsel to conduct an investigation into 

Judge Webster’s involvement with U.S. Technologies.



Amid the subsequent controversy, the SEC Chairman announced his 

intention to resign on November 5, the Chief Accountant announced his 

resignation on November 8, and Judge Webster resigned from the PCAOB on 

November 12, effective upon the appointment of a new chairman. To date, 

the PCAOB has had two planning meetings, which have included Judge 

Webster. The PCAOB is expected to hold its first official meeting on 

January 6, 2003, at which time members’ terms officially begin. At this 

time, no acting chairman or replacement chairman has been appointed to 

the PCAOB. See appendix I for a more detailed chronology of major 

events.



Chief Accountant Did Not Inform the Commission of Issues at U.S. 

Technologies Prior to the Vote:



As discussed above, the Office of the Chief Accountant performed two 

reviews into Judge Webster’s involvement in U.S. Technologies prior to 

his appointment as PCAOB chairman. According to those in attendance, in 

an October 15 meeting, which included the SEC Chairman, the Chief 

Accountant, and the Chairman’s Chief of Staff, Judge Webster mentioned 

that he had formerly served as chairman of the audit committee of the 

board of directors of U.S. Technologies, a company on the brink of 

failure. He said that he asked SEC officials at that meeting to check 

SEC’s records to see if they indicated any problems relating to U.S. 

Technologies.[Footnote 7] According to the SEC Chairman, he told Judge 

Webster that they would contact him if any problems were found. 

Following this meeting, the SEC Chairman asked the Chief Accountant to 

look into U.S. Technologies. No one who attended the meeting contacted 

SEC’s General Counsel, who was responsible for vetting PCAOB 

candidates. Instead, the Chief Accountant asked his secretary to follow 

up on whether there were any open or closed SEC investigations of the 

company. Contact with the Division of Enforcement revealed that SEC was 

looking into allegations of misconduct by an officer of U.S. 

Technologies, not Judge Webster, involving a Schedule 13D filed in 

1999.[Footnote 8] Staff in the Office of the Chief Accountant received 

information from Enforcement staff that led them to believe that 

Enforcement staff expected to close the matter. Because the matter 

involved an officer of U.S. Technologies and not the company directly 

nor the activities of its board of directors, the Chief Accountant 

concluded that this did not affect Judge Webster’s nomination to serve 

as chairman of the PCAOB. According to the Chief Accountant, he passed 

along information from Enforcement staff to the SEC Chairman’s Chief of 

Staff that indicated there was no problem as a result of Judge 

Webster’s involvement with U.S. Technologies, and the Chief of Staff 

reported the same to the SEC Chairman. According to Judge Webster, the 

SEC Chairman and Chief Accountant independently informed him on October 

22 or 23 that his involvement in U.S. Technologies would not pose a 

problem. The SEC Chairman said that he recalled contacting Judge 

Webster, but the Chief Accountant said that he did not recall 

contacting Judge Webster.



There was a second inquiry into U.S. Technologies and Judge Webster by 

the Office of the Chief Accountant. This inquiry was prompted late on 

October 24 when the Chief Accountant reviewed a draft newspaper 

article, which mentioned that Judge Webster had formerly served on the 

board of directors of U.S. Technologies and had served as the chairman 

of its audit committee until July 2002. The Chief Accountant asked one 

of his staff to do some additional follow up but indicated that he 

thought it was “clean” on the basis of the initial review. This second 

review, as described in greater detail in figure 1, included examining 

certain corporate disclosures that U.S. Technologies filed with SEC, 

such as the most recent annual and quarterly filings. Early on the 

morning of October 25, staff became aware that the company had 

disclosed in a 2001 filing that it dismissed its external auditor in 

August 2001, a month after the auditor informed the company of material 

internal control weaknesses. Upon learning about the change in auditor, 

staff in the Office of the Chief Accountant did not contact Judge 

Webster to obtain additional information on this issue, nor did they 

contact other audit committee members, the company, the current or 

former external auditor, or the SEC General Counsel.



Figure 1: Detailed Analysis of the Office of the Chief Accountant’s 

Second Review of U.S. Technologies:



[See PDF for image]



Note: SEC requires a publicly held company to file a Form 8K when the 

company changes its auditor.



[See PDF for image]



Similar to his initial determination of October 15, the Chief 

Accountant evaluated the additional information that had been 

collected, including information on U.S. Technologies’s change in 

external auditor and determined that, in his view and his staff’s view, 

nothing had come to light that affected the suitability of Judge 

Webster to serve as PCAOB chairman. The Chief Accountant told us that 

his decision was based on his review of financial disclosure documents 

filed with SEC; his experience as an auditor; the stature and 

reputation of Judge Webster, who had been confirmed by the Senate five 

times; and his knowledge that additional vetting would occur post-

appointment. The Chief Accountant also said the documents filed with 

SEC by U.S. Technologies, which were determined to be late and reported 

internal control weaknesses, described problems that were not unusual 

in small, rapid-growth companies. He said that such companies often 

outgrow their existing financial and accounting systems and the 

capacity of their chief financial officers. Moreover, he was persuaded 

by the fact that U.S. Technologies’s auditor had ultimately given the 

company a clean opinion. Having decided that U.S. Technologies posed no 

problems with regard to Judge Webster’s nomination, the Chief 

Accountant did not believe that he needed to share this information 

with the SEC Chairman or the other Commissioners. The Chief Accountant 

said that he had made a similar judgment about Mr. Biggs who had been 

on the audit committee of the board of directors of McDonnell-Douglas 

when it entered into a consent decree with SEC regarding issues 

involving accounting irregularities several years ago.



According to the SEC Chairman, he knew that Judge Webster was the 

former chairman of the audit committee of the board of directors of 

U.S. Technologies before the October 25 vote. He said that he learned 

after the vote that law enforcement authorities were investigating the 

Chief Executive Officer of U.S. Technologies. Specifically, Judge 

Webster told us that he telephoned the SEC Chairman on October 28 to 

inform him that he had learned during the weekend of October 26 and 27 

that law enforcement was investigating U.S. Technologies’s Chief 

Executive Officer. Further, the SEC Chairman and the other 

Commissioners told us that they learned for the first time of reported 

“allegations of fraud” against U.S. Technologies and that the company 

had dismissed its external auditor following an audit that uncovered 

material internal control weaknesses from a reporter’s inquiry on 

October 30 or from the October 31 newspaper article.[Footnote 9] This 

disclosure prompted the SEC Chairman to ask the General Counsel to 

investigate Judge Webster’s role in these matters. The Office of the 

General Counsel has subsequently suspended the investigation due to 

Judge Webster’s resignation.



Vetting Process Was Initiated Post-Appointment:



Vetting candidates is a vital component of the appointment process. The 

General Counsel was asked to vet the appointees, and according to the 

SEC Chairman, he expected that some vetting and background checks would 

be performed by the General Counsel on candidates throughout the 

process. Although the Chairman said that he knew that some vetting 

would occur post-appointment, he was surprised at how little was done 

before the vote. We found that after the selection process broke down 

in early October and Commissioners began to interview a larger number 

of candidates than staff originally planned, the General Counsel met 

with many but not all of the potential candidates who were interviewed. 

Specifically, the General Counsel told us that prior to October 25, he 

had met with 17 of the roughly 25 candidates who were interviewed. 

However, the Office of the Chief Accountant did not schedule meetings 

for him with three of the five individuals who were ultimately 

appointed to the PCAOB.



The General Counsel said that he understood that his role in interviews 

with candidates beginning in early October was to address questions 

regarding service on the PCAOB, such as pay, location, ethics 

restrictions, and other matters important to attracting quality 

candidates. He also informed candidates that they would be required to 

submit questionnaires and be subject to a background check. The General 

Counsel said that he expected that the final slate would be subject to 

additional interviews and vetting. As a result, the candidates with 

whom he met were not systematically queried about current or previous 

membership on boards of companies nor were they subject to the other 

planned elements of the vetting process. For example, we found that SEC 

also did not systematically use its available internal technological 

capabilities and resources to the fullest extent possible to begin to 

collect fundamental information on the applicants being interviewed as 

it had initially planned to do. Moreover, SEC staff did not 

consistently search internal databases such as the Name Relationship 

Search Index (NRSI) and the Electronic Data Gathering and Retrieval 

System (EDGAR), or periodical databases such as LexisNexis and Westlaw, 

for any information on potential candidates.[Footnote 10] Instead, if 

any candidate brought up an issue that might potentially affect his or 

her fitness to serve, the General Counsel would look into the matter. 

This occurred in at least two instances during the interview process. 

The General Counsel met with Judge Webster prior to his appointment, 

but there was no discussion of U.S. Technologies. The General Counsel 

said that he first learned of potential concerns about Judge Webster 

and U.S. Technologies from press inquiries in the days leading up to 

the October 31 newspaper article.



Early in the selection process, there also was no clearly defined and 

agreed-upon method for vetting of candidates, and SEC staff considered 

various approaches to vetting the slate of five candidates. Initially, 

the Office of the General Counsel explored using the FBI to conduct 

background investigations into PCAOB appointees. However, because the 

PCAOB was not a federal government entity and the FBI was unlikely to 

be able to complete required investigations within SEC’s tight time 

frames, SEC staff decided that it would be more appropriate to hire an 

outside contractor to perform this role.



The General Counsel agreed to develop an appointee questionnaire that 

then would be supplied to the outside contractor that would be 

performing the background checks. It was the General Counsel’s 

expectation throughout the process that background checks would be 

performed only for the five individuals actually nominated for the 

PCAOB. Early in the selection process, the SEC Chairman and staff 

believed that the selection process would be completed by the end of 

September and that at least some vetting of the appointees would be 

completed before the October 28 statutory deadline for the appointment 

of the PCAOB. However, by mid-October the slate had still not been 

agreed upon and the General Counsel had just hired a contractor to 

conduct background checks on the appointees. Therefore, it became clear 

that vetting of candidates could not be completed prior to appointment 

and the General Counsel concluded that it would be necessary to vet the 

PCAOB members post-appointment. Ultimately, the General Counsel did not 

know the final slate of names selected from among those who were 

interviewed until October 24, the night before the vote. As a result, 

insufficient time remained to properly vet the PCAOB members prior to 

their appointment, and the General Counsel and his staff were able to 

perform only a very limited inquiry into enforcement activities before 

the Commission’s vote. Although some indicated surprise, all of the 

Commissioners were informed before the vote that background checks had 

not been performed on the candidates and that the Office of the General 

Counsel planned to use a questionnaire and outside contractor to vet 

the appointees. At the October 25 Commission meeting, the Commissioners 

selected the first chairman and members of the PCAOB and authorized 

background checks.



On November 1, 2002, the Office of the General Counsel formally 

notified the Commission of the specific steps that staff from the 

Office of the General Counsel had taken or planned to take to examine 

the background of each PCAOB member. The Office of the General Counsel 

also provided the Commissioners with a copy of the questionnaire, which 

was based on the federal “Questionnaire for National Security 

Positions” and the “Statement for Completion by Presidential Nominees,” 

that each PCAOB member was asked to complete. This questionnaire was 

sent to the PCAOB appointees on November 6, and all documents were 

completed and returned by November 13. A supplemental questionnaire was 

sent to the PCAOB appointees on November 14, and all documents were 

completed and returned to SEC by November 20.



Also on November 1, the Office of the General Counsel provided 

additional information on the role of CRM Consulting, the private 

contractor hired to verify the information on the questionnaires. At 

the time of our review, CRM Consulting was reviewing the appointees’ 

completed questionnaires and expected to complete its review by the end 

of the year. SEC staff are to review the information provided by CRM 

Consulting and look into certain issues, such as outstanding or 

anticipated lawsuits, administrative proceedings against the member, 

legal judgments, pending civil or criminal inquiries involving the 

member in any way, investigations or sanctions of the members by 

professional associations, financial obligations that might affect a 

member’s service, potential conflicts of interest, and other matters 

that if they became publicly known could subject the Commission or the 

PCAOB to embarrassment or disrespect. In addition to staff from the 

Office of the General Counsel, staff from the Division of Enforcement 

will be involved in this process. The Office of the General Counsel had 

planned to include a review of Judge Webster’s activities involving 

U.S. Technologies and other relevant matters. However, this review was 

suspended following Judge Webster’s resignation on November 12. The 

Office of the General Counsel described the staff review of the 

background checks as limited; SEC plans to rely primarily on the 

contractor’s check. The staff review also will not involve an 

assessment of the sufficiency of the member’s education, professional 

competence, or experience to serve. The review process was still 

ongoing at the time of our review.



Several Factors Contributed to the Breakdown of SEC’s Selection and 

Vetting Process:



Although SEC lacked a documented and formalized selection and vetting 

process for nominees, several factors contributed to the eventual 

breakdown of the Commission’s ability to select a slate of nominees 

that could be unanimously appointed. First, lacking formalized and 

tested procedures familiar to SEC staff and the Commissioners, the SEC 

Chairman did not reach consensus with the other Commissioners about the 

process; therefore, the Commission was unable to provide clear 

direction to staff. Second, the Commission neither agreed upon nor 

articulated formal selection criteria beyond the general criteria 

provided by the act. Finally, the lack of pre-appointment background 

checks and vetting exposed SEC to risks.



Selection Process Broke Down in Absence of a Consensus among 

Commissioners:



Perhaps the biggest impediment to the smooth functioning of the 

selection process was a lack of initial consensus among the 

Commissioners and key SEC staff on the selection process. As previously 

mentioned, the Chairman initially decided that staff, primarily the 

Chief Accountant, who would have most contact with the PCAOB, would 

drive the effort. Although we found some evidence that staff from the 

Office of the Chief Accountant and General Counsel had informal 

meetings about the selection and vetting process in August, the process 

was not formalized and continued to change over time.



SEC did not find viable solutions to deal with Sunshine Act constraints 

nor did the staff formalize a selection process and submit a plan to 

the Commission for its approval.[Footnote 11] One option would have 

been to hold an open meeting to discuss and agree to a process. Another 

option, which was subject to constraints identified by the General 

Counsel, would have been to hold a closed meeting. However, some of the 

Commissioners did not want to hold an open meeting because of privacy 

concerns about potential nominees and public scrutiny. Others were 

concerned that a closed meeting would have raised questions about the 

transparency of the process. A third option, which was suggested by at 

least one of the Commissioners, would have been to formalize the 

process in writing, circulate it, and reach agreement among the 

Commissioners. Reaching a consensus through a process meeting early in 

the process on the roles, responsibilities, and duties of the 

Commission and SEC staff would have helped to provide direction and 

focus on how the selection process could best be accomplished. Without 

the benefit of an organizational meeting to share their thoughts and 

perspectives, it was difficult for the Commissioners to discuss the 

process and how they thought it should work. Instead, the Chief 

Accountant usually provided information to the SEC Chairman or his 

staff, and that information was expected to be relayed to the other 

Commissioners through weekly meetings between the SEC Chairman and each 

Commissioner. The SEC Chairman said that he also thought the Chief 

Accountant was meeting with the other Commissioners, but the Chief 

Accountant said that he relied to a great extent on the SEC Chairman’s 

weekly meeting with each Commissioner to keep them apprised. As a 

result, the Chief Accountant and the Chairman acted as intermediaries 

in keeping the Commissioners involved in the process.



The lack of early consensus and approval of the process by the 

Commission continued to affect the selection process. For example, some 

of the Commissioners complained that they were not sure about what was 

occurring and that they did not want to receive a final slate of names 

without being able to independently query candidates. As Commissioners 

raised concerns, the SEC Chairman and the Chief Accountant would adjust 

the process to accommodate the input provided. For example, early in 

the selection process, one Commissioner suggested that SEC focus on 

selecting a chairman and build the rest of the membership around that 

person. Another Commissioner, unhappy with the lack of a process and 

the apparent lack of progress, began arranging meetings with candidates 

on his own. However, he did not initially include the Chairman, which 

created a problem. Both concerns listed above led to adjustments and 

expanded the selection process. The Commissioners ultimately were not 

able to reach agreement on an individual to serve as the chairman, and 

each of the Commissioners interviewed more candidates than originally 

planned. The lack of an articulated, agreed-upon process also eroded 

communications as the deadline drew closer. The evening before the 

October 25 vote, only three of the five Commissioners were provided 

with a draft of the names of the final slate.



Commission Did Not Have Formalized Selection Criteria Beyond Those in 

the Act:



Although the act provides broad selection criteria, SEC did not develop 

more specific selection criteria on the composition of the PCAOB other 

than the two mandated CPA slots. Staff discussed developing more 

specific selection criteria but decided that any additional criteria 

might draw criticism from some observers or potentially eliminate 

otherwise worthy candidates from being considered. Developing more 

specific selection criteria was especially important because the 

statute provided only broad requirements, and SEC had to use discretion 

and judgment in making its selections. For example, the act left it up 

to SEC to decide how much auditing experience the two CPAs should have 

to serve on the PCAOB. However, SEC staff neither documented nor 

clearly articulated, what, if any, additional selection criteria SEC 

planned to use to evaluate the hundreds of names that it had received 

for consideration on the PCAOB. For example, SEC’s August 1, 2002, 

release restated the broad criteria established by statute that members 

should be appointed from:



“among prominent individuals of integrity and reputation who have a 

demonstrated commitment to the interests of investors and the public, 

and an understanding of the responsibilities for and nature of the 

financial disclosures required of issuers under the securities laws and 

the obligations of accountants with respect to the preparation and 

issuance of audit reports with respect to such disclosures.”:



However, these criteria alone made it difficult to narrow the list of 

nominees and applicants.



We considered the process followed by other entities that appoint 

boards, nominate agency heads, or fill staff positions. Generally, the 

process includes some sort of selection criteria. For example, the 

Financial Accounting Foundation (FAF), which appoints members to serve 

on the Financial Accounting Standards Board (FASB) as terms expire, has 

specific selection criteria for board membership. In addition to 

knowledge of financial accounting and reporting and an awareness of the 

financial reporting environment, FAF’s selection criteria include other 

skills such as critical thinking, communication, and interpersonal 

skills. Likewise, SEC has a similar process for hiring staff for 

senior-level positions. Although the task faced by SEC was unique in 

some respects, there are valid comparisons that can be made; SEC staff 

also indicated that they considered the FAF approach among others when 

framing its selection and vetting process. However, we found no 

evidence that any additional selection criteria were identified, 

documented, and applied consistently among the candidates. Nor was 

consistent and sufficient information collected that would have allowed 

staff and the Commissioners to apply such criteria as considered 

appropriate.



In keeping with the notion of augmenting the act’s selection criteria, 

the Chief Accountant said that his goal was to create a “balanced” 

board, which he defined as a diverse board representing a variety of 

constituencies and ideologies. He also stressed that he and the 

Commissioners sought a racially and gender-diverse membership. Given 

that the act required that two of the PCAOB’s five members be CPAs, the 

Chief Accountant wanted to ensure that the other members had skills 

needed to establish a new organization. The Chief Accountant said that 

he generally categorized nominees or applicants into broad groups, 

including investor advocates, former chief executive officers or 

business executives, attorneys, politicians, academics, regulators, 

and accountants. This approach was also consistent with the FAF model 

for FASB, which is balanced among academics, investors, industry 

representatives, and CPAs. However, unlike FAF, this approach does not 

appear to have been well-articulated or communicated to the Commission 

or the public, nor does it appear that all members of the Commission 

ever endorsed the Chief Accountant’s balanced board approach. One 

Commissioner wanted the board to have a strong law enforcement 

orientation because of the PCAOB’s mandate to enforce its regulations 

and standards. Yet another Commissioner wanted the board to include a 

majority of “reformers,” reflecting what he considered was the purpose 

of the act. At times, some Commissioners believed that balance also 

involved political party affiliation. The lack of agreement and open 

dialogue about these issues hampered the Commission’s ability to reach 

a consensus and eventually contributed to the ineffectiveness of the 

process. Participants in the process also believed that it was 

complicated by the involvement of a wide range of external parties and 

media scrutiny. As a result, the split Commission vote on the PCAOB, 

most notably the vote on the chairman, raised speculation about the 

integrity of the process.



Lack of Pre-Appointment Background Checks and Vetting Exposed Process 

to Risk:



As previously mentioned, after the Commission was unable to appoint a 

consensus candidate for PCAOB chairman by the end of September, the 

Office of the General Counsel was forced to vet the final slate post-

appointment. Although the Chairman had tasked the General Counsel with 

vetting the PCAOB appointees, the Commission and staff did not discuss 

or reach agreement on the role to be played by the General Counsel in 

the interview process after early October when the process changed. One 

method of vetting would have been for the General Counsel, in addition 

to serving as a resource to candidates, to use a uniform list of 

questions to ask of potential candidates before the Commissioners 

interviewed them.[Footnote 12] Similarly, staff in the Office of the 

Chief Accountant had developed a list of interview questions that 

apparently was not used during the interviews, but which would have 

allowed the interviewers to solicit consistent information from 

candidates. The General Counsel said that he was not consistently 

scheduled for interviews with candidates and that he did not see the 

final slate of candidates until the evening before the vote. Therefore, 

the General Counsel could not elicit background information, adequately 

utilize existing SEC databases, or access other publicly available 

sources to conduct a minimum level of due diligence on potential 

members’ board memberships, affiliations, conflicts of interests, 

litigation, or other activities that might raise actual or apparent 

conflicts of interest or raise issues that could hamper the 

effectiveness of the PCAOB or embarrass the Commission. Due to the 

process and communication breakdown, the Office of the Chief Accountant 

in connection with the Office of the General Counsel, the Division of 

Enforcement, and the Division of Corporation Finance did not explore 

all internal sources of information early enough or fully enough to 

ensure that no conflicts existed. The Office of the General Counsel 

also was not able to review other publicly available sources of 

information in a timely manner. For example, the Office of the General 

Counsel could have learned about pending litigation through sources 

such as Westlaw and LexisNexis. The absence of vetting, while made 

known to the Commission prior to the vote, may have prevented the 

Commission from making a fully informed vote about the candidates.



Conclusions:



Given the short time frame to appoint members and the lack of an 

existing formalized process, the PCAOB selection process was a 

difficult undertaking for SEC. Based on our reviews of various 

correspondence and extensive interviews with the principals involved, 

it is clear that the Commissioners never collectively discussed 

establishing a process nor reached consensus on how best to proceed in 

selecting members for the PCAOB. This lack of consensus was evidenced 

by a fundamental disagreement about whether the Commissioners should 

have played a lead role in identifying potential PCAOB candidates or 

whether the process should have been staff-driven as envisioned by the 

Chairman. Although Sunshine Act requirements may have made it more 

difficult for the Commission to reach this much needed consensus, SEC 

did not identify effective alternative methods for ensuring that the 

views of all the Commissioners were reflected in the process. As a 

result, the process changed and evolved over time and was neither 

consistent nor effective. Although the Commission was informed that 

background checks and vetting had not occurred before the vote on 

October 25, the Chairman and Commissioners generally believed that the 

Office of the General Counsel and/or the Office of the Chief Accountant 

was undertaking some type of vetting of candidates throughout the 

process. Given the highly scrutinized, political nature of the 

appointment process, any decisions had to be able to withstand intense 

public scrutiny and, hence, the lack of vetting proved to be a 

significant flaw in the selection process.



Based on our reviews of thousands of pieces of correspondence and 

comprehensive interviews, we found no evidence that the SEC Chairman 

knew anything before the October 25 vote other than that Judge Webster 

had once been chairman of the audit committee of the board of directors 

of U.S. Technologies, a company on the brink of failure. This 

information, which the SEC Chairman heard from Judge Webster on October 

15, was not detailed and did not raise a major concern at that time, 

and prior to the vote, the Chairman’s Chief of Staff had told the 

Chairman that Judge Webster’s involvement in U.S. Technologies was not 

a problem. However, in making this conclusion, insufficient due 

diligence was performed by the Office of the Chief Accountant. In 

addition, the Chief Accountant’s failure to communicate any information 

to the General Counsel, who had responsibility for the vetting process, 

could have contributed to this incomplete assessment.



When staff in the Office of the Chief Accountant conducted further 

analysis into U.S. Technologies on October 25, they became aware that 

the company’s 2001 filings disclosed that the company had dismissed its 

external auditor a month after that external auditor reported material 

internal control weaknesses related to the company’s accounting and 

financial reporting infrastructure resulting from the lack of an 

experienced chief financial officer. Based on the factors previously 

discussed including his experience as an auditor, his knowledge of 

Judge Webster’s long and prominent record of public service, and an 

understanding that additional vetting would take place post-

appointment, the Chief Accountant concluded that this matter did not 

raise a concern and decided that it was not necessary to inform the 

Chairman, the other Commissioners, or the Office of the General Counsel 

of these issues. In light of the current environment surrounding 

auditors, the role played by audit committees of boards of directors of 

publicly held companies and the expectation that new members of the 

PCAOB be beyond reproach, it is clear from our review of the relevant 

documents that these matters, especially when viewed in the current 

environment, should have prompted SEC to perform additional, in-depth 

evaluation before reaching a conclusion about U.S. Technologies and 

Judge Webster’s involvement. Further, in our view, the information 

concerning Judge Webster’s role as chairman of the audit committee of 

the board of directors of a company that had dismissed its external 

auditor after the auditor had found material internal control 

weaknesses should have been shared by the Chief Accountant with the SEC 

Chairman and other Commissioners prior to the vote.



SEC was under enormous pressure in selecting the PCAOB members and had 

little time to do so. SEC also had difficulty getting certain 

outstanding individuals to agree to be PCAOB members because of the 

full-time service requirement and the need for members to give up 

certain forms of income and other professional or business activities. 

However, going forward, the Commission will be tasked with establishing 

a more credible process to replace individual PCAOB members, starting 

first with selecting a replacement for the chairman and then conducting 

annual staggered reappointments.



Recommendations for Executive Action:



Much can be done to improve the selection and vetting process. Before 

any additional members are appointed to the PCAOB, especially the 

chairman, we recommend that the Commission:



* reach agreement and document the process to be followed, the sequence 

and timing of key steps, and the roles to be played by the Commission 

and the staff in the selection and vetting of candidates;



* develop agreed-upon, detailed selection criteria for PCAOB members 

and the chairman that fully embrace the principles articulated in the 

Sarbanes-Oxley Act of 2002;



* develop a vetting process that ensures that before an applicant is 

brought to the Commission for serious consideration, certain minimum 

background and reference checks are performed to ensure that the 

individual has no potential legal or ethical impairments and ensure 

that the vetting process is completed before the Commission votes to 

appoint members to the PCAOB; and:



* determine what candidate information should be documented, analyzed, 

and shared among the Commission and staff.



Moreover, we recommend that the SEC Chairman, direct staff involved in 

the PCAOB selection process to make greater use of available technology 

to conduct necessary background checks and to generate sufficient 

details on the qualifications of potential applicants so that the 

Commission can make informed decisions on the fitness of potential 

applicants to be PCAOB members.



Agency Comments:



We requested comments on a draft of this report from SEC Commissioners, 

SEC’s General Counsel, SEC’s former Chief Accountant, the Chairman’s 

former Chief of Staff, and others at SEC involved in the selection and 

vetting process. In addition, we requested comments from Judge William 

H. Webster and John H. Biggs. Each of these parties provided only 

technical comments on the report’s contents, which were incorporated as 

appropriate. The Chairman and each of the Commissioners also told us 

that they generally agreed with the report’s recommendations.



We will send copies of this report to the Ranking Member of the Senate 

Committee on Banking, Housing, and Urban Affairs; the Chairman of the 

House Committee on Energy and Commerce; the Chairman of the House 

Committee on Financial Services; and other interested congressional 

committees. We also will send copies to the Chairman and Commissioners 

of the SEC, the former Chief Accountant, Judge Webster, Mr. Biggs, and 

others upon request. In addition, this report is also available on 

GAO’s Web site at no charge at http://www.gao.gov.



If you or your staff have any questions concerning this letter, please 

contact Orice M. Williams or me at (202) 512-8678. Toayoa Aldridge, 

Wesley Phillips, Derald Seid, David Tarosky, and Barbara Roesmann made 

key contributions to this report. In addition, Robert Cramer of our 

Office of Special Investigations and Nelson Egbert and Mary Beth 

Sullivan of the SEC Office of the Inspector General made key 

contributions to this report.



Richard J. Hillman

Director, Financial Markets and  Community Investment



Signed by Richard J. Hillman



[End of section]



Appendix I: Summary of Key Events Associated with the Selection of the 

Public Company Accounting Oversight Board:



Table 1:



Date (2002): July 30; Event: Sarbanes-Oxley Act of 2002 is signed into 

law, requiring the Securities and Exchange Commission (SEC) to appoint 

a five-member Public Company Accounting Oversight Board (PCAOB) within 

90 days.



Date (2002): August 1; Event: Chairman delegates responsibility for 

identifying candidates for the PCAOB to the SEC Chief Accountant. The 

General Counsel was tasked with vetting candidates. The legislative 

deadline to appoint the board is October 28, but SEC staff plan to 

complete the process by September 30; SEC issues a release calling 

for nominations and applications for the board to be submitted by 

September 2. SEC also begins to directly solicit names of potential 

candidates from various stakeholders.[A].



Date (2002): Early August; Event: Paul A. Volcker emerges as the 

consensus choice for PCAOB chairman.



Date (2002): August 9; Event: SEC Chairman has initial meeting with the 

Secretary of the Treasury and the Chairman of the Board of Governors of 

the Federal Reserve System to discuss candidates and obtain input.



Date (2002): August 14; Event: List of PCAOB candidates with 210 names 

is distributed to the Commissioners.



Date (2002): August 18; Event: Chief Counsel in the Office of the Chief 

Accountant suggests that a meeting be scheduled to discuss the 

mechanics of selecting the members of PCAOB.



Date (2002): August 23; Event: Office of the General Counsel formalizes 

procedures for vetting candidates.



Date (2002): August 26; Event: Chief Accountant recommends that SEC 

engage a private firm to conduct background investigations of PCAOB 

candidates.



Date (2002): August 28; Event: Updated list of candidates with 325 

names is distributed to the Commissioners.



Date (2002): September 2; Event: SEC cutoff date for receipt of 

nominations and applications; SEC Chairman, one Democratic 

Commissioner, and the Chief Accountant meet with Mr. Volcker in New 

York City to discuss the PCAOB chairmanship position. Mr. Volcker 

agrees to inform SEC Chairman of his decision by September 5.



Date (2002): September 5; Event: SEC learns that Mr. Volcker will not 

accept the chairmanship.



Date (2002): September 11; Event: SEC Chairman, a Democratic 

Commissioner, and the Chief Accountant meet with John H. Biggs in New 

York City to discuss the PCAOB chairmanship.



Date (2002): Mid-September; Event: Charles Niemeier, PCAOB appointee, 

receives call from the Office of the Chief Accountant requesting a copy 

of his résumé.



Date (2002): September 19; Event: Kayla Gillan, PCAOB appointee, 

receives call from the Office of the Chief Accountant to schedule a 

telephone conference with the Chief Accountant.



Date (2002): September 20; Event: SEC Chief Accountant interviews Ms. 

Gillan by telephone.



Date (2002): September 23; Event: Willis Gradison, PCAOB appointee, 

receives call from the Office of the Chief Accountant requesting a copy 

of his credentials.



Date (2002): September 24; Event: Mr. Biggs meets in New York with 

third Commissioner.



Date (2002): September 25; Event: Ms. Gillan meets in New York with one 

Commissioner.



Date (2002): September 26; Event: Ms. Gillan and Mr. Biggs meet in New 

York City at the suggestion of a Commissioner; One Commissioner 

schedules interviews with fellow Commissioners for Ms. Gillan and 

another candidate. The Chairman was not included.



Date (2002): Late September; Event: Office of the Chief Accountant 

begins scheduling interviews of PCAOB candidates with the 

Commissioners. Mr. Gradison receives a call from the Chief Accountant 

to come in for interviews. Mr. Niemeier is also asked to come in for 

interviews.



Date (2002): September 27; Event: For the Chairman, Mr. Biggs’s 

appointment is contingent upon another specific individual being 

appointed to the PCAOB. One of the other Commissioners informs the 

Chairman that a Commissioner may not be willing to support that 

individual; SEC Chairman calls William H. Webster to ask him to 

consider taking a position on the new PCAOB; Mr. Biggs has meetings 

with two Commissioners at SEC headquarters.



Date (2002): September 27-30; Event: Two Commissioners inform the SEC 

Chairman that three of the Commissioners are unclear as to what is the 

PCAOB selection process, which they urge the Chairman to articulate. 

The two Commissioners suggest that all five Commissioners have a 

meeting about the selection process and “discuss where we are and where 

we are going.”



Date (2002): September 30; Event: Daniel Goelzer, PCAOB appointee, 

receives a call from the Chief Accountant requesting a copy of his 

résumé.



Date (2002): October 1; Event: Article in The New York Times reports 

that Mr. Biggs had “agreed to be the first head” of PCAOB; Ms. 

Gillan meets with three Commissioners at SEC headquarters; Mr. Biggs 

and the Chairman of the Board of Governors of the Federal Reserve 

System speak by telephone about the PCAOB.



Date (2002): October 2; Event: SEC Chairman calls Mr. Biggs to inform 

him that the prior day’s newspaper article had created consternation at 

SEC and “complicated things” regarding the consideration of Mr. Biggs 

for chairman of PCAOB; Mr. Goelzer meets with the SEC Chairman and 

the Chief Accountant; Mr. Gradison has meetings with three 

Commissioners at SEC headquarters.



Date (2002): October 3; Event: Mr. Goelzer has meetings with remaining 

four Commissioners at SEC headquarters; Mr. Gradison has meetings 

with the Chief Accountant, one Commissioner, and the SEC Chairman.



Date (2002): October 4; Event: Article in The New York Times alleges 

that the SEC Chairman was “backing away from” Mr. Biggs as PCAOB 

chairman. For the SEC Chairman, this raises questions about Mr. Biggs’s 

independence; Through the issuance of a Statement of Work and 

Request for Quotations (RFQ), SEC solicits bidders to conduct 

background investigations of prospective PCAOB members. The RFQ 

requests that quotations be furnished by October 8.



Date (2002): October 8; Event: Mr. Niemeier meets individually with 

Commissioners at SEC headquarters.



Date (2002): October 11; Event: Ms. Gillan has telephone interview with 

the SEC Chairman.



Date (2002): October 15; Event: Judge Webster meets at SEC headquarters 

with the SEC Chairman, the Chief Accountant, and the Chairman’s Chief 

of Staff, who together explain to Judge Webster the value he could 

bring to the PCAOB. During this meeting, Judge Webster mentions that he 

was the former chairman of the audit committee of the board of 

directors of U.S. Technologies, Inc; At the request of staff in the 

Office of the Chief Accountant, staff in SEC’s Division of Enforcement 

searches the Name Relationship Search Index database for information on 

U.S. Technologies; Around this time, the Office of the General 

Counsel realized that vetting would have to be completed post-

appointment.



Date (2002): October 17; Event: The Office of the Chief Accountant and 

the Office of the General Counsel file an Order for Supplies or 

Services to have Contract Resource Management, Inc. (CRM), conduct 

background investigations on PCAOB appointees. The order is for five to 

eight background investigations; During a meeting with the Federal 

Reserve Chairman concerning a supervisory matter, the SEC Chairman 

shared several names of potential nominees for the PCAOB.



Date (2002): October 21; Event: Judge Webster meets with the SEC 

Chairman, the Chief Accountant, and the Chairman’s Chief of Staff at 

SEC headquarters a second time to again discuss the possibility of 

Judge Webster serving on PCAOB; SEC Chairman meets with Mr. 

Niemeier.



Date (2002): October 22; Event: Judge Webster meets with remaining 

Commissioners in person or by telephone. Judge Webster meets separately 

with the SEC General Counsel to discuss the full-time nature of PCAOB 

service and what that would entail.



Date (2002): October 23; Event: A Commissioner requests that the SEC 

Chairman schedule an open meeting for the PCAOB vote. The Chairman 

schedules the open meeting for 2 p.m. on October 25; Judge Webster 

agrees in the evening to be PCAOB chairman; Chief Accountant leaves 

messages for Mr. Gradison and Mr. Goelzer regarding “exciting news.” 

Mr. Gradison returns the call the following morning, and the Chief 

Accountant informs him of his nomination.



Date (2002): October 24; Event: Chief Accountant and the SEC Chairman 

recommend terms of office for board members; Chief Accountant asks 

member of his staff to look again into the U.S. Technologies filings 

and enforcement actions; Chief Accountant informs Ms. Gillan of her 

nomination to the board. Also, the SEC General Counsel does a verbal 

background check over the telephone; SEC Chairman calls the Chairman 

of the Board of Governors of the Federal Reserve System and informs him 

that Judge Webster has accepted the PCAOB chairmanship. Later that day, 

the SEC Chairman provides the Chairman of the Board of Governors of the 

Federal Reserve System and the Secretary of the Treasury with the names 

of the four other nominees and asks them for letters endorsing SEC’s 

selections to the PCAOB; Office of the General Counsel completes 

search of Name Relationship Search Index database for information on 17 

finalists for the PCAOB.



Date (2002): October 25; Event: Staff from the Office of the Chief 

Accountant provides the Chief Accountant with an overview of 

information collected on U.S. Technologies; Mr. Niemeier finds out 

that he has been selected for the PCAOB the morning of the vote; 

Commissioners see final slate and are formally told that vetting will 

occur post-appointment. Also, PCAOB nominees find out for the first 

time the names of their fellow board members; Judge Webster, Ms. 

Gillan, Mr. Goelzer, Mr. Gradison, and Mr. Niemeier are appointed to 

the PCAOB at the SEC open meeting.



Date (2002): October 28; Event: Judge Webster telephones the SEC 

Chairman to inform him that law enforcement officers had seized 

equipment and records at U.S. Technologies’s offices.



Date (2002): October 30; Event: SEC press office receives an inquiry 

from The New York Times seeking comment on the content of an article it 

plans to print the following day concerning a criminal fraud 

investigation at U.S. Technologies; Office of the Chief Accountant 

looks into whether the SEC Division of Corporation Finance reviewed the 

U.S. Technologies’s Form 8-K and Form 8-K/A filings.



Date (2002): October 31; Event: Article in The New York Times alleges 

that Judge Webster provided the SEC Chairman with detailed information 

about his role in U.S. Technologies when he met with him earlier in the 

month; SEC Chairman and at least one other Commissioner 

independently contact the SEC Office of the Inspector General to 

investigate these allegations; Commission also asked the SEC Office 

of the General Counsel to conduct an investigation into Judge Webster’s 

involvement with U.S. Technologies.



Date (2002): November 1; Event: SEC General Counsel outlines for the 

Commission the specific steps his staff are taking to examine the 

backgrounds of each PCAOB appointee.



Date (2002): November 5; Event: SEC Chairman resigns.



Date (2002): November 6; Event: SEC Office of the General Counsel sends 

out vetting questionnaires to PCAOB members with a deadline of November 

15 for submission.



Date (2002): November 8; Event: Chief Accountant resigns.



Date (2002): November 12; Event: Judge Webster resigns as chairman of 

the PCAOB.



Date (2002): November 13; Event: PCAOB holds planning meeting that 

includes Judge Webster.



Date (2002): November 14; Event: Office of the General Counsel sends 

out supplemental questionnaires to PCAOB members with a deadline of 

November 20 for submissions.



Date (2002): November 15; Event: All questionnaires have been sent to 

CRM, the contractor SEC hired to conduct background investigations.



Date (2002): November 20; Event: Office of the General Counsel sends 

Ms. Gillan’s and Messrs. Niemeier’s, Gradison’s, and Goelzer’s 

supplemental questionnaires to CRM.



Date (2002): November 29; Event: Article in The Wall Street Journal 

reports on the role played by Arthur Levitt in supporting Mr. Biggs.



Date (2002): December 2; Event: PCAOB holds its second planning meeting 

that includes Judge Webster; CRM briefs the Office of the General 

Counsel on its preliminary findings and indicates that it will provide 

a more formal report on December 12.



Date (2002): December 31; Event: CRM is to provide a final report on 

the supplemental questionnaires to the Office of the General Counsel by 

this date.



[A] Stakeholders included Members of Congress, the Chairman of the 

Board of Governors of the Federal Reserve, the Secretary of the 

Treasury, industry groups, senior-level SEC staff, self-regulatory 

organizations, witnesses from related congressional hearings, and 

others.



[End of table]



Source: GAO analysis of SEC documents, relevant interviews, and other 

information.



FOOTNOTES



[1] SEC was involved in establishing the Municipal Securities 

Rulemaking Board, which was created under the Securities Acts 

Amendments of 1975, Pub. L. No. 94-29, §13, to regulate brokers, 

dealers, and banks dealing in municipal securities. 



[2] Under Reorganization Plan No. 10, most of the Commission’s 

executive and administrative functions were transferred to the SEC 

Chairman, including the appointment and supervision of Commission 

personnel, distribution of business among the administrative units, and 

the use and expenditure of funds. Moreover, the Chairman effectively 

sets the agenda and policy direction for the Commission and determines 

what issues staff bring before the Commission.



[3] By the October 25 vote, SEC had compiled a list of more than 450 

names. 



[4] The New York Times, “Chief of Big Pension Plan Is Choice for 

Accounting Board,” October 1, 2002.



[5] The New York Times, “SEC Chief Hedges on Accounting Regulator,” 

October 4, 2002.



[6] The New York Times, “Audit Overseer Cited Problems in Previous 

Post,” October 31, 2002.



[7] Judge Webster told us that he was not concerned about the financial 

activities of the company, given that the company was receiving clean 

audit opinions from its external auditors. However, he said that he was 

concerned about certain activities of the company’s chief executive.



[8] The Securities Exchange Act of 1934, Section 13(d), requires 

certain persons who acquire beneficial ownership of more than 5 percent 

of certain classes of equity securities to file an appropriate 

disclosure with SEC. These disclosures are usually made on a Schedule 

13D.



[9] The New York Times, “Audit Overseer,” October 31, 2002.



[10] NRSI is an internal SEC system that tracks open and closed 

investigations, proceedings, and other relevant information. EDGAR is a 

database system through which public companies electronically file 

registration statements, periodic reports, and other forms to SEC. In 

addition to the EDGAR system, which is publicly available, SEC also has 

an internal system that includes the status of filings reviewed by SEC 

staff and the results of those reviews. LexisNexis provides 

authoritative legal, news, public records, and business information. 

Westlaw is an on-line legal research service, providing a broad 

collection of legal resources, news, business, and public records 

information.



[11] The Government in the Sunshine Act (Sunshine Act), Pub. L. No. 94-

409, § 2, generally requires that every meeting of an agency be open to 

public observation. Therefore, if more than two SEC Commissioners meet 

a quorum is present, which requires public notice and the meeting must 

be open to the public. However, SEC has some latitude in holding a 

closed meeting to discuss certain matters. 



[12] In August, staff in the Office of the General Counsel developed a 

list of questions for vetting the final slate of candidates, but the 

questions were not used.



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