Regulatory agencies' revolving door drives imminent change.

Last year (2005) was one of tremendous change in the regulatory world--and not just for those in financial accounting and reporting rule-making. Beyond Sarbanes-Oxley year two, focus on the small business issuer and rating agency, tax and pension reform, an even more prevalent issue existed: the revolving door of leadership at key Washington agencies.

Departure announcements emanating from the U.S. Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) kept everyone guessing as to who would be named next. And, looking back on the early months of this year, the trend continues for regulatory agencies.

Most recently, the appointment of Ben Bernanke as chairman of the Federal Reserve Board marked the replacement of the man who had monitored the U.S. economy since August 1987, former Chairman Alan Greenspan.

SEC, PCAOB Departures

Since the Sarbanes-Oxley Act was signed in 2002, the SEC has kept pace in implementing the requirements of the law. Heading this charge at the SEC were, in this author's opinion, three key individuals: former Chairman William Donaldson, former Chief Accountant Donald Nicolaisen and former Director of the Division of Corporation Finance Alan Beller.

In June 2005, Donaldson stepped down as chairman after a little over two years in the role; he was succeeded by the current chairman, Christopher Cox. Donald Nicolaisen departed in October 2005, and Alan Beller completed his final days with the commission in February. Securities lawyer John White was slated to join the SEC in late March as the new Director of Corporation Finance, but at this time the Chief Accountant position is still vacant. Scott Taub, former Deputy Chief Accountant, is currently acting as chief until a permanent head of the Office of the Chief Accountant is appointed.

But the jury is still out as to who will succeed Nicolaisen. There is little disagreement amongst preparers that Nicolaisen led with a balanced and fair hand during an incredibly challenging time for those in the financial accounting and reporting arena. There has been much speculation as to who will be named his replacement.

Will Chairman Cox select an individual with similar background to Nicolaisen--a public accountant and auditor? Or will he look to an individual in the preparer community--a controller of a major corporation or possibly a CFO of a smaller company?

Regardless of where the next chief comes from, there is no doubt that this individual will be looked upon to execute the chairman's critical agenda, including "an all-out war on complexity." Thus, the chairman will need to find a chief who can provide integral assistance in finding a solution to simplify financial reporting for the preparer while still meeting the needs of the everyday investor--no small task.

In addition to the daunting challenge of replacing the chief accountant, Chairman Cox must also replace inaugural PCAOB Chairman William McDonough, who led the board since June 2003. Board Member Bill Gradison has been named acting chairman during this interim period, but many question whether he will eventually be named chairman.

McDonough's legacy likely lies in Auditing Standard No. 2 (AS2), the auditor's guide to implementing Section 404 of the Sarbanes-Oxley Act on internal controls. AS2 and reporting on internal controls were the focus of so much attention during the past few years at the PCAOB and SEC, and will likely continue to occupy much time of leaders of both agencies, since balance in implementing the regulation is still sought. A critical player in developing AS2 was the former Chief Auditor, Douglas Carmichael, who left the PCAOB in January; his deputy, Tom Ray, has been elevated to the chief auditor role.

Eyes on SEC Chairman

Clearly, the past year was one of tremendous change, and the many leadership positions still vacant signal that more change is yet to come. The SEC and the PCAOB are two respected U.S. regulatory institutions, and while PCAOB--in its early years of existence--is still charting its course, the SEC has a long history. That history has included a vast array of leadership styles through recent chairs--Donaldson, Harvey Pitt, Arthur Levitt, Richard Breeden and David Ruder--each demonstrating a unique personality and arguably great achievement in improving financial reporting and accounting.

All eyes will be focused on Cox as he continues to fill critical vacancies at the agencies and creates his legacy of leadership at the SEC. Right now, he's focused on several key subjects--executive compensation, interactive data and financial simplification--but other issues will surely draw additional scrutiny.

Christine DiFabio ([e-mail]) is FEI Director of Technical Activities-N.J. and liaison to the Committee on Corporate Reporting (CCR).

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