A fight between the “watcher” and those “being watched” is currently underway within the U.S. Securities and Exchange Commission (SEC) The battle is over the future of the Public Company Accounting Oversight Board (PCAOB) and the agency’s chair, James Doty. It is also a battle between investors seeking more disclosures in audits and the “big four” auditors who want relaxed, lesser auditing standards.  

As reported by Reuters, the real issue is “who holds sway with regulators in Washington – investors large and small who seek better disclosure of what really goes on inside companies, or the financial-services establishment that’s supposed to serve those investors.”

John Bogle, the founder of Vanguard, said that, “The accounting firms have been letting corporations get away with reporting all kinds of funny pro forma earnings. The addition of Jim Doty to the PCAOB was a big upgrade. And if the firms are angry with him, he’s clearly doing something right.”

James Doty has been great for the advocates of investors who wish to reign in and tighten controls over the “big four” accounting firms. Those who want to prevent the next major financial crisis and those advocates for financial reform in general are on Doty’s side.

Reuters author Charles Levinson points out that the “big four”, which includes PricewaterhouseCoopers, Deloitte, Ernst & Young and KPMG, are audit companies that make up 98% of the U.S. stock markets’ value. He noted that, “During the crisis, nine major financial institutions collapsed or were rescued by the government within months of receiving clean bills of health from one of the Big Four.”

Doty’s term at the PCAOB ended in October and since then, he waits for the SEC to re-appoint him, working on a day-to-day basis. But, James Schnurr, the SEC’s new chief accountant – and Doty’s supervisor – is fighting to oust Doty.

Reuters’ investigative report determined that Schnurr’s SEC appointment “was a remarkable instance of Washington’s “revolving door.” Schnurr is from the industry being regulated with an auditing background. He is famous for signing off on the books of a few huge funds – each one going bankrupt and subsequently costing investors more than $115 billion in losses.

Doty first learned that Schnurr was out to get him when, at an industry gala in front of potential future employers and several colleagues, Schnurr publicly dissed Doty, telling the crowd that he was “moving too slowly.” Since then, Schnurr has continued to try and oust Doty and de-rail his efforts to increase auditors’ accountability.

In a statement, Doty said that, “I think this is the case with the PCAOB and SEC in the work we do together, including proposals to give more information to investors about who is leading the audits of the companies in which they invest.”

Lynn Turner, a former Big Four executive and former chief accountant of the SEC was quoted in the report that, “The very people the PCAOB is regulating are the ones that are overseeing them.”

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