Deconstructing the PCAOB: Using Organizational Economics to Assess the State of a Regulator

58 Pages Posted: 28 Sep 2022

See all articles by Francine McKenna

Francine McKenna

The Wharton School

Mikhail Pevzner

University of Baltimore - Merrick School of Business

Amy Sheneman

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Tzachi Zach

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Date Written: September 22, 2022

Abstract

Using the principles of organizational economics, we assess the quality of the organizational architecture of the Public Companies Accounting Oversight Board (PCAOB). We use the Four Pillar Framework developed in Brickley, Smith, and Zimmerman (2000) to understand why—according to the SEC’s Chairman Gensler and other stakeholders—the PCAOB may not have entirely realized its mission of investor protection. Our analysis is enabled by the transcripts of the 2019 criminal trial U.S. v. Middendorf and Wada (i.e., PCAOB-KPMG “steal the inspection data” scandal), which for the first time exposed the inner workings of the PCAOB. Our analysis of the transcripts is augmented by other publicly available documents. Our primary conclusion is that the functioning of the PCAOB has been significantly hampered by misalignment of its tasks (in particular in relation to the SEC), sub-optimally designed performance measurement and employee compensation, and weaknesses in the PCAOB’s organizational culture. These misalignments created an environment susceptible to PCAOB employees’ criminal misconduct which enabled the PCAOB-KPMG “steal the inspection data” scandal and other Board governance and leadership challenges.

Keywords: PCAOB, organizational architecture, incentive alignment

JEL Classification: G28, G38, K23, M42, M48

Suggested Citation

McKenna, Francine and Pevzner, Mikhail and Sheneman, Amy and Zach, Tzachi, Deconstructing the PCAOB: Using Organizational Economics to Assess the State of a Regulator (September 22, 2022). Available at SSRN: https://ssrn.com/abstract=4227295 or http://dx.doi.org/10.2139/ssrn.4227295

Francine McKenna

The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Mikhail Pevzner

University of Baltimore - Merrick School of Business ( email )

1420 N. Charles St.
Baltimore, MD 21201-5779
United States

Amy Sheneman

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States

Tzachi Zach (Contact Author)

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States
614-292-4101 (Phone)

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