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. 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 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. 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. 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. 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.