* White House OMB estimates PCAOB could face $18 mln cut
* PCAOB chair says sequestration should not apply
* PCAOB budget comes from fees; is not set by Congress
* Chair says considering seeking legal review from DOJ
By Sarah N. Lynch
WASHINGTON, Feb 13 (Reuters) - The top U.S. audit watchdog said the federal government is "simply wrong" in its decision to include the nonprofit corporation on a list of agencies facing steep automatic budget cuts if Congress fails to act.
"We are not a part of the federal government," Public Company Accounting Oversight Board Chairman James Doty told reporters on Wednesday.
The government's position "is simply wrong and flies in the face of clear statutory language," he said on the sidelines of an appearance before the U.S. Securities and Exchange Commission to discuss the PCAOB's 2013 budget needs.
Doty said it might be a good idea if the PCAOB sought a legal review of the matter from the Justice Department's Office of Legal Counsel, though nothing has been decided.
He added that the PCAOB in the interim will come up with a contingency plan. The plan, however, would not include furloughs or cuts to staff, which he called the organization's "life blood."
The PCAOB is funded through fees from public companies and broker-dealers. But it is listed in the federal budget each year, and the SEC must vote to approve its budget annually.
This year, the SEC approved a $245.6 million budget for the PCAOB, an increase of about 8 percent from the 2012 budget of $227.7 million.
In preliminary estimates last year of how sequestration would affect each government agency, the Office of Management and Budget said the SEC's $1.321 billion budget could be facing a cut of $108 million.
Also included in that document are some organizations that do not receive congressional appropriations. The PCAOB is listed as facing a potential $18 million cut, while the Securities Investor Protection Corp (SIPC), which is also funded through industry fees, is listed for a potential $23 million cut.
An official at the OMB said on Wednesday that the sequestration law reduces budget resources in all accounts unless they are exempted. The PCAOB and SIPC's'accounts were not granted an exemption, and the PCAOB and SIPC have funds available through federal laws that let them collect and spend the money. As such, their accounts can be sequestered, the official said.
The budget increase approved by the SEC for the PCAOB's 2013 needs is nearly the same amount on the sequestration chopping block.
Elisse Walter, the SEC's chairman, said her agency is aware of the potential impacts to the PCAOB and is prepared to work with the organization if the looming March 1 cuts go into effect.
The PCAOB was created by the 2002 Sarbanes-Oxley Act in response to accounting scandals at companies including Enron. It regulates auditors of public companies and broker-dealers, conducting routine inspections, taking enforcement actions when needed, and setting auditing standards for the industry.
It is still in the early stages of carrying out inspections of broker-dealer auditors, a new authority it won in the 2010 Dodd-Frank Wall Street reform law.
It is also involved in talks with Chinese regulators over a failure by Chinese audit firms to turn over work papers to the PCAOB and the SEC.
QUIRK IN SEQUESTRATION LAW
The sequestration law was passed in response to an impasse over raising the nation's borrowing limit as Democrats and Republicans wrangled over how to address the nation's budget deficit. The law set a deadline for across-the-board spending cuts unless a deal on the budget is reached.
Stephen Harbeck, SIPC's president and chief executive, called the sequestration legislation a "square peg in a round hole" type of problem.
SIPC, which was created by Congress to help customers of failed brokerages recover their money, is funded by industry fees. Though it has a $2.5 billion line of credit available from the federal government, it has never tapped it.
"The clear intent is to capture government monies, and make sure they don't get used by the government. We don't do that," Harbeck told Reuters in an interview on Tuesday.
"Nevertheless, under some readings of the sequestration legislation, it seems that if you were set up by the government, you have to do something about this."
He said the SIPC is having discussions about the matter internally. "I am sure that ... if this becomes necessary to deal with, rational minds will prevail and we'll find a way to continue our operations," Harbeck added.