Securities Regulation Daily Wrap Up, ACCOUNTING AND AUDITING—Bipartisan Senate Legislation Would Bring Transparency to PCAOB Enforcement Proceedings, (May 1, 2013)

By Jim Hamilton, J.D., LL.M.

In an effort to protect investors, improve the oversight of corporate auditing, and ensure that the financial reports of publicly traded companies are accurate and reliable, Sens. Jack Reed (D-RI) and Charles Grassley (R-Iowa) have reintroduced the PCAOB Enforcement Transparency Act, S. 848, in the 113th Congress. The Reed-Grassley bill would make PCAOB disciplinary proceedings public in order to bring auditing deficiencies at the firms or the companies they audit to light in a timely manner and to help deter violations.

PCAOB. The PCAOB sets auditing standards for auditors of public companies, examines the quality of audits performed by public company auditors, and, where necessary, imposes disciplinary sanctions on registered auditors and auditing firms. The PCAOB oversees more than 2,400 auditing firms registered with the Board, as well as the thousands of audit partners and staff who contribute to a firm’s work on each audit.

The PCAOB was created in the wake of a series of corporate accounting scandals that cost investors billions of dollars and hurt the U.S. economy. Congress established the PCAOB to audit the auditors, noted the senators, but the Sarbanes-Oxley Act creating the Board also required that PCAOB disciplinary proceedings be kept confidential through charging, hearings, initial decision, and appeal. Unfortunately, said the senators, the secretive nature of the process enables firms that engage in misconduct to drag out the proceedings for years while investors are kept in the dark.

The PCAOB’s closed proceedings run counter to the public enforcement proceedings of other regulators, including the SEC, the CFTC and the FDIC. Indeed, nearly all administrative proceedings brought by the SEC against public companies, brokers, dealers, investment advisers, and others are open, public proceedings.

Transparency. The Reed-Grassley bill would make PCAOB hearings and all related notices, orders, and motions, open and available to the public unless otherwise ordered by the Board. The PCAOB procedure would then be similar to SEC Rules of Practice for similar matters, where hearings and related notices, orders, and motions are open and available to the public.

The PCAOB is responsible for ensuring that auditors of public companies meet the highest standards of quality, independence, and ethics, said Sen. Reed, and reliable financial reporting is vital to the health of the economy. Thus, it is imperative to pass legislation to enhance transparency in the PCAOB’s enforcement process. Currently, Congress, investors, and others are being denied critical information about an auditor’s disciplinary process. Investors and companies alike should be aware when the auditors and accountants they rely on have been charged or sanctioned for violating professional auditing standards, emphasized Sen. Reed.

For his part, Sen. Grassley posited that the legislation is based on the principle that transparency brings accountability. S. 848 levels the playing field between auditors reviewed by the SEC and auditors reviewed by the PCAOB. Currently, PCAOB proceedings are secret, he noted, while SEC proceedings are not. In his view, the secrecy provides incentives to bad actors to extend the proceedings as long as possible, so they can continue to do business without notice to businesses about potential problems with a particular auditor.

According to the senators, this lack of transparency surrounding disciplinary proceedings under current law can provide unscrupulous firms with an incentive to litigate cases in order to continue to shield conduct from the public.

For example, they noted that an accounting firm that was subject to a disciplinary proceeding issued no fewer than 29 additional audit reports on public companies during the course of the proceedings. Those public companies and their investors were completely unaware there was a potential auditing problem with this accounting firm. Before the firm was expelled from public company auditing, it issued those audit reports, knowing all the while that it was subject to disciplinary proceedings. However, investors were denied this information.

LegislativeActivity: AccountingAuditing PCAOBNews