Senate Bill Would Make PCAOB Disciplinary Hearings Public

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A bipartisan pair of influential senators introduced legislation Friday that would make disciplinary hearings against auditing firms public.

The bill would change a provision of the Sarbanes-Oxley Act that requires the Public Company Accounting Oversight Board to keep disciplinary proceedings against auditing firms confidential. The proposed legislation, sponsored by Senators Jack Reed, D-R.I., and Chuck Grassley, R-Iowa, is called the PCAOB Enforcement Transparency Act of 2011.

The bill follows up on a proposal last year by the PCAOB’s acting chairman at the time, Dan Goelzer, to make the disciplinary proceedings public. Goelzer wrote to the leaders of the Senate Banking Committee and the House Financial Services Committee and even included a draft of the legislation (see PCAOB Drafts Bill to Make Disciplinary Proceedings Public).

Goelzer argued that the secretive disciplinary process encourages accounting firms and auditors to drag out the proceedings for years and consume unnecessary staff time while the public remains unaware of problems with the firms or the companies they have audited. The Securities and Exchange Commission, in contrast, makes its enforcement hearings and injunctive actions public, Goelzer pointed out.
The current chairman of the PCAOB, James Doty, also has called for making the disciplinary proceedings public, arguing that “secrecy has a variety of unfortunate consequences” and this “state of affairs is not good for investors, for the auditing profession, or for the public at large.”

Congressional action would be needed in order to change the provisions of the Sarbanes-Oxley Act that keep the PCAOB’s disciplinary proceedings secret. The PCAOB was established with the passage of Sarbanes-Oxley in 2002 in response to a wave of accounting scandals at companies like Enron and WorldCom. The PCAOB has to keep its disciplinary proceedings confidential through the entire process of charging, hearings, initial decision, and appeal, enabling firms that engage in misconduct to drag out the proceedings while the investing public is kept in the dark, sometimes for years. 

The Reed-Grassley bill would make PCAOB disciplinary proceedings public to bring auditing deficiencies at the firms or the companies they audit to light in a timely manner and help to deter violations. The PCAOB oversees more than 2,400 auditing firms registered with the board, along with thousands of audit partners and staff who contribute to a firm’s work on each audit.

“The PCAOB is responsible for ensuring that auditors of public companies meet the highest standards of quality, independence, and ethics,” Reed said in a statement. “Reliable financial reporting is vital to the health of our economy and we must take the legislative steps necessary 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.”

He and Grassley pointed out that the 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.  

One accounting firm that was the subject of a disciplinary proceeding issued no fewer than 29 additional audit reports on public companies during the course of the proceedings, they noted. Because of the confidential nature 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, but investors were denied this information.

“Sunshine is the best disinfectant,” Grassley said. “This legislation levels the playing field between auditors reviewed by the SEC and auditors reviewed by the PCAOB. Currently, PCAOB proceedings are secret while SEC proceedings are not. 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. This bill ends the secrecy and brings the kind of transparency that adds accountability to agency proceedings.”

They argued that the PCAOB’s closed proceedings run counter to the public enforcement proceedings of other regulators. Not only the SEC, but also the Labor Department, the Federal Deposit Insurance Corporation, the U.S. Commodity Futures Trading Commission, and other government agencies use public proceedings, as does the self-regulating Financial Industry Regulatory Authority. Nearly all administrative proceedings brought by the SEC against public companies, brokers, dealers, investment advisers and others are open, public proceedings. 

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.

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