Senators Jack Reed, D-R.I., and Chuck Grassley, R-Ia., have re-introduced legislation to make disciplinary proceedings of the Public Company Accounting Oversight Board public in order to expose auditing deficiencies at firms or the companies they audit in a timely way and help curb violations.
The bill, known as the PCAOB Enforcement Transparency Act, was originally introduced in 2011 by the two senators before they re-introduced the legislation last week (see Senate Bill Would Make PCAOB Disciplinary Hearings Public). Currently, auditing firms facing the possibility disciplinary action from the PCAOB can delay the release of reports on the proceedings until they are resolved.
The Sarbanes-Oxley Act of 2002 that created the PCAOB in the wake of high-profile accounting scandals at Enron, WorldCom and other companies required the PCAOB’s disciplinary proceedings to be kept confidential through the charging, hearings, initial decision and appeal stages. However, the PCAOB’s board members have long argued that the secretive nature of the process enables firms that engage in misconduct to drag out the proceedings for years while the investing public is kept in the dark.
“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 last week. “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.”
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.
“Transparency brings accountability,” said Grassley. “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.”
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 senators argue 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
They pointed out that an accounting firm that was subject to a disciplinary proceeding issued 29 additional audit reports on public companies during the course of the proceedings. However, those public companies and their investors were completely unaware there was a potential auditing problem with this accounting firm. Before the firm was suspended 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.
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