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Enforcement Staff Supports Legislation to Make PCAOB Disciplinary Proceedings Public

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

PCAOB Deputy Enforcement Director William Ryan said he supports legislative efforts to amend the Sarbanes-Oxley Act of 2002 to make disciplinary proceedings public.

Sections 105(c)(2) and 105(d)(1)(C) of Sarbanes-Oxley bar the public from disciplinary hearings unless the board finds a reason to open them up and the auditor or firm being investigated agrees.

Following a letter by then-PCAOB Acting Chairman Daniel Goelzer, Sens. Jack Reed, a Democrat from Rhode Island, and Chuck Grassley, a Republican from Iowa, introduced a bill in 2011 to make PCAOB disciplinary proceedings public. And they have been reintroducing it over the years because it had never moved beyond the legislative proposal stage.

“Certainly, we in enforcement are very much in favor of that. And there have been cases that we certainly believe [accounting firms] would not have litigated it,” Ryan said during the inaugural meeting of the PCAOB’s reconstituted Investor Advisory Group (IAG) on June 8, 2022.

For example, he cited a case against Kabani & Co., Inc.

“I think we had substantial evidence against the respondent, but the respondent wanted to continue in business while keeping the alleged misconduct quiet,” Ryan said.

In 2015, the PCAOB issued an order sanctioning Kabani. But the firm litigated the case. It went through a PCAOB hearing process. After that, it went to the PCAOB board members. Then the firm appealed to the SEC, which oversees the board. The commission sustained the PCAOB’s findings. Then Kabani appealed the SEC’s decision. In 2018, the U.S. Court of Appeals for the Ninth Circuit denied Kabani’s petition for review.

“Substantial evidence supports the SEC’s finding that petitioners violated PCAOB Accounting Standard No. 3 (“AS3”) with the requisite scienter,” the court stated in its opinion. “The indications of an attempted cover-up—the backdated sign-off dates, the altered metadata, and petitioners’ failure during the inspection to disclose the changes made after the documentation completion deadlines—all strongly support an inference of knowledge and intent.”

Today, no one is allowed to find out what actions are being punished, whom the board has charged, the issues being litigated, or whether the PCAOB staff has prevailed or not. Because the disciplinary actions remain closed until there is a settlement or a decision by the SEC on the board’s sanctions, shareholders would not know that auditors are facing sanctions from the PCAOB. Moreover, the accounting firms can keep doing audit work without public scrutiny.

When the PCAOB first asked Congress to consider amending Sarbanes-Oxley, the board cited Gately & Associates as an example of why the proceedings need to be transparent.

The firm issued 29 additional audit reports on public company financial statements between the start of the board’s proceeding and the public disclosure of the board’s charges, which did not occur until the SEC affirmed the PCAOB’s decision to revoke Gately’s registration and bar it from auditing public company financial statements.

Fast forward to today, the question about transparency of the process came up because IAG panel member Jeffrey Mahoney, general counsel of the Council of Institutional Investors (CII), asked the PCAOB’s enforcement staff about it.

“Some PCAOB chairs have publicly expressed support for Congress to pass legislation to address that issue,” Mahoney said and asked whether there is discussion about taking a public position by the new board members.

While Ryan could not speak to the new board members’ position, he explained the merits of making the proceedings public.

“I think incentives are in place for folks even who know they have committed a violation to keep litigating, to keep the matter quiet as long as possible to keep in business as long as possible,” he said. “Speaking for myself, I certainly fully support the bills that would make our disciplinary proceedings public.”

Moreover, the transparency will be good for the enforcement division, he said.

“We should be held to account in the Division of Enforcement if we bring a case and lose,” he said. “So currently, if we bring a case and lose either before a hearing officer or the board, that would stay quiet.”

PCAOB member Kara Stein, who is currently acting co-chair of the IAG, said that the question highlights for both the board and the IAG ways “to improve the enforcement program.”

It is unclear why the Senate has never taken up the bill and pass it. Other regulators, most prominently for example the SEC, have open administrative proceedings. If passed, the bill would make the PCAOB disciplinary proceedings similar to that of the commission’s.

However, the Big Four accounting firms and the AICPA have historically opposed the transparency reforms.

AICPA President and CEO Barry Melancon, testifying in 2012 before the House Financial Services Committee’s Capital Markets subcommittee, said Congress left the proceedings private because it “understood that auditors belong to a profession in which a good reputation is essential, and publication of unproven charges may end an individual auditor’s career or audit firm’s existence.”

The disciplinary transparency bill has been a perennial lobbying item for the accounting and auditing profession.


This article originally appeared in the June 13, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.

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