By Soyoung Ho
PCAOB member Jay Brown, who has been a strong investor advocate at the audit regulatory board, will leave this month, the organization said on January 12, 2021.
Some observers have been expecting his departure because of the position his wife holds. SEC Commissioner Allison Herren Lee has had to recuse herself on major decisions the PCAOB makes, such as audit standard changes and its annual budget. As part of its oversight activities, the SEC must approve the PCAOB’s proposed changes before they become effective or otherwise permitted under the securities laws.
Further, the observers say President-elect Joe Biden will likely appoint Lee acting chair of the securities commission after inauguration before naming a permanent chair. Currently, the SEC’s acting chair is Elad Roisman, who was named by outgoing President Donald Trump last month following the departure of Jay Clayton. He was commission chief from May 2017 to December 2020. Biden is reportedly expected to name former Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler under the Barack Obama administration as the new SEC chair. This requires Senate confirmation, which can take a few months.
“Now that the Democrats will hold the majority on the SEC, Allison can’t afford to be recused from matters relating to the PCAOB,” said Barbara Roper, director of investor protection with the Consumer Federation of America. “We’ll be very sorry to lose Jay at PCAOB, where he’s been the lone voice for investors on the board in recent years. But this was the right decision for them to make.”
Brown, previously a law professor at the University of Denver, was one of the five new members of the PCAOB when then-SEC Chairman Clayton in December 2017 decided to change all board members for a fresh start. Brown’s first term was set to expire in October this year. He would have been eligible for a second five-year term had he not resigned.
During his tenure, which began in February 2018, Brown was vocal about putting the needs of investors front and center of the board’s activities. This went against the SEC’s priorities set by Clayton who largely focused on loosening rules for Corporate America following President Trump’s deregulatory agenda.
In the past three and a half years, investor protection advocates have been worried that the SEC’s deregulatory actions—and correspondingly that of the majority of PCAOB members who seem to have been following the lead of the commission—would put investors at greater risk of losing their hard-earned money.
Unlike the SEC, which has a tripartite mission—to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation—the PCAOB’s sole mission is to protect investors and further public interest in the preparation of independent audit reports.
Congress passed the Sarbanes-Oxley Act in 2002, which among other measures, set up the board to prevent a repeat of accounting scandals at companies like Enron and WorldCom, which cost investors an estimated $85 billion.
And Brown was the only one at the board who voted against loosening a rule related to auditor independence. That rule is currently awaiting commission vote.
What Will Happen to Auditor Independence Rule?
Investor advocates have banded together in a joint comment letter to urge the commission not to approve the PCAOB’s Release No. 2020-003, Amendments to PCAOB Interim Independence Standards and PCAOB Rules to Align with Amendments to Rule 2-01 of Regulation S-X, published in November. This was to adopt changes to its auditor independence rules so they better align with the SEC’s recent revisions to Rule 2-01, Qualifications of Accountants, in Regulation S-X, intended to streamline its auditor independence rules in response to large audit firms’ request.
Investors are strongly opposed to the SEC’s rule changes, and consequently PCAOB’s plans, that effectively give more discretion to auditors when assessing whether they are independent of their clients. Critics said that auditors have always pushed for the changes so they can do more business and make more money.
The market regulator on November 20 published the PCAOB’s rule changes for public comment in Release No. 34-90473, Notice of Filing of Proposed Rules on Amendments to PCAOB Interim Independence Standards and PCAOB Rules to Align with Amendments to Rule 2-01 of Regulation S-X.. Comments were due by December 18.
The SEC has 45 days to act after publishing the board’s rule for public comment under Section 19(b)(2)(A) of the Securities Exchange Act of 1934. The provision allows the SEC to extend the period by an additional 45 days if the agency determines that a longer period is appropriate.
It is unclear if the SEC will extend the period to act. But following Brown’s departure, the SEC’s vote will be 2 to 2. If Lee had to recuse herself, it would have been 2 to 1.
Nevertheless, if the vote is a tie, the PCAOB rule will still go into effect because Section 19(b) of the Exchange Act says that if the SEC does not act within the time frame, “a proposed rule change shall be deemed to have been approved.”
In the meantime, investor protection advocates want reversal of the rule changes under the new administration.
“Auditor independence will need to be on the agenda for new rulemaking at both the SEC and PCAOB in the new administration—and, for a change, not to weaken the rules,” Roper said.
This article originally appeared in the January 13, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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