One year after the Public Company Accounting Oversight Board (PCAOB) added Follow-on Disciplinary Proceedings to its rulemaking agenda, the project got removed, according to the most recent update to the board’s standard-setting and rulemaking agendas.
The staff wanted to present a proposal by the end of 2023, but it never happened and ultimately got dropped in mid-May 2024. The objective of the project was to consider rule changes to expedite follow-on disciplinary proceedings against firms or associated individuals who have been convicted of certain crimes or were enjoined or sanctioned by a court or another regulator.
To a founding member of the PCAOB, this move is a no-brainer.
“It’s not clear to me why the board thought this was important in the first place, so I’m not surprised they dropped it,” Daniel Goelzer, who served from late 2002 to early 2011, told Thomson Reuters on May 23.
This is especially true given that the staff has been under heavy pressure to recommend changes to numerous standards and rules in a relatively short period of time as the board is pursuing the most ambitious rulemaking effort under the leadership of Erica Williams.
Board member George Botic pointed to the board’s priorities and resources available to tackle rulemakings.
“We have a lot of priorities, there is a lot of moving parts, and when you look at all the priorities, the staff think about where they are with things, that’s kind of where they landed in terms of their use of upcoming rulemaking agenda in light of everything that we are doing,” Botic told Thomson Reuters on May 17.
In the meantime, Goelzer said that he’s “not aware that the board ever said much about the rationale for this idea, beyond a brief sentence in the rulemaking agenda, so perhaps I’m missing something.”
“But the SEC’s rules already provide for automatic suspension of the ability of an accountant to practice before the commission if he or she is convicted of a crime or disciplined by a state,” said Goelzer, who served as general counsel of the Securities and Exchange Commission (SEC) from 1983 to 1990.
In particular, he cited the following SEC Rules of Practice 102(e): “Any attorney who has been suspended or disbarred by a court of the United States or of any State; or any person whose license to practice as an accountant, engineer, or other professional or expert has been revoked or suspended in any State; or any person who has been convicted of a felony or a misdemeanor involving moral turpitude shall be forthwith suspended from appearing or practicing before the Commission.”
SEC Rule 102 is about “appearance and practice before the commission,” and Rule 102(e) relates to suspension and disbarment.
The SEC, as the securities regulator, oversees the PCAOB.
“The PCAOB could adopt a rule that would permit follow-on proceedings in a broader range of circumstances, but I doubt that would really add much to investor protection as a practical matter,” Goelzer said.
Permanent Broker-Dealer Audit Inspection Program Perpetually Not on Agenda
In the meantime, efforts to establish a permanent inspection program for audits of broker-dealers have been on the backburner, and it is likely to stay there for the time being.
Despite pursuing the most ambitious standard-setting activities, the current makeup of the board never put the broker-dealer inspection program on the agenda.
PCAOB leaders said that the inspection is working well under an interim or temporary program set up over a decade ago after Dodd-Frank gave the board the authority to inspect audits of broker-dealers. Sec. 982 of PL111-203
Congress established the inspection program to lessen the risk of a repeat of the Bernard Madoff Ponzi scheme, in which the outside accountant never bothered to verify that the assets reported on client statements were being managed by Madoff’s investment company.
But Dodd-Frank left the scope of the inspection program and the frequency of inspections to the PCAOB’s discretion. The audit regulator is also free to differentiate among categories of broker -dealers and whether to exempt some auditors from inspections.
After establishing a temporary program, the board had worked on a rule proposal for a permanent program but decided to shelve it. Since then, Congress in 2018 considered a bill that would exempt small privately held brokers and dealers that do not handle client funds from hiring a PCAOB-registered accounting firm as part of their annual reporting requirements. The bill did not pass.
During William Duhnke’s tenure—Williams’s immediate predecessor—the board did consider proposing a permanent program with potential congressional action in mind.
Today, when asked about when the PCAOB will consider setting up a permanent program, Botic again pointed to the many priorities of the PCAOB.
“To your point about interest in the past what a permanent program may look like, that’s going to be presumably a lot of comments, a lot of effort to do that,” Botic said. “And I think it’s fair to say both in my prior life and now that the b-d program is working as an interim program.”
Before becoming a board member in October 2023, Botic was the director of the Division of Registration and Inspections.
“So, it’s not as if it’s going to stop. There is no sunset in the interim program, and we issue our annual reports. We are talking at conferences about the b-d program etcetera,” he said. “Whether it should be a permanent program, I think at some point personally there needs to be. But … it comes back to priorities and resources.”
This article originally appeared in the June 5, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.
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