Citing partisanship at the audit regulatory board, progressives are pressuring SEC Chair Gary Gensler to fire all current members of the board—the PCAOB—who were appointed at the end of 2017 by Jay Clayton, whom then-President Donald Trump tapped to head up the securities commission. Gensler, who took over the agency a month ago, is President Joseph Biden’s appointee.
Today, Republican appointees have four seats with no Democrats, progressive groups said. One seat is currently vacant. And they are taking particular aim at PCAOB Chairman William Duhnke, a former aide to Republican Sen. Richard Shelby of Alabama. For a while, Shelby headed up the Senate Banking Committee.
The SEC, which oversees the PCAOB, appoints the five board members for five-year terms, which can be renewed once. Unlike the SEC, the progressives emphasized that the PCAOB is supposed to be apolitical when it comes to appointments. The chair cannot be a practicing certified public accountant (CPA), and no more than two board members can be a CPA. This is to mitigate conflicts of interest under the Sarbanes-Oxley Act of 2002, which established the PCAOB to supervise accounting firms that audit publicly listed companies in order to prevent accounting scandals that toppled Enron and WorldCom and cost investors an estimated $85 billion two decades ago.
But the progressive groups said they are profoundly concerned about the current state of the PCAOB “after the deleterious effects of the Trump administration on our financial regulatory system.”
The Trump administration pursued a largely deregulatory agenda, which corporations welcomed but was strongly opposed by investors and consumer protection advocates.
“Rather than retaining Board members who facilitated the demise of the PCAOB’s commitment to its mission, the SEC should install five new PCAOB board members fully committed to high standards in American public firm auditing,” according to a May 14, 2021, letter signed by 11 groups, including Revolving Door Project, Americans for Financial Reform, and Public Citizen.
“The SEC’s duty is not to satisfy partisan critics,” the letter said. “It is to safeguard investors from fraud and preserve the security of the financial system. The longer Duhnke and his cohorts remain in control of the PCAOB, the greater danger investors face, due to his deliberate inaction.”
Investor protection groups fear cutting back rules increase risks of fraud. Businesses, however, argued burdensome regulations have not been beneficial but added costs to comply with increasingly complex rules.
But the PCAOB “has collapsed into a pattern of non-enforcement and retaliation against whistleblowers or internal objectors over the past few years,” they wrote. “We hold Duhnke… largely liable for the PCAOB’s chaos in recent years. Duhnke has no prior background in financial services. His sole qualification was a career of loyalty to the influential Republican Senator Richard Shelby (AL), whose many former staffers have traded on their connections to secure lucrative and powerful positions in the federal bureaucracy. They are sometimes known as the ‘Shelby mafia.’”
The SEC declined to comment. The PCAOB did not have a comment.
After Clayton became the chairman in May 2017, he shattered the previous norm and replaced all five board members for a fresh start. Among other things, the clean-up occurred after the board in April 2017 revealed an elaborate scheme by KPMG LLP auditors and PCAOB staffers to help the Big Four firm pass the board’s annual audit firm inspection.
Before Clayton took the helm of the SEC, it was almost a given that board members would serve two terms, or at least serve out the remainder of a term.
Clayton’s initial picks for the board had three who were industry-leaning while two were more investor protection-oriented. When investor-leaning Kathleen Hamm’s term was up for renewal, she was given the boot in favor of Trump’s White House staffer Rebekah Goshorn Jurata. Then when former PricewaterhouseCoopers LLP partner James Kaiser said he did not want to seek a second-term, PCAOB Chief Auditor Megan Zietsman, previously a partner with Deloitte & Touche LLP, was elevated to be a member. Duhnke had hired her to run the audit rulemaking division.
The two other board members named by Clayton are Duane DesParte, who was previously a corporate controller, and Jay Brown, a law professor at the University of Denver.
Brown, a strong investor advocate, stepped down early this year because his wife, Allison Herren Lee, would become acting chair of the SEC until Gensler arrived.
Towards the end of his tenure, Brown increasingly criticized the board publicly for not putting the interest of investors front and center. The board by a vote of 4 to 1, with Brown dissenting, moved ahead with a rule that gives more discretion to auditors to determine whether they are independent of their clients without due process. Investor protection advocates were vehemently opposed to it. This means there is currently no active voice representing investors.
Unlike the SEC’s tripartite mission, which includes the facilitation of capital formation, the audit regulatory board has only one mission: protect investors and further the public interest in the preparation of informative, accurate, and independent audit reports.
“Investors remain in tremendous danger the longer Duhnke constrains his own agency from scrutinizing public company auditing standards,” the letter stated. As “an agency specifically obligated to do everything in its power to prevent financial fraud, it falls to the SEC to intervene.”
Partisanship at the PCAOB?
The PCAOB, which is not a government, has no partisan mandates unlike federal regulatory agencies, the groups said, and both Republican and Democratic administrations had kept the board’s leadership to “the general formula for an executive commission since its creation — namely, that the President’s party shall control three seats and the opposition party shall control two.”
But Republican appointees controlling four seats at the board is in line with a broader trend across the federal government of Republican administrations, especially the Trump administration, “using any and all legal — and sometimes illegal — means to install their ideological allies in power while depriving opposition figures of their mandatory or customary roles,” the groups claimed.
They noted that when Duhnke became chair in January 2018, he proceeded to replace division heads, another break from previous practice.
“These former staffers signed non-disparagement agreements amidst rumors that the firings were retaliatory in nature,” the groups wrote in the letter.
It also took 19 months for the board to hire an enforcement director and general counsel after their predecessors left, “a testament to his low prioritization of the Board’s most essential enforcement duty,” the letter states, adding that inspection reports were down 27 percent in 2019. “Duhnke also reportedly fought with Commissioner Kathleen Hamm over basic hiring decisions, which may have contributed to her losing her position in October 2019.”
Others have criticized that the PCAOB did not hold a single advisory group meetings in 2019 and 2020. In March, the board disbanded existing advisory groups and set up a new Standards Advisory Group (SAG) focused on the board’s standard-setting activities and is currently seeking nominations. This new panel that is being set up has been heavily criticized, however, for lack of investor input. Among other things, the auditing profession would have a prominent seat at the table as it has the exclusive rights to nominate auditors to the panel while no other group does.
“This all leads to tremendous harm to the agencies themselves, but more importantly, to the policy functions which the agencies were designed to carry out,” the letter states. “As it relates to the PCAOB, Duhnke driving this agency into atrophy through hard-knuckle conservative politics cannot come at a worse time” when retail investing has become popular in part fueled by “meme” stocks and cryptocurrencies.
“Retail investors are among the least likely to ascertain information about firms outside of their public disclosures, which if fraudulent, could lead inexperienced investors to gamble and lose their savings,” the letter stated. “The PCAOB should be ensuring that the new potential liabilities or opportunities posed by institutional cryptocurrency investment are conveyed clearly and accurately to prospective … investors, but under Duhnke, we can be sure that the agency will do as little as possible.”
This article originally appeared in the May 20, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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