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US Securities and Exchange Commission

SEC Chair Gensler Gives Ambiguous Response to Whether PCAOB Disciplinary Proceedings Should be Made Public

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 6 minute read

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 6 minute read

During an event commemorating the 20th anniversary of the Sarbanes-Oxley Act of 2002, SEC Chair Gary Gensler carefully sidestepped a question about whether the law should be amended to make public disciplinary proceedings against an auditor or audit firm by the PCAOB.

Gensler first replied that under PCAOB Chair Erica Williams’s leadership, “there is going to be robust investigations and where appropriate work with our [enforcement] team at the SEC under Director [Gurbir] Grewal.”

The securities regulator oversees the PCAOB, which not only sets auditing standards but also has inspection and enforcement authority over accounting firms registered with the board. Williams was named to run the board in November 2021 after Gensler removed previous PCAOB chairman William Duhnke, who was much criticized for ignoring investor views. Duhnke was named to the PCAOB when the SEC was headed up by Jay Clayton during the Trump administration, which emphasized more business-friendly approach to regulation.

When a moderator pressed for an answer, Gensler, who was a senior adviser to Sen. Paul Sarbanes when the law was being written two decades ago, briefly explained why the law had made the board’s disciplinary proceedings confidential.

“Congress did take a little bit of different approach—I remember those debates at the time,” Gensler said on July 27, 2022, during the Evolution of Corporate Reporting event hosted by the Center for Audit Quality (CAQ), an affiliate of the AICPA which represents accounting firms that audit public companies. He was referring to the SEC, which by contrast has public enforcement proceedings.

“And part of those debates were just that recognizing that the SEC was and still is here,” he said. “And of course, if there is any criminal side, the Department of Justice was there. The Public Company Accounting Oversight Board had a little bit different role than the official sector being the SEC and the Department of Justice.”

In an interview with Thomson Reuters on Aug. 1, PCAOB Chair Williams did not take a stance, emphasizing that the board’s job is to faithfully carry out its mandate, which is to protect investors.

“That being said, we’re trying to increase transparency where we can,” she said, adding that the board’s advisory group meetings are public. “And to the extent that we can promote more transparency through our inspections and in other areas, that’s what we’re going to do. But on that issue… I defer to Congress to make the law; our job is really to just faithfully execute it.”

History of Support by PCAOB Chairs

However, over the years some, including officials from the PCAOB, have said that the law needs to be revised.

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 disciplinary proceedings public. PCAOB Chairman James Doty during Obama years also publicly supported the revision.

The senators have been reintroducing it over the years because it had never moved beyond the legislative proposal stage. This is likely because the AICPA and Big Four accounting firms have been successfully lobbying against the revision. The accounting and auditing profession believes that having a good reputation is crucial. But when the PCAOB publicly pursues unproven charges, it may end careers or audit firms’ existence.

In particular, Sections 105(c)(2) and 105(d)(1)(C) of Sarbanes-Oxley bar the public from disciplinary hearings. The board also can make the proceedings public if it finds a reason to open them up and the auditor or firm being investigated agrees. This means that today, the public does not know 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.

Sarbanes-Oxley was passed in response to large accounting frauds. For example, when Enron collapsed in December 2001, it was the largest bankruptcy in U.S. history. The company had cooked its books, and its auditors Arthur Andersen let it happen.

Today, former PCAOB Acting Chairman Goelzer still firmly believes Congress should amend Sarbanes-Oxley.

“SOX requires that PCAOB enforcement actions be non-public until the conclusion of the case, and if the PCAOB loses, that the case remain non-public forever,” Goelzer said on August 1. “That is a structural flaw in the statute that limits the effectiveness of PCAOB enforcement.”

“Non-public proceedings encourage delaying tactics and discourage settlements. Non-public proceedings also deprive the public of a real time understanding of the kinds of auditing lapses that the board believes require sanctions and of whether it is successful in pursuing them,” Goelzer further explained. “Congress should amend the law to end enforcement secrecy and make PCAOB actions against accountants – like SEC enforcement actions – open to the public, beginning with the decision to bring a case.”

Lynn Turner, the SEC’s chief accountant from 1998 to 2001, agreed, noting that the commission made its enforcement proceedings pubic more than 30 years ago in May 1989.

“There have been no negative consequences for investors and the public resulting from that decision,” Turner said on July 28. “Congress needs to permit the PCAOB to carry out its proceedings in the public as well.” He is currently a member of the board’s two advisory groups.

‘We Mean Business,’ Says Williams on Holding Wrongdoers to Account

In the meantime, Williams said that the PCAOB will fully enforce its rules.

“If you aren’t holding wrongdoers to account and showing that there’s consequences for putting investors at risk, then I don’t think that you’re being a strong enough regulator, and we really mean business at the PCAOB for those people who are trying to cheat investors, and we’re going to use every tool in our enforcement toolbox that includes significant sanctions, substantial penalties,” she told Thomson Reuters.

During her tenure in the past six to seven months, she said that the penalties levied against firms and individuals doubled compared to the past five years.

The PCAOB has also brought the highest penalty against an individual and using provisions that had not been used before.

“The message is… we mean business,” Williams warned. “If you are going to cheat investors, we are going to hold you to account.”


This article originally appeared in the August 3, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.

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