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US Securities and Exchange Commission

SEC Removes PCAOB Chairman Duhnke, Seeks to Fill All Board Member Positions

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

The SEC said that William Duhnke was “removed” as chairman of the audit regulatory board—the PCAOB, effective June 4, 2021.

Board member Duane DesParte was designated to serve as acting chair, also effective June 4.

In addition, the commission is seeking to replace and fill all five seats. One seat has been vacant since late January when Jay Brown stepped down as his wife, SEC Commissioner Allison Herren, became acting chair and served in that capacity until Gary Gensler was sworn in as permanent chair on April 19.

The commission oversees the PCAOB. This includes appointments and removal of board members and approval of the PCAOB’s annual budget and audit standard changes.

The coming wholesale change at the board follows heavy lobbying by progressive groups and senators who asked the SEC to replace all board members for a fresh start. They took particular aim at Duhnke, a former staffer to Republican Senator Richard Shelby, for bringing an industry-friendly approach to supervising auditing firms when the PCAOB’s sole mission is to protect investors and further the public interest in the preparation of informative, accurate, and independent audit reports.

Former PCAOB member Brown late into his tenure had also been critical of the board, saying that it had been ignoring investor views even as it pursued agenda that favored the auditing profession.

Moreover, progressive groups told the SEC that the PCAOB has four Republican appointees with no Democrats.

“The SEC’s duty is not to satisfy partisan critics,” the groups told the SEC in mid-May. “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.” (See Progressives to SEC Chair Gensler: Fire all Members of Audit Regulatory Board in the May 20, 2021, edition of Accounting & Compliance Alert.)

“The PCAOB has an opportunity to live up to Congress’s vision in the Sarbanes-Oxley Act,” SEC Chair Gensler said in a statement. “I look forward to working with my fellow commissioners, Acting Chair DesParte, and the staff of the PCAOB to set it on a path to better protect investors by ensuring that public company audits are informative, accurate, and independent.”

Dissent

However, in a joint statement, SEC Commissioners Hester Peirce and Elad Roisman, who voted against removing Duhnke and replace all board members, said they have serious concerns about the hasty decision.

“Although the Commission has the authority to remove PCAOB members from their posts without cause, in all of our actions, we should act with fair process, fully-informed deliberation, and equanimity, none of which characterized the Commission’s actions here,” Peirce and Roisman said. “Instead the Commission has proceeded in an unprecedented manner that is unmoored from any practical standard that could be meaningfully applied in the future…. These actions set a troubling precedent for the Commission’s ongoing oversight of the PCAOB and for the appointment process, including with respect to attracting well-qualified people who want to serve. A future in which PCAOB members are replaced with every change in administration would run counter to the Sarbanes Oxley Act’s establishment of staggered terms for Board members, inject instability at the PCAOB, and undermine the PCAOB’s important mission by suggesting that it is subject to the vicissitudes of politics.”

Jay Clayton Started Precedent

But this will be the second time that the SEC will choose an entirely new board members. Jay Clayton, when he headed up the SEC, shattered previous norms and replaced all at the end of 2017. 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.

DesParte was previously a corporate controller, and Brown was a law professor at the University of Denver before joining the PCAOB.

The SEC’s Office of the Chief Accountant will begin the process to solicit applications for the five seats, and additional information will be provided in the coming weeks.

The SEC appoints the five board members for five-year terms, which can be renewed once. 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.

 

This article originally appeared in the June 7, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.

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