A federal judge on January 7, 2025, dismissed a Texas audit firm’s lawsuit against the Public Company Accounting Oversight Board (PCAOB) without prejudice following decision by the audit regulatory board’s enforcement staff to close its investigation against the unnamed small accounting firm.
This effectively moots the John Doe Corporation v. PCAOB lawsuit, which was filed late March 2024 by John Doe Corp. to halt the board’s investigation of its audit work on crypto assets. The anonymous auditor had alleged that the PCAOB’s document demand was “excessively intrusive and burdensome.” (See Anonymous Audit Firm Sues PCAOB to Block ‘Excessively Intrusive and Burdensome’ Investigative Demand.)
The firm had filed the complaint in the Southern District of Texas, one of three similar challenges aimed at the structure of the PCAOB’s enforcement.
John Doe Corp. has been represented by Dickinson Wright PLLC and the New Civil Liberties Alliance (NCLA), a conservative organization that is also involved in separate John Doe challenges against the PCAOB in Tennessee and Washington, D.C.
The Texas judge who ordered the January 7 dismissal is Lee Rosenthal, and it follows a stipulation of dismissal on January 6.
In particular, the plaintiff received a letter from the PCAOB on December 27, 2024, notifying that the Division of Enforcement and Investigations (DEI) had completed its investigation and determined not to recommend any enforcement action to the board, and that the investigation is now closed.
The DEI will also not further investigate the firm’s financial-statement audit that was the subject of the investigation. Further, the DEI withdrew the document demand. Therefore, both parties agreed that the plaintiff’s claims are moot.
It must be noted that not all investigations lead to enforcement actions. But the NCLA claimed victory in this case.
“Although NCLA wanted an authoritative decision from the Court declaring PCAOB’s investigation unconstitutional, the next-best alternative was having the Board close its investigation in the face of our constitutional challenges,” Russ Ryan, senior litigation counsel of the NCLA, said in a statement. “It’s a complete victory for this client, but NCLA will continue its ongoing fight to end PCAOB’s Star Chamber proceedings against our other clients.”
John Doe filed the case on March 27 last year after the DEI issued six document demands. Among other things, the complaint called the process ironically “secret” while the plaintiff remained anonymous.
Section 105 of Sarbanes-Oxley Act of 2002 bars the public from following disciplinary proceedings unless the board finds a reason to open them up and the auditor or firm being investigated agrees. While a Senate bill was first introduced in 2011 and successively reintroduced to make PCAOB disciplinary proceedings public, it never moved beyond the legislative proposal stage because the auditing profession has been successful in lobbying against the bill.
Overall, the NCLA is effectively arguing that the enforcement provision in the Sarbanes-Oxley, which created the PCAOB over two decades ago in response to accounting scandals at companies like Enron and Worldcom, is unconstitutional.
The organization claimed that the PCAOB’s document demand “was not authorized by any court of law.”
“PCAOB’s processes allowed no opportunity for John Doe Corporation to challenge the demand in court before either complying with the demand or facing severe financial penalties, debarment, and potential criminal prosecution, depriving NCLA’s client of due process of law,” the NCLA said.
In an emailed statement in the meantime, a PCAOB spokesperson said: “In every PCAOB investigation, the staff of the Division of Enforcement and Investigations develop the facts of the matter and apply those facts to the law. DEI staff then make an informed decision about whether to pursue the investigation further based on the facts and the law. This investigation was no different. The dismissal of the case in the Southern District of Texas in no way addressed, analyzed, or affirmed the merits of the arguments Plaintiff made in that case.”
This article originally appeared in the January 8, 2025, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.
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