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U.S. Audit Regulator Asks Court to Dismiss Suit by Accountant Challenging Disciplinary Proceedings

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 6 minute read

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 6 minute read

The U.S. Public Company Accounting Oversight Board (PCAOB) on April 14, 2023, filed a motion to dismiss a lawsuit brought by an anonymous auditor who challenged the board‘s “secret” disciplinary proceedings. Among other reasons, the board noted that John Doe‘s Jan. 19, 2023, suit was filed in the U.S. District Court for the Northern District of Texas. But the board is located in Washington, D.C., and its disciplinary proceedings occur there.

The plaintiff‘s complaint “does not come close to alleging that the Board has contacts with the State of Texas sufficient to meet the due process requirements for asserting personal jurisdiction,” lawyers for the board wrote in their motion to dismiss. “And nothing in the Complaint suggests that the conduct at issue in the underlying enforcement proceeding has any connection to Texas. There is thus no possible basis for this Court to exercise personal jurisdiction over the Board in this case.”

The board ‘s attorneys said that the proper venue is the District Court for the District of Columbia.

Doe was an auditor based in the South American country of Colombia at a firm that is part of a global network of accounting firms. His complaint does not say that Doe lived in, worked in or even visited the U.S. or Texas while he was employed at the firm.

The disciplinary action in question involves audit work done in 2015, and he was part of a component audit team for an unnamed public company, helping the lead auditor in the same network. The international company is headquartered abroad and allegedly has a presence in Texas.

But the component auditor was responsible for auditing only “one subsidiary or component” of the company. And the plaintiff‘s complaint never alleges that the component auditor or Doe audited the company‘s U.S. or Texas-based operations.

In early 2022, the board informed Doe that he might be disciplined because he had “failed to cooperate with the Board‘s inspection and investigation” of the firm‘s role in the 2015 audit. Then in December 2022, the board instituted formal disciplinary proceedings against Doe.

Doe is seeking relief as to six separate claims: the boards “taxing and funding scheme” violates the Constitution and separation of powers; the board is violating the Constitution by “exercising core executive law enforcement power against  [Doe] without meaningful direction and supervision by principal officers of the Executive Branch”; the hearing officer is an inferior officer who was “not lawfully appointed in accordance with the Appointments Clause,”; the hearing officer “enjoys multiple layers of protection from removal by the President,” which allegedly violates the Constitution; the board‘s disciplinary proceedings are unfair for “accused accountants” in violation of due process; and the are “depriving [him] of any opportunity to defend himself before a jury.”

A board spokesperson said: “The PCAOB is laser focused on protecting investors.”

Doe, represented by conservative group New Civil Liberties Alliance (NCLA), believes that the PCAOB proceedings are unconstitutional despite the enforcement authority given to the regulatory board by the Sarbanes-Oxley Act of 2002.

The law established the PCAOB to protect investors in response to accounting scandals at companies like Enron and WorldCom.

Sections 105(c)(2)  and 105(d)(1)(C) of Sarbanes-Oxley bar the public from disciplinary hearings unless the board finds a reason to open them up and the auditor   or firm being investigated agrees. The Securities and Exchange Commission oversees the PCAOB, and any challenge to disciplinary actions must go through the SEC commission first and then to a federal court of appeals.

In the meantime, the PCAOB has retained several experienced attorneys, including legal heavy-hitters such as former solicitor general Donald Verilli and Jeffrey Lamken.

Lamken is a former law clerk to Justice Sandra Day O ‘Connor, and he represented the PCAOB in Free Enterprise Fund v. PCAOB. In that case, the Supreme Court by 5 to 4 ruled in 2010 that the Sarbanes-Oxley Act is constitutional, and that the board could continue to function as it had previously. But the decision in essence also gave more oversight power to the SEC. It gave the commission powers to remove PCAOB board members more freely.

Verilli, who argued more than 50 cases before the Supreme Court, was the Obama administration‘s top lawyer for the high court cases, winning lawsuits involving the Affordable Care Act, same-sex marriage and immigration law. Verilli is currently with Munger, Tolles & Olson LLP.

Other attorneys representing the PCAOB are Marc Fuller of Jackson Walker LLP and Virginia Grace Davis, also with Munger, Tolles & Olson. Lamken is with Mololamken LLP.

PCAOB‘s attorneys also filed a memorandum to support the motion to dismiss, arguing that the complaint just “raises a scattershot collection of constitutional claims in an effort to block a pending Board disciplinary proceeding against him.”

Even though the board allegedly maintains two offices in Texas, the complaint does not suggest that those offices had anything to do with the lawsuit. And the Supreme Court made it clear that such offices cannot give rise to personal jurisdiction.

Moreover, “Even if the Court determines that venue is proper in this District, the Court should transfer this action to the District of Columbia pursuant to 28 U.S.C. § 1404(a), which vests courts with discretion to transfer an action ‘[f]or the convenience of parties and witnesses, in the interest of justice, . . . to any other district or division where it might have been brought,‘“ the memo stated.

Further the memo said that Doe did not exhaust administrative remedies first before bringing the suit.

NCLA remained steadfast in its conviction that Doe‘s rights were violated.

“We believe today‘s motion lacks merit and we intend to respond accordingly,” NCLA‘s Russ Ryan said. “By unhappy coincidence for the PCAOB, much of the motion was already undercut by this morning ‘s Supreme Court decision in the Cochran/Axon case.”

In the April 14 decision, the high court unanimously ruled in favor of plaintiffs that challenged the constitutionality of the in-house courts of the SEC and the Federal Trade Commission. The court rejected the commissions‘ argument that such cases cannot be brought in federal court unless their in-house judges have ruled against the plaintiffs.


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