5/02/2019 — 

WASHINGTON, DC – In an effort to protect investors, improve the oversight of corporate auditing, and ensure that the financial reports of publicly traded companies are accurate and reliable, U.S. Senators Jack Reed (D-RI) and Chuck Grassley (R-IA) reintroduced the PCAOB Enforcement Transparency Act.  The Reed-Grassley bill would make Public Company Accounting Oversight Board (PCAOB) disciplinary proceedings public to bring auditing deficiencies to light in a timely manner and help deter violations.

The PCAOB was created in the wake of a series of corporate accounting scandals, including those involving Enron and WorldCom, that cost investors billions of dollars and hurt the U.S. economy.  Congress established the PCAOB to audit the auditors.  But the 2002 Sarbanes-Oxley law creating the Board also required PCAOB’s disciplinary proceedings to be kept confidential through charging, hearings, initial decision, and appeal.  Unfortunately, the secretive nature of the process enables firms that engage in misconduct to drag out the proceedings for years while the investing public is kept in the dark.

The Reed-Grassley bill will make PCAOB hearings and all related notices, orders, and motions, open and available to the public unless otherwise ordered by the Board.  This would more closely align the PCAOB's procedures with those of the Securities and Exchange Commission (SEC) for analogous matters.

“When people invest their money, they deserve to know the facts. Reliable financial reporting is vital to the health of our economy, and it’s time to take the legislative steps necessary to enhance transparency in the PCAOB’s enforcement process.  Increasing transparency and accountability of audit firms subject to PCAOB disciplinary proceedings bolsters investor confidence in our financial markets and better protects companies from problematic and unscrupulous auditors,” said Senator Reed.  “Concealing PCAOB disciplinary proceedings from the public creates a lack of transparency that invites abuse and undermines the Congressional intent behind the PCAOB, which was to shine a bright light on auditing firms and practices, and to bolster the accountability of auditors of public companies to the investing public. Over the years, some bad actors have used this loophole to shield themselves from public scrutiny and accountability.   Our bipartisan bill would finally close this loophole.”

“There’s no reason to expect there to be accountability behind closed doors.  This bill closes a loophole that has allowed businesses under audit by the PCAOB to remain under audit in secret.  Making PCAOB proceedings transparent and open would force the actions of bad actors to be exposed for the world to see. Businesses and investors have a right to know if the business they’re working with has serious legal problems,” said Senator Grassley.

To conduct its duties, the PCAOB, under the oversight of the SEC, oversees more than 1,800 registered accounting firms, as well as the audit partners and staff who contribute to a firm's work on each audit. The Board's ability to begin proceedings that can determine whether there have been violations of its auditing standards or rules of professional practice is an important component of its oversight.

The lack of transparency surrounding disciplinary proceedings under current law can provide unscrupulous firms with an incentive to litigate cases in order to continue to shield conduct from the public.

For example, an accounting firm continued to issue no fewer than 29 additional audit reports on public companies without those companies knowing that it was subject to a PCAOB disciplinary proceeding.  Disturbingly, these investors and the public company clients of that audit firm were deprived of important information about the proceeding against the firm and the substance of any violations.

PCAOB’s confidential proceedings run counter to the public enforcement proceedings of other regulators, including the SEC, the U.S. Department of Labor, the Federal Deposit Insurance Corporation, the U.S. Commodity Futures Trading Commission, the Financial Industry Regulatory Authority, and others. 

Last year, Senator Reed, the Ranking Member of the Armed Services Committee, successfully included similar language in the 2019 National Defense Authorization Act (NDAA) directing the U.S. Defense Department to require auditing and accounting firms it hires to disclose whether the firm has been the subject of enforcement actions by regulators, such as the PCAOB.  Under this law:

SEC. 1006. Transparency of accounting firms used to support Department of Defense audit.

For all contract actions (including awards, renewals, and amendments) occurring more than 180 days after the date of the enactment of this Act, the Secretary of Defense shall require any accounting firm providing financial statement auditing or audit remediation services to the Department of Defense in support of the audit required under section 3521 of title 31, United States Code, to provide the Department with a statement setting forth the details of any disciplinary proceedings with respect to the accounting firm or its associated persons before any entity with the authority to enforce compliance with rules or laws applying to audit services offered by accounting firms.