Senators reintroduce legislation to make PCAOB disciplinary proceedings public

Senators Jack Reed, D-R.I., and Chuck Grassley, R-Iowa, have reintroduced legislation to make the Public Company Accounting Oversight Board’s disciplinary proceedings against auditing firms and auditors public.

The PCAOB Enforcement Transparency Act aims to expose auditing deficiencies at firms or the companies they audit more promptly to deter violations. The same senators originally introduced the bill in 2011 at the urging of the PCAOB’s then-chairman Daniel Goelzer (see Senate bill would make PCAOB disciplinary hearings public). Goelzer had argued that the secretive disciplinary process encourages accounting firms and auditors to drag out disciplinary proceedings for years and consume unnecessary staff time while the public remains unaware of problems with the firms or the companies they have audited. However, the secretive procedures were enshrined in the Sarbanes-Oxley Act of 2002 that created the PCAOB, and it would take an act of Congress to change it. Goelzer wrote to Congress in 2010 and even suggested draft legislation (see PCAOB drafts bill to make disciplinary proceedings public).

The Reed-Grassley bill would make PCAOB hearings, along with all the related notices, orders, and motions, open and available to the public unless otherwise ordered by the board. The PCAOB procedure would then be similar to SEC Rules of Practice for similar matters, where hearings and related notices, orders, and motions are open and available to the public.

Courtesy of the PCAOB

“The PCAOB is responsible for ensuring that auditors of public companies meet the highest standards of quality, independence and ethics,” Reed said in a statement. “Reliable financial reporting is vital to the health of our economy and we must take the legislative steps necessary to enhance transparency in the PCAOB’s enforcement process. Currently, Congress, investors, and others are being denied critical information about an auditor’s disciplinary process. Investors and companies alike should be aware when the auditors and accountants they rely on have been charged or sanctioned for violating professional auditing standards.”

The PCAOB expressed support for the legislation. "I appreciate the continued support of Chairman Grassley and Senator Reed to bring transparency to litigated PCAOB enforcement proceedings to better protect investors,” said PCAOB Chairman James Doty.

Reed and Grassley argued that the lack of transparency currently surrounding disciplinary proceedings can provide unscrupulous firms with an incentive to litigate cases so they can continue to shield their conduct from the public. They pointed to one accounting firm that issued 29 audit reports on public companies without any of those companies knowing PCAOB disciplinary proceedings were underway against it. Both investors and other clients of the auditing firm were unaware of the proceedings against the firm and the extent of violations.

The senators noted that the public enforcement proceedings of other regulators are public, such as the Securities and Exchange Commission, the Department of Labor, the Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission, the Financial Industry Regulatory Authority, and others. Nearly all of the SEC’s administrative proceedings against public companies, brokers, dealers, investment advisers and others are public.

“Transparency brings accountability,” Grassley said in a statement. “This legislation levels the playing field between auditors reviewed by the SEC and auditors reviewed by the PCAOB. Currently, PCAOB proceedings are secret while SEC proceedings are not. The secrecy provides incentives to bad actors to extend the proceedings as long as possible so they can continue to do business without notice to businesses about potential problems with a particular auditor. This bill ends the secrecy and brings the kind of transparency that adds accountability to agency proceedings.”