According to a White House budget issued on February 10, 2020, the White House is considering transferring the authority of the Public Company Accounting Oversight Board (PCAOB or Board) to the SEC by 2022 in order to eliminate duplication between the two regulators and to “reduce regulatory ambiguity.” See A Budget for America’s Future.
The Sarbanes-Oxley Act of 2002 established the PCAOB as a nonprofit corporation to oversee the audits of public companies in order to protect investors and the public interest by promoting informative, accurate, and independent audit reports. This was done in response to accounting scandals at major companies such as Enron and Worldcom. The SEC has oversight authority over the PCAOB, including the approval of the Board’s rules, standards, and budget. And, of course, the SEC has authority to broadly enforce the securities laws against, among others, auditors of public companies and registered broker-dealers. The PCAOB, however, rather than focusing on the entire range of securities law violations, typically focuses on violations of audit quality standards as embodied in its rules. For example, the PCAOB recently charged Pricewaterhouse Coopers’ Mexican affiliate firm with violating its Rule 3520, which requires a registered public accounting firm to be independent of the firm’s issuer audit clients. See In the Matter of Pricewaterhouse Coopers, S.A., PCAOB Release No. 105-2019-017 (Aug. 1, 2019). Moreover, many of the PCAOB staff members have public auditing experience, often with “Big Four” firms. Although the SEC also hires accountants, the agency would need to ramp up its hiring dramatically if it were to assume the PCAOB’s existing regulatory authority.
Sarbanes-Oxley was amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, establishing funding for PCAOB activities, primarily through annual fees assessed on public companies, based on their relative average monthly market capitalization, and on broker-dealers, based on their relative average quarterly tentative net capital. Despite the fact that the Board’s operations are supported by these fees, the Administration estimates that its elimination would save an estimated $580 million over nine years. While the PCAOB and its board members’ annual salaries of more than $500,000 have long been controversial among Republicans and Democrats, any move to shutter it would likely set off a political firestorm.
While the White House further considers its proposal to fold the PCAOB into the SEC, it is sure to consider the Board’s sixteen-year history which, recently, has been problematic. Indeed, this is not the first time that the PCAOB has drawn controversy or scrutiny, including over certain criminal charges arising from an embarrassing leak of confidential information about future inspections of a Big Four firm. Moreover, in 2018, the number of settled disciplinary orders made public by the PCAOB dropped by 63%. In May 2019, the Board became the subject of a whistleblower complaint filed by a group of current and former PCAOB employees that alleged infighting and staffing issues. In particular, the whistleblower complaint alleged that the Board’s chairman had created a “sense of fear” at the PCAOB in an apparent push to oust senior staffers.
Then, last September, a nonpartisan Project on Government Oversight report criticized the PCAOB by pointing out that since 2002, it had only brought 18 enforcement actions against the Big Four accounting firms, despite having found 808 instances of defective audits and only imposed $6.5 million in fines, despite its authority to levy as much as $15 million per violation.
As the fate of the PCAOB remains uncertain, we can expect to see the Enforcement Division of the SEC continue to focus on the liability of gatekeepers, including auditors. See Enforcement Annual Report.
Moreover, there is no reason to believe that the PCAOB will stop fulfilling its regulatory mandate that includes conducting examinations and investigations as the White House ponders its existence. Inadequate responses to problematic PCAOB examinations can lead to disastrous “bet-the-firm” investigations and litigation by the PCAOB Division of Enforcement and Investigations. In the course of these actions, the Board may seek to suspend or bar the registration of firms and their associated persons. Therefore, firms would be well advised to pay attention to PCAOB examinations and devote resources to handling them properly, including to engaging experienced defense counsel to protect against such claims at an early stage.