Friday, September 24, 2010

PCAOB Asks Congress to Make Disciplinary Proceedings Public

In a letter to House Financial Services Committee Chair Barney Frank and Ranking Member Spencer Bachus, PCAOB Acting Chair Dan Goelzer asked for legislation amending Sarbanes-Oxley so that Board disciplinary hearing against individual auditors and accounting firms will be public. From the initiation of the PCAOB disciplinary proceeding through the SEC decision to let the snactions commence, the entire proceeding takes place behind closed doors. The closed nature of Board disciplinary proceedings is in sharp contrast to similar SEC proceedings against auditors. 

The proposed legislative draft would make Board disciplinary proceedings public when the Board decides that the evidence gathered in an investigation warrants charging a firm or individual with a violation, while at the same time maintaining exisiting confidentiality of Board inspections. The draft would also retain the Board's flexibility to order non-public proceedings in appropriate cases. 

According to Chairman Goelzer, the non-public nature of Board disciplinary proceedings has adverse consequences for investors, audit committees, and auditors. The public is denied important informaton about PCAOB cases and audit committees are kept in the dark about an auditor's alleged misconduct. Even after a hearing officer finds that the alleged violations occurred, the matter may remain non-public until appealed to the SEC. Investors can be left unaware company financials are being audited by audtors charged and even sanctioned by the Board. As an example, Chairman Goelzer cited the recent Gately case in which the firm issued 29 additional audit reports on public companies' financials between commencement of the Board's proceedings and public disclosure of the Board's charges.

Another adverse consequence of non-public PCAOB proceedings is that audit firms and auditors have an  incentive to litigate Board proceedings rather than settle because they can continue to conduct audits without disclosure to clients or investors of the Board's charges. Again, the Gately case is illustrative, where the firm continued its audit practice during the two years between the filing of the Board's case and the disclosure of sanctions. Similarly, the incentive to litigate consumes Board resources better deployed elsewhere.

More broadly, said the PCAOB Chair, the non-public nature of disciplinary proceedings limits the Board's ability to us its enforcement authority to improve audit quality and deter violations of Board rules. When the Board concludes that there has been an audit failure warranting enforcement action, auditors do not learn of that decision for an extended period of time. Thus, other auditors who face similar situations will be unaware of what prompted the Board to take disciplinary action

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