By Mark S. Nelson, J.D.
Senators Elizabeth Warren (D-Mass) and Bernie Sanders (I-Vt) sent a letter to SEC Chair Gary Gensler asking Gensler to use the Commission’s authority to replace the sitting members of the Public Company Accounting Oversight Board. Warren and Sanders said in the letter that such a move is necessary because, in their view, the Trump Administration’s deregulatory agenda had "slowed" the PCAOB’s work, resulted in fewer enforcement matters, and had threatened the audit regulator’s independence.
PCAOB independence. In the nearly 20 years since the Sarbanes-Oxley Act became law and thereby created the PCAOB, the law’s namesakes, Sen. Paul Sarbanes (D-Md) and Rep. Michael Oxley (R-Ohio), have both passed away, and yet their overall statutory vision for the PCAOB has endured, having survived a Supreme Court challenge to the Board’s structure. The execution of that vision, however, has been met with mixed reviews. In recent years, the PCAOB has been beset by leaked audit plans, a cheating scandal, and the replacement of the entire board by former SEC Chair Jay Clayton.
Warren’s and Sanders’s letter criticized Clayton’s action to replace the Board as an event that had briefly kindled hope for the appointment of a more active PCAOB focused on investor protection and auditor oversight but which ultimately resulted in the appointment of what the senators characterized as "partisan cronies." The senators explained that the replacement board brought with it a deregulatory agenda that they said has diminished the Board’s oversight of auditors and has subjected the Board to concerns about industry capture.
Specifically, Warren and Sanders point to the appointment of former Congressional aide William Duhnke III as PCAOB Board Chair. According to a The Wall Street Journal article cited by the senators, Duhnke had presided over a period of discord among Board members. The article also noted a whistleblower complaint that alleged that Duhnke had instilled a "sense of fear" within the PCAOB. Warren and Sanders further observed that the Clayton replacement Board included for the first time a member from one of the Big Four audit firms.
"You [Gensler] have an opportunity and an obligation to strengthen the PCAOB, protect its independence, and ensure it lives up to its responsibilities - all of which are central to the SEC's mandate to 'promote a market environment that is worthy of the public's trust,’" the Warren-Sanders letter concluded.
Power to remove the Board. The Commission, as Warren and Sanders noted in their letter, has wide authority to oversee the PCOAB’s activities under the Supreme Court’s 2010 opinion in Free Enterprise, which severed from the Sarbanes-Oxley Act a provision that allowed removal of Board members only for cause, and under Sarbanes-Oxley Act Section 107(d). The Commission’s statutory authorities include rescinding the Board’s authorities, censuring the Board, and censuring or removing individual Board members.
Of the five Board members appointed by Clayton in 2017, that is, Duhnke, J. Robert Brown, Kathleen Hamm, James Kaiser, and Duane DesParte, only Duhnke and DesParte remain on the Board. Brown was the most recent to departure shortly before his wife, SEC Commissioner Allison Herren Lee, became Acting SEC Chair. The other two current Board members are Rebekah Goshorn Jurata and Megan Zietsman. One Board seat remains vacant.
At the time, Clayton issued a public statement in which he described the new Board thus: "The new Board’s collective experience spans the phases of the financial reporting process, and also includes: senior positions in the executive and legislative branches of government, government investigations, military service, SEC investor advisory committee service, board member service, experience in teaching and writing about corporate and securities laws matters, experience in engaging with investors, demonstrated leadership on cybersecurity and fintech matters, and experience with preparing financial disclosures for both large and smaller reporting companies."
Clayton added: "A PCAOB Board that brings such a wide variety of perspectives to bear through consensus based decision-making should be able to move forward on effectiveness of standard-setting, robustness in oversight of the audit profession, and global leadership in audit regulation."
But the Clayton-era SEC also would ease some audit independence standards, a development Warren and Sanders also criticized in their letter. The senators cited Lee’s and Commissioner Caroline Crenshaw’s dissent from that rulemaking in which they addressed the inherent conflicts of interest that pervade the current issuer-pays model for the auditing profession while expressing concern that audit independence standards would become less effective and less transparent.
Emerging audit concerns. Looking ahead, Warren and Sanders also suggested that a leadership change at the PCAOB is needed because the audit regulator should be doing more to scrutinize auditors’ work in light of the current economic environment. The senators said asset price increases that emerged during the COVID-19 pandemic could become bubbles that eventually pop, leading to an economic downturn. The senators also cited worries about the influence on markets of meme stocks, such as GameStop, which briefly sent markets into a period of extreme volatility, an increasing presence of special purpose acquisition companies (SPACs), and an inherent volatility of virtual currencies.