Sens. Jack Reed (D-RI) and Chuck Grassley (R-IA) introduced legislation that would make the Public Company Accounting Oversight Board (PCAOB) disciplinary hearings open to the public to bring auditing deficiencies to light and deter violations.
The PCAOB was created through Sarbanes-Oxley following a wave of corporate accounting scandals, such as Enron and WorldCom, to audit the auditors. The law said PCAOB’s disciplinary proceedings, however, would be kept confidential through charging, hearings, initial decision, and appeal. The bill’s sponsors said 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.
Reed and Grassley’s PCAOB Enforcement Transparency Act would make all PCAOB hearings and related notices, orders, and motions open and available to the public unless otherwise ordered by the board.
“The PCAOB is responsible for ensuring that auditors of public companies meet the highest standards of quality, independence, and ethics,” Reed said. “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.”
Grassley said the bill 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 U.S. Department of Labor, the Federal Deposit Insurance Corporation (FDIC), the U.S. Commodity Futures Trading Commission (CFTC), and the Financial Industry Regulatory Authority (FINRA) also hold public enforcement hearings.
“Transparency brings accountability,” Grassley said. “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.”
The lawmakers said the lack of transparency surrounding disciplinary proceedings can provide unscrupulous firms with an incentive to litigate cases in order to continue to shield conduct from the public.
They gave the example of an accounting firm that continued to issue no fewer than 29 additional audit reports on public companies without any of those companies knowing about its PCAOB disciplinary proceedings.