Views on improving the integrity of global capital markets
13 June 2013

Investors Remain in the Dark When PCAOB Disciplinary Actions Are Hidden in the Shadows

“Sunlight is said to be the best of disinfectants.” – U.S. Supreme Court Justice Louis Brandeis

As the Public Company Accounting Oversight Board (PCAOB) marks its 10-year anniversary since its formation under the Sarbanes–Oxley Act (SOX), investors should be reminded that, under this law, public disclosure of pending disciplinary actions against audit firms is restricted. Under SOX, the PCAOB is prohibited from disclosing the identities of audit firms and auditors accused of wrongdoing while disciplinary proceedings are underway. This delays providing meaningful information about investigative matters to investors who rely most on the audits.

In the meantime, the auditor is free to serve existing clients and even acquire new clients who are unaware of the serious allegations that auditor is facing. The auditor, on the other hand, is incentivized to drag out the proceedings for as long as possible. This does not serve the investing public and is not consistent with the PCAOB’s mission of investor protection. 

Recently U.S. Senators Jack Reed (a Democrat representing Rhode Island) and Chuck Grassley (a Republican representing Iowa) re-introduced a bill that would make PCAOB hearings, and all related notices, orders, and motions, open and available to the public unless otherwise ordered by the PCAOB. This is similar to the proceedings of the U.S. SEC, whose hearings, and related notices, orders, and motions, are available to the public. The Reed-Grassley bill announcement notes the following:

“PCAOB’s closed proceedings run counter to the public enforcement proceedings of other regulators, including the U.S. Securities and Exchange Commission (SEC), the U.S. Department of Labor, the Federal Deposit Insurance Corporation (FDIC), the U.S. Commodity Futures Trading Commission (CFTC), the Financial Industry Regulatory Authority (FINRA), and others. Nearly all administrative proceedings brought by the SEC against public companies, brokers, dealers, investment advisers, and others are open, public proceedings.”

As noted in the announcement of the proposed legislation, one accounting firm subject to a PCAOB disciplinary proceeding went on to issue at least 29 additional audit reports on public companies during the course of the proceedings. Those public companies and their investors were unaware that the audit firm had problems. The firm ultimately was expelled from public company auditing after it issued those audit reports, but investors remained in the dark.

We urge passage of the Reed-Grassley bill, which is in the best interest of the investor.

It is time to provide additional transparency and ensure that public company audits and auditors meet the highest standards of quality.


Photo credit: iStockphoto/carolo7

About the Author(s)
Matt Waldron

Matt Waldron is a director of financial reporting policy at CFA Institute. He drafts position papers and comment letters, representing membership interests regarding financial reporting and disclosure proposals issued by the FASB, the IASB, and others.

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