A bipartisan pair of influential senators introduced legislation that would make disciplinary hearings against auditing firms public.
The bill would change a provision of the Sarbanes- Oxley Act that requires the Public Company Accounting Oversight Board to keep disciplinary proceedings against auditing firms confidential. The proposed legislation, sponsored by Senators Jack Reed and Chuck Grassley is called the PCAOB Enforcement Transparency Act of 2011.
The current chairman of the PCAOB, also has called for making the disciplinary proceedings public, arguing that “secrecy has a variety of unfortunate consequences” and this “state of affairs is not good for investors, for the auditing profession, or for the public at large.”
The PCAOB is responsible for ensuring that auditors of public companies meet the highest standards of quality, independence, and ethics,” Reed said in a statement. “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.”
Lack of transparency surrounding disciplinary proceedings under current law can provide unscrupulous firms with an incentive to litigate cases in order to continue to shield conduct from the public.
One accounting firm that was the subject of a disciplinary proceeding issued no fewer than 29 additional audit reports on public companies during the course of the proceedings, they noted. Because of the confidential nature of the proceedings, those public companies and their investors were completely unaware there was a potential auditing problem with this accounting firm. Before the firm was expelled from public company auditing, it issued those audit reports, knowing all the while that it was subject to disciplinary proceedings, but investors were denied this information.
“Sunshine is the best disinfectant,” Grassley said. “This legislation 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 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.”
They argued that the PCAOB’s closed proceedings run counter to the public enforcement proceedings of other regulators. Not only the SEC, but also the Labour Department, the Federal Deposit Insurance Corporation, the U.S. Commodity Futures Trading Commission, and other government agencies use public proceedings, as does the self-regulating Financial Industry Regulatory Authority. Nearly all administrative proceedings brought by the SEC against public companies, brokers, dealers, investment advisers and others are open, public proceedings.
