The establishment of the Public Company Accounting Oversight Board (the "PCAOB" or "Board") was a key element of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley").1 In addition to authorizing the PCAOB to inspect and set professional standards for public accounting firms, Sarbanes-Oxley conferred broad discretion on the Board to investigate and discipline firms and their "associated persons" for violations of the federal securities laws governing the preparation and issuance of audit reports, as well as other professional standards. Sarbanes-Oxley did so, however, without curtailing the existing enforcement authority of the Securities and Exchange Commission (the "SEC" or "Commission") over public company auditors.
The PCAOB has been operating for the better part of a decade, and the Board is currently pursuing an active agenda under its new Chairman, James R. Doty, that may result, among other things, in both mandatory audit firm rotation and changes in the auditors' reporting model. In addition, the PCAOB has now conducted numerous enforcement investigations and publicly announced the resolution of dozens of enforcement cases. While the bulk of the Board's resources are devoted to its inspection program, an increasing number of public accounting firms and auditors have found themselves the subject of scrutiny by the Board's Enforcement Staff. With the 10-year anniversary of Sarbanes-Oxley fast approaching, it is an opportune time to review the PCAOB's enforcement program to date. This article (1) analyzes the public enforcement actions brought by the PCAOB and the areas that have been the focus of the Board's enforcement program, and (2) highlights features that distinguish the PCAOB's enforcement program from that of the SEC, a larger agency with a longer history and considerably broader enforcement powers.
Analysis of the Board's Publicly Announced Enforcement Proceedings
Since its creation, the PCAOB generally has sought to coordinate its enforcement efforts with those of the SEC. In some instances, the Board may focus on the conduct of the auditors, while the SEC investigates the audit client (typically, a public company), its management, and other relevant parties. In other cases, however, the SEC's Enforcement Division may take the lead with respect to all aspects of an investigation and ask the PCAOB's Enforcement Staff to stand down.2 In one enforcement proceeding to date, which involved the auditors of Satyam Computer in India, both the PCAOB and the SEC took action against the accounting firms involved.3
The PCAOB announced its first settled enforcement action against a registered public accounting firm in 2005 and, as of December 2011, has publicly announced the resolution of 45 enforcement actions.
Under Sarbanes-Oxley and the Board's rules, PCAOB enforcement proceedings are non-public unless (1) the parties consent to a public hearing,4 (2) the Board has imposed sanctions and the time to file an appeal with the SEC has expired,5 or (3) the SEC, on appeal, issues an order regarding the sanctions imposed.6 Because a respondent in a PCAOB proceeding has little incentive to consent to a public hearing, and the appeals process can take years to complete, there are enforcement actions brought by the PCAOB that are not yet - and may never be - known to the public. Moreover, if a formal or informal investigation is conducted but no disciplinary proceeding is instituted, or if a disciplinary proceeding is instituted but no sanctions are imposed by a hearing officer (or, on appeal, by the Board), the public is unlikely to learn of the existence of the investigation or the proceeding.
Of the PCAOB's 45 public enforcement actions, 41 are settled disciplinary orders. Similar to SEC settlements, PCAOB settlements typically are structured with the respondent consenting to the entry of the Board's order and the imposition of sanctions without either admitting or denying the Board's findings. Only four of the public enforcement actions are adjudicated matters that have been litigated before a Board-designated hearing officer. Given the non-public nature of the adjudication and appeal processes, however, there are likely several additional proceedings that are currently being contested and that have not yet been publicly disclosed.
Basis for Sanctions Imposed in PCAOB Enforcement Cases
The PCAOB has expansive authority to investigate registered firms and their associated persons, and numerous enforcement tools at its disposal. A review of the Board's publicly disclosed actions indicates that, in broad terms, the Board's enforcement activities have focused principally on two objectives: (1) responding to perceived failures by PCAOB-registered firms or their associated persons to comply with professional standards during audit engagements, and (2) addressing improper conduct by registered firms or their associated persons during Board inspections or enforcement investigations.
Specifically, 26 of the Board's 45 publicly announced enforcement actions allege failures by firms or individual auditors to have complied with professional auditing standards during the course of an audit.7 The alleged violations that gave rise to such enforcement actions include, for example:
- Excessive reliance by auditors on management representations without performing sufficient audit procedures;8
- The failure to perform sufficient audit procedures with respect to key financial statement items, such as significant assets and sources of revenue;9
- The failure to evaluate whether information obtained during an audit represented fraud risks that warranted further inquiry;10
- Excessive reliance on audit staff that did not have the degree of technical training or proficiency required under the circumstances;11
- Reliance by registered firms on work performed by other auditors without performing sufficient procedures to determine whether such reliance was appropriate;12
- The failure to take steps to prevent further reliance on a prior audit opinion after having concluded that a client's previously issued financial statements were misleading;13
- The failure to exercise due care and objectivity in the performance of a concurring partner review;14 and
- The failure to assemble and maintain sufficient audit documentation.15
While most PCAOB proceedings alleging audit deficiencies have confined the claims to violations of professional standards, in a few cases the Board has taken the additional step of asserting that the conduct of registered firms was so egregious that it violated the Securities Exchange Act of 1934 (the "Exchange Act"). Two such cases involved allegations that auditors violated the antifraud provisions of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by issuing audit reports representing that audits had been conducted in accordance with PCAOB standards, when the auditors knew, or were reckless in not knowing, that such representations were false.16 In addition, the PCAOB has alleged in four proceedings that registered firms failed to comply with their responsibilities under Section 10A of the Exchange Act, which prescribes the steps that outside auditors must take when they become aware that a client may have engaged in illegal conduct.17
The PCAOB has also brought four public enforcement actions alleging that registered firms and associated persons violated auditor independence requirements. These violations included, among other things, purchasing the audit client's securities while serving as a member of the engagement team and accepting an offer to serve on the audit client's board of directors, and commencing service in that role, during the audit engagement period.18
In addition to sanctioning registered public accounting firms and their personnel for violations that occurred while performing audits, the PCAOB has held them accountable for abuses of the Board's processes. The Director of the PCAOB's Enforcement Division, Claudius Modesti, recently stated that his staff has seen an "uptick" in the altering of auditing documents on the eve of a Board inspection, which he characterized as "a very irrational response to a regulatory process" that will not be tolerated.19 The Board's enforcement record supports that statement. The PCAOB has brought 11 actions alleging that associated persons interfered with the Board's inspection program by, for example, altering or backdating workpapers after learning which audits would be reviewed by the Board's inspection personnel.20 In seven other proceedings, the Board alleged that a firm or an individual failed to cooperate with a PCAOB investigation by, for example, refusing to provide documents or testimony in response to an Accounting Board Demand issued by the Enforcement Staff.21 In another case, the Board took action after learning that an individual who had previously been barred from associating with a registered public accounting firm remained associated with that firm and had performed services for some of the firm's public audit clients.22 These proceedings demonstrate that the Board will look harshly on conduct that obstructs, significantly delays, or misleads the PCAOB's Staff, or disregards sanctions that the Board has previously imposed. In another recent case, the PCAOB sanctioned a registered firm that had failed to file an annual report with the Board or pay its annual support fee on a timely basis.23
To date, 11 of the Board's public enforcement actions – approximately 24% – have been brought against one of the "Big Four" accounting firms or their associated persons. The remainder of the PCAOB's proceedings have been brought against smaller firms or solo practitioners.
Range of Sanctions Imposed in PCAOB Enforcement Cases
Under Section 105(c)(4) of Sarbanes-Oxley, the PCAOB has the authority to impose a broad array of sanctions on registered public accounting firms or their associated persons. These sanctions include (1) revoking a firm's registration, (2) suspending or barring an individual from associating with a registered public accounting firm, (3) placing limitations on a firm or person's business activities, (4) ordering civil money penalties, (5) imposing a censure, (6) requiring additional professional training, (7) requiring the engagement of an independent monitor to observe and report on the firm's compliance program, and/or (8) requiring the adoption or implementation of policies and procedures designed to improve audit quality or effectuate compliance with applicable laws, professional standards, or Board rules, including through the engagement of an independent consultant.24 However, the Board is only authorized to impose its most severe sanctions — registration revocations, bars from association, limitations on business activities, and monetary penalties in excess of $100,000 for a natural person and $2,000,000 for any other person — if it finds that a firm or individual has engaged in intentional or knowing conduct, including reckless conduct, or repeated acts of negligent conduct.25
A review of the sanctions imposed by the PCAOB in its public enforcement proceedings illustrates how the Board has exercised its statutory authority to date. In 37 of the 45 public proceedings (approximately 82%), the Board has ordered the revocation of a firm's registration with the PCAOB and/or barred or suspended an individual from associating with a registered public accounting firm. Within those 37 proceedings, there were 43 instances where an individual was barred or suspended from associating with a registered public accounting firm. Of those 43 instances, 18 were permanent bars, 20 were bars where the individual was granted the right to petition the Board for reinstatement after a set number of years, and five were suspensions that automatically expired when the suspension period lapsed. The Board imposed a censure in 11 cases, and in four of those cases the censure was the only sanction ordered by the PCAOB.
The Board has imposed civil monetary penalties in nine cases. These penalties have ranged from a $1,000 penalty imposed on a firm that was censured for failing to file an annual report and pay its support fee on a timely basis to a $1.5 million penalty that was imposed jointly and severally on five registered public accounting firms in India that were part of the PricewaterhouseCoopers ("PwC") global network.26
In comparison, the PCAOB has been less inclined to utilize the other sanctions available under Section 105(c)(4) and the Board's rules to address violations identified during the course of an investigation. A notable exception, however, is the Board's proceeding in early 2011 against the Indian member firms of PwC. In that matter, the Board, among other things (1) prohibited the firms' acceptance of any new public audit clients until they certified that they had complied with the undertakings set forth in the Board's order, (2) required the engagement of an independent monitor to review and report on the firms' quality control systems and engagement performance, (3) required the adoption and implementation of enhanced policies and procedures in specified areas, (4) required an increase in the number of experienced audit support personnel, and (5) ordered a review and revision of the firms' training programs, as well as the provision of additional education and professional training on selected topics, including professional skepticism and fraud detection, to the firms' associated persons.27 In addition, in another case that involved allegations that a firm had failed to respond appropriately to concerns about an engagement partner's competence and proficiency, the Board ordered the firm to maintain records in sufficient detail to describe its quality control policies and procedures for identifying and addressing potential concerns regarding the performance and deployment of audit partners and directors.28
The high percentage of cases involving registration revocations or bars from association indicates that one of the Enforcement Staff's primary objectives has been to ensure that firms and individuals that it considers unfit for professional practice play a curtailed role in the preparation or issuance of audit reports for public companies. Conversely, the relatively low percentage of actions imposing fines suggests that, while the PCAOB is certainly willing to extract monetary penalties from member firms and their associated persons in some circumstances,29 doing so has not been a principal concern to the Board or its Enforcement Staff to date.
Distinctive Features of the PCAOB's Enforcement Program
In several respects, the PCAOB's enforcement actions against registered public accounting firms and their associated persons resemble administrative proceedings brought against auditors by the SEC under Section 4C of the Exchange Act and Rule 102(e) of the Commission's Rules of Practice.30 For example, the majority of those actions are settled, rather than litigated; the cases, if contested, are heard in the first instance before an administrative law judge or hearing officer, rather than in federal court; and a common resolution of a proceeding is to bar an auditor from public practice with the right to reapply subsequently for the restoration of his or her practice privileges. Despite such similarities, however, there are several distinctive features of the PCAOB's enforcement program compared to that of the Commission.
The PCAOB's Enforcement Authority is Narrow and Targeted
Compared to the SEC's mandate to enforce the federal securities laws with respect to a broad range of market participants and activities, the Board was assigned a narrower role by Congress. Specifically, under Sarbanes-Oxley, the Board is authorized to investigate any act or practice by a registered public accounting firm or associated person that may violate any provision of Sarbanes-Oxley, the rules of the Board, the provisions of the securities laws relating to the preparation and issuance of audit reports and the obligations and liabilities of accountants with respect thereto, or professional standards.31 Conversely, even in cases that may involve complex accounting and financial reporting issues, the Board has no jurisdiction or enforcement authority over public companies or their employees (or, for that matter, any individual who was not, at the time of the relevant conduct, an associated person of a registered firm).
As a result, the Board's enforcement program is geared toward prosecuting alleged audit failures, independence violations, failures to adhere to other professional standards or Board requirements, and failures to cooperate with a Board inspection or investigation by public accounting firms or their associated persons. Because the Board has no authority to investigate an issuer's potential violations of generally accepted accounting principles ("GAAP") or disclosure requirements, and a public company and its employees may not even be aware of a PCAOB investigation of the company's external auditors, the Board exercises caution in describing a company's conduct in its public orders.32 As a practical matter, these limitations increase the likelihood that PCAOB investigations involving alleged audit failures will focus on situations where a company has already restated its financial results or admitted misconduct, as opposed to situations where both the company and its auditors continue to support the issuer's judgments under GAAP.33
The corollary of the PCAOB's focused role under the federal securities laws is the thoroughness of the Board's Enforcement Staff when it does commence an investigation. While some Board investigations are limited in scope, a PCAOB investigation of a registered firm can involve the issuance of multiple "Accounting Board Demands" for documents and testimony related to (1) prior audit reports and quarterly reviews, (2) the audit staff's experience and relevant training, (3) internal communications between and among the audit team, concurring review partners, firm management, national office personnel, and/or technical experts, (4) communications with the issuer's management, (5) documentation and communications about specific audit procedures, (6) any SEC comment letters issued to the firm's client addressing accounting or financial reporting issues and the company's responses, and (7) the auditor's compliance with its own internal auditing, independence, and quality control procedures. In a similar vein, the testimony of individual witnesses before the Enforcement Staff often takes multiple days, with both staff lawyers and accountants actively posing questions to witnesses.
Non-Cooperation with the PCAOB's Enforcement Staff is an Independent Basis for Severe Sanctions
Non-cooperation by a registered public accounting firm with a PCAOB investigation may result in severe sanctions under Sarbanes-Oxley and the Board's rules. In particular, each accounting firm that seeks to register with the PCAOB must, as a condition of registration, agree to comply with any request for testimony or the production of documents made by the PCAOB.34 In addition, firms must agree to secure and enforce similar consents from each of their associated persons.35 Giving teeth to these requirements, Sarbanes-Oxley authorizes the Board to bring disciplinary proceedings against any registered public accounting firm or associated person that has (1) failed to comply with an Accounting Board Demand issued by the Board, (2) knowingly made a false material declaration or used information containing a false material declaration, (3) abused the Board's processes for the purpose of obstructing an investigation, or (4) otherwise failed to cooperate in connection with an investigation.36
Registered public accounting firms and their associated persons are permitted to invoke the attorney-client privilege or the work product doctrine as a basis to withhold information from the PCAOB's Staff.37 In addition, recipients of Accounting Board Demands may, in good faith, attempt to negotiate the scope of demands that are unreasonable, unduly burdensome, or vague. However, while registered firms are entitled to zealously defend their interests, they must balance that objective with the need to maintain, where possible, a positive relationship with the Board, which may inspect them regularly and adopt new standards governing their audit engagements and other services. Moreover, registered firms and their associated persons risk discipline – including a possible suspension or bar on their ability to audit public companies or SEC-registered broker-dealers – based solely on a failure to cooperate with the Board. In comparison, while the failure of an accounting firm to provide information to the SEC's Enforcement Staff during an investigation may lead to a subpoena enforcement action in federal court,38 the Commission lacks similar express authority to impose sanctions on a firm for non-cooperation during an SEC inquiry.39
PCAOB Enforcement Staff May Prevent Accounting Experts from Attending Testimony to Assist Legal Counsel
Both SEC and PCAOB rules expressly recognize the right of a witness in an enforcement proceeding to be represented by counsel.40 Given the technical accounting and auditing issues that can arise during the course of testimony relating to an audit engagement, counsel may find it useful, if not imperative, to bring an accounting expert to the testimony to assist in counsel's understanding of the questions and answers and to protect the witness's rights. Counsel's ability to do so, however, is less certain in a PCAOB investigation than in an SEC proceeding.
In the context of an SEC proceeding, a federal court held over two decades ago in SEC v. Whitman that the Commission is required to permit a non-lawyer accountant to attend investigative testimony for the purpose of providing technical assistance to counsel on accounting and auditing issues.41 The court reasoned that "[g]ranting permission to the witness' attorney to bring an expert of his own choosing to the agency proceedings as an extension of himself * * * is a simple and expedient way to give veritable meaning to the witness' right to counsel." The PCAOB, however, has taken the position that it is not bound by that precedent because Whitman is rooted in the Administrative Procedures Act, which in the Board's view does not apply to its proceedings because Sarbanes-Oxley provides that the Board shall not be considered an "agency or establishment" of the United States Government.42
As a result, the PCAOB's rules provide that the Board and the Enforcement Staff have discretion to determine if a technical expert may attend investigative testimony to assist counsel. The Board believes that this approach "provides sufficient flexibility for the [Enforcement Staff] to permit a technical consultant to be present during investigative testimony," and has stated that it expects the Staff "to allow that presence in appropriate circumstances and on appropriate terms, including, for example, that the consultant not be a partner or employee of the firm with which the witness is associated." At the same time, the PCAOB has noted its expectation that its Staff will be "vigilant about not permitting a firm's internal personnel effectively to monitor an investigation by sitting in on testimony of all firm personnel."43
In SEC investigations involving accounting firms, many firms often make an in-house accounting expert available to legal counsel to assist with an investigation and attend testimony. The PCAOB's rules and public statements suggest that this option typically will not be available during a Board investigation. As a result, counsel may need to line up another expert who is not affiliated with the registered public accounting firm under investigation or face the possibility that he or she may be required to address challenging technical issues that arise during testimony without an accounting expert on hand to assist in counsel's understanding of the issues.
Both the PCAOB Staff and Respondents in PCAOB Proceedings Are Limited in Their Ability to Obtain Cooperation from Entities and Persons Not Subject to the PCAOB's Direct Jurisdiction
The PCAOB has broad authority to compel testimony and the production of documents from registered public accounting firms and their associated persons. In comparison, under Sarbanes-Oxley, the Board lacks jurisdiction over any entity that is not (or was not) a registered public accounting firm, or over any person who is not (or was not) an associated person of a registered firm. While the Board may issue a request, referred to as an Accounting Board Request, for documents or testimony to any person the Board considers relevant or material to an investigation,44 compliance with any such request is voluntary. These limitations place the PCAOB at a disadvantage relative to the SEC in obtaining information from entities and individuals that may be highly relevant to an enforcement investigation or later proceeding.
For example, until recently, it did not appear that the Board had the authority to compel testimony or the production of documents from a person who was associated with a registered public accounting firm at the time of the conduct under investigation, but not at the time of the investigation or hearing.45 The Dodd-Frank Act attempts to resolve that issue, however, by expressly granting the Board authority to compel formerly associated persons to provide testimony or documents related to events that occurred while they were associated persons.46 Accordingly, any current or former associated person of a firm with knowledge of relevant facts can be required to participate in a Board investigation or disciplinary hearing – at least with respect to events that occurred after the passage of Dodd-Frank.
Even so, the Board's authority remains limited in other respects. Specifically, the Board currently has no direct ability to compel testimony or documents from third parties, such as officers or employees of a registered firm's audit clients. In the context of Board investigations, Sarbanes-Oxley contemplated that the PCAOB would adopt procedures governing requests by the Board to the SEC to issue subpoenas to compel documents or testimony from such persons.47 Board Rule 5111, approved by the SEC in 2004, thus provides that the Board may seek issuance of third-party subpoenas by submitting an application to the Commission that includes a completed form of subpoena and any additional information that the SEC requires.48 However, the SEC does not appear to have adopted any corresponding rules that address how the Commission will handle such requests.49 As a result, it remains unclear as to whether, in any particular situation, the Board's Staff will be able to enlist the SEC's assistance and on what terms.
Moreover, while the Board may request the issuance of a Commission subpoena to compel documents or testimony relevant to an investigation, firms or individuals who are respondents in a PCAOB disciplinary proceeding cannot do the same as part of their own defense. Board Rule 5424(b) provides that, during a disciplinary proceeding, the PCAOB, on its own initiative or at the request of a party to the hearing, may seek the issuance of a Commission subpoena to compel testimony or documents from any person that the Board considers relevant or material to the Board proceeding. However, in approving Rule 5424(b) in 2004, the SEC expressed concerns that the issuance of a Commission subpoena in the context of a PCAOB disciplinary hearing would be "a novel and potentially complex arrangement" and stated that the SEC and PCAOB Staffs should jointly craft additional rules to govern the implementation of Rule 5424(b). At that time, the SEC also stated that "Rule 5424(b) will not be available for use in PCAOB proceedings until these additional rules and procedures have been developed and implemented to our satisfaction."50
Subsequently, the Board proposed Rule 5424(c), which sets forth detailed procedures by which a party in a disciplinary proceeding can request that the Board seek issuance of a Commission subpoena under Rule 5424(b).51 The SEC has never approved this rule, however, and there are no other publicly available SEC rules or procedures to effectuate a subpoena request by a party to a PCAOB disciplinary action. Accordingly, a respondent in a PCAOB disciplinary proceeding has no ability to compel third parties, including an audit client or its employees, to provide potentially mitigating, if not exculpatory, testimony or documents in connection with a Board proceeding. This limitation is potentially significant, and may give rise to arguments in specific cases that the Board's proceeding failed to comply with due process standards.
PCAOB Enforcement Proceedings Are Non-Public Until the Time to File an Appeal Has Expired or the SEC Issues an Order on the Board's Decision
Under Sarbanes-Oxley, hearings in PCAOB enforcement proceedings are non-public unless the Board determines that there is good cause for the hearings to be public and all parties have consented.52 In addition, both the hearing officer's Initial Decision and any Final Decision of the Board in connection with a disciplinary proceeding remain non-public unless (1) the Board has imposed sanctions and the time to file an appeal has expired,53 or (2) the sanctions imposed are appealed to the SEC and the Commission enters an order regarding the Board's sanctions.54 In contrast, since 1988, SEC administrative proceedings against public accountants under Rule 102(e) have been publicly disclosed by the SEC when instituted, and both the Initial Decision of an SEC administrative law judge and any order of Commission on appeal are made public.55
The practical effects of nonpublic hearings may be significant. In particular, because PCAOB enforcement proceedings are made public only after a deadline to file an appeal lapses or, on appeal, the Commission has itself issued an order regarding the sanctions imposed, parties to a proceeding (whether a registered firm, an associated person of a registered firm, or the PCAOB's Enforcement Staff) have an incentive to litigate and appeal unfavorable decisions, regardless of the merits, in order to delay publicizing the action. This tactic could delay public awareness of a case for years, given the right to appeal a PCAOB hearing officer's decision to the Board, and a decision by the Board to the Commission.56
The PCAOB has also voiced concerns that the non-public nature of its proceedings may allow an auditor to continue to engage in public audit practice for years without the public or the auditor's clients knowing that a disciplinary action has been commenced. In addition, the Board has complained that delays in the public announcement of its disciplinary proceedings deprives other registered firms and the public of timely information regarding the types of violations of Board rules or standards that may give rise to enforcement actions. In response, the PCAOB has advocated for increased transparency in its disciplinary proceedings. Enforcement Director Modesti stated in 2010 that the nonpublic nature of disciplinary proceedings is "the most pressing issue facing the Board's enforcement program and its ability effectively to protect investors."57 More recently, PCAOB Chairman James Doty echoed these concerns, stating that "[d]ecades ago, the SEC found that non-public proceedings in cases against auditors of public companies were not in the best interest of investors and opened their administrative proceedings against auditors to the public" and that "[i]nvestors would be best served by similar transparency in PCAOB disciplinary proceedings."58
At least some members of Congress appear sympathetic to the Board's criticisms of the current Sarbanes-Oxley requirements. Bills have been introduced in both the United States Senate and the House of Representatives to make PCAOB disciplinary proceedings public.59 A press release issued by Senator Jack Reed's office states that the Senate bill is intended to "make PCAOB hearings and all related notices, orders, and motions, open and available to the public unless otherwise ordered by the Board."60 If such legislation were enacted, the PCAOB's procedure would then be similar to the SEC's Rules of Practice for similar matters, where hearings and related notices, orders, and motions are all a matter of public record.
The PCAOB Has a Broader Range of Expressly Authorized Sanctions than Available to the SEC under Exchange Act Section 4C or Rule 102(e)
As noted, Sarbanes-Oxley authorizes the PCAOB to impose a broad array of sanctions on registered firms and their associated persons in enforcement proceedings. They range from sanctions that are very severe, such as revoking a firm's PCAOB registration or the right of an individual to associate with a PCAOB-registered firm, to sanctions that are less draconian, such as imposing temporary limits on a firm's activities or ordering an associated person to complete additional professional training.61 This "menu" of potential sanctions available to the Board is much broader than the sanctions identified as available to the SEC under Section 4C of the Exchange Act or Rule 102(e) of the Commission's Rules of Practice. Under these provisions, the Commission's sanctions are limited to either censuring a person, or temporarily or permanently denying that person the privilege of appearing or practicing before the SEC.62
Despite the range of sanctions that Congress contemplated the PCAOB might impose in its enforcement actions, the Board has only rarely imposed sanctions to date in its public proceedings that did not include either revoking a firm's registration or barring an individual from associating with a registered public accounting firm (either permanently or for some period of time). As discussed, 37 of the 45 public enforcement actions involved a revocation or a bar, while 11 actions included a censure, nine actions included a civil money penalty, and only two actions imposed other types of authorized sanctions. This record suggests not only that the Board has modeled its enforcement proceedings after the Commission's Rule 102(e) cases, but also that the PCAOB might be able to bring a larger number of cases to an earlier conclusion if the Board made greater use of some of the less onerous sanctions available under Sarbanes-Oxley and the Board's rules.
The PCAOB was established to promote the preparation of informative, accurate, and independent public company audit reports. The Board has not been prolific in terms of the number of enforcement cases that have been publicly disclosed, averaging approximately seven proceedings per year. As of year-end 2010, however, the Enforcement Division had 23 formal investigations open,63 so the PCAOB's enforcement program is clearly more active than the public list of resolved cases might suggest. Based on the Board's efforts to date, the majority of the PCAOB's future enforcement proceedings will likely continue to underscore the Board's focus on alleged audit failures and abuses of the Board's administrative processes.
1 Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 275 (codified in various sections of 15 U.S.C.) ("Sarbanes-Oxley").
2 James R. Doty, Chairman, PCAOB, What's Changed: New Frontiers for Auditors Without Borders (Oct. 14, 2011).
3 In the Matter of Price Waterhouse, Bangalore, et al, PCAOB Release No. 105-2011-002 (Apr. 5, 2011); In the Matter of Lovelock & Lewes, et al, Exchange Act Release No. 64184 (Apr. 5, 2011).
4 Section 105(c)(2) of Sarbanes-Oxley.
5 Section 105(d)(1)(C) of Sarbanes-Oxley; PCAOB Rule 5204.
6 Section 105(e)(1) of Sarbanes-Oxley.
7 Some PCAOB enforcement actions include more than one basis for the sanctions imposed.
8 See, e.g., In the Matter of Chisholm, Bierwolf, Nilson & Morrill, LLC, et al, PCAOB Release No. 105-2011-003 (Apr. 8, 2011); In the Matter of Price Waterhouse, Bangalore, et al, PCAOB Release No. 105-2011-002 (Apr. 5, 2011); In the Matter of Jennifer Nakao, CPA, PCAOB Release No. 105-2010-002 (Feb. 17, 2010).
9 See, e.g., In the Matter of Traci Jo Anderson, et al, PCAOB Release No. 105-2010-007 (Aug. 12, 2010); In the Matter of Cordovano and Honeck, P.C., et al, PCAOB Release No. 105-2008-004 (Dec. 18, 2008); In the Matter of Jaspers + Hall, PC, et al, PCAOB Release No. 105-2008-002 (Oct. 21, 2008).
10 See, e.g., In the Matter of Chisholm, Bierwolf, Nilson & Morrill, LLC, et al, PCAOB Release No. 105-2011-003 (Apr. 8, 2011); In the Matter of Thomas Benson, et al, PCAOB Release No. 105-2007-002 (June 29, 2007); In the Matter of Turner Stone & Company, LLP, PCAOB Release No. 105-2006-002 (Dec. 19, 2006).
11 See, e.g., In the Matter of Chisholm, Bierwolf, Nilson & Morrill, LLC, et al, PCAOB Release No. 105-2011-003 (Apr. 8, 2011); In the Matter of Moore & Associates, Chartered, et al, PCAOB Release No. 105-2009-006 (Aug. 27, 2009).
12 See, e.g., In the Matter of Moore & Associates, Chartered, et al, PCAOB Release No. 105-2009-006 (Aug. 27, 2009); In the Matter of Clancy and Co., P.L.L.C., PCAOB Release No. 105-2009-001 (Mar. 31, 2009).
13 See, e.g., In the Matter of Lawrence Scharfman CPA PA, et al, PCAOB Release No. 105-2009-005 (Aug. 11, 2009).
14 See, e.g., In the Matter of Williams & Webster, P.S., et al, PCAOB Release No. 105-2007-001 (June 12, 2007).
15 See, e.g., In the Matter of Chisholm, Bierwolf, Nilson & Morrill, LLC, et al, PCAOB Release No. 105-2011-003 (Apr. 8, 2011); In the Matter of Robert T. Taylor, CPA, et al, PCAOB Release No. 105-2010-006 (Apr. 27, 2010); In the Matter of Jaspers + Hall, PC, et al, PCAOB Release No. 105-2008-002 (Oct. 21, 2008).
16 In the Matter of The Blackwing Group, LLC, et al, PCAOB Release No. 105-2009-007 (Dec. 22, 2009); In the Matter of Moore & Associates, Chartered, et al, PCAOB Release No. 105-2009-006 (Aug. 27, 2009).
17 See, e.g., In the Matter of Lawrence Scharfman CPA PA, et al, PCAOB Release No. 105-2009-005 (Aug. 11, 2009); In the Matter of Kantor, Geisler & Oppenheimer, P.A., et al, PCAOB Release No. 105-2007-009 (Dec. 14, 2007).
18 In the Matter of Susan E. Bikert, PCAOB Release No. 105-2007-003 (Nov. 14, 2007); In the Matter of Kenny H. Lee CPA Group, Inc., et al, PCAOB Release No. 105-2005-004 (Nov. 22, 2005).
19 Altering Documents 'A Big No-No,' BNA DAILY REP. FOR EXECUTIVES, Dec. 7, 2011. The Board conducts inspections of member firms to assess the degree of compliance of each firm and associated persons of that firm with Sarbanes-Oxley, the Board's rules, the rules of the Commission, and professional standards. The Board publishes its Inspection Staff's general observations in an inspection report, however, as required by Sarbanes-Oxley, any significant criticisms of the firm's quality control system remain nonpublic, unless the firm fails to make sufficient progress in addressing those criticisms. The Board's Inspection Staff has no authority to sanction a firm or associated person, although the publication of a critical inspection report can cause varying degrees of reputation harm. If the Board's Inspection Staff determines that a firm or associated person thereof may have engaged in violative conduct, the Inspection Staff may refer the matter to Board's Enforcement Division, the SEC, or state regulatory authorities.
20 See, e.g., In the Matter of Darrin G. Estrella, CPA, PCAOB Release No. 105-2011-004 (Aug. 1, 2011); In the Matter of Peter C. O'Toole, CPA, PCAOB Release No. 105-2011-005 (Aug. 1, 2011).
21 See, e.g., In the Matter of Davis Accounting Group, P.C., et al, PCAOB File No. 105-2009-004 (Mar. 29, 2011); In the Matter of Larry O'Donnell, CPA, P.C., et al, PCAOB File No. 105-2010-002 (Oct. 19, 2010). An Accounting Board Demand, similar to a subpoena, is a command issued by the Board to a registered public accounting firm or associated person to produce documents or provide testimony. PCAOB Rule 1001(a)(ix).
22 In the Matter of Cordovano and Honeck, LLP, et al, PCAOB File No. 105-2010-004 (Aug. 29, 2011).
23 In the Matter of GLO CPAs, LLLP, PCAOB Release No. 105-2011-006 (Nov. 30, 2011).
24 See also PCAOB Rule 5300.
25 Section 105(c)(5) of Sarbanes-Oxley. The standard for imposing these more severe sanctions is substantially similar to the standard set forth in the SEC Rule of Practice 102(e)(1)(iv), which permits the Commission to impose a censure or deny an accountant the privilege of practicing before the Commission based on a finding of "improper professional conduct." 17 C.F.R. § 201.102(e) (2009).
26 In the Matter of GLO CPAs, LLLP, PCAOB Release No. 105-2011-006 (Nov. 30, 2011); In the Matter of Price Waterhouse, Bangalore, et al, PCAOB Release No. 105-2011-002 (Apr. 5, 2011).
27 In the Matter of Price Waterhouse, Bangalore, et al, PCAOB Release No. 105-2011-002 (Apr. 5, 2011).
28 In the Matter of Deloitte & Touche LLP, PCAOB Release No. 105-2007-005 (Dec. 10, 2007).
29 Pursuant to Section 109(c)(2) of Sarbanes-Oxley, funds collected by the Board as a result of the assessment of monetary penalties shall be used to fund a merit scholarship program for students in accredited accounting degree programs.
30 Securities and Exchange Act § 4C, 15 U.S.C. § 78d-3 (2006); 17 C.F.R. § 201.102(e) (2009).
31 See Section 105(b)(1) of Sarbanes-Oxley.
32 The Board's disciplinary orders typically state that any description of audit failures relating to GAAP departures in an issuer's financial statements "necessarily reflects the Board's judgment concerning the proper application of GAAP" and that "[a]ny such description of GAAP departures * * * should not be understood as an indication that the Commission has considered or made any determination concerning the issuer's compliance with GAAP." See, e.g., In the Matter of The Blackwing Group, LLC, et al, PCAOB Release No. 105-2009-007, n.10 (Dec. 22, 2009). Such disclaimers are important, since a public company and its employees do not have any formal opportunity to express their views to the Board or its Enforcement Staff regarding the PCAOB's characterization of issues that may directly involve the company's activities.
33 In theory, an audit of a public company's financial statements could fail to comply with professional auditing standards even if the financial statements themselves were fairly presented in accordance with GAAP. However, enforcement proceedings against auditors frequently arise from allegations, if not findings, that an issuer's financial statements did not comply with GAAP and that the auditors would have detected those errors had they conducted a proper audit.
34 See PCAOB Form 1, Application for Registration, Item 8.1.
36 See Section 105(b)(3) of Sarbanes-Oxley, as implemented by PCAOB Rule 5110.
37 The PCAOB has stated that it will not consider a valid assertion of the privilege against self-incrimination under the Fifth Amendment to the United States Constitution to be non-cooperation. The Board does, however, take the view that assertions of the Fifth Amendment privilege may be used as evidence in Board disciplinary proceedings and may serve as the basis for evidentiary inferences against the person asserting the privilege. In addition, the Board may report assertions of that Fifth Amendment privilege to other government authorities. See Rules on Investigations and Adjudications, PCAOB Release No. 2003-015, A2-33 (Sep. 29, 2003) ("Adopting Release").
38 See, e.g., U.S. Securities and Exchange Commission v. Deloitte Touche Tohmatsu CPA Ltd., File No. 1:11-MC-00512-DAR (D.D.C. filed Sept. 8, 2011); Press Release, U.S. Sec. & Exch. Comm'n, SEC Files Subpoena Enforcement Action Against Deloitte & Touche in Shanghai (Sept. 8, 2011).
39 In the SEC enforcement context, the extent of a person's cooperation can be a consideration factoring into the SEC's charging decision and its view of the appropriate sanctions. In addition, the SEC may refer a person to the United States Attorney's Office for potential criminal prosecution if it believes that a person's non-cooperation rises to the level of obstruction of justice or perjury.
40 PCAOB Rule 5109(b); SEC Rule of Practice 102(b).
41 613 F. Supp. 48 (D.D.C. 1985).
42 Adopting Release at A2-19; Section 101(b) of Sarbanes-Oxley.
43 Adopting Release at A2-18 and 19.
44 PCAOB Rule 5105.
45 However, the Board has consistently taken the position that it has the authority to sanction a person formerly associated with a registered public accounting firm based on conduct that occurred while that person was an associated person.
46 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 929F, 124 Stat. 1376, 1853 (codified in various sections of 15 U.S.C.).
47 Section 105(b)(2)(D) of Sarbanes-Oxley, as implemented by PCAOB Rule 5111.
48 PCAOB Rulemaking: Public Company Accounting Oversight Board; Order Approving Proposed Rules Related to Investigations and Adjudications, Exchange Act Release No. 49704 (May 14, 2004).
49 The SEC's Office of Inspector General ("OIG") conducted an audit of the Commission's oversight of the PCAOB and detailed its findings and recommendations in a September 2006 report. See WALTER STACHNIK, OFFICE OF THE INSPECTOR GEN., U.S. SEC. & EXCH. COMM'N, AUDIT OF OVERSIGHT OF PCAOB (AUDIT NO. 412) (2006) (the "Report"). In the Report, the OIG identified a need for SEC policies and procedures governing PCAOB requests under Rule 5111 and addressing "whether the Commissioners will approve requests; how the request will be considered (at a closed Commission meeting, Executive Session meeting, or seriatim); and the role, if any, of the PCAOB in presenting the matter for consideration." Report at 7. The OIG's recommendation for SEC policies and procedures for evaluating PCAOB subpoena requests under Rule 5111 remained an open item in the OIG's Semi-Annual Report to Congress until as recently as March 2010. See H. DAVID KOTZ, OFFICE OF THE INSPECTOR GEN., U.S. SEC. & EXCH. COMM'N, SEMI-ANNUAL REPORT TO CONG.: OCT. 1, 2009 – MAR. 31, 2010 (2011).
50 PCAOB Rulemaking: Public Company Accounting Oversight Board; Order Approving Proposed Rules Related to Investigations and Adjudications, Exchange Act Release No. 49704 (May 14, 2004).
51 Under the proposed rule, a party would be able to request that a hearing officer recommend to the Board that the PCAOB seek the issuance of a Commission subpoena, and both the hearing officer and the Board would have discretion to deny the party's request.
52 See Section 105(c)(2) of Sarbanes-Oxley.
53 Section 105(d)(1)(C) of Sarbanes-Oxley; PCAOB Rule 5204.
54 Section 105(e)(1) of Sarbanes-Oxley.
55 See SEC Rule of Practice 301.
56 Under any circumstances, a PCAOB enforcement proceeding can take a longer period of time to conclude than an SEC enforcement proceeding, since a PCAOB hearing officer's Initial Decision can be appealed to the full Board and the Board's decision, in turn, can be reviewed by both the SEC and then a federal court of appeals. In comparison, the decision of an SEC administrative law judge is appealed directly to the Commission.
57 Claudius B. Modesti, Director of Enforcement, PCAOB, The Need for Transparency in PCAOB Disciplinary Proceedings, Address Before the New York State Society of CPAs' SEC Conference (Sept. 28, 2010).
58 The Role of the Accounting Professional in Preventing Another Financial Crisis: Hearing Before the S. Comm. on Banking, Housing & Urban Affairs, 112th Cong. (Apr. 6, 2011) (testimony of James R. Doty, Chairman, PCAOB).
59 PCAOB Enforcement Transparency Act of 2011, S. 1907, 112th Cong. (2011); H.R. 3503, 112th Cong. (1st Sess. 2011).
60 Press Release, Senator Jack Reed, Reed and Grassley Seek to Increase Transparency at Accounting Watchdog (Nov. 18, 2011), available at http://reed.senate.gov/press/release/reed-and-grassley-seek-to-increase-transparency-at-accounting-watchdog.
61 See supra footnotes 24 and 25 and accompanying text.
62 The SEC has effectively expanded the types of sanctions imposed in Rule 102(e) proceedings, however, by
requiring firms or individuals to include various "undertakings" in their settlement orders with the Commission,
such as the retention of independent consultants and payments "in the nature of a penalty."
63 PCAOB, 2010 ANNUAL REP. 21 (May 2011).
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