Legislative Proposal on Public Enforcement Proceedings 

DATE Aug. 5, 2010 
SPEAKER(S): Daniel L. Goelzer, Acting Chairman 
EVENT: PCAOB Open Board Meeting 
LOCATION: Washington, DC 

The discussion of failure to supervise presents the opportunity to discuss another aspect of the Board's enforcement program. Under the Sarbanes-Oxley Act, the Board's enforcement proceedings are nonpublic, unless the Board finds there is good cause for a proceeding to be public and the parties consent to public proceedings. The auditors and audit firms that we charge with violating PCAOB standards, or with other serious violations, have little incentive to consent to opening the case against them to public view. On the contrary, the fact that, absent consent, our enforcement proceedings are required to be secret creates a considerable incentive to litigate. Litigation postpones - often for several years &mdash the day on which the public learns that the Board has charged the auditor or firm.

I believe the time has come for us to ask Congress to change the law and make our enforcement proceedings public, unless there is some good reason for a particular matter to be closed.

Since so much of our enforcement work now occurs out of the public's sight, it may be helpful to describe in general terms how the Board's disciplinary process works. If, after a nonpublic investigation, the Board votes to institute a disciplinary proceeding, the auditor or audit firm that has been charged has a choice between settling the case or litigating with the Board's enforcement staff. If the choice is litigation, the matter is assigned to the Board's hearing officer. After pre-trial proceedings, there is a hearing at which the staff must prove its case and the respondent may present its defense. Evidence is introduced, and witnesses testify. Once the hearing officer issues his decision, either party — the auditor or the enforcement staff — may appeal to the Board. As in any appeal, the parties file briefs and may request oral argument. If the Board's decision is unfavorable to the auditor or firm, they may appeal again - this time to the SEC. In that event, the Board continues to be prohibited from reporting its decision to the public, unless and until the Commission allows the Board-imposed sanction to take effect. From the initiation of the disciplinary proceeding through at least the SEC decision to let the sanctions commence, the entire proceeding takes place behind closed doors.

This is in sharp contrast to an SEC administrative proceeding against an auditor. If the SEC were to bring the same case, alleging the same violations, against the same auditor, the SEC's charges would be disclosed at the time the Commission instituted its proceeding. Any administrative trial would be open to the public. If there were an appeal to the Commission and an oral argument, the public could attend. The ability — or inability — of the Commission's staff to prove its charges would be a matter of public record. In the case of the PCAOB proceeding, no other auditor, no investor, no audit committee, no member of the media is entitled to know what the Board considers to merit discipline, whom we have charged, what issues are being litigated, and whether the Board's staff has won or lost. The public is in the dark about how the Board uses its enforcement authority until there is a settlement or an SEC decision on the Board's sanctions.

For many years, the SEC faced a similar problem. Old SEC Rule 2(e) contained a presumption in favor of private disciplinary proceedings involving accountants, auditors, and lawyers. Because proceedings against accountants and auditors were private, there were incentives for delay and protracted litigation. It was not unusual for cases against the major accounting firms to take many years to work through the non-public process. When I was General Counsel of the SEC, in the late 1980s, the Commission changed the presumption in its rule from private to public disciplinary proceedings. Unfortunately, we find ourselves with the same problem the Commission confronted, but lack the option of solving it by amending the Board's rules. Public proceedings would require a change in the Sarbanes-Oxley Act.

I believe the Board should ask Congress to make that change so that the public will have the same access to our enforcement proceedings as to those of the SEC. Of course, as in the case of the SEC, Board investigations should remain private and confidential, and the process of asking a firm or individual for a statement of position — which is similar to the SEC Wells process — also should stay private. However, if the Board votes to initiate formal disciplinary action, the administrative proceeding in which the validity of those charges is decided should normally be public.

Obtaining this kind of legislation will not happen overnight. And, of course, we will need to consult with the SEC and seek its support. I believe, however, that the time has arrived to begin that process.