These proposals would revise the Board's rules in light of the
Dodd-Frank Act and would also make an assortment of other updating
and clarifying changes. The principal PCAOB impacts of the
Dodd-Frank Act are to give the Board regulatory authority over
auditors of securities brokers and dealers and to empower the Board
to share nonpublic inspection information with foreign regulators.
The new law also made some technical changes to the Board's
authority unrelated to those two objectives, such as clarifying that
the Board retains enforcement jurisdiction over people who violate
Board rules or standards, but leave the accounting profession before
the Board has a chance to commence disciplinary action against them.
Clearly, the Board needs to conform its rules to changes in the
statutes that govern its work, and I support the proposals. To the
extent they flow from Dodd-Frank, the amendments the staff has
proposed should be largely non-controversial.
However, mixed in with this regulatory housekeeping are some more
significant issues. I hope that investors, public companies,
broker-dealers, and auditors will not let their eyes glaze over as
they wade through the regulatory minutiae and miss the nuggets of
policy. I would particularly direct attention to three areas.
First, as we have discussed at other public meetings, most
broker-dealers are small, non-public companies. The rules that work
for public company auditors may not always make sense for
closely-held, mom-and-pop operations. For example, the Board is not
proposing to extend the requirement for audit committee pre-approval
of auditor non-audit services to broker-dealer engagements. The
Board is, however, proposing to apply the same prohibition against
the auditor providing tax services to individuals who are involved
in the financial reporting process to broker-dealer auditors as
already apply to issuer auditors.
While in general the lines drawn in the proposed amendments make
sense, I have doubts about the personal tax services provision. As
the proposing release explains, the Board adopted that part of its
independence rules in 2005, in response to situations in which the
auditor's tax advice to corporate executives seemed to be in
conflict with the best interests of the public company. Clearly, the
auditor should not be involved in situations in which corporate
insiders responsible for financial reporting cause a publicly-held
company to structure their compensation in a way that reduces the
insiders' taxes, but increases the company's. But it is far from
clear — at least to me — that the same concerns apply to
privately-held brokerage firms, especially ones that are owned by a
single individual or a small group of partners. In those cases, the
conflict between the audit client and the insider does not exist,
since there are no public shareholders.
Second, there are some significant proposals in this release that
would affect public company auditors. For example —
- The Board is proposing to require the filing of a special
report if a registered accounting firm resigns, declines to stand
for re-appointment, or is dismissed from an issuer audit
engagement and the issuer fails to file the required Form
8-K report with the SEC. This proposed change addresses the
potential risk posed when issuers (including significant
subsidiaries) change auditors, but fail to notify the Commission
and the investing public.
- The Board is also proposing to revise it annual reporting
form, Form 2, to reflect the Dodd-Frank requirement that certain
foreign public accounting firms must designate the Board or the
Commission is the firm's agent for service of process under
Section 106 of the Act. Designating such an agent makes it more
feasible for the Commission to compel foreign firms to produce
work papers in SEC investigations. In effect, the proposal would
require firms to indicate in their annual reports to the Board
whether or not they have complied with this new law.
I have no particular problem with these proposals, but they may
raise issues of the extent to which the Board should use its
authority to require firms to file reports as a lever to encourage
compliance, or to compensate for non-compliance, with other laws or
with the SEC's 8-K requirements. Commenters may want to consider
that issue.
Finally, these amendments include changes to the rules that
govern Board disciplinary proceedings, including increasing the
level of fines, specifying the burden of proof with respect to
affirmative defenses, and encouraging affidavits in support of Wells
submissions. While I don't think any of these will have a major
effect on the way Board enforcement proceedings are conducted, those
who regularly practice before the Board should certainly pay
attention to them. PCAOB enforcement practitioners may also have
ideas for other ways in which the procedural framework that governs
the enforcement process could be improved.
As the Board gains more experience with its new authority under
Dodd-Frank, I expect that further revisions to the Board's rules and
procedures will be necessary. In the meantime, I hope that
commenters will provide any insights they may have on the practical
application of these proposals and on whether there are other
amendments that should be considered now.
* * *
I want to close by recognizing the staff members who have worked
hard over the last several months to prepare this release and the
related rule changes. The work was, I am sure, at some points
interesting and stimulating, but at others tedious, if not
mind-numbing. The main authors of the release were Nancy Doty,
Associate General Counsel, and Vincent Meehan, Assistant General
Counsel. Bob Burns, Associate General Counsel, also played a key
role. Thanks to all of you for your efforts. Thanks also to our
colleagues at the SEC for their helpful suggestions.