HRO Securities Defense Blog

PCAOB Attempts to Publicize Litigated Disciplinary Proceedings

Litigation against the PCAOB has always been unusually difficult. Disciplinary cases resulting from investigations are heard by hearing officers who are PCAOB employees, and, regardless of the location of respondents and witnesses, the organization insists on holding hearings in Washington, D.C., imposing additional economic burdens on respondents. Nearly all PCAOB proceedings are brought against small firms that, in the absence of insurance coverage, cannot afford to fight the powerful, well-funded PCAOB enforcement staff.

One of the few benefits enjoyed by respondents is the confidential nature of this litigation. Unlike settled cases, which are immediately posted on the PCAOB’s website, information about litigated cases is required to be kept confidential. However, the PCAOB is trying to change the law to allow such cases to be publicized. If successful, this proposal will further increase the already considerable litigation advantages enjoyed by the PCAOB.

SUPREME COURT DECISION DISAPPOINTS PCAOB’s ADVERSARIES

The U.S. Supreme Court’s June 28, 2010 decision in Free Enterprise Fund et al. v. PCAOB (No. 087-861) is a disappointment for those who hoped to the court would invalidate the Public Company Accounting Oversight Board’s authority over auditors of SEC-reporting companies.   Under Sarbanes-Oxley, board members could only be removed by the SEC for good cause, and the SEC Commissioners, in turn, could only be removed by the President for good cause.  The Court held that the “tenure” limitations on the removal of the PCAOB’s board members violated the Constitution’s separation of powers clause.   However, the Court further held that the unconstitutionality of Sarbanes Oxley’s tenure limitations  did not affect the validity of its remaining provisions.  The Court stated that “the Board may continue to function as before,” but its members may be removed at will by the SEC.

The Court’s ruling indicates that the PC

PCAOB "Bars from Association" -- a Vague and Ambiguous Standard

Investigations by the Public Company Accounting Oversight Board enforcement staff often culminate in a recommendation to seek sanctions against regulated firms and individual CPAs through institution of  disciplinary proceedings.   Bars from association with any registered firm are the most commonly sought sanction against individuals.  Yet, applicable legal standards are vague and ambiguous, making it very difficult for barred CPAs to figure out what they are allowed to do.

PCAOB INVESTIGATIONS AND ENFORCEMENT ACTIONS: THE “NUCLEAR OPTION” FOR SMALL FIRMS

In the wake of Enron and other accounting scandals, popular and Congressional sentiment strongly favored subjecting auditors to increased regulation.   Congress created the Public Company Accounting Oversight Board through passage of the Sarbanes-Oxley Act to oversee audit firms that are engaged in auditing SEC-reporting issuers. The PCAOB was given sweeping inspection and enforcement powers.  The PCAOB is now using these powers to strictly enforce its very strict interpretation of often-ambiguous accounting and auditing standards.  In light of the extremely onerous and burdensome nature of PCAOB inspections and investigations, and the board’s tendency to target sole practitioners and small firms, the accounting profession and the investing public have the right to ask whether the cost of PCAOB regulation is simply too high.

New Cooperation Initiative: Potential SEC Enforcement “Game Changer”

In a recent speech, Division of Enforcement Director Robert Khuzami announced a new cooperation initiative that has the potential to dramatically change the way the SEC staff interacts with individuals and companies. Historically, the SEC has insisted on punishing all individuals who engaged in wrongdoing and seeking the full array of harsh sanctions against them, regardless of the extent to which they cooperated with the staff, or whether they "self-reported" the misconduct. Mr. Khuzami’s initiative features cooperation agreements, deferred prosecution agreements, and non-prosecution agreements.

According to Mr. Khuzami, the Division of Enforcement will now use cooperation agreements in which it agrees to recommend to the Commission that a cooperator receive credit for cooperating in its investigations or related enforcement actions. Such credit will only be extended if the cooperator provides substantial assistance in those investigations and enforcement actions. Mr. Khuzami did not state what this "credit" will consist of, but presumably could include foregoing the imposition of civil penalties.