A House Financial Services subcommittee, chaired by New York Democratic Rep. Carolyn Maloney, will hear testimony on Wednesday afternoon on several draft legislative proposals intended to strengthen the power of the Securities and Exchange Commission and the auditing regulator, the Public Company Accounting Oversight Board or PCAOB, to prosecute violations of securities laws and hold the perpetrators accountable.
Three of the proposed bills concern the business of the PCAOB.
They come while this independent regulator, created by the Sarbanes-Oxley Act of 2002 in the wake of the Enron fraud and the demise of auditor Arthur Andersen, weathers an ongoing scandal involving now-former senior members of global audit firm KPMG’s audit quality and professional practice group. Those senior partners improperly obtained and used confidential information belonging to the PCAOB in an effort to improve the results of the regulators annual inspections of the firm’s audits.
On Monday the SEC fined KPMG $50 million for the PCAOB-related “steal the exam” scandal, where one KPMG partner has already been found guilty, three others entered guilty pleas, and one still faces trial, and for an additional scandal involving widespread cheating on internal compliance and ethics testing.
Rep. Sylvia R. Garcia, a Democrat from Texas introduced a bill on June 14 to establish a whistleblower program at the PCAOB that is similar to the program Congress established at the SEC under the Dodd-Frank Act. Witnesses for the hearing include Jordan A. Thomas, a partner at the law firm Labaton Sucharow who leads its whistleblower practice.
Whistleblowers would be incentivized, if eligible upon the successful completion of a PCAOB disciplinary action, to come forward when they suspect violations of the Sarbanes-Oxley Act, the rules of the PCAOB and the SEC, and other laws, rules, and professional standards governing the audits of public companies, brokers, and dealers. These whistleblowers would also be protected from retaliation by their employer.
Rep. Ayanna Pressley, a Democrat from Massachusetts, introduced the PCAOB Enforcement Transparency Act of 2019 (on June 10. This draft bill will make PCAOB hearings and all related notices, orders, and motions, open and available to the public unless otherwise ordered by the regulator, similar to SEC Rules of Practice where hearings and related notices, orders, and motions are open and available to the public. The Sarbanes-Oxley Act currently requires the PCAOB to keep its investigations and disciplinary proceedings confidential at least until the case is appealed to the SEC, the SEC elects on its own to review the PCAOB’s final decision, or the opportunity for SEC review has passed. A similar bill has been repeatedly introduced over the years in the Senate as well as in the House, but each time has met with defeat after significant lobbying by the largest audit firms.
Finally, Rep. Brad Sherman, a Democrat from California and an accountant, introduced the Holding Foreign Companies Accountable Act on June 10. The bill attempts to resolve an ongoing problem faced by the PCAOB — significant obstacles in inspecting the principal auditor’s work for 224 U.S-listed companies with $1.8 trillion in combined market capitalization. William Duhnke, the PCAOB chairman said in a speech last December that there are also 207 more U.S.-listed companies where the PCAOB can only inspect some—although not all—of the auditor’s work.
In particular, the Chinese government has long prevented the PCAOB from inspecting auditors in China and Hong Kong. The draft bill would require the SEC to prohibit U.S. public companies from trading on an exchange or an alternative trading system if the firm is inspected annually and it uses a foreign public accounting firm that the PCAOB is unable to inspect for 3 consecutive years. Or if the primary auditor is inspected by the PCAOB once every three years and it retains a foreign public accounting firm to assist that the PCAOB is unable to inspect for 6 consecutive years.
The bill proposes that the SEC can end the trading prohibition once the company certifies that it has retained a public accounting firm that the PCAOB is able to inspect and would also require an issuer to disclose whether it is state-owned or government-controlled.