William Duhnke III is the Chairman of the Public Company Accounting Oversight Board (PCAOB), and he was recently a witness in front of the House Financial Services Committee in a hearing entitled, “An Examination of the Financial Accounting Standards Board and the Public Company Accounting Oversight Board.”
SOX was a public accounting reform bill passed after the scandals of Enron, Worldcom, Tyco, and other publicly traded companies cooked their books to show greater profitability.
It created more oversight over the accounting firms which do the financial statements of the companies.
One of those features was the creation of PCAOB, which oversees the auditors of publicly traded companies, but PCAOB has been involved in its own numerous scandals since its inception.
In October 2019, the website QZ had a story entitled “America’s Beleaguered Audit Watchdog is Under Fire Yet Again” about PCAOB.
QZ noted, “Set up in 2003 to oversee the audit profession after collusion led to the collapse of Enron and WorldCom, the Public Company Accounting Oversight Board (PCAOB) has issued just $6.5 million in fines in its 16-year history. That’s especially surprising since the board found that the Big 4 accounting firms bungled almost a third of the audits it has analyzed since 2009.”
The article continued, “The Wall Street Journal reports that the board conducted 27% fewer audit inspections this year, suffered an exodus of senior staff, is embroiled in infighting, and is caged in a ‘sense of fear,’ according to a whistleblower letter reportedly written by several current and former board employees, which was seen by the WSJ. After receiving the letter, the Securities Exchange Commission (SEC), which oversees the oversight board, appointed former SEC chair Harvey Pitt to look into the body’s corporate governance, the WSJ reports.”
In another scandal, a former PCAOB leader went to jail after she illegally took PCAOB exam planning material.
Here is part of an article in Compliance Week.
“Cynthia Holder, who was an inspections leader at the Public Company Accounting Oversight Board before she joined KPMG, was sentenced to eight months in federal prison after pleading guilty in October 2018 to two separate counts of conspiracy to commit fraud. Her sentence includes two years of supervised release. A restitution amount will be set at a later date, according to the U.S. Department of Justice.
“Holder and five others were accused of executing a plan to get confidential inspection planning information from the PCAOB about which of KPMG’s audits would be inspected, providing an opportunity to double-check work ahead of the inspection. Three others also entered guilty pleas to similar charges, including Brian Sweet, a former PCAOB staffer who left the PCAOB to join KPMG, taking the first batch of ill-gotten information with him in the job change.”
Duhnke noted the scandals in his written statement, “In 2018, we used the opportunity to perform a comprehensive assessment of the PCAOB. To help our assessment, we engaged in significant public outreach. We sought input from our core stakeholders on what we were doing well, what we needed to improve, and how we could best improve audit quality. We heard from the SEC, investors, audit committees, financial statement preparers, audit firms, academics, and others.
“The message we received back was loud and clear: The PCAOB was ripe for change. The PCAOB had, in many respects, lost the public’s trust. The organization was out of touch with market developments and stakeholders’ needs. It had not matured significantly since opening its doors in 2003. During that time, it developed a culture that lacked internal accountability. And, its integrity had been compromised in 2017 by employees leaking confidential inspections information to those we are charged to regulate.”
Duhnke continued, “With that as our starting point, we set the PCAOB back on the path envisioned by Congress when it passed the Sarbanes-Oxley Act. We published a new five-year strategic plan in November 2018. That plan emphasizes the need for us to transform the PCAOB into a trusted leader that promotes high quality auditing through forward-looking, responsive, and innovative oversight. It articulates five specific goals and identifies the core values we expect our people to demonstrate as they work towards those goals: integrity, excellence, effectiveness, collaboration, and accountability.”
Democrats and Republicans responded in various ways to his conclusion.
Bill Huizenga is a Republican from the State of Michigan who is on the committee.
During his five-minute question and answer period, he suggested that PCAOB overlaps its oversight with the Securities and Exchange Commission.
Duhnke said the core functions of PCAOB were, “inspections, enforcement, and standard setting.”
“Am I correct in understanding that the SEC has oversight not only of your agency but also any specific enforcement action that the PCAOB undertakes.
“They are involved as an appellant authority,” Duhnke replied.
“As I understand it, the SEC itself has an examinations program and an enforcement arm?” Huizenga asked.
“They do,” Duhnke.
Huizenga also noted that the PCAOB’s program and set up is like the PCAOB’s.
“I’m asking these questions because I’m wondering if we’re not seeing a duplication and some overlap between the PCAOB and the SEC,” Huizenga concluded.
Brad Sherman is a Democrat from the State of California and he chairs the Subcommittee on Investor Protection, Entrepreneurship and Capital Markets of the House Financials Services Committee.
His sub-committee hosted the hearing.
“Financial statement restatements have been in a steady decline for the last four years,” Sherman said.
He noted that reduced revisions were a way to measure how well audit firms were doing.
Duhnke noted in his answer not only were revisions down but the revisions were less serious, “In the beginning of the process it would show things like not even auditing revenue and now we’re talking about deficiencies that are as less significant as missing one particular documentation for a factor in an internal control.”
Sherman responded, “Not only has there been a decline in the re-statements but many of those re-statements are merely revision statements which are the lowest level of re-statement.”