[Congressional Record Volume 157, Number 177 (Friday, November 18, 2011)]
[Senate]
[Pages S7831-S7832]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
By Mr. REED (for himself and Mr. Grassley):
S. 1907. A bill to promote transparency by permitting the Public
Company Accounting Oversight Board to allow its disciplinary
proceedings to be open to the public, and for other purposes; to the
Committee on Banking, Housing, and Urban Affairs.
Mr. REED. Mr. President, today I am introducing the PCAOB Enforcement
Transparency Act of 2011 along with Senator Grassley.
One of the largest securities frauds in history began unraveling in
August 2001 when an Enron vice president expressed her concern that the
company might ``implode under a series of accounting scandals.'' Enron
disclosed a few months later that its historical financial statements
were not accurate. A subsequent restatement revealed over that $500
million in losses had gone unreported. Several other large corporate
frauds followed shortly thereafter. For instance, in June 2002,
WorldCom admitted that it had misrepresented its profitability to
investors.
The Senate Committee on Banking, Housing, and Urban Affairs conducted
a series of hearings on the issues that were raised by the revelations
of Enron and other public companies. The hearings produced a remarkable
consensus on a number of underlying causes, including weak corporate
governance, a lack of accountability, and inadequate oversight of
accountants charged with auditing a public company's financial
statements.
In order to address the gaps and structural weaknesses revealed by
the investigation and hearings, Congress passed the Sarbanes-Oxley Act
of 2002. The Senate passed this legislation on a 99 to 0 vote.
The Sarbanes-Oxley Act ensured that corporate officers were directly
accountable for their financial reporting and for the quality of their
financial statements. The new law also created a strong, independent
board to oversee the conduct of the auditors of public companies, the
Public Company Accounting Oversight Board, PCAOB or Board.
The board is responsible for overseeing auditors of public companies
in order to protect investors and further the preparation of
informative, accurate, and independent audit reports on the financial
statements of public companies. The board operates under the oversight
of the U.S. Securities and Exchange Commission, SEC.
The PCAOB is responsible for setting auditing standards for auditors
of public companies, for examining the quality of audits performed by
public company auditors, and where necessary, for imposing disciplinary
sanctions on registered auditors and auditing firms. The PCAOB oversees
more than 2,400 registered auditing firms, as well as the thousands of
audit partners and staff who contribute to a firm's work on each audit.
The board's ability to commence proceedings to determine whether
there have been violations of its auditing standards or rules of
professional practice is an important component of its oversight. In
order to determine whether to institute a proceeding, the board's
enforcement staff conducts a nonpublic investigation and makes a
recommendation to the five-member board.
However, unlike other oversight bodies, such as the SEC, the U.S.
Department of Labor, the Federal Deposit Insurance Corporation, FDIC,
the U.S. Commodity Futures Trading Commission, CFTC, the Financial
Industry Regulatory Authority, FINRA, and others, the Board's
disciplinary proceedings are not allowed to be public.
Unfortunately, over the last several years, bad actors have been
taking advantage of this lack of transparency. In April 2011, the
Subcommittee on Securities, Insurance, and Investment, which I chair,
considered the issue of enhancing the PCAOB's effectiveness by
permitting the Board to disclose information about its enforcement
proceedings. PCAOB Chairman James Doty noted that the ``secrecy has a
variety of unfortunate consequences'' and
[[Page S7832]]
this ``state of affairs is not good for investors, for the auditing
profession, or for the public at large.''
In one example, an accounting firm that was subject to a disciplinary
proceeding continued to issue no fewer than 29 additional audit reports
on public companies without any of those companies knowing about the
PCAOB proceedings. Those public companies and their investors were
completely in the dark about the board's decision to both institute
disciplinary proceedings and about the progress of those proceedings.
The auditor knew about the proceedings, but the investors and public
companies were denied information that was arguably very relevant to
the audit relationship.
There are additional reasons that the proceedings should be open and
transparent. First, the closed proceedings run counter to the public
proceedings of other oversight bodies, as I have already noted. Indeed,
nearly all administrative proceedings brought by the SEC against public
companies, brokers, dealers, investment advisers, and others are open,
public proceedings.
The PCAOB's secret proceedings are not only shielded from the public,
but from Congress as well. The public and Congress have a role in
ensuring that not just auditors are held to account, but also that the
PCAOB is held to account as well for its oversight of the auditors and
audit firms.
Second, the incentive to litigate cases in order to continue to
shield conduct from the public as long as possible frustrates the
process and requires the expenditure of needless resources by both
litigants and the PCAOB. In April, Chairman Doty, who testified before
the Subcommittee on Securities, Insurance, and Investment, noted that
``the fact that PCAOB disciplinary proceedings are required to be
secret creates a considerable incentive to litigate.''
Third, a recent academic study noted that the public nature of SEC's
proceedings against companies result in good results. ``Observing a
public SEC enforcement action in its industry against a target firm is
likely to increase a peer firm's knowledge about SEC activity and cause
it to revise upward its subjective probability of attracting such an
action against itself.'' In effect, the study noted that this may serve
as a deterrent to misconduct because of a perceived increase in
``getting caught.'' Accordingly, the audit industry would also benefit
from timely, public, and non-secret enforcement proceedings.
Our bill will make hearings by the PCAOB, and all related notices,
orders, and motions, open and available to the public unless otherwise
ordered by the board. The board procedure would then be similar to the
SEC's Rules of Practice for similar matters, where hearings and related
notices, orders, and motions are open and available to the public.
We need to ensure public proceedings to better protect and serve
companies and investors. I hope our colleagues will join Senator
Grassley and me in taking the legislative steps necessary to enhance
transparency in the PCAOB's enforcement process.
Mr. President, I ask unanimous consent that the text of the bill be
printed in the Record.
There being no objection, the text of the bill was ordered to be
printed in the Record, as follows:
S. 1907
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``PCAOB Enforcement
Transparency Act of 2011''.
SEC. 2. OPEN MEETINGS AUTHORIZED.
Section 105(c)(2) of the Sarbanes-Oxley Act of 2002 (15
U.S.C. 7215(c)(2)) is amended to read as follows:
``(2) Public hearings.--Hearings under this section shall
be open to the public, unless the Board, on its own motion or
after considering the motion of a party, orders otherwise.''.
SEC. 3. PUBLICATION OF DETERMINATIONS.
Section 105(d)(1)(C) of the Sarbanes-Oxley Act of 2002 (15
U.S.C. 7215(d)(1)(C)) is amended by striking ``(once any stay
on the imposition of such sanction has been lifted)''.
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