[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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