[Congressional Record Volume 159, Number 58 (Thursday, April 25, 2013)]
[Senate]
[Pages S3041-S3042]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. REED (for himself and Mr. Grassley):
  S. 848. 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 2013 along with my colleague Senator Grassley. This 
bill will allow the Public Company Accounting Oversight Board, PCAOB, 
to make public disciplinary proceedings it has brought against auditors 
and audit firms earlier in the process.
  Slightly over 10 years ago, our markets fell victim to a series of 
massive financial reporting frauds, including those involving Enron and 
WorldCom. Public companies had produced fraudulent and materially 
misleading financial statements, which artificially drove their stock 
prices up and misrepresented their overall profitability. Once the 
fraud was discovered, investor confidence plummeted, as did the markets 
themselves. We all took a step back after this crisis and asked 
ourselves how such massive financial fraud in public reporting 
companies could have gone undetected for so long.
  The Senate Committee on Banking, Housing, and Urban Affairs conducted 
a series of hearings on issues that were raised by the revelations 
raised by fraud at Enron and other public companies. The hearings 
produced 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, the Senate passed the Sarbanes-Oxley 
Act of 2002 in 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 law also created a strong, independent board 
to oversee the conduct of the auditors of public companies, the Public 
Company Accounting Oversight Board.
  The PCAOB is responsible for overseeing auditors of public companies 
in order to protect investors who rely on 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 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.
  However, unlike other oversight bodies, such as the SEC, the U.S. 
Department of Labor, the Federal Deposit Insurance Corporation, the 
U.S. Commodity Futures Trading Commission, the Financial Industry 
Regulatory Authority, and others, the Board's disciplinary proceedings 
are not allowed to be public unless the parties consent. Of course, 
parties subject to disciplinary proceedings have no incentive to 
consent to publicizing their alleged wrongdoing and thus these 
proceedings remain cloaked behind a veil of secrecy. In addition, the 
Board's decisions in disciplinary proceedings are not allowed to be 
publicized until after the complete exhaustion of an appeals process, 
which can often take several years.
  The PCAOB's nonpublic disciplinary proceedings create a lack of 
transparency that invites abuse and undermines the Congressional intent 
behind the establishment of the PCAOB, which was to shine a bright 
light on auditing firms and practices, and to bolster the 
accountability of auditors of public companies to the investing public.
  Over the last several years, bad actors have taken advantage of the 
lack of transparency by using it to shield themselves from public 
scrutiny and accountability. PCAOB Chairman James Doty has repeatedly 
stated in testimony provided to both the Senate and House of 
Representatives over the past two years that the secrecy of the 
proceedings ``has a variety of unfortunate consequences'' and that such 
secrecy is harmful to investors, the auditing profession, and 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 disciplinary proceedings. In other words, investors and the 
public company clients of that audit firm were deprived of relevant and 
material information about the proceedings against the firm and the 
substance of any violations.
  There are several reasons why the Board's enforcement proceedings 
should be open and transparent. First,

[[Page S3042]]

as I have already noted, the closed proceedings run counter to the 
public proceedings of other government oversight bodies. Indeed, nearly 
all administrative proceedings brought by the SEC against those it 
regulates 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. How can 
the public and Congress properly evaluate the Board's oversight of 
auditors and audit firms, and its enforcement program, when no one is 
entitled to know any of the details of these administrative 
proceedings, including whether a proceeding has even been initiated?
  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.
  Third, agencies such as the SEC have observed the benefits of open 
and transparent disciplinary proceedings, which include the benefit of 
informing peer audit firms of the type of activity that may give rise 
to enforcement action by the regulator. In effect, transparency of 
proceedings can serve as a deterrent to misconduct because of a 
perceived increase in the likelihood of ``getting caught.'' 
Accordingly, the audit industry as a whole 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, transparent and available to the public unless 
otherwise ordered by the Board. This would make the PCAOB's procedures 
similar to those of the SEC for analogous matters.
  Increasing the transparency and accountability of audit firms subject 
to disciplinary proceedings instituted by the PCAOB is a critical 
component of efforts to bolster and maintain investor confidence in our 
financial markets, and should better protect companies as well from 
problematic auditors.
  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.
                                 ______