Statements on Introduced Bills and Joint Resolutions

Floor Speech

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Mr. REED. Mr. President, the PCAOB Enforcement Transparency Act, which I reintroduce today with Senator Grassley, will permit the Public Company Accounting Oversight Board (PCAOB) to make public the disciplinary proceedings it has brought against auditors and audit firms earlier in the process.

More than fifteen years ago, our markets were victimized by a series of massive financial reporting frauds, including those involving Enron and WorldCom. In response to this crisis, the Senate Committee on Banking, Housing, and Urban Affairs conducted multiple hearings, which produced consensus on a number of underlying causes, including weak corporate governance, a lack of accountability, and inadequate oversight of accountants charged with auditing public companies' financial statements.

In a 99 to 0 vote, the Senate passed the Sarbanes-Oxley Act of 2002 to address the structural weaknesses and faults revealed by the hearings. Among its many provisions, this law called for the creation of a strong and independent board, the PCAOB, 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.

To conduct its duties, the PCAOB, under the oversight of the U.S. Securities and Exchange Commission (SEC), oversees more than 1,800 registered accounting firms, as well as the audit partners and staff who contribute to a firm's work on each audit. The Board's ability to begin proceedings that can determine whether there have been violations of its auditing standards or rules of professional practice is an important component of its oversight.

However, unlike 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 other oversight bodies, the Board's disciplinary proceedings cannot be made public without consent from the parties involved. Of course, parties subject to disciplinary proceedings have no incentive to consent to publicizing their alleged wrongdoing and thus these proceedings typically remain cloaked behind a veil of secrecy. In addition, the Board cannot publicize the results of its disciplinary proceedings until after the appeals process has been completely exhausted, which can often take several years.

Concealing PCAOB disciplinary proceedings from the public creates a lack of transparency that invites abuse and undermines the Congressional intent behind 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 years, some bad actors have used this loophole to shield themselves from public scrutiny and accountability. Former PCAOB Chairman James Doty repeatedly stated in testimony provided to both the Senate and House of Representatives 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.

For example, an accounting firm continued to issue no fewer than 29 additional audit reports on public companies without those companies knowing that it was subject to a PCAOB disciplinary proceeding. Disturbingly, these investors and the public company clients of that audit firm were deprived of important information about the proceeding against the firm and the substance of any violations. There are other critical reasons why the Board's enforcement proceedings should be open and transparent.

First, the incentive to litigate cases in order to shield conduct from public scrutiny as long as possible frustrates the process and requires both litigants and the PCAOB to expend needless resources.

Second, agencies such as the SEC have found that open and transparent disciplinary proceedings can be valuable because they inform peer audit firms of the type of activity that could lead to enforcement action by the regulator. In effect, transparent 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 more closely align the PCAOB's procedures with those of the SEC for analogous matters.

Increasing transparency and accountability of audit firms subject to PCAOB disciplinary proceedings bolsters investor confidence in our financial markets and better protects companies from problematic auditors. I hope our colleagues will join Senator Grassley and me in supporting this legislation to enhance transparency in the PCAOB's enforcement process.

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