Statements on Introduced Bills and Joint Resolutions

Floor Speech

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 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.

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