Statements on Introduced Bills and Joint Resolutions

Floor Speech

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Mr. REED. Mr. President, today I am joined by Senator Grassley in reintroducing the PCAOB Enforcement Transparency Act. This bill permits 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.

Over 10 years ago, our markets were victimized by a series of massive financial reporting frauds, including those involving Enron and WorldCom. These and other public companies had produced fraudulent and materially misleading financial statements, which artificially drove their stock prices up. Once the fraud was discovered, investor confidence plummeted.

In response to this crisis, the Senate Committee on Banking, Housing, and Urban Affairs conducted a series of 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 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. This law also created a strong, independent board, the PCAOB, to oversee the conduct of the auditors of public companies.

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 and operates under the oversight of the U.S. Securities and Exchange Commissioner, SEC.

To conduct its duties, 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 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'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 nonpublic nature of these PCAOB disciplinary proceedings creates 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, some 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, 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, including 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 also from Congress, making it difficult, if not impossible, to effectively evaluate the Board's oversight of auditors and audit firms, and its enforcement program.

Second, the incentive to litigate cases in order to continue to shield conduct from public scrutiny 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 found open and transparent disciplinary proceedings to be valuable because they inform 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 more closely align the PCAOB's procedures with 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, while better protecting 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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