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Senators to SEC Chair Jay Clayton: What the Hell Is Going On At the PCAOB?

It seems we weren’t the only ones who were disturbed by the Wall Street Journal article last week detailing the dysfunction at the PCAOB under the tremendous leadership of chairman and meetings hater William Duhnke.

In a letter dated Oct. 17 to SEC Chair Jay Clayton, Sens. Sherrod Brown (D-OH) and Jack Reed (D-RI) called the less-than-ideal culture at the PCAOB, which was detailed in a whistleblower complaint seen by the WSJ, “troubling.” The senators also took a shot at Clayton, writing that “the SEC’s recent oversight of the PCAOB shows questionable judgment and an alarming lack of transparency.”

The three-page letter, which was posted today on the website (h/t to Francine McKenna of MarketWatch), criticized the lack of audit inspection reports the PCAOB has released this year (27% fewer, according to the WSJ) and the lack of a full-time PCAOB enforcement director and general counsel—positions that have been vacant for almost a year and a half.

These positions are critical for the PCAOB’s ability to carry out its mandate. These vacancies hinder the PCAOB’s ability to conduct meaningful oversight and enforcement, and the prolonged vacancies undermine the long-term effectiveness of PCAOB.

Brown and Reed also said the SEC’s recent announcement that commissioner Hester Peirce will lead the agency’s coordination efforts with the PCAOB is a bit of a head-scratcher.

That statement, appended at the end of a separate announcement, is troubling because it displays an alarming lack of transparency and raises the potential of undue influence on the Board of the PCAOB. Although Section 107 of the Sarbanes-Oxley Act provides that “the Commission shall have oversight and enforcement authority over the Board,” Congress did not mandate a single SEC Commissioner to have the role of “coordinator”, or for oversight of the PCAOB Board other than by Commission action. Furthermore, Commissioner Peirce was a longtime colleague of current PCAOB Chairman William Duhnke, which also raises questions about her selection for this role.

Huh, I didn’t know about the Duhnke-Peirce connection, but it seems they were both staffers under Sen. Richard Shelby (R-AL). Yeah, the senators have a right to be concerned by that. It’s like the Financial Reporting Council in the U.K. using a consulting firm headed by a former KPMGer to investigate why KPMG’s risk management, controls, and the behavior of partners and other employees in its audit practice are so bad.

And speaking of KPMG, the letter of course makes mention of the scandal with the PCAOB, with the senators writing, “Now, more than ever, the PCAOB must enhance its oversight activity, with a particular focus on enforcement.”

The senators want some answers, not only on why it’s gotten so bad over at the PCAOB but also clarification on Peirce’s new role. So they gave Clayton eight questions to answer, including:

  • When were you first made aware of the whistleblower letter?
  • Please provide the process for SEC oversight of PCAOB staffing adequacy, including any consideration of the extended vacancy of senior staff positions, such as the general counsel and director of enforcement.
  • What is the legislative or regulatory authority, if any, for the coordination role you announced last week?
  • Please describe the responsibilities for the coordination role, the scope of the “coordination efforts”, and how such efforts will improve the “efficiency and effectiveness” of the SEC’s and the PCAOB Board’s oversight of public accounting firms. Also, please explain how such activity will be evaluated and how the full Commission will be involved.

The letter concludes, “We look forward to your response.” Don’t hold your breath, senators.