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The SEC Got Rid of the Only PCAOB Member Not Drinking the William Duhnke Kool-Aid

Ladies and gentlemen, THIS is the current state of your PCAOB under the leadership of William Duhnke, according to the Wall Street Journal:

A watchdog tasked with protecting investors by policing audits of public companies has slowed its work amid board infighting, multiple senior staff departures, and allegations that the chairman has created a “sense of fear,” according to a whistleblower letter and people familiar with the situation.

But before we get into today’s revelations by the WSJ, let’s go back to last Friday, the day that ex-PCAOB inspections leader Jeffrey Wada was sentenced to nine months in prison for leaking confidential audit inspection information to KPMG executives in 2016 and 2017—the scandal that turned the PCAOB into the shit-show it has become.

Kathleen Hamm

That afternoon, the SEC announced that Kathleen Hamm, a cybersecurity expert who Bloomberg described as a “Democrat-aligned board member,” wouldn’t retain her seat on the PCAOB for a second term. Instead, the SEC appointed Rebekah Goshorn Jurata, a White House economic policy aide, to replace Hamm, effective Oct. 24.

In addition, the SEC announced that commissioner Hester Peirce will lead the agency’s coordination efforts with the PCAOB. This is how bad things have gotten at the PCAOB when the SEC needs an intermediary to report back on what the hell the PCAOB is or isn’t doing.

Compliance expert Matt Kelly wrote on his blog, Radical Compliance, that Peirce is an outspoken proponent of rolling back compliance with Section 404(b) of the Sarbanes-Oxley Act.

I mean, Peirce would also probably try to make compliance with all federal securities law optional if she could do it, but 404(b) is one of her fave targets.

Poor Kathleen Hamm really wanted to stay on the PCAOB for another term, but you figured the writing was on the wall when the SEC posted for her board seat over the summer, as Francine McKenna of MarketWatch reported last month:

Hamm stepped into a term in 2018 that had approximately two years remaining, expiring this October. She is eligible for reappointment to the second five-year term, through 2024, but now she’s had to reapply for her job and no one is saying why.

Well, apparently Hamm and Duhnke weren’t seeing eye to eye on policy issues, according to Bloomberg:

Hamm, who joined the PCAOB in January 2018 to complete a partial term, has had policy disagreements with Chairman William Duhnke III, according to people familiar with the matter. She resisted Duhnke’s efforts to eliminate or severely cut back an investor advisory committee, said the people, who requested anonymity to discuss internal matters at the board.

Rebekah Goshorn Jurata

The lack of PCAOB Investor Advisory Group and Standing Advisory Group meetings of late is something else Francine wrote about last month. She noted that neither committee has held a meeting this year. And she also reported that the PCAOB has held no public meetings of its governing board since Dec. 20, 2018, which is in violation of Sarbanes-Oxley Act bylaws that require the PCAOB to hold at least one public meeting of its governing board each calendar quarter. We assumed this was because Duhnke hates meetings as much as Adrienne and I do.

Back to Bloomberg:

Others who follow the PCAOB closely also noted that until [SEC Chairman Jay] Clayton and the other SEC commissioners decided to replace the entire five-person board last year, members were regularly re-upped. As recently as last year, the SEC decided to give a second term to another current board member, Duane DesParte. His policy views are more closely aligned with Duhnke’s than Hamm, the people said.

So the SEC got rid of the troublemaker in Hamm and put in Jurata, who began her professional career as a staff attorney in the SEC’s Division of Trading and Markets and was special assistant to the president for financial policy at the National Economic Council, because she won’t make waves under the Republican leadership of Clayton and Duhnke.

And it just so happens that Jurata worked most recently for Andrew Olmem, a White House official who worked under Duhnke when the two men served on the Republican staff of the Senate Banking Committee, the WSJ noted. Before taking over as PCAOB chairman in January 2018, Duhnke served as staff director for the Senate Banking Committee under Sen. Richard Shelby (R-AL).

It’s all about politics, man, as Kelly noted in his blog:

Now we have Jurata as one more loyalist vote on the PCAOB, and libertarian Peirce watching the whole board like a schoolmarm who reads too much Ayn Rand. That leaves Clayton in excellent position to weaken 404(b) audits like he wants, because he can also orchestrate the PCAOB’s oversight of audit firms to go easy on SOX auditing. …

It’s a nifty power grab on Clayton’s part. Then again, as I’ve said before, he undoubtedly feels the heat to get his agenda done before President Trump implodes in impeachment or gets tossed from office next year. Gotta make hay while the sun shines, even if you toss good PCAOB members over the side to do it.

Remember what happened shortly after the SEC cleaned house at the PCAOB in early January 2018 and appointed Duhnke as chairman and appointed Hamm, DesParte, and three others to replace all the incumbents on the board? Longtime high-ranking PCAOB officials started leaving en masse: Martin Baumann, chief auditor and director of professional standards; Helen Munter, director of registration and inspections; Claudius Modesti, director of the PCAOB’s Division of Enforcement and Investigations; and Gordon Seymour, general counsel; among others, headed for the exits.

Today, the WSJ revealed that a one-page whistleblower complaint—written by a group of current and former PCAOB employees—was filed with the board in May and also sent to SEC commissioners in August. The WSJ reported:

Within months of arriving, Mr. Duhnke began pushing out longtime senior executives, according to the whistleblower letter and people familiar with the matter. The former executives, who included the board’s general counsel and its director of inspections, agreed to sign nondisparagement agreements in exchange for six months of continued compensation, the people said. …

The whistleblower letter said the regulator “is permeated by a sense of fear,” due to “the numerous terminations … [some] driven by retaliation.”


And to top it all off, the PCAOB hasn’t had a permanent general counsel or enforcement director for 16 months, which is probably why it has issued 27% fewer audit inspection reports this year, the WSJ reported. The board’s website shows around 50 permanent roles need to be filled, out of about 850, and Duhnke has clashed with other board members over hiring choices, according to the WSJ.

What a freakin’ mess.