U.S. Senators Elizabeth Warren (D-Mass.) and Bernie Sanders (I-Vt.) sent a letter to Security and Exchange Commission (SEC) Chair Gary Gensler requesting the SEC use its authority to immediately remove and replace the members of the Public Company Accounting Oversight Board (PCAOB), which sets standards for audits of public company financial statements required under Sarbanes-Oxley.
“We ask that you make full use of these authorities to undo the Trump administration’s damage and begin the serious work of rebuilding the PCAOB. This must start with a clean slate and a new direction in leadership,” the lawmakers wrote.
The Sarbanes-Oxley Act of 2002, enacted in the wake of the Enron scandal, established the PCAOB as an independent body “to oversee the audits of public companies in order to protect investors and further the public interest in the preparation of informative, accurate, and independent audit reports.” More than 1,700 auditing firms are registered with the PCAOB, including 560 firms that “audit more than 12,000 issuers that file financial statements with the SEC or otherwise play a substantial role in those audits.” Those issuers, which include about 7,400 public companies, represent nearly $47 trillion in global market capitalization.
While the PCAOB has long struggled to live up to its mission, the Trump administration weakened the agency even more, taking deliberate steps to erode the PCAOB’s independence and expertise while facilitating the agency’s capture by partisan and corporate interests. In 2017, following the leak of confidential PCAOB inspection plans to the auditing firm KPMG, former SEC Commissioner Jay Clayton fired all five members of the Board. But rather than appoint replacements with “a demonstrated commitment to the interests of investors and the public” and experience with the audit process – as required by the Sarbanes-Oxley Act – Clayton appointed partisan cronies, including William Duhnke, who currently serves as chair of the Board.
Under Duhnke’s leadership, the PCAOB has sharply reduced enforcement actions, excluded advisory groups and investor advocates from participating in its policymaking processes, and weakened auditor independence standards. The depth of the PCAOB’s deterioration was corroborated by a 2019 whistleblower complaint filed by current and former PCAOB employees. According to press reports, the PCAOB “slowed its work amid board infighting, multiple senior departures, and allegations that the chairman has created a ‘sense of fear.'”
“Reversing the damage done by the previous administration and appointing Board members who are committed to ensuring the integrity of the auditing process and our capital markets is an urgent matter, and we urge you to move quickly to do so,” the senators wrote.
The SEC’s oversight authority over the PCAOB includes the approval of the Board’s rules, standards, and budget, and the agency can remove PCAOB members with a majority vote by SEC commissioners.
“You have an opportunity and an obligation to strengthen the PCAOB, protect its independence, and ensure it lives up to its responsibilities – all of which are central to the SEC’s mandate to ‘promote a market environment that is worthy of the public’s trust.’ Aligning the PCAOB Board with the agency’s mission requires immediate attention, and we ask that you move quickly to address this important matter,” the lawmakers wrote.