SEC Removes the Chair and Plans to Clean House at the PCAOB
On June 4, the SEC announced that it had removed William Duhnke from his position as Chair of the Public Company Accounting Oversight Board. One of the other Board members, Duane Desparte, was appointed as Acting Chair. The SEC simultaneously announced that it intended to seek candidates to fill all five PCAOB board positions, signaling that Mr. Desparte and the other two sitting board members could also eventually be removed, despite the fact that their terms do not expire until 2023, 2024, and 2025, respectively. Prior to Mr. Duhnke’s ouster, the five-member board had one vacancy.
Under the Sarbanes-Oxley Act, the SEC appoints the PCAOB board, whose members serve for 5-year terms. The statute provides that PCAOB members can only be removed for cause – i.e., some type of misbehavior in office. However, in 2010, the Supreme Court held that the “for cause” limitation on board member removal was unconstitutional, in effect, striking it from the statute and permitting a majority of the SEC to remove a PCAOB member at any time, for any reason. In 2017, at the beginning of the Trump Administration, the SEC, under Chair Jay Clayton, replaced the entire PCAOB board. See SEC Appoints an All-New PCAOB, November-December 2017 Update. SEC Chair Gary Gensler, who took office in April, has now taken the same action. The two Republican SEC Commissioners issued a dissenting statement.
In the weeks leading up to the SEC’s June 4 announcement, Chair Gensler had come under considerable pressure to replace the PCAOB board. Most notably, in a May 25 letter, Senators Elizabeth Warren and Bernie Sanders asked that “the SEC use its authority to immediately remove and replace the sitting members of the Public Company Accounting Oversight Board (PCAOB).” They described the PCAOB as a “troubled agency” that the Trump Administration had weakened by “taking deliberate steps to erode the PCAOB’s independence and expertise while facilitating the agency’s capture by partisan and corporate interests.”
In a June 8 announcement, Chair Gensler formally commenced the appointment process. He invited interested persons to apply for a seat on the PCAOB by June 29.
Comment: The impact that a new PCAOB may have on audit committees is difficult to determine until a new Board is selected and seated. However, there may be major changes in the PCAOB’s philosophy and priorities. In the statement announcing Mr. Duhnke’s removal, SEC Chair Gensler said that the “PCAOB has an opportunity to live up to Congress's vision in the Sarbanes-Oxley Act" and that he looked forward to setting the PCAOB “on a path to better protect investors by ensuring that public company audits are informative, accurate, and independent." It is unclear specifically what those statements mean, but replacement of the entire PCAOB board could foreshadow significant changes in oversight of the auditing profession and of public company financial reporting.
At minimum, it seems likely that the PCAOB will revive its Standing Advisory Group and Investor Advisory Group and, in general, become more open than in recent years to input from investors and other users of audited financial information. It is also likely that, consistent with Chair Gensler’s priorities at the SEC, the PCAOB will actively explore the potential role of auditors in considering ESG risks as part of financial statement and internal control audits and in reviewing company ESG disclosures. There have also been suggestions over the past few years that the PCAOB should more frequently pursue enforcement actions against auditors for deficiencies uncovered in PCAOB inspections and that enforcement actions and inspection reports should identify the reporting company involved, not just the accounting firm. Changes of this nature could have important ramifications for the work of audit committees.