SEC dismisses Republican audit watchdog, considers new board members after Warren and Sanders push

Warren said Duhnke’s removal was “absolutely the right move” and signaled that she would be pushing for a bigger reshuffle. The SEC, which is also responsible for hiring PCAOB executives, may grant his wish. The agency said it would seek candidates for all five of the regulator’s board positions, although three of its members who serve five-year terms remain in place.

“Our audit process must be independent and with integrity,” Warren said in a Twitter post. “Let’s replace the other members with people who are up to the agency’s mission.

While the PCAOB is little known to people outside of finance, Warren and Sanders’ demands show how progressives are trying to reshape regulation with Democrats in control in Washington. One of their goals is for the PCAOB to join the campaign to force companies to disclose their role in climate change, one of the most controversial issues facing American businesses.

Left-wing efforts to overhaul audit oversight trigger a pullback not only from Republicans, but also from business groups and some government watchdogs who warn that dismissal of board members threatens the political independence of PCAOB operations.

As part of the Sarbanes-Oxley Act of 2002, Congress created the PCAOB to strengthen oversight of how publicly listed companies are audited. Lawmakers decided to create the new independent body, which operates as a nonprofit, after accounting scandals questioned the reliability of financial information companies provide to investors.

The Washington-based regulator has been tasked with overseeing major audit firms, such as KPMG and PricewaterhouseCoopers, that state-owned companies pay to ensure the accuracy of their financial statements. The SEC serves as the supervisor of the PCAOB, and the commissioners of the SEC are responsible for appointing the direction of the PCAOB.

The SEC, which is led by three Democratic commissioners and two Republican commissioners, did not provide a breakdown of the votes it garnered on Thursday. But the agency’s GOP commissioners on Friday reprimanded the decision to remove Duhnke, who, before being appointed to head the PCAOB in 2017, served as Senator Richard Shelby’s longtime aide (R-Ala. ).

In a joint statement, Republican SEC Commissioners Hester Peirce and Elad Roisman – who also served as Shelby’s assistants – said they were concerned about “the hasty and truncated decision-making process underlying this action.” . They said this set a “troubling precedent for the commission’s continued monitoring of the PCAOB and for the appointment process.”

“While the commission has the power to remove PCAOB members from their positions without cause, in all of our actions we must act with fair process, fully informed deliberation and equanimity, none of which has characterized the actions. of the commission here, ”they said. . “Instead, the commission has proceeded in an unprecedented manner that is detached from any practical standard that could be applied meaningfully in the future.”

Rep. Patrick McHenry of North Carolina, the top Republican on the House financial services committee, said this amounted to politicization of the PCAOB and that “I will hold Mr. Gensler accountable for this decision.”

“President Gensler appears to be treating the PCAOB like political football beholden to a left-wing Democratic commission that flatters progressives like Elizabeth Warren,” McHenry said. “If this is the case, it is not clear why the PCAOB should continue to exist as a separate entity from the SEC in the future.”

While it alarmed Republicans, Friday’s announcement could help ease tensions between the left and Gensler, whose relations with longtime liberal allies were becoming strained at the start of his SEC tenure.

Progressives first applauded when President Joe Biden named Gensler as Wall Street’s top cop because of his Obama-era chairmanship of the Commodity Futures Trading Commission, where he cracked down on the big banks. But in April, Gensler infuriated many of its biggest advocates when he hired a corporate defense attorney to lead the SEC enforcement. The app director resigned days later over concerns about his conduct in a case representing ExxonMobil. The episode left Gensler facing scrutiny from his former champions, and Wall Street reformers are now trying to keep the pressure on the SEC chairman.

“He had a huge reputation for going out of his time [in the Obama administration] for a willingness to choose big fights, ”said Jeff Hauser, executive director of the Revolving Door Project, which called for the ousting of the PCAOB leadership. “The question is, is he still this Gary Gensler?”

Gensler said in a statement Friday that the PCAOB “has the opportunity to live up to the vision of Congress.”

“I look forward to working with my fellow Commissioners, Interim President DesParte and PCAOB staff to put it on the path to better investor protection by ensuring that public company audits are informative, accurate and independent, ”Gensler said.

The PCAOB has faced a series of scandals since its inception that have called into question its ability to monitor conflicts of interest in corporate audits.

William Webster, the first SEC appointed chairman to head the PCAOB, resigned after a few weeks on the job amid revelations he was on the board of a company accused of accounting fraud. In 2018, prosecutors accused former PCAOB employees of leaking confidential information about inspection plans to KPMG, one of the “big four” accounting firms.

A 2019 report from Project on Government Oversight found that in 16 years, the PCAOB has brought just 18 enforcement cases involving 21 audits against the top four accounting firms, even though it cited 808 cases where companies issued faulty audits.

In 2017, as the KPMG leak scandal began to unfold, the SEC refused to reappoint the current PCAOB board members and replaced them with five new executives, including Duhnke, who as chairman , got one of Washington’s most coveted jobs with a salary of $ 670,000.

In Warren and Sanders’ eyes, the SEC’s decision to clean up in the Trump era did nothing to strengthen PCAOB’s oversight of the financial sector.

In a letter to Gensler on May 25, lawmakers said the new board was populated by “partisan buddies with a deregulation agenda and little relevant experience.” They said the PCAOB under Duhnke decided to weaken auditing standards and enforcement action fell. Duhnke himself has been the subject of internal complaints about his conduct and a wrongful dismissal lawsuit.

Before Duhnke’s layoff was announced, PCAOB officials have defended their case in recent years. Duhnke said the results of preliminary inspections of America’s largest audit firms in 2020 “show the greatest improvement in audit quality in the past decade.” PCAOB spokesperson Jackie Cottrell said the board is allocating substantial and increasing resources to enforcement priorities, with a focus on cases involving significant audit failures. Cottrell also said the termination claims were “unfounded”.

But progressives have warned that there is an urgent need for the SEC to revamp the PCAOB as investors rush into a booming stock market and a rush of private companies try to profit from the boom by going public through specialized acquisition companies. They also see the PCAOB as a key element in supporting a likely push by the SEC to force state-owned companies to disclose their contributions and exposure to climate change.

The demand to start fresh with the PCAOB board presents a tough choice for Gensler, who declined to comment on this story. Some government watchdogs warn that removing the entire board can make matters worse.

“There is no room for politics in an audit committee,” said Tim Stretton, policy analyst for Project on Government Oversight. “Starting over from scratch every four or eight years with a new administration would inherently make this council partisan.”

Business groups are also warning the SEC against removing the PCAOB board.

“Biparty Sarbanes-Oxley legislation set the PCAOB to exclude politics from financial reporting,” said Tom Quaadman, executive vice president of the US Chamber of Commerce’s Center for Capital Markets Competitiveness. “To dismiss the board of directors would be a giant leap back and endanger the quality of the audit.”

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