Yikes! What is going on at the PCAOB? You may recall that, back in 2018, former staffers at the PCAOB and former partners of KPMG were charged by the SEC in connection with “their participation in a scheme to misappropriate and use confidential information relating to the PCAOB’s planned inspections of KPMG.” You know, that case where the former PCAOB staffers were accused of leaking to KPMG the plans for PCAOB inspections of KPMG—“literally stealing the exam.” (See this PubCo post.) The same scheme led the U.S. Attorney’s Office for the SDNY to file criminal charges against the former staffers, and some have actually been sentenced to prison. But that’s not even the half of it.

As reported by the WSJ, the PCAOB “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….The regulator has issued 27% fewer audit-inspection reports this year, board data show, as senior staff positions remain unfilled for months.” What’s more, that same whistleblower complaint— submitted by a group of employees to the board in May and to the SEC in August—precipitated the appointment of Harvey Pitt, former SEC Chair, to review “PCAOB corporate governance.”

A PCAOB spokesperson told the WSJ that, following the eruption of the leaking scandal in 2017, the board “undertook a sweeping assessment in 2018 of its operations and has been working toward ‘a series of transformation initiatives to address systemic issues that exist across the organization.’” And, after the SEC became aware of the leak of confidential information, in December 2017, it replaced the PCAOB’s entire board. But, the WSJ reports, shortly after arriving, the new Chair “began pushing out longtime senior executives, according to the whistleblower letter and people familiar with the matter. The whistleblower letter said the regulator ‘is permeated by a sense of fear,’ due to ‘the numerous terminations … [some] driven by retaliation.’” The new Chair has also “clashed with other board members over hiring choices, the people familiar with the matter said.”

Then, although PCAOB members have historically been reappointed for new terms, one board member, Kathleen Hamm, wasn’t reappointed to the board, support from the Council of Institutional Investors notwithstanding. She was replaced on the PCAOB by a White House staffer. In addition, SEC Chair Jay Clayton announced that Commissioner Hester Peirce would be leading the SEC’s “coordination efforts with the Board of the PCAOB, in coordination with the SEC’s Chief Accountant Sagar Teotia and the Office of the Chief Accountant.” While, at first glance, it all sounds fairly anodyne, reports surfaced that Hamm had had disagreements with the PCAOB Chair on policy matters.

In addition, Bloomberg Financial Accounting News reports, two Democrats on the Senate Banking Committee sent a letter to Clayton suggesting, in light of the problems cited by the whistleblower in the WSJ article, that SEC oversight of the PCAOB showed “questionable judgment and an alarming lack of transparency.” The Senators also questioned the appointment of Peirce and sought information on the role she would be playing. They characterized her appointment as “troubling” because it “raises the potential of undue influence,” given that the entire SEC is supposed to oversee the PCAOB, not a single coordinating commissioner, and that Peirce was a “longtime colleague” of the PCAOB Chair. The letter also requested more information about Pitt’s appointment, which they characterized as “unwise,” in light of his prior resignation as SEC chair amid a controversy involving the appointment of the first PCAOB chair. The senators urged the SEC to consider someone with no history related to “failed oversight” of the PCAOB. They also expressed concern about the recent decline in audit inspection reports and the vacant senior staff positions.

And, if that weren’t enough, former SEC Chair Arthur Levitt pens an op-ed in the NYT, charging that “what is happening at the Public Company Accounting Oversight Board—the body tasked with auditing the auditors—should alarm the investing public and anyone who cares about objective and experienced oversight of the audit profession.” His concern was an outgrowth of the change in members of the board (which he appears to view as politically motivated), as well as the appointment of Peirce, whom he termed “a regulation skeptic, [to be] in charge of coordination efforts with the board—a signal that the S.E.C. is seeking to pull it into its efforts to weaken requirements for audits of internal controls at public companies.” (See this PubCo post.) The PCAOB has a critical role to play; yet, citing the WSJ article, he contended that it “ is doing less oversight and inspection work than it once did, and key positions at the agency are unfilled. Morale is reportedly low.” In his view, what is “at risk isn’t a specific regulatory function of the P.C.A.O.B.; it’s the independence and the credibility of the board and its staff as a whole.”

According to Bloomberg Financial Accounting News, during remarks at a recent conference in NYC, a PCAOB member addressed the various concerns raised about the PCAOB, citing “the board’s strategic plan unveiled in August 2018, which charted a new path for the now 17-year-old regulator. The plan outlined goals to prevent and deter audit violations, expedite inspections and enforcement cases, and raise the expectations of the board and its staff’s conduct. ‘The board, our leadership team, and our people are still very committed to implementing that plan. It is a journey and change takes time.’”