Blog: SEC removes Duhnke as PCAOB Chair

Cooley LLP

Cooley LLP

On Friday, the SEC announced that it had “removed” William D. Duhnke III from the PCAOB and designated Duane M. DesParte to serve as Acting Chair, effective Friday. Duhnke has been serving as Chair since January 2018. The SEC also announced that it intends to seek candidates to fill all five board positions on the PCAOB.  In the press release,  SEC Chair Gary Gensler said that the “PCAOB has an opportunity to live up to Congress’s vision in the Sarbanes-Oxley Act….I look forward to working with my fellow commissioners, Acting Chair DesParte, and the staff of the PCAOB to set it on a path to better protect investors by ensuring that public company audits are informative, accurate, and independent.” What’s it all about?

While the vote tally was not released, in light of their joint statement, it’s evident that Commissioners Hester Peirce and Elad Roisman voted against the action. Their statement objected not just to the removal of Duhnke, but also to the intent expressed to replace all five PCAOB members, including members whose terms have not yet expired:

“We have serious concerns about the hasty and truncated decision-making process underlying this action. Although the Commission has the authority to remove PCAOB members from their posts without cause, in all of our actions, we should act with fair process, fully-informed deliberation, and equanimity, none of which characterized the Commission’s actions here.  Instead the Commission has proceeded in an unprecedented manner that is unmoored from any practical standard that could be meaningfully applied in the future.  We are unaware of any similar action by the Commission in connection with its oversight of the PCAOB.  These actions set a troubling precedent for the Commission’s ongoing oversight of the PCAOB and for the appointment process, including with respect to attracting well-qualified people who want to serve.  A future in which PCAOB members are replaced with every change in administration would run counter to the Sarbanes Oxley Act’s establishment of staggered terms for Board members, inject instability at the PCAOB, and undermine the PCAOB’s important mission by suggesting that it is subject to the vicissitudes of politics.”

And the top Republican on the House Financial Services Committee, Patrick McHenry, released a statement characterizing the action as

“unprecedented and a blatant politicization of an independent PCAOB….Chairman Gensler appears to be treating the PCAOB like a political football beholden to a left-wing Democrat Commission that panders to progressives like Elizabeth Warren. If this is the case, it’s unclear why the PCAOB should continue to exist as a separate entity from the SEC going forward. I have a lot of questions about how and why the Chair took this action, including whether or not Commissioner Lee recused herself from a Commission vote given her conflicts of interest, and I will be holding Mr. Gensler accountable for this decision.”

There’s no official word on what happened here, but that hasn’t stopped anyone from speculating. Let’s put a big “allegedly” in front of the entire discussion below, but here’s what reporters are saying. Politico characterized the termination as “a victory” for progressives “after they called for the audit watchdog’s leadership to be fired…. The progressives warned that the PCAOB, which was established after the Enron and WorldCom accounting scandals, was failing to crack down on corporate wrongdoing and was captured by industry.” Reuters said that “Duhnke’s ouster is a warning shot by the new SEC chair Gary Gensler.” The PCAOB, Reuters continued, “has long been criticized by Democrats for being toothless,” adding that two Senators “last month pressed the SEC to immediately replace the board, which they said has fallen down on its job of overseeing audit firms meant to keep publicly-traded companies in check.”  In addition, Reuters reported that the “PCAOB has also come under criticism by hawks who wanted it to take a tougher stance on Chinese auditors of U.S.-listed Chinese companies which have generally evaded U.S. oversight.” The WSJ also cited the letter from the two Senators, which contended that the prior administration had taken “deliberate steps to erode the PCAOB’s independence and expertise, leading the watchdog to, for example, weaken auditor-independence rules and exclude investors from participating in its policy-making process.” According to Bloomberg, “Duhnke’s critics argued that he had mismanaged the regulator and was too friendly to accounting firms…. Gensler’s decision will likely inflame partisan squabbling about the PCAOB.”

Accounting Today agreed that the PCAOB has “come under criticism,” but attributed the criticism to “ending meetings of its Investor Advisory Group and Standing Advisory Group and holding few open meetings during Duhnke’s tenure. Duhnke became chairman in January 2018 and, over the next two years, the rest of the other board members and much of the top staff at the PCAOB were gone, including a board member who was replaced by a White House aide…. The PCAOB also overhauled its standard-setting agenda, strategic plan, and audit firm inspection process in keeping with the deregulatory agenda” of the prior administration and then-SEC Chair Jay Clayton. similarly attributed the firing to complaints from advisors: “The move by Gensler is not a surprise. As CFO reported on May 20, former members of the PCAOB’s Investor Advisory Group (IAG) sent a letter to Gensler and several Democratic politicians in mid-April calling for Duhnke III’s removal. The letter accused the PCAOB of ‘drifting away’ from its ‘core mission of investor protection’ in the past four years and said urgent action was needed to ‘restore investor trust and confidence in the quality of public company audits in the United States.’ The letter also said, ‘Given their track record, we do not believe the current PCAOB Board members are up to the task of re-focusing the PCAOB on its core mission because they are responsible for the dramatic shift away from what investors expect.’” According to  CFODive“Duhnke has been the subject of criticism by investor advocates and others, including former PCAOB advisors, for taking steps they viewed as increasing risks. ‘These failures [by PCAOB] increase risks to our financial system and require immediate attention,’ the former advisors said in a letter to the SEC in April.   Critics also took issue with a proposal last year to fold PCAOB into the SEC and make its function part of the SEC’s mission.” The WSJ reported that Duhnke had recently “faced criticism from investors who said the PCAOB didn’t adequately incorporate their feedback into its work. Under Mr. Duhnke, the watchdog in 2018 stopped holding meetings of two groups that consulted investors, citing what the board described as the meetings’ ineffectiveness. It still conducts other events with investors though.”

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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