Chair Gensler Overhauls PCAOB

Faegre Drinker Biddle & Reath LLP

On Friday June 4, 2021, Securities and Exchange Commission Chair Gary Gensler removed the head of the Public Company Accounting Oversight Board (PCAOB), an independent agency created by the Sarbanes-Oxley Act of 2002 that is charged with setting standards and overseeing audits of public companies and broker-dealers. The move is part of a broader overhaul of the PCAOB announced by the SEC that includes soliciting nominations for all five of the PCAOB’s board positions, including board positions currently filled by members whose terms have not yet expired.

The removed chair of the PCAOB, William Duhnke III, was appointed by former President Trump and had held the position since January 2018. In 2020, President Trump called for the PCAOB to be folded into the SEC by 2022, losing its independent watchdog status. In a recent lawsuit filed against Duhnke, the PCAOB’s former chief risk officer alleged that Duhnke shared President Trump’s sentiment and called the PCAOB a “frivolous organization” that should be combined with the SEC.

The PCAOB overhaul is a win for progressive Democrats in Congress who have long sought a stronger, more independent board. Just last month, Senators Elizabeth Warren of Massachusetts and Bernie Sanders of Vermont sent a letter to the SEC calling for immediate replacement of all members of the PCAOB for what they characterized as a deliberate erosion of the PCAOB’s independence and expertise during the Trump administration and the “agency’s capture by partisan and corporate interests.”

Not everyone supports Chair Gensler’s moves. The SEC’s Republican commissioners, Elad Roisman and Hester Peirce, registered their “serious concerns” about “the hasty and truncated decision-making process underlying” Chair Gensler’s proposed shakeup of the PCAOB. In a statement issued on Friday, the two commissioners said:

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.

It is unclear what policy shifts, if any, will result from the SEC’s overhaul of the PCAOB. However, the shakeup is likely to result in an agenda that reflects the goals of the Biden Administration, which likely will include harsher application of the PCAOB’s examination program and stricter enforcement of audit standards and rules applicable to registrants. Registrants should consider engaging outside counsel if they are involved in difficult examinations or investigations by the PCAOB’s Division of Enforcement and Investigations.

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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