By Natalie DeCoste

The Public Company Accounting Oversight Board (PCAOB) is getting an overhaul by the Securities and Exchange Commission after years of dysfunction.

The PCAOB is a nonprofit corporation established by Congress to oversee the audits of public companies to protect investors and further the public interest through the preparation of independent audit reports. The PCAOB is also in charge of overseeing the audits of brokers and dealers, including compliance reports filed under federal securities laws. The organization is under the purview of the SEC.

After years of what the SEC considers lax oversight, the Commission ousted the entire PCAOB board. In addition, chairman William D. Duhnke III is under investigation and has been replaced by Duane M. DesParte.

“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,” said SEC Chair Gary Gensler.

The agency was created to restore consumer faith in financial markets after the accounting scandals of the early 2000s, specifically the Enron scandal. Unfortunately, the PCAOB has been plagued by criticisms that it has been too easy on the auditing profession. When Duhnke assumed his chairman position in 2018, the previous board had just been replaced after a scandal where one of its staff members helped a major auditing firm pass inspection.

These latest developments at the PCAOB suggest the group could soon take more action against auditing firms. The group announced just three settled enforcement actions, with penalties totaling $35,000. That number is far less than the 54 actions with fines totaling $4.9 million seen in 2017, the last full year before Duhnke’s board took over.

The SEC is investigating how the PCAOB operates, including its handling of whistleblowers and other employees, according to people familiar with the matter. Duhnke allegedly retaliated against employees he disagreed with by forcing them out of their jobs.

In response to the allegations, Duhnke released a written statement.

“Every single allegation of wrongdoing that has been made against me is false. It’s obvious that certain individuals have abused their positions of authority by orchestrating a well-coordinated smear campaign,” said Duhnke.

While Duhnke and the board were removed from their positions, not everyone at the SEC agreed with the decision. The two Republican members of the SEC, Hester Peirce and Elad Roisman, objected to the abrupt move by Gensler and the other Democratic commissioners to clean house, claiming the move set a dangerous precedent.

“We have serious concerns about the hasty and truncated decision-making process underlying this action,” they said in a statement. “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.”