- Characteristics of PCAOB Investigations
- December 14, 2009
- Law Firm: Holland & Hart LLP - Denver Office
Six years after the passage of Sarbanes-Oxley, the PCAOB is ramping up the number of investigations and enforcement actions against audit firms and individual CPAs. Lawyers defending clients in PCAOB investigations therefore must learn about the PCAOB’s processes and procedures. PCAOB investigations share many characteristics with SEC investigations. This is not surprising, since most of the PCAOB Enforcement staff members are SEC “alumni.” Like the SEC, the PCAOB issues formal orders of investigation that authorize its staff to issue subpoenas compelling the production of documents and the testimony witnesses. Unlike the SEC, however, the PCAOB cannot issue subpoenas to third parties who are not registered accounting firms or associated persons of such firms. Failure to comply with PCAOB subpoenas (called “accounting board demands”) can subject firms and individuals to sanctions. To conduct investigations, the PCAOB staff, like the SEC, takes the sworn testimony of witnesses who are under oath and whose statements are transcribed by a court reporter. Witnesses have the same rights to counsel and to a copy of their transcripts as witnesses in SEC investigations; however, they do not have the right to keep copies of investigative exhibits. The likelihood of PCAOB scrutiny highlights the need for individuals and firms to retain detailed workpapers evidencing audit planning and procedures; this is particularly important when relying on the work of “other auditors.”
The detailed nature of the charging letters gives defense counsel certain advantages. Counsel need not worry about having to pry information from reluctant staff members (as is often the case in SEC investigations). If the charges involve “grey areas” of accounting subject to competing views, as is often the case, it may be possible to attack the PCAOB staff’s interpretation. In this regard, practitioners should have a working knowledge of GAAP and, with the help of their clients, should cite to accounting literature supporting their position. If the client has sufficient financial resources, hiring an expert to defend both the company’s underlying accounting and the client’s compliance with GAAS can be effective. A well-written response to a charging letter can lead to settlement on more favorable terms
PCAOB sanctions, including revocation of firm registration and lengthy or even permanent bars from association, can be devastating for firms and individuals. Practitioners must also worry about the collateral consequences of PCAOB orders, which must be reported to state Boards of Accountancy. Given what’s at stake, it is important for audit firms and individual CPAs to retain counsel immediately upon learning that PCAOB Enforcement is taking an interest in their activities.