July 10, 2005
Oops! PCAOB Investigation Leaked
Posted by Gordon Smith

One of the potentially big innovations in SOX was the creation of the Public Company Accounting Oversight Board (PCAOB), which has been relatively quiet (except for the bit about internal controls) since the kerfuffle surrounding the appointment of William Webster as the Board's first chair. Things may be about to get more interesting, as the SEC inadvertantly disclosed a PCAOB investigation of Deloitte & Touche in connection with the audit of Navistar. This is the latest in a string of bad news stories for Deloitte, which include a big fine in the Adelphia case and an adverse ruling in the Parmalat litigation.

In addition to creating additional questions about Deloitte, this action raises questions about the effect of PCAOB sanctions on accounting firms. If the PCAOB imposes sanctions here, it will be the first such action against one of the Big Four. (The PCAOB's first disciplinary action is discussed here.) How will Deloitte's clients react? It seems to me that the PCAOB needs to find a means of enforcing the accounting standards without making one firm seem much worse than the others ... unless, of course, that one firm is much worse than the others. Interesting that Deloitte is the only Big Four firm that did not change its business model after Enron to split consulting and auditing. Is that relevant here?

Thanks to the White Collar Crime Prof Blog for the tip.

By the way, my friend Donna Nagy just published an article entitle Playing Peekaboo With Constitutional Law: The PCAOB and its Public/Private Status, in which she writes:

In creating the PCAOB, Congress provided the Board with a guaranteed source of funding, the means for subpoening documents, official immunity from civil liability, privileges from third party discovery, and a comprehensive system of oversight by the Securities and Exchange Commission (SEC or Commission)....

Notwithstanding its governmental creation, its governmental objectives, its governmental powers and privileges, and its governmentally appointed Board members, Congress established the PCAOB as a private, not-for-profit corporation. Congress’s determination to situate the PCAOB in the private sector could not have been clearer. In a section entitled “status,” the Act provides that “the Board shall not be an agency or establishment of the United States government and that “[n]o member or person employed by, or agent for, the Board shall be deemed to be an officer or employee or agent for the Federal Government by reason of such service.” The PCAOB’s public/private status renders its sardonic nickname “peekaboo” more than a bit profound.

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