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August 5, 2010 Open Meeting

Legislative Proposal on Public Enforcement Proceedings

Statement of Daniel L. Goelzer, Acting Chairman

The discussion of failure to supervise presents the opportunity to discuss another

aspect of the Board’s enforcement program. Under the Sarbanes-Oxley Act, the
Board’s enforcement proceedings are nonpublic, unless the Board finds there is good
cause for a proceeding to be public and the parties consent to public proceedings. The
auditors and audit firms that we charge with violating PCAOB standards, or with other
serious violations, have little incentive to consent to opening the case against them to
public view. On the contrary, the fact that, absent consent, our enforcement
proceedings are required to be secret creates a considerable incentive to litigate.
Litigation postpones – often for several years -- the day on which the public learns that
the Board has charged the auditor or firm.

I believe the time has come for us to ask Congress to change the law and make
our enforcement proceedings public, unless there is some good reason for a particular
matter to be closed.

Since so much of our enforcement work now occurs out of the public’s sight, it
may be helpful to describe in general terms how the Board’s disciplinary process works.
If, after a nonpublic investigation, the Board votes to institute a disciplinary proceeding,
the auditor or audit firm that has been charged has a choice between settling the case
or litigating with the Board’s enforcement staff. If the choice is litigation, the matter is
assigned to the Board’s hearing officer. After pre-trial proceedings, there is a hearing at
which the staff must prove its case and the respondent may present its defense.
Evidence is introduced, and witnesses testify. Once the hearing officer issues his
decision, either party – the auditor or the enforcement staff -- may appeal to the Board.
As in any appeal, the parties file briefs and may request oral argument. If the Board’s
decision is unfavorable to the auditor or firm, they may appeal again – this time to the
SEC. In that event, the Board continues to be prohibited from reporting its decision to
the public, unless and until the Commission allows the Board-imposed sanction to take
effect. From the initiation of the disciplinary proceeding through at least the SEC
decision to let the sanctions commence, the entire proceeding takes place behind
closed doors.
AUGUST 5, 2010 OPEN MEETING

Legislative Proposal On Public Enforcement Proceedings

Statement of Daniel L. Goelzer
Page 2 of 2

This is in sharp contrast to an SEC administrative proceeding against an auditor.

If the SEC were to bring the same case, alleging the same violations, against the same
auditor, the SEC’s charges would be disclosed at the time the Commission instituted its
proceeding. Any administrative trial would be open to the public. If there were an
appeal to the Commission and an oral argument, the public could attend. The ability –
or inability -- of the Commission’s staff to prove its charges would be a matter of public
record. In the case of the PCAOB proceeding, no other auditor, no investor, no audit
committee, no member of the media is entitled to know what the Board considers to
merit discipline, whom we have charged, what issues are being litigated, and whether
the Board’s staff has won or lost. The public is in the dark about how the Board uses its
enforcement authority until there is a settlement or an SEC decision on the Board’s
sanctions.

For many years, the SEC faced a similar problem. Old SEC Rule 2(e) contained
a presumption in favor of private disciplinary proceedings involving accountants,
auditors, and lawyers. Because proceedings against accountants and auditors were
private, there were incentives for delay and protracted litigation. It was not unusual for
cases against the major accounting firms to take many years to work through the non-
public process. When I was General Counsel of the SEC, in the late 1980s, the
Commission changed the presumption in its rule from private to public disciplinary
proceedings. Unfortunately, we find ourselves with the same problem the Commission
confronted, but lack the option of solving it by amending the Board’s rules. Public
proceedings would require a change in the Sarbanes-Oxley Act.

I believe the Board should ask Congress to make that change so that the public
will have the same access to our enforcement proceedings as to those of the SEC. Of
course, as in the case of the SEC, Board investigations should remain private and
confidential, and the process of asking a firm or individual for a statement of position –
which is similar to the SEC Wells process – also should stay private. However, if the
Board votes to initiate formal disciplinary action, the administrative proceeding in which
the validity of those charges is decided should normally be public.

Obtaining this kind of legislation will not happen overnight. And, of course, we
will need to consult with the SEC and seek its support. I believe, however, that the time
has arrived to begin that process.