PCAOB Enforcement Scorecard Informs On Future Priorities

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Law360 (February 5, 2021, 4:57 PM EST) —

Robert Cox

Kimberly Kolar

Steve Richards

COVID-19 challenges appear to be a principal reason for a 30% decrease in the number of Public Company Accounting Oversight Board Division of Enforcement and Investigations settled orders in 2020 from 2019. However, PCAOB enforcement priorities were unchanged in 2020.

Those enforcement priorities are significant audit violations, cross-border audits, foreign auditors, engagement quality reviews and compliance with PCAOB rules, such as noncooperation with board inspectors and Form 3 special reporting. In addition, the PCAOB is increasing its focus on firms’ systems of quality control both in inspections and enforcement.

Some key takeaways from the 2020 settled orders are:

• Continued expansion of sanctions of engagement quality reviews;

• Continued focus on cross-border audits and non-U.S. firms; and

• Increase in sanctions for firms that failed to timely file Form 3.

In addition, with the change in administrations and possible changes in leadership at the U.S. Securities and Exchange Commission and PCAOB, we expect more robust PCAOB enforcement efforts.

COVID-19 Challenges

Like many regulatory authorities, the PCAOB experienced challenges related to COVID-19 for its operations. While working from home was part of the PCAOB’s vocabulary prior to the pandemic, COVID-19 forced the board to fully embrace this style of work in ways that were not previously anticipated.

For example, in-person testimony of witnesses ceased by March. This necessitated that the board quickly evaluate its options for conducting remote testimony. Moving to a remote platform presented logistical challenges both in terms of technology and the use of exhibits. Like the SEC Division of Enforcement, the DEI staff adjusted its approach, and by late spring, the board had succeeded in resuming testimony of witnesses in investigations.

Last year was a year of personnel transition for the DEI. In January 2020, Patrick Bryan joined the PCAOB as its director — only the second to hold the position since its creation in April 2003. Then, in March, Mark Adler, the former DEI acting director and the division’s chief trial counsel, departed the PCAOB.

By the Numbers

The challenges present in 2020 are partially reflected in a greater than 30% decrease in the number of settled orders in 2020 from 2019. In 2020, the PCAOB made 21 settled orders public, compared with 31 settled orders in 2019.[1] This was the fewest number of settled orders made public by the PCAOB since 2013, when 13 settled orders were issued.

The chart below illustrates the categories of settled orders in 2019 and 2020 on a percentage basis. For simplicity’s sake, we have used the following categories: audit failures, rules violations, noncooperation, independence and terminations of bars.

Most professionals who regularly practice in the securities regulation and enforcement space are familiar — at least on a high level — with how regulators source their cases.

For example, the SEC’s Division of Enforcement routinely receives referrals from its other divisions, as well as from whistleblowers and other regulators. The PCAOB is no different. Given the SEC’s own challenges related to COVID-19, there may have been fewer referrals to the PCAOB in 2020, as well as fewer referrals between PCAOB divisions, resulting in a lower number of potential matters.

Further, as part of its transformation process, the PCAOB Division of Registrations and Inspections undertook the arduous process of revamping its…