Warren said Duhnke’s removal was “absolutely the right move” and she signaled that she would push for a bigger shakeup. The SEC, which is also responsible for hiring the PCAOB’s leaders, may grant her wish. The agency said it would seek candidates for all five of the regulator’s board positions, even as three of its members who serve five-year terms remain in place.
“Our auditing process needs to be independent and with integrity,” Warren said in a Twitter post. “Let’s replace the other members with people who live up to the agency’s mission.”
While the PCAOB is little known to people outside of finance, the demands by Warren and Sanders show the extent to which progressives are trying to reshape regulation with Democrats in control of Washington. Among their goals is that the PCAOB join the campaign to force companies to disclose their role in climate change, one of the most controversial issues confronting corporate America.
The left’s effort to overhaul audit oversight is triggering pushback not only from Republicans but also business groups and some government watchdogs who warn that throwing out the board members threatens the political independence of the PCAOB’s operations.
As part of the 2002 Sarbanes-Oxley Act, Congress established the PCAOB to bolster oversight of how publicly traded companies are audited. Lawmakers decided to create the new independent body, which operates as a nonprofit corporation, after accounting scandals called into question the reliability of financial information that companies provide to investors.
The Washington-based regulator was tasked with policing major audit firms, such as KPMG and PricewaterhouseCoopers, that public companies pay to ensure the accuracy of their financial statements. The SEC serves as the PCAOB’s overseer, and SEC commissioners are responsible for appointing PCAOB leadership.
The SEC, which is led by three Democratic commissioners and two Republican commissioners, did not provide a breakdown of the votes it took Thursday. But the agency’s GOP commissioners on Friday rebuked the decision to remove Duhnke, who before being appointed to lead the PCAOB in 2017 served as longtime aide to Sen. Richard Shelby (R-Ala.).
In a joint statement, Republican SEC Commissioners Hester Peirce and Elad Roisman — who also served as aides to Shelby — said they had concerns about “the hasty and truncated decision-making process underlying this action.” They said it set a “troubling precedent for the commission’s ongoing oversight of the PCAOB and for the appointment process.”
“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,” they said. “Instead the commission has proceeded in an unprecedented manner that is unmoored from any practical standard that could be meaningfully applied in the future.”
Rep. Patrick McHenry of North Carolina, the top Republican on the House Financial Services Committee, said it amounted to a politicization of the PCAOB and that “I will be holding Mr. Gensler accountable for this decision.”
“Chairman Gensler appears to be treating the PCAOB like a political football beholden to a left-wing Democrat commission that panders to progressives like Elizabeth Warren,” McHenry said. “If this is the case, it’s unclear why the PCAOB should continue to exist as a separate entity from the SEC going forward.”
While it alarmed Republicans, Friday’s announcement may help ease tensions between the left and Gensler, whose relationship with long-time liberal allies was becoming strained in the early days of his SEC tenure.
Progressives first applauded when President Joe Biden nominated Gensler to serve as Wall Street’s top cop because of his Obama-era chairmanship of the Commodity Futures Trading Commission, where he cracked down on big banks. But in April, Gensler infuriated many of his biggest advocates when he hired a corporate defense lawyer to lead SEC enforcement. The enforcement director stepped down days later amid concerns about her conduct in a case representing ExxonMobil. The episode left Gensler facing fierce scrutiny from his former champions, and Wall Street reformers are now trying to keep pressure on the SEC chair.
“He had a tremendous reputation coming out of his time [in the Obama administration] for a willingness to pick big fights,” said Revolving Door Project executive director Jeff Hauser, who has been calling for the PCAOB leadership’s ouster. “The question is, is he still that Gary Gensler?”
Gensler said in a statement Friday that the PCAOB “has an opportunity to live up to Congress’s vision.”
“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,” Gensler said.
The PCAOB has faced a series of scandals since its launch that have called into question its ability to police conflicts of interests in corporate audits.
William Webster, the first chair that the SEC appointed to lead the PCAOB, resigned after just a few weeks on the job because of revelations that he served on the board of a company accused of accounting fraud. In 2018, prosecutors charged former PCAOB employees with leaking confidential information on inspection plans to KPMG, one of the “Big Four” accounting firms.
A 2019 report from the Project on Government Oversight found that over 16 years the PCAOB brought only 18 enforcement cases involving 21 audits against the four leading accounting firms, even though it cited 808 instances where the companies issued defective audits.
In 2017 as the KPMG leak scandal began to unfold, the SEC declined to reappoint the PCAOB’s existing board members and replaced them with five new leaders, including Duhnke, who as chair secured one of the most coveted jobs in Washington with a salary of $670,000.
In the eyes of Warren and Sanders, the SEC’s move to clean house in the Trump era did nothing to strengthen the PCAOB’s oversight of the finance industry.
In a letter to Gensler on May 25, the lawmakers said the new board was populated with “partisan cronies with a deregulatory agenda and little relevant experience.” They said the PCAOB under Duhnke moved to weaken audit standards and that enforcement actions plummeted. Duhnke himself has faced internal complaints about his conduct and a wrongful termination lawsuit.
Before news broke of Duhnke’s firing, PCAOB officials defended their track record in recent years. Duhnke said that preliminary inspection results for the largest U.S. audit firms in 2020 “show the greatest improvement in audit quality in the past decade.” PCAOB spokesperson Jackie Cottrell said the board was allocating substantial and increasing resources to enforcement priorities, with an emphasis on cases involving significant audit failures. Cottrell also said that the termination lawsuit claims were “baseless.”
But progressives warned it was an urgent priority the SEC to revamp the PCAOB as investors pile in to a surging stock market and a rush of private firms try to take advantage of the boom by going public through special-purpose acquisition companies. They also see the PCAOB as key to supporting a likely push by the SEC to force public companies to disclose their contributions and exposure to climate change.
The demand to start fresh with the PCAOB board presents a tough choice for Gensler, who declined to comment for this story. Some government watchdogs are warning that removing the entire board may make matters worse.
“There’s no room for politics on an audit board,” said Project on Government Oversight policy analyst Tim Stretton. “Starting fresh, every four or eight years with a new administration, would inherently make this board partisan.”
Business groups are also warning the SEC against removing the PCAOB board.
“The bipartisan Sarbanes-Oxley legislation established the PCAOB in such a manner to keep politics out of financial reporting,” said Tom Quaadman, executive vice president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness. “Firing the board would be a giant leap backwards and endanger audit quality.”