Regulatory Personhood: The Elixir for Redundancy between the SEC and the PCAOB

36 Pages Posted: 26 Aug 2022 Last revised: 31 Oct 2022

Date Written: October 30, 2022

Abstract

REGULATORY PERSONHOOD: THE ELIXIR FOR REDUNDANCY BETWEEN THE SEC
AND THE PCAOB

Sarah J. Williams*

The Public Company Accounting Oversight Board (“PCAOB” or “Board”) is a quasi-governmental regulatory agency created by Congress over twenty years ago in response to revelations of widespread financial fraud at economically significant public companies, including Enron and WorldCom (which rate among the largest bankruptcies in U.S. history). These accounting scandals revealed, among other ills, abdication of gatekeeping responsibility by accounting firms entrusted to audit the financial statements of publicly held companies. Legislative intercession, in the form of the Sarbanes-Oxley Act of 2002, created the PCAOB to improve the quality of these audits. Since its formation, however, the agency has experienced significant challenges. Litigants have challenged its constitutionality, and the Trump administration challenged its very existence. Those challenges dissipated, but the utility of the agency continues to be publicly questioned. Representative Bill Huizenga introduced a bill in October 2021 to amend the Sarbanes-Oxley Act to transfer the PCAOB’s responsibilities to the U.S. Securities and Exchange Commission (“SEC”).

Proposals to eradicate the Board expressed vague concerns about the redundancy of its responsibilities with those of the SEC, and alleged resultant monetary waste. Responses to these proposals reflected similarly amorphous assertions regarding the PCAOB’s efficacy, either in totality or with respect to specific areas of its oversight responsibilities. The author previously evaluated concerns about the efficacy of the Board from the perspective of regulatory verifiability - the process used to authorize accounting firms to audit public companies. This Article continues to explore the value of the PCAOB as a regulator by examining its concurrent enforcement authority with SEC.

This Article provides background on allocation of enforcement authority of public company auditors, then examines normative elements of, and challenges lurking in, systems involving overlapping regulatory authority. The Article theorizes that the SEC-PCAOB enforcement amalgamation works well due to the SEC’s proprietary focus on misconduct by public company management and related gatekeepers who facilitate such wrongdoing. The Article analyzes SEC enforcement matters since the Board’s operationalization, and identifies a pattern evidencing a complementary, not redundant, system of shared enforcement. The Article attributes the SEC behavior to regulatory personhood, which is neutralizing risks of wasteful and contentious redundancy that might otherwise arise. Finally, the Article warns that despite the positive impact of regulatory personhood on emulsion in the public auditor enforcement regime, the imbrication of the SEC and PCAOB creates dissonances that should be addressed to strengthen the ability of enforcement to serve as an effective deterrent. Given the shared jurisdiction of the two agencies, the PCAOB should adopt rules for the automatic deregistration of auditors barred from public company practice by the SEC. Further, SEC enforcement actions against auditors should be referenced on the PCAOB’s website depicting the disciplinary histories of these vital market participants.

Keywords: SEC, PCAOB, enforcement, auditing, accounting, securities regulation, securities and exchange commission, public company accounting, accountant, auditor

Suggested Citation

Williams, Sarah, Regulatory Personhood: The Elixir for Redundancy between the SEC and the PCAOB (October 30, 2022). St. John's Law Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4173205 or http://dx.doi.org/10.2139/ssrn.4173205

Sarah Williams (Contact Author)

Penn State Dickinson Law ( email )

150 S. College Street
Carlisle, PA 17013
United States

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