Are We Seeing Double? Regulatory Overlap Between the SEC and the PCAOB

The U.S. Securities and Exchange Commission (SEC) recently announced that it was initiating proceedings against a former audit partner at PricewaterhouseCoopers LLP for violating professional standards in reviewing the financial statements of Mattel, Inc. One might wonder why it is the SEC, and not the Public Company Accounting Oversight Board (PCAOB or Board), that is taking action against an accountant for failing to properly perform its audits of a public company’s financial statements. After all, the PCAOB was created by Congress after the financial scandals at Enron, World Com, and other public companies, to oversee public company auditors. The legal explanation is that the PCAOB is the designated regulator for these accountants, but the SEC’s authority is not disrupted – it may enforce federal securities laws as well as Board rules regarding these accountants. As a policy matter, the SEC’s continuing expenditure of resources on auditor regulation raises questions about the need for the PCAOB.

In 2020, the Trump administration questioned the efficacy of the PCAOB in submitting a budget proposal to Congress that contemplated merging the Board into the SEC as a cost-saving measure. That proposal was not adopted. In 2021, a bill was introduced in Congress to amend the Sarbanes-Oxley Act to transfer the PCAOB’s responsibilities to the SEC, again raising concern about the redundancy of the PCAOB’s functions. Most recently, an SEC commissioner opined that the PCAOB should be subsumed within the SEC, observing that the SEC continues to enforce laws and standards against public company auditors.

The overlapping authority of the PCAOB and the SEC is not unique in the world of regulation. The SEC shares regulatory responsibility with the CFTC, the various self-regulatory organizations it oversees, and others. Overlapping enforcement authority can be beneficial – it can stimulate healthy regulatory competition that results in thorough policing of regulated entities. Of course, it can also have deleterious effects, such as duplicative use of resources in addressing the same misconduct and adoption of contradictory policies.

My examination of enforcement actions brought by the SEC during its coexistence with the PCAOB sheds light on whether the overlapping enforcement authority wastes regulatory resources. This examination was narrowly constructed, focusing on final enforcement matters against public company auditors for misconduct in connection with the performance of an audit of the financial statements of an identified issuer. It also consolidated actions that were finalized seriatim against a firm and multiple accountants named as wrongdoers for misconduct arising from the same audit(s). Finally, the examination was limited to cases where the underlying conduct could have been addressed by both the SEC and the PCAOB. For this purpose, it excluded enforcement actions where the underlying audit predated the PCAOB’s operation, or the audit firm was not registered with the Board, and therefore the misconduct fell outside of its jurisdiction.

The survey identified 64 distinct matters where the SEC used its enforcement authority against public company auditors (or their associated accountants) where the Board also could have brought an action. However, the survey revealed only five instances in which the PCAOB also acted. This result suggests an allocation, rather than a duplication, of resources. The survey shows that in the vast majority of matters where the SEC acted against auditors, the auditor’s misconduct contributed to financial statement misconduct by the issuer or its management that the SEC was already addressing. A similar survey performed on PCAOB enforcement actions revealed no evidence that the PCAOB shares the SEC’s interest in focusing on auditor misconduct that contributes to financial misconduct at a public company. The Board’s enforcement actions cover a wide swath of misconduct. Some relate to violations of audit standards, and a sizable portion concerns lack of compliance with Board requirements to file reports, pay fees, and cooperate in investigations and inspections.

The SEC’s focus on cases against auditors that involve financial misconduct the SEC is also pursuing can be attributed to regulatory personhood. “Personhood” describes the condition of being an individual person. The theory of personhood, however, has its genesis in philosophy. It was applied by German philosopher George Hegel to describe human connectivity to intangible objects as a means of demonstrating free will. Property scholar Margaret Radin considered Hegel’s definition in her exploration of the regulation of private property rights. Unlike corporate personhood, which ascribes to corporations behaviors and rights typically attributed to humans, Radin’s work recognizes that inanimate objects can become an extension of one’s self, creating a protectable and exclusionary property interest in that object. Regulatory personhood recognizes that an agency’s enforcement priorities may create a proprietary boundary that neutralizes any turf wars between agencies with overlapping enforcement authority.

While regulatory personhood creates efficiencies between agencies with shared jurisdiction, the SEC-PCAOB relationship demonstrates that it can also create fissures in the regulatory scheme. Both the SEC and the PCAOB impose remedies on the same regulated industry, but information about those remedies is divvied up between the websites of the two agencies. As a result, a public company auditor barred from participating in public company audits by the SEC might nonetheless continue to appear on the PCAOB’s website as a registered firm, suggesting that the company is authorized to perform public company audits. Regulatory personhood may keep the two agencies from fighting over enforcement cases, but it does not yet extend to coordinating for the purpose of informing the public in an efficient way. In the spirit of cooperation and in furtherance of the public interest, the PCAOB should adopt rules automatically removing from its registration list any firm that is not eligible to audit a public company as the result of an SEC enforcement action. The Board should also include on its individual summary pages for each registered firm disciplinary actions taken by the SEC against such firm or its associated accountants.

This post comes to us from Assistant Professor Sarah J. Williams at Penn State Dickinson Law. It is based on her article, “Regulatory Personhood: The Elixir for Redundancy Between the SEC and the PCAOB,” forthcoming in  St. John’s Law Review and available here.

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