U.S. Representative Scott Garrett (Republican, New Jersey) was first elected to Congress in 2002, months after the passage of the Sarbanes-Oxley Act. A couple of weeks ago, he introduced legislation that would amend S-OX to require that PCAOB* enforcement actions against auditors be made public. This is a very positive development, but the way in which it came about is actually pretty disgusting.
In fact, much of the accounting provisions in S-Ox were tweaked to be palatable to the Big Four. Based on an email from Lynn Turner, former SEC Chief Accountant and a recent Bloomberg article, this is the background leading up to the recently proposed legislation to amend S-Ox.**
Prior to 1989, the SEC enforcement proceedings against auditors took place behind closed doors. The SEC changed its rules to make the proceedings public because the firms would drag out proceedings for years. In the meantime, investors could be left in the dark with respect to a firm or auditor who had engaged in unprofessional conduct. In 2002, as a result of the numerous corporate scandals and highly questionable audits, Congress introduced and debated what would become S-Ox. Early drafts of the bill, which ultimately established the PCAOB, would have made their enforcement proceedings public just like those by the SEC.
Eventually, Senator Paul Sarbanes (Democrat from Maryland) separately called Turner and Harvey Goldschmid (former SEC Commissioner, now deceased). Senator Sarbanes told them that he was negotiating with Senator Mike Enzi (Republican, Wyoming). Senator Enzi is known to have received significant support from the Big Four and was leading the negotiations on their behalf. Senator Sarbanes hoped that he could gain bi-partisan support for his legislation, and Enzi had told him, that if Sarbanes would accept certain changes, he could pick up 4-6 Republican votes.
One of the changes the Enzi demanded on behalf of the Big Four in exchange for Republican votes was that PCAOB enforcement proceedings would remain private and confidential until all final appeals, including appeals to the SEC, had been exhausted. Sarbanes in his phone calls asked Turner and Goldschmid if they agreed with such a change. Both of responded with a strong “no.” They had been at the SEC and observed first hand the difficulties with bringing enforcement actions against auditors and auditing firms, especially the large international ones. In 1998, they had led the efforts to rewrite the SEC’s rules of practice (Rule 102(e)) for determining when an auditor had engaged in unprofessional conduct. They knew first hand how such conduct could be so detrimental not only to investors in a company, but to the broader capital markets and confidence in them. Enron, a major part of the impetus for S-OX was in essence Exhibit A for auditor misconduct.
But over Turner and Goldschmid’s objections, Senator Sarbanes acceded to the demands of the Republicans backed by the Big Four. And when the Senate Banking Committee vote on the legislation, he received six Republican votes. Within two weeks, Worldcom imploded and investors in the capital markets continued to see trillions in value evaporate before their eyes. But the changes made in the Senate Banking Committee were agreed to and were not to be reversed on the debate on the Senate floor.
As a result, the PCAOB today is unable to make public its enforcement proceedings public, despite the fact if the SEC brings an enforcement action, it can make it public as it has done so for the past 27 years.
Ultimately in 2010, in a letter to Congress the PCAOB stated that the “nonpublic nature of Board disciplinary proceedings has serious adverse consequences for the investing public, audit committees, the auditing profession, the Board and other interested parties, such as Congress.” Subsequently, legislation was introduced in the Senate in 2011 to make PCAOB investigations public. However, both the senate and house failed to act on it.
Here’s the Creepy Part
According to the Bloomberg article, Representative Garrett did not support the 2011 legislation. Moreover, his prior actions also strongly suggest vehement opposition to even the idea of a PCAOB. Barney Frank (Democrat, Massachusetts and chair of the House Committee on Financial Services) said that Garrett could have been a co-sponsor. The legislation now being sponsored by Garrett is virtually identical to the 2011 legislation.
So, what happened? Perhaps this is why Garrett changed his tune:
“[Garrett has] regularly been on the receiving end of generous donations from the … Big Four…. That relationship fractured in July 2015 when Politico reported that Garrett told fellow Republican lawmakers he wouldn’t give money to the party’s congressional campaign arm because it was supporting openly gay candidates….
Shortly after the news broke, the Big Four canceled a fundraiser they had scheduled for Garrett. The firms haven’t donated to him since.”
The Bloomberg article also reports that Garrett and his office claim to have no memory of his animus toward the PCAOB, or his opposition to the 2011 proposed legislation. Whaddya know.
* * * * * *
I guess there is a lesson here for students of accounting — perhaps as a cautionary tale — but I’m not sure what it is. From the standpoint of the Accounting Establishment is it that ‘no good deed goes unpunished’? Or maybe it’s ‘you reap what you sow.’
For the rest of is, maybe it’s as simple as “follow the money.”
Or is it that we are doomed if we keep re-electing professional shills like Scott Garrett?
*I am a member of the Standing Advisory Group of the PCAOB. All of the views expressed in this blog post are my own.
**Lynn Turner has granted me permission to paraphrase from his email.