The Effectiveness of the PCAOB’s Predecessor Was Hampered by the Absence of a Privilege Protecting Its Inspectionsĭuring the hearings that led Congress to pass SOX, several prominent witnesses criticized the audit regulator at the time (the predecessor to the PCAOB) as “ineffective.” One reason for this ineffectiveness, according to the regulator itself, was its inability to shield its oversight process from private litigants who wanted information for lawsuits against accounting firms. The SOX Privilege Provides Confidentiality That Is Critical to the PCAOB’s Successful Inspection RegimeĪ.
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Finally, Part IV suggests that, in order to resolve these issues, the SEC should adopt a formal policy relating to PCAOB materials that acknowledges the full force of the SOX privilege and establishes internal procedures for working with materials covered by the privilege. Part III then shows that Goldstone creates practical problems for the PCAOB, for the auditing profession it oversees, and paradoxically, for the SEC itself. Part III explains how Goldstone undermines the SOX privilege and, in turn, threatens to weaken the entire PCAOB oversight regime. Part I briefly outlines why the privilege is critical to the success of the PCAOB’s inspection regime, and Part II sketches its statutory basis. This article explains how Goldstone misreads SOX. In Goldstone, the United States District Court for the District of New Mexico concluded that when the SEC brings enforcement actions, it can disclose privileged information received from the PCAOB. 2014), the first judicial opinion on the issue. This resistance to the statutory language is apparent in Securities & Exchange Commission v. They find it counterintuitive-and therefore hard to accept-that a statute would restrict the SEC’s use of information it obtains from the PCAOB. The problem is that some private litigants, some SEC staff, and at least one court do not read this simple mandate to mean what it says. SOX makes this condition quite plain, stating that regulators who accept privileged information from the PCAOB “shall maintain such information as confidential and privileged.” SOX permits this sharing, but only on the express condition that the receiving regulator must preserve the SOX privilege. The threat to this privilege arises when the PCAOB shares information with other regulators, including the Securities and Exchange Commission (“SEC” or the “Commission”). Recent developments, however, threaten to undermine one of the critical foundations of the PCAOB oversight program: the “SOX privilege.” This statutory privilege ensures that the details of PCAOB inspections and investigations remain confidential. According to knowledgeable commentators, these inspections have significantly improved the audits of public-company financial statements. The PCAOB soon began inspecting accounting firms. In 2002, a wave of high-profile accounting scandals led Congress to pass the Sarbanes-Oxley Act-“SOX.” In SOX, Congress created the Public Company Accounting Oversight Board-the “PCAOB”-and charged it to oversee the auditors of public companies. Volume 2, Issue 1 (2012) – Sovereign Debt Crisis.Volume 2, Issue 2 (2012) – Complexity of Financial Regulation.Volume 3, Issue 1 (2013) – Shareholder Activism.Volume 3, Issue 2 (2013) – Corporate Political Spending.Volume 4, Issue 2 (2014) – Benefit Corporations.
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