Chairman’s Firing Is Latest Jolt at Troubled Financial Watchdog

For a Washington regulator that pretty much nobody has heard of, the Public Company Accounting Oversight Board is suddenly getting a lot of attention—and for all the wrong reasons. On Friday, the U.S. Securities and Exchange Commission, which oversees the board, fired chairman William Duhnke III. This came after several weeks of progressive activists, investor advocates, and Senators Elizabeth Warren and Bernie Sanders calling for a change of leadership. Despite its obscurity, the PCAOB has a vital role: policing the auditing firms that sign off on companies’ books. Ultimately, its job is to stop frauds like Enron and WorldCom.

Chairman’s Firing Is Latest Jolt at Troubled Financial Watchdog

Those corporate accounting scandals gave birth to the PCAOB, which early in its tenure adopted the motto “restoring confidence.” Since its creation by Congress in 2002, the watchdog, nicknamed Peek-a-Boo (a play on its initials), has struggled to live up to that goal. In almost two decades, the board has brought few big cases and made little headway on one of its important responsibilities, writing standards for auditors.

Although Duhnke is in the spotlight now, the PCAOB has a history of dysfunction that precedes him, under both Republican and Democratic administrations. Its first chairman, former FBI and CIA chief William Webster, quit before the organization even found office space, after it turned out he sat on the audit committee of a company under investigation for securities fraud. Years later, the board was rocked by a pair of scandals. One was quiet and hasn’t been previously reported: In 2016 a board member left after his affair with a staff member was discovered by an employee—who then tried to use the information to blackmail the PCAOB. A bigger bombshell came in 2018, when the U.S. Department of Justice unveiled charges against three former PCAOB employees who allegedly helped the Big Four accounting firm KPMG cheat on the watchdog’s inspections.

Duhnke was part of an effort to start over. A whole new five-member board slate including Duhnke as chairman was put forward by Trump-appointed SEC head Jay Clayton in late 2017—and unanimously supported, including by the one Democrat on the commission at the time. The SEC told the new leaders to get the place on track, an assignment that Duhnke says he’s embraced. But his critics contend that he followed the Trump administration’s deregulatory playbook, cutting the PCAOB’s inspection budget while enforcement cases fell by about half. And he was dogged by internal strife and complaints about his management. “Yes, the PCAOB needed to get cleaned up,” says Lynn Turner, a former SEC chief accountant who helped draft the law that set up the board. “But it’s not getting cleaned up, it’s getting worse.’’

The PCAOB is set up as a nonprofit corporation. It’s funded mainly by a special fee public companies have to pay, and employs about 800 people. The chairman makes $673,000 a year and the other four board members earn $547,000—high salaries that are supposed to attract leaders with the technical skills to keep an eye on some of the world’s most sophisticated accountants. “The PCAOB is the cop of the cops,” says Jeff Hauser, who runs the Revolving Door Project and wrote a letter with 10 other liberal groups on May 13 calling for new SEC Chairman Gary Gensler to fire the entire board. A similar plea to appoint a new chairman was sent in April by Turner and 10 others who’d served on a PCAOB advisory committee.

Chairman’s Firing Is Latest Jolt at Troubled Financial Watchdog

In a May 25 letter asking Gensler to act, Warren and Sanders note that the PCAOB has long been “a troubled agency,” but contend that under President Donald Trump things got even worse. They said it’s been led by “partisan cronies with a deregulatory agenda and little relevant experience.” The senators and other critics said the need for change was urgent. Accounting scandals like the one embroiling German company Wirecard AG have been cropping up in Europe, and many think companies in the U.S. will be next, especially if the stock market continues its torrid rise. Investors have been pouring money into complex products such as SPACs, or blank-check companies, where opaque accounting is the norm.

Duhnke is a Navy veteran who often rode his motorcycle to the office. Although he had no experience with accounting, he spent 20 years as a close aide to powerful Republican Senator Richard Shelby of Alabama. (By law, only two members of the board can be certified public accountants.) Duhnke’s critics complain that besides cutting the inspections budget, he did away with an outside investor advisory panel and took more than a year to fill top positions such as enforcement director. One hire that he did make promptly: a granddaughter of Senator Shelby, who had recently graduated from college and took an entry-level job at the organization.

Duhnke billed his work as a management turnaround. As he told Congress early last year, the PCAOB “lacked internal accountability, and its integrity had been compromised.” The organization’s recent past helped make his case. Exhibit A was the inspection scandal. The Justice Department case accused KPMG, which had been faring poorly on PCAOB inspections, of giving highly paid jobs to the regulators’ employees in exchange for confidential details about which audits would be reviewed by its inspectors. KPMG then used the information—referred to by one PCAOB employee as “the grocery list”—to make sure its work was shipshape before the PCAOB arrived for what was supposed to be a surprise inspection.

Four people involved in the scheme ended up pleading guilty, and two were convicted, though appeals are pending. KPMG paid a $50 million fine in 2019 to settle related civil charges brought by the SEC.

The other problem that preceded the 2017 revamp has never become public. Board member Jay Hanson resigned with no explanation on a Friday evening right before Christmas in 2016, two years before his term expired. Hanson had an intimate relationship with a subordinate, which then triggered the alleged blackmail plot, according to half a dozen people with knowledge of internal investigations into the matter, who didn’t want to be named discussing confidential information. Another employee had uncovered communications by the pair and then tried to use the information to personally profit. The SEC’s top leaders were especially upset, according to some of the people, because the PCAOB initially tried to deal with the situation without notifying them. Hanson didn’t return phone calls and emails requesting comment.

Duhnke’s moves to impose what he’s called “cultural changes’’ inside the PCAOB caused their own turmoil. He fired more than 20 senior officials. Duhnke’s defenders say that he has acted with unanimous support of the other board members on all the major personnel decisions. Getting consensus was a reason for slow hiring.

Duhnke also spent a lot of time pushing the PCAOB’s divisions to work together and have the group communicate more frequently with outside constituents such as audit committees and investors, his supporters say. He modernized the board’s website, hired the first head of information security, and started a risk assessment office. The overall budget, they say, hasn’t gone down since Duhnke took over.

“We made quite a few changes when the new board arrived, and those changes definitely rocked the boat,” Duhnke said before his removal. “My goal with each and every change is to leave the PCAOB in a much stronger place.” He added that the board’s preliminary 2020 inspection results of the largest audit firms show the greatest improvement in audit quality in the past decade.

Still, the PCAOB board itself hasn’t been immune from tension. At a meeting in October 2019, then-board member Jay Brown and Duhnke got into a heated argument sparked by a news leak. According to three people who were briefed on the dustup after it happened but asked to remain anonymous to discuss an internal squabble, Duhnke whizzed an empty soda can toward Brown. (He was near a trash can, which may have been the intended target.) Then, as Brown tried to leave, Duhnke physically blocked him from the door. Shaken up after the confrontation, Brown discussed with an SEC official the possibility of reporting Duhnke to the police.

Reached for comment, Brown said this description of events was “not correct” but said he wouldn’t respond further. According to some of the people, Brown spoke to SEC Chairman Clayton about the episode, prompting an investigation by the commission’s inspector general. Duhnke says the probe found no basis for the allegations, which he calls “absurd.”

Duhnke’s management also provoked complaints from rank-and-file workers. A 2019 whistleblower letter purporting to be from a group of current and former employees laid out the firing spree and described renovations where Duhnke ordered his office suite walled off from the rest of the staff. More recently, a wrongful termination suit filed in March by Chief Administrative Officer Sue Lee accused Duhnke of targeting Democratic workers and using anti-Chinese slurs in reference to the Covid-19 pandemic. Duhnke denied the allegations and filed a counterclaim, contending that Lee billed the board for personal travel and improperly expensed items, including a pair of AirPods. Lee, in her court response, said the AirPods were provided for work use and returned, and that all her travel was approved by the PCAOB.

The SEC’s firing of Duhnke on Friday afternoon was signed off on by a vote of the five-member commission, which has three Democrats and two Republicans. The SEC didn’t say how each commissioner voted, but the two Republican members issued a statement blasting the move. “We have serious concerns about the hasty and truncated decision-making process underlying this action,” wrote Hester Peirce and Elad Roisman. Democratic commissioner Allison Herren Lee is married to Brown, the former PCAOB board member. The SEC made Duane DesParte, a current member of the board, the acting PCAOB chairman. It also said it would seek candidates to fill all five seats on the board.
 
Read next: One Tech-Funded University Helped Shape FTC’s Hands-Off Approach

©2021 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.