PCAOB wins case challenging constitutionality
- Key insight: Learn the reason two auditors sued the PCAOB over its disciplinary proceedings.
- What’s at stake: The constitutionality of PCAOB’s disciplinary proceedings has been criticized by civil liberties groups.
- Expert quote: “Private citizens have no business behaving like government prosecutors.” — Mark Chenoweth, NCLA
The Public Company Accounting Oversight Board won a consolidated John Doe case that claimed the PCAOB violated the rights of two auditors.
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In the two cases, plaintiffs Doe 1 and Doe 2 worked at different firms and have no relationship with one another. After an investigation in December 2022, the PCAOB instituted disciplinary proceedings against Doe 1, alleging that the anonymous auditor improperly modified audit documents, misled inspectors about those documents and failed to cooperate with the investigation. In the other case, after an investigation in September 2023, the PCAOB instituted disciplinary proceedings against Doe 2, alleging that the second unidentified auditor failed to adequately evaluate significant accounting estimates during a 2018 audit.
The PCAOB contends that each plaintiff violated several rules and auditing and professional standards, while both plaintiffs denied the allegations. The plaintiffs argued the PCAOB’s disciplinary proceedings violate the Seventh Amendment right to a jury trial, the Due Process Clause of the Fifth Amendment, the Appointments and Vesting Clauses of Article II, the nondelegation doctrine, and the Taxing Clause of Article I.
The U.S. District Court for the District of Columbia denied the plaintiff’s motion and ruled in favor of the PCAOB.
“We appreciate the Court’s decision, and the PCAOB Enforcement Division remains committed to prosecuting violations that present risks to investors and audit integrity,” said PCAOB director of enforcement George Demos in a statement last week.
The PCAOB was created in 2002 by the Sarbanes-Oxley Act to oversee the audits of public companies. Though it is organized as a nonprofit, it is often treated as “part of the government” for constitutional purposes. It is overseen by the Securities and Exchange Commission, and, subject to that oversight, the PCAOB has broad enforcement authority. It may inspect registered accounting firms, investigate possible violations of regulations or professional standards, and institute disciplinary proceedings against registered firms and associated persons.
Every accounting firm that audits public companies under the securities laws must register with the PCAOB, pay an annual fee, and comply with its rules and oversight. The Board’s Division of Enforcement and Investigations conducts investigations and prosecutes disciplinary proceedings.
The PCAOB has faced backlash over these processes, including from the New Civil Liberties Alliance, which has
“PCAOB disciplinary prosecutions resurrect the kind of lawless tribunals our Founders fought a revolution to escape,” Russ Ryan, one of the NCLA’s senior litigation counsel, said in a statement. “There’s no judge, no jury, no transparency and no accountability to any elected official, and yet the Board can inflict career-ending punishment and million-dollar fines.”
NCLA president Mark Chenoweth commented, “Private citizens have no business behaving like government prosecutors. PCAOB’s ersatz enforcement proceedings are devoid of due process of law, which requires supervision by real judges in real courts.”
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