Legislation moving through the House of Representatives would fold the Public Company Accounting Oversight Board (PCAOB) into the Securities and Exchange Commission (SEC).
The bill provides no funding for the operations of the PCAOB once folded into the SEC – thus effectively putting the PCAOB out of business.
Last week a group of former SEC officials, PCAOB advisory committee members, and former auditors – wrote to Congressional leaders urging defeat of the legislation.
“If adopted, the bill would have a devastating impact on the accuracy and reliability of financial reporting upon which investor protection and the health and integrity of our financial markets rely,” they wrote.
“This is not a theoretical concern. Twenty-five years ago, a wave of accounting scandals at companies large and small culminated in the bankruptcies of Enron and WorldCom, rocking the financial markets, destroying tens of thousands of jobs, and decimating the retirement savings of millions of Americans.”
“Recognizing that weak auditing standards, a lack of auditor independence, and lax, underfunded oversight of audit firms were key root causes of the crisis, Congress acted on an overwhelmingly bipartisan basis to enact the Sarbanes-Oxley Act.”
“The bill included as its centerpiece the establishment of the PCAOB, an independent board, staffed by subject matter experts, to set audit, independence, and quality control standards, register audit firms, inspect audits of public companies, and bring enforcement actions for violations.”
“While many of us would agree there is room for improvement in the operations of the PCAOB, it will not be achieved through this means. On the contrary, this bill would move in the other direction, weakening auditor oversight and undermining investor protection.”
“This attack on audit quality would occur at a time when investor-owned public companies are paying in excess of $17 billion each year for audits of their financial statements. Bill sponsors are proposing this radical step without any apparent consideration of the potential impact on auditor oversight, market integrity, investor protection, or capital formation.”
One of the signers of the letter is Lynn Turner, a former chief accountant at the SEC.
“The House Financial Services Committee approved it last week,” Turner told Corporate Crime Reporter in an interview last week. “I heard that there is an expectation that this and other legislation will be combined into the House Budget reconciliation bill and adopted at the end of May or the first week of June.”
“The Democrats in the Senate are likely to go to the Parliamentarian and seek a ruling that some of this legislation that gets put into the so-called Big Beautiful Bill is not relevant to the budget and therefore cannot be included in the Big Beautiful Bill.”
“The question then becomes – does the parliamentarian want to keep her job or not? If you are in one of these senior roles in DC today, the question is – are you going to give them the answer they want, or are you going to give them what you think is the right answer? If you give them an answer and they don’t like it, there is a good chance you are going to be unemployed within 24 hours.”
Will the bill go through?
“If I were betting on this, I would bet that it will go through. I hope it won’t.”
There is growing opposition from you and other former SEC people, from Better Markets, from the Consumer Federal of America –
“And from AARP. A lot of elderly people have a tremendous amount of money in the market. And those people are likely to get hit with losses sometime in the future as a result of this bill.”
“In this profession, we have a track record that shows the quality of our work is not what it should be. A lot of the time it’s because people just were not told the truth. So every twenty or thirty years, it catches up with the stock market. And companies fail. And when you have a few of those companies fail together, as we saw with those handful of banks a couple of years back, the markets tumble and people lose money. And that’s exactly what will happen again. It’s not a matter of if it will happen. It’s a matter of when it will happen.”
“History is perfect on this one. It always happens.”
If it’s going to happen no matter what, why keep the PCAOB?
“What you hope is that you get an effective PCAOB so that it doesn’t happen,” Turner said.
How and why was the PCAOB created?
“In the mid-1970s to early 1980s, there were a number of high profile companies in the United States that turned out to be engaged in fraud,” Turner said. “Some of them were making corrupt payments in the forms of bribes to government officials to get government favors or to get government contracts.”
“As a result, Congress held quite a few hearings, both in the Senate and House. Since these audits of these firms were done by these big private companies, Congress decided we needed a public overseer of those firms. And they introduced legislation back around 1978 that would have created public accounting oversight for them.”
“In response, the private firms agreed to make some reforms. They were probably more baby steps than anything, but they agreed to make the reforms. They were the Big Eight at the time. They agreed that they would inspect one another’s audits and issue a report as to what they found in terms of the quality of each other’s audits.”
“They referred to it as the peer review process. In essence, they were each reporting on one another. And it turned out to be a process much like in grade school, where the students agree that no one’s going to tell on one another and get one another in trouble. And so it was a flawed process almost from the beginning.”
“That was in place from the late 1970s to 2002, when the PCAOB concept was again introduced in Congress, then passed this time. But during that entire time frame, not one of the firms had issued any type of qualified report on one another’s audits. They were all glowing reports that each firm was doing their audits in accordance with the standards – when in fact they had not been adhering to the standards.”
“And then came 2002 with another host of financial fraud cases with names like Enron and Worldcom and Tyco and HealthSouth – quite a few of them. As a result of those, Congress then pulled out that old legislation from the late 1970s. They held many hearings on it and reintroduced and passed legislation. Of the 435 members in the House, all but three voted for it. And in the Senate, the vote was 99 to zero for it.”
“So it was adopted overwhelmingly, and it created this Public Company Accounting Oversight Board that had been debated for thirty years and then finally it was put in place.”
Was there any public interest group in Washington watchdogging the accounting industry?
“As part of the reform in the late 1970s, there was a public interest type organization – although it was funded by the profession. It was called the Public Oversight Board.”
“That was in place from 1977 to January 2002, when the then chairman of the SEC in essence said – we are no longer going to use you and put them out of work. They had done some good things, but in the end, back in 2000, the accounting firms and their trade industry group – the American Institute of Certified Public Accountants – withdrew their funding for the Public Oversight Board after the board had decided to do a truly independent investigation as to whether or not the firms were really independent.”
“And the firms came out and said – we refuse to pay for that, so we’re withholding all your funding, which, in essence, just cut them off at the knees. And it told you all you needed to know. While they had good intent and they were good people, that mechanism of funding just wasn’t ever going to be effective.”
“Of course, up to that point in time, we knew the firms weren’t being transparent at all with respect to the quality of their audits. They always touted that high quality, but at the end of the day, all the corporate scandals highlighted just how poor the quality of the audits were. And that was not only in the US, but around the globe.”
The profession wants to push this legislation through Congress that would merge the PCAOB with the SEC?
“The four big firms are four of the largest private companies in the world with billions upon billions in revenues, hundreds of thousands of employees around the globe. And they’re also among the top donors during the political elections. As a result, they have tremendous influence and power as a result of the money they dole out in Washington, D.C.”
“If they wanted the PCAOB to stay in place, which I don’t think they do, then the PCAOB would stay in place.”
What’s their problem with the PCAOB? It’s a weak regulator and it gives them some cover.
“From the firms’ perspective, they would prefer that everyone on the board be people that they can influence. And they want to influence what the actual work of the Board is and what the board says in terms of quality of inspections.”
“Now, the firms are upset that the PCAOB has inspected them and found very significant problems. The firms try to say all those are not big deals. You know, they say the PCAOB is nickel and diming them to death. But that’s not true.”
“I’ve actually seen some of them in some of the work I’ve done, I’ve seen where the inspections have been exceptionally well done, and found some very significant problems that the auditor on their own had not told the public about. And when that happens, the firms get upset that stories come out and say that the auditor, in a particular circumstance, had not done a good audit. And they really dislike that.”
Why would merging the functions of the PCAOB into the SEC be problematic?
“There are a host of reasons. For starters, in the legislation that Congress is considering right now, that bill doesn’t contain one dime of funding for the PCAOB once it’s merged into the SEC. Without additional funding, none of the obligations that the SEC will take over from the PCAOB will be carried out because you have no money to carry them out with.”
“The PCAOB, as it’s currently structured, charges a fee to public companies and the big auditing firms to pay for the work of the PCAOB. It’s not paid for by the taxpayers. It’s paid for by the public companies and the auditing firms.”
The legislation would effectively zero out the PCAOB?
“Yes. Unless they come up with funding. The employees over at the PCAOB get private sector wages.”
It’s not a government agency?
“No.”
The employees get their check from what agency?
“The PCAOB – which is funded by the companies.”
How many employees are at the PCAOB?
“It was about 500. It may be around 800 now.”
Who appoints the board members of the PCAOB?
“The five commissioners of the SEC. And that’s the number one problem with the PCAOB – the people the SEC has selected. From the very first board, there have been serious issues as to how the Commission has gone about selecting those people.”
“One board member was previously on the board of a public company. He had gotten into a disagreement with the auditors and he fired the auditors. He had been selected and voted on by the SEC. And when the New York Times did an article about his background, then Senator John McCain, Senator Paul Sarbanes called for the SEC chairman to step down and called for another chairman to be picked for the PCAOB. The then chair of the SEC did have to step down. And they selected another chairman to be the first chairman of the PCAOB. But they have had issues like that throughout the years.”
How would you rate the current board?
“I was a college professor for a while. And I graded students based upon how they performed.”
“The current board on enforcement has been pretty good. It has certainly ramped up enforcement, ramped up fines and penalties, well above where they were in the past. In the past, they were negligible.”
“The Sarbanes Oxley Act of 2002 created the PCAOB. And it gave the PCAOB great leeway in the fines they could assess. And up until this current board, most of the prior boards assessed small or negligible fines.”
“But this board has stepped it up on enforcement. So on enforcement, I would give this board a B or a B+. By Washington, D.C. standards, I would say it has done a good job.”
“When it comes to inspections, they have been more transparent in terms of what they have inspected. But they are still somewhat a black hole. For example, they refuse to give the names of the companies they have inspected, which is probably one of the most important pieces of information that the PCAOB has. It should be made available to investors, but instead they hide it.”
Do they do random inspections?
“Yes. They will do some random inspections. They will do some inspections where they think there is greater risk. In determining which companies to inspect, they look at the publicly available information. They might see risky behavior. All too often, they’ll just look at two lines in the financial statement and not look at the rest of the audit. So you will get an incomplete picture. And in some cases, they don’t inspect the risky areas. And in some cases, they don’t inspect the risky company.”
Just to be clear, the PCAOB inspects the audits?
“Yes. And their enforcement actions are against the private auditing companies, not against the public companies.”
Are the big four behind the push to zero out the PCAOB?
“I don’t think initially they were driving it. They weren’t happy. But the first time this showed up was toward the end of the first Trump term. There was a paper developed in the Treasury Department at that point. That paper called for the PCAOB to be merged into the SEC. Nothing happened with it. But then when the infamous Project 2025 report came out, that paper had incorporated into it this notion of moving the PCAOB into the SEC.”
“And then legislation was introduced in 2021 by Congressman Bill Huizinga (R-Michigan). He introduced legislation that, if adopted, would move the PCAOB into the SEC. That legislation didn’t go anywhere.”
“It never went anywhere until the change of the control of Congress in 2024. Now, legislation has been introduced in the House Financial Services Committee by its chair. That legislation is about a page and a half. It moves the PCAOB into the SEC without any funding whatsoever. And the legislation is extremely ambiguous as to exactly what the SEC is supposed to do or not do.”
“House Speaker Mike Johnson has hired a former PCAOB board member by the name of William Duhnke. Duhnke was at the PCAOB from about the end of 2017 to when Trump stepped down and left.”
“When a new SEC chair came in, they fired Duhnke. He had done a terrible job. He got fired and went to work for one of the largest lobbying firms in the country. He was with them until the last election. Then he became chief of staff for Mike Johnson.”
“He would have a role in this legislation.”
[For the complete q/a format Interview with Lynn Turner, see 39 Corporate Crime Reporter 19(12), May 12, 2025, print edition only.]