The Public Company Accounting Oversight Board, a Washington regulator that almost no one has heard of, is suddenly gaining a lot of attention—and for all the wrong reasons. The Securities and Exchange Commission, which oversees the board, fired chairman William Duhnke III on Friday. This came after several weeks of calls for a leadership change from progressive activists, investor advocates, and Senators Elizabeth Warren and Bernie Sanders. Despite its obscurity, the PCAOB performs an important function: it polices the auditing firms that sign off on companies’ books. Its ultimate goal is to put an end to frauds like Enron and WorldCom.
Those corporate accounting scandals gave birth to the PCAOB, which adopted the motto “restoring confidence” early in its tenure. Since its establishment by Congress in 2002, the watchdog, dubbed Peek-a-Boo (a play on its initials), has struggled to meet that standard. In nearly two decades, the board has brought few major cases and made little progress on one of its most important responsibilities, writing auditing standards.
Although Duhnke is currently in the spotlight, the PCAOB has a history of dysfunction under both Republican and Democratic administrations. Its first chairman, former FBI and CIA Director William Webster, resigned before the organization even had an office, after it was discovered that he served on the audit committee of a company under investigation for securities fraud. A pair of scandals rocked the board years later. One was quiet and not previously reported: in 2016, a board member resigned after his affair with a staff member was discovered by an employee, who then attempted to blackmail the PCAOB with the information.
The PCAOB is a non-profit organization. It is primarily funded by a special fee levied on public companies and employs approximately 800 people. The chairman is paid $673,000 per year, and the other four board members are paid $547,000—high salaries designed to attract leaders with the technical skills needed to keep an eye on some of the world’s most sophisticated accountants. “The PCAOB is the cop of cops,” says Jeff Hauser, who runs the Revolving Door Project and signed a letter on May 13 with ten other liberal organizations urging new SEC Chairman Gary Gensler to fire the entire board.
Duhnke’s work was billed as a management turnaround. The PCAOB “lacked internal accountability, and its integrity had been compromised,” he told Congress early last year. His case was aided by the organization’s recent history. The inspection scandal was Exhibit A. In the Justice Department case, KPMG, which had been performing poorly on PCAOB inspections, was accused of giving highly paid jobs to regulators’ employees in exchange for confidential information about which audits would be reviewed by its inspectors. KPMG then used the information—dubbed “the grocery list” by one PCAOB employee—to ensure that its work was in order before the PCAOB arrived for what was supposed to be a surprise inspection.
Four people involved in the scheme pleaded guilty and two were convicted, though appeals are still pending. In 2019, KPMG agreed to pay a $50 million fine to settle related civil charges brought by the SEC.
The other issue that arose prior to the 2017 redesign was never made public. Jay Hanson, a board member, resigned without explanation on a Friday evening just before Christmas in 2016, two years before his term expired. According to a half-dozen people with knowledge of internal investigations into the matter who did not want to be named discussing confidential information, Hanson had an intimate relationship with a subordinate, which triggered the alleged blackmail plot. Another employee had discovered the pair’s communications and then attempted to profit from them. According to some sources, the SEC’s top executives were particularly irritated because the PCAOB initially attempted to deal with the situation without informing them. Hanson did not respond to phone calls or emails seeking comment.
According to his supporters, Duhnke also spent a significant amount of time pushing the PCAOB’s divisions to collaborate and have the group communicate more frequently with outside constituents such as audit committees and investors. He updated the board’s website, hired the first information security officer, and established a risk assessment office. The overall budget, they say, hasn’t gone down since Duhnke took over.