The PCAOB House-Cleaning and You

I’m all for a thorough spring cleaning, but this is next-level: the Securities and Exchange Commission fired the head of the Public Company Accounting Oversight Board on Friday, and told the remaining three board members that they’ll be gone too as soon as the SEC finds suitable replacements. 

SEC commissioner Gary Gensler announced the news late Friday afternoon. The target of his broom job was William Duhnke, chair of the PCAOB since January 2018 and bête noire of liberals in Washington who had complained — correctly — that Duhnke had been weakening the audit industry regulator since the day he arrived. 

For now, PCAOB board member Duane DesPartes will act as interim chairman. But Gensler also announced Friday that the agency will be soliciting nominations to replace the entire five-member board as soon as possible. The board had been operating with only four members since January when former member Robert Brown quit, shortly after blasting Duhnke’s plans for the PCAOB as “a tragic mistake.”

What does all this mean for corporate audit and compliance professionals? Lots. So let’s start unpacking those implications. 


First is the matter of Duhnke’s dismissal itself. At best, one could describe his tenure at the PCAOB as tumultuous and controversial. During his time at the agency, enforcement actions against audit firms reached an all-time low. A report published earlier this year by Cornerstone Research found that PCAOB enforcement plummeted in 2020 — and then stayed at record-low levels all year, while other enforcement agencies such as the SEC returned to pre-pandemic levels by the end of 2020. 

Aside from tepid enforcement, Duhnke also presided over turmoil within the PCAOB and various stakeholder groups. The agency disbanded its Investor Advisory Group and Standing Advisory Group, which prompted some members of the Investor Advisory Group to write a letter to Gensler earlier this year calling for reform, including Duhnke’s removal. He also led an overhaul of the PCAOB’s standard-setting agenda, strategic plan, and audit firm inspection process, all in step with the deregulatory drift of the Trump Administration. 

Were those moves legal? Yes. They were also imperious, self-righteous, and alienating. That has a habit of catching up to a person, both in Washington and in life. 

Then there’s the wrongful termination lawsuit filed in April by the PCAOB’s former chief risk officer, Sue Lee. She claims Duhnke “perpetrated a racist and xenophobic campaign” against Lee because of her Chinese heritage, and that during the pandemic Duhnke repeatedly used phrases such as “kung flu” and “Chinese flu” in her presence. Duhnke also once saw a Chinese-langague periodical in Lee’s office, she claims, and asked “whether some Chinese national snuck Chinese propaganda into the office.” 

Duhnke also noticed a picture on Lee’s desk of her standing with Sen. Elizabeth Warren, the suit says, and you can imagine how that went over. The suit is peppered with other claims that Duhnke wanted to purge Democratic-leaning employees from the agency in favor of Trump loyalists. 

So that’s Duhnke and his tenure at the PCAOB. Good riddance to it.

What PCAOB Sweep Means for Audit Profession

In the immediate term, this means little. But once the SEC replaces the full PCAOB board (within a few months), presumably that will mean an audit regulator moving more in step with Gensler’s agenda. 

For example, we can expect to see the new PCAOB climb aboard the ESG disclosure train. Clearly the SEC is going to adopt a rule sometime soon requiring enhanced disclosures of climate change, diversity, and other ESG issues from publicly traded companies. A crucial subsequent question will be whether, and how, somebody audits all that stuff to assure its accuracy. That’s where a Gensler-leaning PCAOB enters the picture. 

The audit industry has already been talking up the idea of audited ESG disclosures — which should surprise nobody, because it means more billable hours for them. Right now, however, the audit standards for such material are rough frameworks published by the AICPA and the Center for Audit Quality. For ESG reporting to be mature and robust, the PCAOB will need to develop auditing standards eventually. 

Audit firms themselves might also brace for more vigorous inspections and enforcement actions. That stronger stance will hit internal auditors and corporate controllers indirectly, as your audit firms give you a harder time on certain issues so they can avoid a harder time from PCAOB inspectors themselves. To a certain extent, that indirect pressure on your internal controls has always been true; it’s just likely to be more true with a re-invigorated PCAOB. 

We could also see the PCAOB revisit its stance on data analytics and cybersecurity. Just weeks ago the agency published an alert saying it saw no need for updated auditing standards to address the use of data analytics in the audit. That struck me as an odd punt on an important issue. 

As to cybersecurity — well, in October 2019, former SEC chairman Jay Clayton replaced the only cybersecurity expert on the PCAOB board, Kathleen Hamm, with White House aide and Trump loyalist Rebekah Gorshorn Jurata. That tells you something about the former leadership’s concerns and priorities, and the need for change. (If I were in charge, I’d bring back Hamm and Robert Brown to the reconstructed PCAOB board.)

What This Means for the Compliance Profession

Rest easy, corporate ethics and compliance officers! There’s an implication for you to consider here too. 



This is the second time in Gensler’s first few weeks as SEC chairman where he’s taken an action that pleased both liberal Democrats on Capitol Hill and the progressive activists around Washington who work closely with those liberal Democrats. That tells you something about the agenda that Gensler might pursue — and that agenda will be much more expansive than SOX 404 audits and who runs the PCAOB. 

The first incident was Gensler hiring long-time corporate lawyer Alex Oh as director of the Division of Enforcement. That move actually didn’t please liberals like Sens. Elizabeth Warren and Bernie Sanders; they were incensed, and progressive groups called on Gensler to reverse course. 

Less than a week later, Oh quit the job. Supposedly she quit because she ran afoul of proper lawyer conduct in a case involving her client, Exxon Mobil; although I’m not entirely sure I believe that reasoning. Regardless, progressives got their way: an enforcement director they saw as too cozy with corporate interests was no longer in the job.

Now we have Gensler again giving Warren, Sanders, and progressive activists what they wanted: a clean sweep at the PCAOB. 



I’m not sure it’s correct to say Gensler is beholden to Warren — although as a liberal lioness and member of the Senate Banking Committee, she can cause much more serious political headaches for Gensler than Republicans in the minority ever could. I suspect it’s more accurate to say Gensler listens to what Warren and her fellow travelers are saying, and understands that it’s in his interests to anticipate their policy demands. (Gensler has been a regulatory agency chairman before, let’s remember; he’s smart, and he knows how the job works.)

So we here in the compliance world should watch how Gensler tries to align his SEC agenda with the more liberal wing of the party. That’s likely to translate into substantial action on climate change and diversity disclosures; and more attention to SPACs that could screw over retail investors; and more accountability for individual executives accused of wrongdoing; and a bigger appetite for use of monetary penalties in corporate enforcement actions

Yes, Gensler was probably going to do all of that anyway. Friday’s actions just underline the point that much more. Plan accordingly.

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