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‘Peekaboo Prosecution’ Turns 20

Russ Ryan
Senior Litigation Counsel

July 26, 2022

Imagine a dystopian world where Congress empowers a private corporation to secretly investigate and punish members of a particular profession — say, auditors. Think of a private version of the Securities and Exchange Commission (SEC), but with evergreen funding that never requires an appropriation from Congress and with lavishly compensated personnel who are exempt from laws designed to keep governmental regulators in check.

Imagine further that this private regulator’s investigative, prosecutorial and adjudicative activity is secretly performed by staff employees with no meaningful supervision by any government official appointed by the president.

Finally, imagine being secretly prosecuted by these nongovernmental enforcers. Your case is then secretly decided by a “hearing officer” who is a fellow company employee of the prosecutors. There is no jury and not even – as self-regulators like the Financial Industry Regulatory Authority (FINRA) routinely provide – a multi-member hearing panel that includes one or two of your industry peers.

Although your accusers likely spent several years amassing their case against you, you get only six months to prepare your defense, and you can’t take depositions or obtain other kinds of pre-hearing discovery that are routinely available in court proceedings and even SEC administrative proceedings.

You’re also denied access to prior decisions where others successfully defended themselves (one of the most critical defense tools since time immemorial), although your prosecutors and the hearing officer have unrestricted access to those same secret precedents.

If you lose, your appeal is decided by the executive officers of the corporation — the same ones who hand-picked the prosecutors and hearing officer and who launched the charges against you in the first place based on secret communications with the prosecutors. And as best you can tell from public sources, no previous appeal has ever succeeded, although many provoked the officers to impose harsher penalties than the hearing officer did.

Believe it or not, this modern version of the Star Chamber already exists in the form of the Public Company Accounting Oversight Board (PCAOB) — often derided as “peekaboo” due to its acronym and infamous secrecy. Congress created the PCAOB 20 years ago this month as part of the Sarbanes-Oxley Act of 2002, and it has been controversial ever since.

The board’s first chairman resigned within a month of his appointment after reports that the SEC was investigating a public company for which he had served as audit committee chairman. The Supreme Court ruled the entire board unconstitutional for unrelated reasons in 2010, but regrettably spared it from early demise by redlining Sarbanes-Oxley to allow the SEC to remove the board’s executive officers. The result? Nearly wholesale turnover of board leadership after each of the last two changes in political administrations.

Scandal erupted again in 2018 when rogue PCAOB staffers leaked confidential board inspection plans to a former colleague then working for a prominent audit firm. More recently, liberal lawmakers have criticized the board as weak and ineffective, while conservative lawmakers have introduced legislation to fold it into the SEC to ensure tighter supervision and accountability.

Originally intended to prevent market-rocking accounting scandals like Enron and WorldCom, the PCAOB has instead targeted most of its enforcement firepower at small audit firms with limited resources to fight back — often firms owned by foreigners or ethnic minorities. Many targeted firms audit only a few tiny public companies that typical retail investors have never even heard of, much less invested in. Few board investigations expose material accounting misstatements or fraud, and fewer still involve investor losses.

Yet these investigations can drag on for years in secrecy. Targeted auditors are compelled to search for and turn over reams of private documents under threat of debarment, monetary penalties and potential criminal prosecution for “noncooperation.” They are also routinely interrogated under oath for multiple days on end. The process is so burdensome and expensive for small auditors that most eventually settle or default rather than resist, and many simply close up shop altogether.

If all this weren’t bad enough, the PCAOB’s home-court adjudication system makes a mockery of due process for the few who have the resources and fortitude to defend themselves. Auditors who endure the board’s years-long gauntlet can eventually appeal to the SEC and later to a federal court, but very few can afford the odyssey. In the board’s first 20 years, fewer than 10 have made it to the SEC and only two all the way to federal court. Nearly all of the hundreds of other board enforcement targets have capitulated or defaulted at some point, never having their cases decided by even a hearing officer, much less the SEC or a court.

It’s no wonder that then-Judge Brett Kavanaugh, while serving on the U.S. Court of Appeals for the District of Columbia Circuit, described the PCAOB as an “unprecedented extra-constitutional stew.” Congress should rewrite this unsavory recipe before the courts inevitably dump the entire crock.



Originally Published in The Hill