Last week, the Securities and Exchange Commission accused a Denver accounting firm of destroying documents and altering work papers at a former client.
Levine, Hughes & Mithuen audited the 1998 and 1999 financial statements of Sport-Haley, a small company that designs golf sportswear under the Haley and Ben Hogan labels.
According to the complaint, the firm gave unqualified opinions on Sport-Haley's financial condition "even though the firm knew or was reckless in not knowing the company's 1998 and 1999 financial statements materially misstated work-in-process ('WIP') inventory, improperly capitalize period costs and materially misstated losses on the sale of headwear equipment."
The SEC also said that after the firm learned about the investigation into Sport-Haley, it altered and destroyed some of the audit work papers
Levine Hughes & Mithuen will pay a $50,000 fine for its alleged misdeeds, and agreed not to audit public companies for the next three years.
Who's The Overseer, SEC Or PCAOB?
The SEC order raises an interesting issue about the oversight of accounting firms.
According to an SEC spokesman, the order barring Levine from practicing before the Commission is "what the SEC has done for years and years and will continue to do."
But, in theory, that's now the job of the PCAOB.
According to The Sarbanes-Oxley Act of 2002, the Public Company Accounting Oversight Board was created to oversee the accounting industry. Specifically, the Act notes that the PCAOB will "conduct investigations and disciplinary proceedings concerning, and impose appropriate sanctions where justified upon, registered public accounting firms and associated persons of such firms."
According to Christi Harlan, a former SEC spokesperson who is now the PCAOB's director of public affairs, there is no turf battle ensuing between the agencies. “We’ll share jurisdiction over registered accounting firms,” she said.
Instead, Harlan noted that the Levine case predated the Board, which is why the SEC took action.
Another PCAOB spokesman concurred, noting that the Commission was taking action "on activities that occurred years before the PCAOB was even conceived."
Overseeing The Oversight Board
But the timing of the Levine complaint isn't the only matter here.
Seidel
Amy Seidel of Faegre & Benson explains that the PCAOB is more focused on regulating the audit process than executing disciplinary actions. “While it is true that accounting firms must be registered with the PCAOB in order to audit public companies, the PCAOB is not the only regulatory authority affecting accounting firms,” she notes.
According to Seidel, “The SEC still has many rules and regulations governing the conduct of accountants that it will continue to enforce.”
In addition, while the PCAOB has certain authorities under SOX, it's still overseen by the Securities and Exchange Commission. In fact, all PCAOB rules need to be approved by the SEC before they can become effective.
Borja
“The SEC retains oversight and enforcement authority over the Board, and no rule of the PCAOB can be effective without the prior approval of the SEC,” notes Paul Borja, a partner with the Washington, D.C. law firm Kutak Rock.
“Also, the PCAOB is still in the process of adopting the rules that it will be enforcing,” said Borja.
As a result, the Board is in a ramp-up stage—hiring staff and codifying standards—which means it's still a work in transition. That means the "line in the sand" between the PCAOB and the SEC will likely shift during the coming months and year.
Nicolaisen
In fact, just last week SEC Chief Accountant Donald Nicolaisen alluded to the fact that the two agencies are still figuring things out.
At a PCAOB roundtable, Nicolaisen said that as the PCAOB engages more staff with expertise in auditor independence issues, he expects “a great number of the independence interpretive issues that currently are handled in my office appropriately will migrate to the PCAOB.”
Despite the Board’s presumed expanded authority, though, the PCAOB will remain subject to SEC oversight.
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