An appeals court has thrown out a regulatory disciplinary finding against a former EY audit partner that was supported by the Securities and Exchange Commission.
The U.S. Court of Appeals for the District of Columbia heard arguments in December from Mark E. Laccetti, a former partner at EY, and the SEC over a disciplinary action originally undertaken by the Public Company Accounting Oversight Board. The appeals court sided with Laccetti, saying he was denied adequate counsel because the PCAOB would not permit Laccetti’s legal counsel to be assisted by an accounting expert during the deposition.
The PCAOB brought charges against Laccetti in 2009 alleging audit violations dating back to 2004 in the audit of Taro Pharmaceuticals. The PCAOB said Taro in Israel engaged an Israeli audit firm, which hired EY in the United States to audit the U.S. subsidiary of Taro. Laccetti served as the engagement partner for the U.S. subsidiary of Taro.
The PCAOB said Laccetti knew the company had weak processes for estimating sales allowances, which would be key to the company’s recognition of revenue and accounts receivable, but did not conduct adequate inquiry or audit procedures to investigate. The PCAOB said it had evidence that the principal audit firm and his own audit firm had identified the risks, but Lacetti was “reckless, or, at a minimum, repeatedly negligent.”
It took roughly seven years for the case to make its way through the PCAOB and SEC enforcement and appeals channels before the SEC finalized and publicly released it in 2016. The PCAOB banned Laccetti for two years from associating with a PCAOB-registered firm and fined him $85,000.
Laccetti took his case to the district appeals court, where he said he was denied adequate counsel because the PCAOB would not permit his EY attorney to have an EY accounting expert present for questioning. According to the appeals court decision, the PCAOB banned an EY accounting expert from testimony because it did not want EY personnel to “monitor the investigation.”
The appellate court decision completely throws out the disciplinary action against Laccetti, says Douglas Cox, a partner at law firm Gibson Dunn who represented Laccetti on appeal. “The PCAOB investigation of and subsequent conclusions about Mr. Laccetti are void,” he says.
It’s not entirely clear, however, whether the PCAOB could or would go back to the drawing board and pursue the charges again. “There are several constitutional and statutory arguments, not addressed by the Court, suggesting that it could not,” says Cox. “If the PCAOB tried to start over, it would have to overcome those arguments. And, in any event, it would be wasteful and unfair for the PCAOB to try to start over.”
The PCAOB declined to comment on the decision.
Cox says accountants and auditors under investigation by the PCAOB have a right to counsel, and that includes the assistance of an accountant to work through highly complex investigations. The PCAOB’s position that it need not permit such assistance undermines the right to counsel, he says.
The appellate decision tells the PCAOB it may not bar a witness from bringing an accounting expert who could assist the witness’s counsel during an investigative interview, says Cox. That suggests the PCAOB will have to change its practices or amend its rules, he says.