A federal appeals court ruled in favor of a former Ernst Young partner who had been suspended by the Public Company Accounting Oversight Board for violating auditing standards, saying he was unjustly denied the right to use an accounting expert to help his lawyer during a PCAOB interview.
The U.S. Court of Appeals for the D.C. Circuit issued the decision last Friday in the case of Mark E. Laccetti. He was suspended from practice by the PCAOB in September 2016 for two years and ordered to pay an $85,000 penalty for violating PCAOB rules and standards in connection with the audit of a foreign company’s accounting statements. Laccetti was in charge of the audit. As part of its investigation, the PCAOB interviewed Laccetti for a deposition. Although he was allowed to bring an EY attorney with him, the PCAOB denied his request to also have an accounting expert accompany him to assist his counsel. The D.C. Circuit appeals panel ultimately agreed that the PCAOB penalties imposed on him infringed on his rights in connection with an investigation into an audit.
“Laccetti asks this Court to vacate the orders and sanctions against him,” wrote the judges. “Laccetti contends that the Board infringed his right to counsel by unreasonably barring the accounting expert from assisting his counsel at the interview. We agree. We grant the petition for review, vacate the order of the Securities and Exchange Commission, and remand with directions that the Commission vacate the Board’s underlying orders and sanctions.”
EY and the PCAOB declined to comment on the case. Laccetti’s attorney Douglas Cox at the law firm Gibson Dunn hailed the decision, though. “The court declared that under the PCAOB’s own rules, the Board may not bar a witness from bringing an accounting expert who could assist the witness’s counsel during an investigative interview,” he said. “As a result, the PCAOB will have to change its practices or amend its rules. The consequences will be widespread, and should lead to fairer PCAOB investigations.”
Gibson Dunn pointed out that accountants and auditors under investigation by the PCAOB have a right to counsel. “In connection with highly complex investigations into audits, a lawyer may need a non-testifying accountant to sit in on a deposition, in order to make sure the lawyer can understand the questioning and adequately represent the client,” said the firm. “The PCAOB has taken the position that, even though it exercises governmental power, it need not permit such assistance. In practice, this undermines the right to counsel. In this particular case, the PCAOB denied the petitioner’s lawyer the assistance of an accountant during the deposition; the petitioner was tried before the PCAOB and sanctioned; and that sanction had been upheld by the SEC. The decision held that the PCAOB and the SEC had infringed petitioner’s right to counsel. It held categorically that under the PCAOB’s rules, the PCAOB may not bar a witness from bringing an accounting expert who could assist the witness’s counsel during an investigative interview.”
As a result of the decision, Laccetti’s attorneys believe the PCAOB will need to change its practices or amend its rules. “The consequences will be widespread, and should lead to fairer PCAOB investigations,” said Gibson Dunn. “In addition, the PCAOB’s status as an agency exercising governmental power has been clarified by this decision. This case shows that attempts to challenge government power face an uphill battle, given the deference courts accord to agencies. Gibson Dunn was able to show that both the PCAOB and the SEC had adopted an erroneous interpretation of the PCAOB’s rules, and overcame the agencies’ view that any error was harmless.”
The court vacated the SEC’s order suspending Lacetti from practicing for two years and gave the PCAOB the option of opening a new disciplinary proceeding where he could be re-interviewed without violating his right to counsel. “The right to counsel is guaranteed by the Board’s rules,” said the court. “Infringement of that right is a serious matter. We cannot sweep that violation under the rug in the manner advocated by the Board in this case.”
Photo: PCAOB
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