On May 24, 2005, the newly-formed Public Company Accounting Oversight Board (PCAOB) initiated its first enforcement actions against several accountants who were alleged to have concealed information requested in a forthcoming PCAOB inspection of their firm.  Separately, the Board's Division of Enforcement and Investigations has commenced several investigations of audits of subsequently restated financial statements.  We have represented several clients in such investigations and have observed the Staff's emerging practice in conducting investigations. 

• How the PCAOB Staff Proceeds:  The Board's investigative process has been very similar to SEC enforcement investigations.  The Staff of the Enforcement and Investigations Division issues document requests (called "Accounting Board Demands " or "ABDs" for short) and requests for testimony from partners and managers of the audit firms that have "the look and feel" of SEC subpoenas.  The Staff will proceed pursuant to a Board "formal order" of investigation, that also resemble those issued by the SEC.  Although the Board's "formal order" of investigation may refer to the audit of one client, the Staff may choose to investigate work done for other clients of the audit firm whose financial statements have similar issues.  Thus, the Division may be looking at issues across the client base of the audit firm.
  
  
• Jurisdiction:  The Staff believes that the PCAOB has jurisdiction for any financial statement that is included within financial statements that are filed after the audit firm registered with the PCAOB in 2003.  This position raises the issue of an impermissible and retroactive imposition of sanctions on accountants for work completed before the firm was registered with the PCAOB or even before the passage of the Sarbanes/Oxley Act in 2002.  We are not yet sure whether the PCAOB will press for claims for financial statements issued prior to the creation of the PCAOB.
  
  
• Coordination with Parallel SEC Matters:  At a May 6, 2005 Practising Law Institute meeting entitled "The PCAOB Speaks in 2005," speakers from the Enforcement and Investigations Division stated that the PCAOB will coordinate with the SEC and that the PCAOB Staff meets frequently with the SEC Staff.  But in our experience, there is significant overlap between PCAOB investigations and those conducted by the SEC; the PCAOB has asked many witnesses the same questions that they were previously asked by the SEC.  At "PCAOB Speaks," Enforcement and Investigations Director Claudius Modesti stated that the dynamic of the interview setting is difficult when there are two regulators on the record.  Staff of the Enforcement and Investigations Division made clear that they would allow the SEC to sit in on PCAOB testimony without asking questions.   The PCAOB Staff has advised us that they are willing to attend SEC testimony of auditors, but will not ask questions and will reserve the right to call a witness for investigative testimony before the PCAOB Staff to ask the same questions.  Thus, it is evident that the PCAOB Staff is reluctant to engage in a joint investigation, creating the risk of a greater burden on accountants.
  
  
• Expert Assistants to Lawyers in Testimony:  PCAOB Rule 5102 gives the Staff flexibility regarding whether to permit counsel to bring experts to assist counsel in representing a client during testimony.  At the "PCAOB Speaks" seminar, the panelists from the Enforcement and Investigations Division stated that under certain circumstances they might allow it, but, in our experience, they have been unwilling to do so even when the accounting issues in question are exceedingly complex.  The Staff does not believe that counsel for an auditor should need the assistance of an expert during testimony.  The PCAOB's position conflicts with the SEC process, which was resolved in a pair of decisions issued by the United States District Court for the District of Columbia in 1985.  Those decisions, SEC v. Whitman, 625 F. Supp. 96 (D.D.C. 1985), reconsideration denied, 613 F. Supp. 48 (D.D.C. 1985), allow counsel to bring expert assistants to SEC testimony.  According to the PCAOB Staff, these decisions do not apply to the PCAOB because they are based on an interpretation of the Administrative Procedure Act, which does not, in their view, apply to the Board, a "private" body.  Whether the Staff's position, which appears to limit counsel's ability to adequately represent a client, is valid, will ultimately depend on whether the PCAOB is a "state actor" and, as such, is required to comply with federal law and the United States Constitution. 
  
  
• Remediation:  During the "PCAOB Speaks" seminar, Mr. Modesti stated that firms must address remediation of audit failures in a prompt fashion.  The PCAOB will want to know what the firm has done to address issues.  In the Staff's view, it is "incumbent upon the firms to cure the problems" and identify "what steps have been taken to cure" the problems.
  
  
• Wells Submission:  Upon the completion of an investigation, the Staff typically will communicate its views of alleged violations in writing.  At the "PCAOB Speaks" seminar, the Staff stated that a potential respondent will have two weeks to provide a written response.
  
  
• Attorney-Client Privilege:  The Staff asserted that it intends to test assertions of privilege to make sure that they are valid; privilege logs will be carefully scrutinized.  If mistakes are discovered, a party will get a reasonable opportunity to cure, however, if the Staff believes that privilege is not properly being asserted, then a non-cooperation proceeding will be brought. 
  
  
• Document Requests:  Accounting Board Demands we have seen frequently call for the audit firm to produce documents that have been previously given to or made available to the Board's Division of Inspections.  At the "PCAOB Speaks" seminar, the Staff made clear that responses to document requests from the Investigations and Enforcement Division and the Inspections Division are separate obligations.  Although many documents are turned over to the PCAOB as part of the annual inspections process, the Staff of the Investigations and Enforcement Division may request these same documents later.