Right To Accountant Violated

The United States Court of Appeals for the District of Columbia Circuit vacated an SEC disciplinary order and remanded with directions to vacate all orders entered in the matter

The Public Company Accounting Oversight Board investigated an audit that had been conducted by the Ernst & Young accounting firm. The Board’s investigation focused in part on Mark Laccetti, who was the Ernst & Young partner in charge of the audit. As part of the investigation, the Board interviewed Laccetti. During that investigative interview, the Board allowed Laccetti to be accompanied by an Ernst & Young attorney. But the Board denied Laccetti’s request to also be accompanied by an accounting expert who would assist his counsel.

The Board ultimately charged Laccetti and found that he had violated Board rules and auditing standards. The Board sanctioned Laccetti, suspending him from the accounting profession for two years and fining him $85,000. The Securities and Exchange Commission affirmed the Board’s decision.

The appeal

Laccetti argues that the Board, in applying the rules, unlawfully barred an accounting expert from assisting Laccetti’s counsel at the investigative interview. The Board stated that it denied Laccetti’s request because Laccetti’s expert was employed at Ernst & Young. The Board did not want Ernst & Young personnel present for the testimony of the Ernst & Young witnesses because it apparently did not want Ernst & Young personnel to monitor the investigation. That was the sole reason provided by the Board for denying Laccetti’s request.

The Board’s rationale suffers from three independent flaws…

An Ernst & Young employee was already planning to attend (and did attend) Laccetti’s interview – namely, the Ernst & Young attorney who accompanied Laccetti. Consistent with Board policy and relevant ethics rules, that Ernst &Young attorney could act as attorney for both Laccetti and the company. See PCAOB Release No. 2003-015 at A2-19 (Sept. 29, 2003). Given the presence of the Ernst & Young attorney at the interview, the Board’s rationale for excluding the Ernst & Young accounting expert – that the Board did not want Ernst & Young personnel to be present – makes no sense here.

Second

even if the Board wanted to bar an Ernst & Young affiliated accounting expert, that explanation would not justify the Board’s denying Laccetti any accounting expert. Instead, the Board could have told Laccetti that he could bring to the interview an accounting expert who was not affiliated with Ernst & Young. The Board did not do so. Rather, the Board’s letter to Laccetti flatly stated that “the presence of a technical expert consultant” is “not appropriate at this time.”

 Third

even putting those points aside, the Board’s rules establish that the Board could not bar Laccetti from using an accounting expert to assist his counsel in these circumstances.

Result

the only reasonable remedy is for the Board, if it chooses and if the law otherwise permits, to open a new disciplinary proceeding against Laccetti and, if it chooses to reinterview Laccetti, to do so without violating his right to counsel. The right to counsel is guaranteed by the Board’s rules. 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.

Circuit Judge Kavanaugh authored the opinion. (Mike Frisch)