PCAOB Investigation Termination and Lawsuit Dismissal Highlight Multiple Challenges Facing the Audit Regulator

Last week, a lawsuit against the Public Company Accounting Oversight Board (PCAOB) was dismissed, following the termination of its investigation into an unnamed Texas accounting firm. The case reflects a series of recent challenges faced by the audit regulator.

The lawsuit, filed on March 27 by the accounting firm under the pseudonym "John Doe Corporation," sought injunctive and declaratory relief against the PCAOB investigation, alleging that the investigative process was "not only abusive, retaliatory, and unduly burdensome," but also "structurally unconstitutional."

Within less than a year, the case went through twists and turns: it was first transferred from a Texas federal court to the U.S. District Court for the District of Columbia at the PCAOB's request, then sent back to Texas on November 19 after the appellate court granted the plaintiff's request. However, before the case went to trial, the firm received a letter from the PCAOB on December 27 stating that it had closed the investigation without recommending any enforcement action. Based on this, both parties reached an agreement on January 6, deeming the claims "moot," and requested the court to dismiss the case. The judge signed the dismissal order on January 7.

Beyond the agreement, the two sides viewed the outcome differently. The plaintiff's attorneys regarded the dismissal and termination of the investigation as a victory. The New Civil Liberties Alliance (NCLA)—which provides pro bono litigation services to challenge "unlawful power" of state and federal agencies and served as co-counsel in this case—declared in a January 7 press release that it had "defeated an unlawful investigation" and vowed to continue fighting the PCAOB.

"While NCLA would have preferred an authoritative court ruling declaring the PCAOB's investigation unconstitutional," NCLA Senior Litigation Counsel Russ Ryan said in a statement, "the next best outcome is that the Board terminated its investigation in the face of our constitutional challenge. This is a total victory for the client, but NCLA will continue to fight the Board's 'star chamber' proceedings against other clients."

Ryan revealed in an interview that NCLA currently has two other pending cases against the PCAOB. He noted that the organization takes no position on whether the PCAOB should exist, but emphasized that if it enforces laws and imposes penalties, it must do so "in a manner consistent with the Constitution and respectful of civil liberties."

According to Bloomberg Law, NCLA has also challenged government agency power in the U.S. Supreme Court and has ties to conservatives, including billionaire Charles Koch. An NCLA spokesperson said the organization is a "partner" of institutions such as the Stand Together Trust, founded by Koch.

Jacob Frenkel, an attorney at Dickinson Wright law firm who also represents the plaintiff firm, declined to disclose the source of litigation funding, but said the strength of the case itself and the fact that it was sent back to a Texas court prompted the PCAOB to abandon the investigation. "The Board will not explain why it terminated the investigation," Frenkel said in an interview, "but we are confident that we had extremely persuasive legal and factual arguments, and successfully moving the case back to the Fifth Circuit in Texas was undoubtedly a factor in the PCAOB's decision not to proceed."

In contrast, the PCAOB downplayed the significance of the dismissal, stating in an emailed statement that the case "did not in any way address, analyze, or confirm the merits of the plaintiff's claims." When asked about the reason for terminating the investigation, a spokesperson did not respond with specifics.

The statement said: "In every PCAOB investigation, staff of the Division of Enforcement and Investigations (DEI) ascertain the facts and apply the law, and then make an informed decision on whether to continue the investigation based on the facts and the law. This investigation was no exception."

Court documents show that the investigation began with an informal request for information in 2021, the PCAOB issued a formal investigation order on August 16, 2022, and the investigation ended last month, lasting approximately three years.

In an amended complaint filed on August 9, the plaintiff objected, arguing that the investigation targeted John Doe's audit of crypto asset accounting, and that the Board had not established any audit standards at the time the relevant audits occurred. "Without Board standards or rules providing fair notice, auditors were left to choose among numerous views on the best methods for auditing issuers of crypto assets," the complaint stated. The Financial Accounting Standards Board did not finalize standards related to crypto assets until 2023.

Challenges to the PCAOB—established under the Sarbanes-Oxley Act of 2002 in the wake of the Enron scandal—come as some anticipate that the Trump administration may weaken or sideline the regulator rather than dismantle it. Robert Pawlewicz, an assistant professor of accounting at the Robins School of Business at the University of Richmond in Virginia, expects a decline in enforcement rather than more lawsuits against the PCAOB in the future.

"I don't expect to see more such lawsuits against the new PCAOB Board, because the new Board and possibly the new head of investigations and enforcement will quietly ease up on enforcement," Pawlewicz said in an email. "The current Board and enforcement division have been very aggressive, and I don't think that will continue."