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PCAOB Settles with Beckstead

The PCAOB reached a settlement with Beckstead and Watts MP Brad Beckstead on Feb, 22 closing out the last act of what was a long-running legal battle that raged all the way up to the U.S. Supreme Court.    

“It feels good,” Beckstead told ANR. “Throughout the entire inspection and investigation process, I was never disciplined or sanctioned by the Board. I felt that they initially characterized me as some outlaw, and wanted to make an example of me to the rest of the small audit firm industry. But I persevered through their harassment tactics, and now I feel vindicated”

The PCAOB said under the terms of the settlement, it agreed to withdraw one of the two inspection reports issued on Beckstead and Watts, to date in order to settle that firm's pending litigation against the Board. 

The report was removed from the PCAOB’s Website on Feb. 25.

“That agreement was based on the unique circumstances of the case and does not constitute an admission or concession with respect to the matters set forth in the report or any issue in the litigation,” said PCAOB spokesperson Colleen Brennan. “Consistent with its general practice, the Board also advised Beckstead and Watts that the PCAOB had concluded its earlier formal investigation of the firm, without prejudice to the Board’s authority to institute a future investigation in connection with any past or future conduct.”

Beckstead filed a joint lawsuit with the Free Enterprise Fund in February 2006 in U.S. District Court in Washington, D.C., challenging the constitutionality of the PCAOB.

The lawsuit claimed the watchdog’s set-up was a violation of the separation of powers and the Appointments Clause of the Constitution.

In June 2010, the U.S. Supreme Court upheld the constitutionality of the PCAOB, but ruled that the limitations on the power to remove the members of the PCAOB only for cause were unconstitutional under the separation of powers doctrine.

With his David versus Goliath legal battle concluded, Beckstead said he wants people to know, really know, he never had problem with the Sabanes Oxley Act, in fact he completely agrees with it for big business.

 “I think it SOX is important in protecting investor’s interests with regards to large companies,” he said. “I don’t agree with it for small business because they typically don’t obtain institutional investors’ money.  The majority of the small business investors are educated about the risks of investing in small business issuers, and they would rather invest than throw their money on a craps table. SOX is a burden, and drives up costs. The smaller companies are exempted from Section 404b of the Act, which requires an audit of the internal controls, but they are not exempt from 404a, which requires management to attest to its system of internal controls.  Audit firms assess its client’s system of internal controls and conducts audit tests according to certain risk factors.  If a company doesn’t have a system of internal controls in place the amount of testing increases proportionally which drives up audit fees. For the type of companies I audit, instead of it costing them $2,000-$3,000 for an audit, now it costs $5,000. The small audit firms are still subject to the PCAOB inspections with the regulators’ having the advantage of 20/20 hindsight, and under those circumstances it is extremely difficult to profitably operate an audit firm.”

This is an excerpt of a story that was published in the February 25, 2011 issue of Accounting News Report

 For more information on Accounting News Report: contact Jonathan Hamilton  702-283-9985.


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