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Watchdog calls for open hearings on accounting firm probes


WASHINGTON (Reuters)—The top U.S. audit watchdog called on Congress to help end the secrecy surrounding its investigations of accounting firms and disciplinary hearings linked to the recent financial crisis.

James Doty, the new chairman of the Public Company Accounting Oversight Board, made a pitch Wednesday for legislation to lift the veil of secrecy over these proceedings, adding to pressure on accounting firms that failed to blow the whistle or helped conceal risky financial practices.

“This secrecy has a variety of unfortunate consequences,” Mr. Doty told the Senate Subcommittee on Securities, Insurance and Investment. “Interested parties, including investors, audit committees, issuers and other auditors, are kept in the dark about alleged misconduct, even after a hearing and adverse findings,” he said.

The PCAOB was established under the 2002 Sarbanes-Oxley Act, which required the board to keep its investigations and disciplinary proceedings confidential.

Subcommittee Chairman Jack Reed, D-R.I., said he was concerned about financial firms using accounting gimmicks during the crisis to hide the true nature of their financial health. He also said he feared auditors did not do their job to ensure books and records were accurate, adding that companies had received unqualified audit reports prior to their collapse or government rescue.

“Without effective audits—directors, creditors and shareholders are all flying blind,” Sen. Reed said. “Without question, there seems to be a systemic lack of...transparency in the last several years.”

U.K. lawmakers called last week for a probe of the world's “big four” auditing firms, with a parliamentary report saying they failed to warn about the risks banks were taking ahead of the crash.

PricewaterhouseCoopers L.L.P., Deloitte L.L.P., Ernst & Young L.L.P. and KPMG L.L.P. check the books of most major companies around the world.

After Wednesday's hearing, Sen. Reed said prosecutors and securities regulators should publicly announce if they decide not to pursue enforcement action against Lehman Bros. for accounting methods it used during the financial crisis.

The Department of Justice and the Securities and Exchange Commission are reportedly investigating Lehman's use of an accounting tactic the company used to mask its financial health.

This so-called “Repo 105” transaction allowed the bank to temporarily move $50 billion off its balance sheets. The examiner for Lehman's bankruptcy proceeding issued a report last year suggesting there was sufficient evidence for a judge to find that Lehman's reported net leverage was materially misleading. Ernst & Young was Lehman's auditor.

Nevertheless, no case has been brought against Lehman since the crisis, and a recent report by the Wall Street Journal said investigators have run into roadblocks and may not ultimately be able to file charges.

Lehman's September 2008 bankruptcy virtually froze capital markets at the height of the 2007-2009 financial crisis.

Anton Valukas, the Lehman bankruptcy examiner and a former U.S. attorney, discussed his findings with lawmakers in testimony on Wednesday. Afterward, however, he declined to say whether the SEC should have brought a case by now.

PCAOB's Mr. Doty told the senators that auditors failed in some cases during the financial crisis to dig deeper into things such as valuation issues.

He added that as inspections of audits continue, he expects to find more deficiencies.

SEC Chief Accountant James Kroeker said in prepared remarks for Wednesday's hearing that the SEC is “considering whether audits performed during the financial crisis complied with the current standards and rules” and looking to see how standards can be improved.

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