“Burn, baby, burn. That’s a beautiful thing.”
These words came from an Enron energy trader, caught on tape during the 2000–2001 California energy crisis celebrating a wildfire that disrupted power lines and further drove up prices inflated by market manipulations. Those words exhibited everything that had gone wrong at the company: arrogance, greed, and a system that rewarded exploitation.
When Enron collapsed, it wasn’t just employees who lost their pensions. It wasn’t just the markets that shuddered. One of America’s most venerable accounting firms—Arthur Andersen, Enron’s auditor—disintegrated in the wake of Enron’s failure. Congress, acting with rare urgency, responded with the Sarbanes-Oxley Act of 2002. Its crown jewel: the creation of the Public Company Accounting Oversight Board (PCAOB).
Now, two decades later, Congress is considering legislation that would dissolve the PCAOB and fold its powers into the SEC. Supporters call it efficiency. Critics call it amnesia.
What Was So Broken in the Early 2000s that the PCAOB Was Needed?
The early 2000s were an age of illusion. On paper, America’s most iconic corporations were thriving. Beneath the surface, they were hiding debt, inflating earnings, and manipulating accounting rules with surgical precision. The rules allowed it. The auditors signed off. The watchdogs looked the other way.
The biggest audit firms were collecting fees for consulting well in excess of audit fees. Financial statements became playgrounds for accounting trickery. Enron hid debt in off-balancesheet vehicles. WorldCom capitalized on routine operating expenses in order to inflate profits. Tyco executives looted the company through bonuses and unauthorized loans. HealthSouth outright fabricated earnings. Adelphia buried over $2 billion in liabilities using co-borrowing arrangements.
Each scandal revealed a structural failing: auditing had become a formality, not a safeguard. The AICPA’s peer review process amounted to little more than a professional courtesy. The SEC was underfunded, slow to act, and politically hamstrung. The system that was supposed to protect investors was built on conflicts of interest, opacity, and inertia.
The collapse of Arthur Andersen wasn’t just a firm failing—it was a wake-up call that the status quo had failed. When a Big Five firm goes down for shredding audit documents, it’s no longer about a rogue company. It’s about a broken system.
What Does the PCAOB Actually Do?
Created by Title I of the Sarbanes-Oxley Act, also known as the Public Company Accounting Reform and Investor Protection Act of 2002 (15 USC § 7211), the PCAOB was given unprecedented authority to register and inspect audit firms, set auditing standards, and discipline firms and individuals. For the first time in US history, audit oversight was not left to the auditing profession itself.
It began with rebuilding trust, but over time, the PCAOB matured into a regulatory force. It created standards like AS 2201 for internal control audits, and AS 3101, which introduced Critical Audit Matters, which now require auditors to flag the most challenging, complex, subjective areas of judgment.
The PCAOB also gained enforcement teeth. Recent years have seen a rise in meaningful penalties, including a $25 million fine against KPMG Netherlands in 2024 for pervasive exam cheating and obstruction (PCAOB News Release, “PCAOB Imposes Record $25 Million Fine on KPMG Netherlands and Bars a Firm Leader After Exam Cheating, Misinforming Investigators,” April 10, 2024, https://tinyurl.com/2d5unkta). The PCAOB has increasingly coordinated with global regulators, even overcoming major political roadblocks to gain inspection access to Chinese audit workpapers in 2022 (News Release, “PCAOB Secures Complete Access to Inspect, Investigate Chinese Firms for First Time in History,” Dec. 15, 2022, https://tinyurl.com/599efeuw).
Despite occasional friction with global standards bodies like the IAASB and IFRS—whose principles-based models often clashed with the PCAOB’s rules-based approach—this tension ultimately pushed multinational networks toward stronger quality control.
Has it been perfect? No. Critics argue that PCAOB inspections often miss the bigger frauds like Wirecard, which concealed over $2 billion in fictitious assets through a web of offshore accounts before its collapse in 2020 (Paul J. Davies, “Wirecard Says Missing $2 Billion Probably Doesn’t Exist,” Wall Street Journal, June 22, 2020), and Luckin Coffee, which fabricated over $300 million in revenue in a 2019 fraud that led to its delisting from Nasdaq [SEC Litigation Release, “Luckin Coffee Agrees to Pay $180 Million Penalty to Settle Accounting Fraud Charges,” December 16, 2020, ref. Securities and Exchange Commission v. Luckin Coffee Inc., No. 1:20-cv-10631 (S.D.N.Y. filed Dec. 16, 2020), https://sec.gov/enforcement-litigation/litigation-releases/lr-24987]. Even US collapses like Silicon Valley Bank (SVB), though not the result of fraud, revealed cracks in regulatory vigilance—SVB’s failure stemmed from poor risk management and interest rate exposure, not accounting deception, yet it still blindsided auditors and regulators alike. Its failure even had a significant impact on the cannabis industry, where companies reliant on high-risk financial service providers—some of which used SVB infrastructure—faced disruptions (Board of Governors of the Federal Reserve System Report, “Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank,” April 28, 2023, https://tinyurl.com/3bzt93wv).
PCAOB sanctions, though growing, are still dwarfed by firm revenues. The enforcement process can be too slow sometimes. But there is now a paper trail, a watchdog, and most importantly—consequences.
If the PCAOB’s Already Under SEC Oversight, Why Fold It In?
The current push to disband the PCAOB hinges on how one answers the following question: if the PCAOB is already under the SEC’s control, why not eliminate the middleman? The answer lies in focus and function. The PCAOB exists solely to oversee auditors. The SEC, by contrast, is responsible for corporate finance, market regulation, trading oversight, and investor protection. Adding audit oversight to the SEC’s already broad agenda risks deprioritizing it—or worse, politicizing it.
PCAOB staff are audit specialists. Its inspectors understand audit documentation, quality control systems, and firm-specific risk models. It was created as an independent body because the SEC’s own shortcomings arguably allowed the Enron-era frauds to fester. To roll the PCAOB into the SEC now would be to return oversight to the same institution that once looked away.
The proposed legislation to eliminate the PCAOB isn’t coming from a place of public outcry, but rather from lawmakers aligned with deregulatory priorities. The timing is not accidental. The PCAOB has grown more assertive in recent years. For example, in 2024, it imposed a record $35.7 million in monetary penalties, marking a 78% increase from the previous year. Some firms don’t like being watched.
What Role Did Washington Play?
There was a real policy drift toward corporate deference across both the Clinton and early Bush administrations—not necessarily for any untoward reasons, but through systemic signals that profitability, growth, and deregulation would be prioritized over government oversight. The Clinton administration embraced a model of third-way economic policy: pro-business, pro-growth, but light on regulatory enforcement. It repealed core provisions of the Glass-Steagall Act through the Gramm-Leach-Bliley Act of 1999 (P.L. No. 106-102), passed the Commodity Futures Modernization Act of 2000 (7 USC § 1 et seq.), and backed major financial mergers that further consolidated risk. Arthur Levitt, the SEC chair during most of Clinton’s tenure, tried to rein in audit firms’ conflicts of interest, but faced pushback from lawmakers and industry lobbyists (see John C. Coffee, Jr., Gatekeepers: The Professions and Corporate Governance. Oxford University Press, 2006, pp 41-49).
The Sarbanes-Oxley Act of 2002 was not passed as a vision for reform. It was passed as a reckoning.
Bush entered office in January 2001. It had not been long since scandals had come to light at Waste Management, which overstated earnings by $1.7 billion through aggressive accounting and asset inflation, and Sunbeam, where executives used channel stuffing and accounting gimmicks to inflate revenues by over $60 million. But rather than reform the regulatory environment, Bush’s team doubled down on deregulation. Harvey Pitt, a former auditor and lawyer for major firms, was appointed to lead the SEC. He advocated for a “kinder, gentler” approach to enforcement, calling audit regulation a “partnership” between government and the private sector (Coffee 2006, ch. 3).
Then came the September 11, 2001 attacks on New York and Washington D.C, and the public’s attention turned to matters of national security. Financial regulation fell even further down the list of priorities. Just two months later, on December 2, 2001, Enron declared. The collapses of Global Crossing, Tyco, and eventually WorldCom soon followed. The Bush administration had deprioritized white-collar enforcement in both the SEC and the DOJ. But the drumbeat of failure became impossible to ignore. The Sarbanes-Oxley Act of 2002 was not passed as a vision for reform. It was passed as a reckoning. A patch sewn into a torn fabric—one that multiple Presidents and Congresses had helped unravel.
What Happens if We Forget?
When Enron and WorldCom imploded, the scandals dominated the accounting curriculum at schools like the author’s Oakland University (Auburn Hills, Mich.). Professors no longer taught just GAAP and debits and credits. They taught fear—of reputational ruin, of regulatory failure, of what happens when no one is watching.
The PCAOB was new. Students joked about it and called it “Peekaboo.” Not to diminish it, but because it sounded like it could pop out at any time. If a firm got inspected, everyone snapped to attention. That nickname came with a grudging respect.
I remember at the time a clear sense that the profession as a whole had been humbled—and might finally take accountability seriously. The PCAOB was never meant to be glamorous. It was meant to be boring, methodical, and effective.
Dismantling the PCAOB now would not be a simple reshuffling of federal regulatory responsibilities. It would be a step backwards, a sign that the lessons of the early 2000s have faded. That the public has forgotten why the fire started—or what was lost to the flames.
