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PCAOB Issues Proposal to Strengthen Auditor Requirements on Fraud

S.J. Steinhardt
Published Date:
Jun 7, 2023

iStock-949207990 Fraud Accounting Invoice

The Public Company Accounting Oversight Board (PCAOB) has issued a proposal to amend its current standards related to the auditor’s responsibility for considering a company’s noncompliance with laws and regulations, including fraud.

The proposed amendments would strengthen and enhance auditor obligations related to a company’s noncompliance with laws and regulations in three key respects:

Identify: The proposal would establish specific requirements for auditors to proactively identify—through inquiry and other procedures—laws and regulations that are applicable to the company and that could have a material effect on the financial statements, if not complied with. The proposal also makes explicit that financial statement fraud is a type of noncompliance with laws and regulations.

Evaluate: The proposal would strengthen requirements related to the auditor’s evaluation of whether noncompliance with laws and regulations has occurred, and if so, the possible effects on the financial statements and other aspects of the audit. For example, the proposed standard would require the auditor to consider whether specialized skill or knowledge is needed to assist the auditor in evaluating information indicating noncompliance has or may have occurred.

Communicate: The proposal would make it clear that auditors are required to communicate to the appropriate level of management and the audit committee as soon as they are made aware that noncompliance with laws or regulations has or may have occurred. Additionally, the proposal would create a new requirement that the auditor must communicate to management and the audit committee the results of the auditor's evaluation of such information. Specifically, this communication would address which matters are likely noncompliance and the effect on the financial statements for those matters that are likely noncompliance.

"A company's noncompliance with laws and regulations, including fraud, can have devastating consequences for investors," PCAOB Chair Erica Y. Williams said during an open board meeting on the proposed standard, Accounting Today reported. "When sanctions, fines and civil settlements directly affect a company's bottom line, or reputational damage causes a company's stock value to decline, innocent investors pay a price."

“By catching and communicating noncompliance sooner, auditors can help companies course correct and better protect investors from risk,” she said in a statement.  

The current rule has gone largely unchanged since the PCAOB adopted it in 2003, shortly after the board was formed. It was copied on an interim basis from the AICPA, whose standard nas not undergone major revisions since 1988, The Wall Street Journal reported.

Board members Duane DesParte and Christina Ho opposed the proposal. Each issued a statement outlining their respective concerns. DesParte wrote, "I am unable to support today’s proposal as I believe it unreasonably and at great cost expands the scope of the audit to incorporate extensive new compliance attestation procedures and will require legal acumen and expertise well beyond the auditor’s core competency." Ho wrote that the proposal includes " a breathtaking expansion of the auditors’ responsibilities, which I believe will hurt investors. This expansion could cause considerable confusion on the appropriate role of auditors, undermine the time-tested accountability framework, and reduce the resilience of the already highly concentrated audit marketplace.

The public comment period is open until Aug. 7.

The Foundation for Accounting Education will host an Auditing Standards Update with Renee Rampulla Webcast on June 13. Participants who attend this update will learn about issued and proposed guidance from the PCAOB.

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