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PCAOB Strengthens Rule on Accountability for Contributing to Firm Violations

S.J. Steinhardt
Published Date:
Jun 14, 2024

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The Public Company Accounting Oversight Board (PCAOB) voted unanimously to expand liability for individuals involved in firm violations, changing the liability threshold from recklessness to negligence. It also proposed tighter rules around one of the ways auditors gather evidence to detect financial misstatements, Accounting Today and The Wall Street Journal reported.

The adoption of an amendment to PCAOB Rule 3502, previously titled Responsibility Not to Knowingly or Recklessly Contribute to Violations and originally enacted in 2005, governs the liability of an associated person of a registered public accounting firm who contributes to that firm’s violations of the laws, rules and standards that the PCAOB enforces.

The amendments change the threshold for liability for contributors to accounting firms’ violations of auditing standards, changing it to negligence from recklessness. The contributors are usually partners in charge of an audit or another firm that assisted in the work.

“With today’s adoption, the Board has aligned PCAOB rules to what investors already expect: that when an associated person’s negligence directly and substantially contributes to firm violations, the PCAOB has tools to hold them accountable,” said PCAOB Chair Erica Y. Williams in the announcement. “We are grateful for the comments we received from investors and other stakeholders on this change, and we look forward to monitoring the impact of the updated rule.”

The PCAOB defines negligence as the failure to exercise reasonable care or competence, covering a wider range of potential behavior in carrying out an audit, according to the Journal, standards to which auditors are already held in other situations. The Securities and Exchange Commission (SEC) already has the ability to seek civil penalties against these parties when they negligently cause firm violations, but the PCAOB does not.

The Center for Audit Quality (CAQ) criticized the proposal. “These same types of concerns about generating inefficiency and ‘self-protective’ behavior among professionals may present an especially acute threat to smaller firms,” the CAQ said in a November 2023 letter to the PCAOB, the Journal reported.

The changes aren’t intended to ensnare junior professionals or other auditors who are responsibly executing their duties, said Williams, according to the Journal.

The Council of Institutional Investors (CII) generally supported the proposal in an October 2023 letter, saying lowering the threshold would bring it in line with other requirements for auditors, the Journal reported. 

The PCAOB also adopted amendments to two standards—AS 1105, "Audit Evidence," and AS 2301, "The Auditor's Responses to the Risks of Material Misstatement"—that aim to clarify auditors' responsibilities when they use technology-assisted analysis, to make sure they obtain sufficient appropriate audit evidence.

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