PCAOB Issues Proposal to Strengthen Accountability for Contributing to Firm Violations
To better protect investors, the proposal would update a nearly 20-year-old rule to allow the PCAOB to hold associated persons accountable when they negligently, directly, and substantially contribute to firms’ violations
The Public Company Accounting Oversight Board (PCAOB) today issued for public comment a proposal to amend PCAOB Rule 3502, Responsibility Not to Knowingly or Recklessly Contribute to Violations. The rule, originally enacted in 2005, governs the liability of associated persons who contribute to registered public accounting firms’ violations of the laws, rules, and standards that the PCAOB enforces.
The deadline for public comment on the proposal is November 3, 2023.
“This proposal is simply updating PCAOB rules to match what investors already expect: that auditors act with reasonable care whenever they are performing their duties – and when an auditor’s negligence results in firm violations that can put investors at risk, the PCAOB has tools to hold them accountable,” said PCAOB Chair Erica Y. Williams.
Rule 3502’s purpose is to enable the Board to hold accountable associated persons of PCAOB-registered firms who directly and substantially contribute to violations committed by registered firms.
Today’s proposal better protects investors with two key updates:
- It strengthens accountability for those who put investors at risk by updating the threshold for liability:
Auditors are already required to exercise reasonable care anytime they perform an audit – and failure to do so constitutes “negligence.”
The current Rule 3502, however, only allows auditors to be held liable for firms’ violations when they “recklessly” contribute to those violations – which represents a greater departure from the standard of care than negligence. This means even when a firm commits a violation negligently, an associated person who directly and substantially contributed to the firm's violation can be sanctioned only if the PCAOB shows that the associated person acted recklessly.
The proposal, if adopted, would update Rule 3502’s liability standard from recklessness to negligence, aligning it with the same standard of reasonable care auditors are already required to exercise anytime they are executing their professional duties. Similarly, the U.S. Securities and Exchange Commission already has the ability to bring enforcement actions against associated persons when they negligently cause firm violations.
The proposal maintains the requirement under the current version of Rule 3502 that an associated person must have contributed to the firm’s violation both “directly and substantially” in order to be held liable.
- It clarifies the relationship between the contributory actor and the primary violator:
To be held liable under the current Rule 3502, an associated person who contributes to a firm’s violation must be an associated person of that particular firm. Given the increasing complexity of arrangements among firms and the constantly evolving nature of technology, the proposal clarifies that associated persons of any firm can be held liable as long as their conduct at least negligently, and directly and substantially, contributes to any firm’s violation, not just violations by a firm with which they are associated.
Throughout the proposal, the Board requests comments on specific aspects of the proposed amendments. Readers are encouraged to answer the Board’s questions, to comment on any aspect of the proposal, and to provide reasoning and relevant data supporting their views.
About the PCAOB
The PCAOB is a nonprofit corporation established by Congress to oversee the audits of public companies in order to protect investors and further the public interest in the preparation of informative, accurate, and independent audit reports. The PCAOB also oversees the audits of brokers and dealers, including compliance reports filed pursuant to federal securities laws.
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