Chair Williams’ Statement on Adoption of an Updated Rule To Strengthen Accountability for Contributing to Firm Violations

Remarks as prepared for delivery 

Auditors are highly trained professionals, with specialized skills and ethical obligations, who are licensed and paid to carry out duties solely entrusted to them. When they fail to exercise the reasonable care or competence entrusted to their profession, investors expect there to be consequences.  

Today, we have the opportunity to update an outdated PCAOB rule and meet those expectations by ensuring that when an associated person’s negligence directly and substantially contributes to firm violations, which can put investors at risk, the PCAOB has tools to hold that associated person accountable.  

To do this, we are amending PCAOB Rule 3502, Responsibility Not to Knowingly or Recklessly Contribute to Violations.  

The updates strengthen accountability for associated persons, including individuals and firms, who put investors at risk by updating the threshold for liability for those who directly and substantially contribute to firm violations from recklessness to negligence. This will allow the PCAOB to hold auditors accountable for failing to exercise the same standard of reasonable care and competence they are already required to exercise anytime they are executing their professional duties. 

As reflected in the thorough economic analysis set forth in the adopting release, there is no reason this amended rule should cost auditors significant time, resources, or money, because auditors are already prohibited from being negligent today as part of their requirement to exercise reasonable care and competence any time they perform an audit. Similarly, the U.S. Securities and Exchange Commission (SEC) already has the ability to seek penalties in enforcement actions against associated persons when they negligently cause firm violations. 

As I’ve said before, if you are doing what you are already supposed to be doing, this amended rule would not affect you. If you are not, there may be consequences.  

I also want to reiterate what I said when we issued this proposal: this change is not intended to ensnare junior professionals or other auditors who are responsibly executing their duties. Again, to be held liable under the amended rule, not only do associated persons have to act negligently, the amended rule also would maintain the current requirement that their negligence must have contributed to the firm’s violation both “directly and substantially.” That does not include auditors whose conduct is remote from, or tangential to, the firm’s violation.  

I want to thank everyone who submitted public comment. Your input helped to shape this rule.  

As proposed, an amendment to the rule would have specified that an associated person can be liable for contributing to a violation by any registered firm. After contemplating this carefully, it’s clear that change was unnecessary. As the Board’s release explains, the rule as currently written covers all plausible scenarios, so the recommendation before us today maintains the current formulation, which references associated persons who contribute to a violation by a registered firm they are associated with.  

Like many of the standards this Board has voted to modernize, Rule 3502 is nearly 20 years old. Things have changed since it was first adopted in 2005.  

The SEC now has the ability to seek civil money penalties in enforcement proceedings against associated persons when they negligently cause firm violations. The way that firms operate has changed. And the expert staff at the PCAOB who have seen how Rule 3502 plays out in the real world are recommending this update.  

Today, we have the opportunity to learn from that expert experience and modernize this outdated rule to ensure there are consequences for negligently, directly, and substantially contributing to firm violations that can put investors at risk.  

I would like to express my gratitude to those individuals who have significantly contributed to this proposal. Specifically, I would like to thank in the Office of the General Counsel: James Cappoli, Connor Raso, Drew Dropkin, and Damon Andrews; in the Office of Economic and Risk Analysis: Martin Schmalz, Rahsan Inget, Tasneem Raihan, Federico Garcia, John Cook, and Shayna Vereen; and in the Division of Enforcement and Investigations, Bob Rice, Bill Ryan, John Abell, and Mike Davis. 

I would also like to thank my fellow Board Members and their staff for their contributions. In addition, I would like to recognize the support provided by the Office of Communications and Engagement. 

Finally, I would like to thank the SEC’s staff for their support and assistance.