Negligent Contribution to a Registered Audit Firm’s Violations of Law or Professional Standards: Amendment of PCAOB Rule 3502

Remarks as prepared for delivery

Today, our staff is recommending that we revise our ethics rules to provide that auditors may be held accountable when they fail to exercise due care and that failure contributes directly and substantially to violations of PCAOB standards or rules by their audit firm.

Auditors have exceptional access to management and to information that cannot be observed by investors and other stakeholders. When auditors do not exercise due care and contribute in a direct and substantial way to violations of PCAOB standards or rules, the PCAOB must be allowed to act. I believe this change will strengthen the Board’s auditor oversight program.

If the PCAOB is not allowed to enforce its standards and rules, particularly when auditors contribute directly and substantially to violations of those standards and rules, investors and other stakeholders will not trust our financial reporting system. That trust is vital to maintaining the preeminence of our capital markets. More importantly, today’s amendment reflects our charge under the Sarbanes-Oxley Act to fashion rules, including ethics rules, that focus on an auditor’s responsibilities and obligation to exercise due care. 

As a practical matter, of course, only individuals (e.g., auditors) can take actions that violate laws, rules, and standards. But under our current rules, the PCAOB cannot discipline negligent auditors whose direct and substantial contributions furthered an audit firm’s violations. In other words, an audit firm could be held liable for negligent acts, but the people contributing to the liability could only be liable if they were reckless – a result that is anomalous at best. Today’s action will close that oversight gap, thus emphasizing the obligation under our ethics rules that an auditor act with reasonable care and competence. Finally, it is important to recognize that today’s amendment to our ethics rules is not intended to encompass good-faith errors in judgment.

In conclusion, this is an incremental but important change in Rule 3502, and I support its adoption.

Before I close, I would like to thank the staff who have contributed to this project. From the Office of the General Counsel: Conner Raso, Drew Dropkin, Damon Andrews, and Vince Meehan. From the Office of Economic and Risk Analysis: Rahsan Inget, Tasneem Raihan, John Cook, Shayna Vereen, and Frederico Garcia; and from the Division of Enforcement and Investigations: Mike Davis, John Abell, and Bill Ryan.