Responsibility and Accountability for Persons Contributing to a Registered Audit Firm’s Violations of Law or Professional Standards, Proposed Amendments to PCAOB Rule 3502

Remarks as prepared for delivery

The proposal before us today may seem very technical, but it is important. It would strengthen the Board’s auditor oversight program and undergird the implementation of the audit standards that the Board is currently modernizing.¹

Under Chair Williams, this Board has focused on updating the legacy auditing standards it inherited and that were written decades ago by the accounting profession. The Board is doing so to advance its mission of protecting investors and furthering the public interest in informative, accurate, and independent audit reports. Much of that work focuses on the auditors’ responsibilities and the obligation of auditors to exercise due professional care.²  

Today, consistent with that focus, the Board is considering whether auditors who contributed directly and substantially to the violations of an audit firm because they failed to exercise reasonable care and competence can be held accountable.

As today’s staff recommendation explains, the Board has identified a gap in its oversight of auditors based on almost two decades of experience. At present, the Board, under existing rules, cannot hold some auditors accountable for directly and substantially contributing to a registered audit firm’s violation of the Board’s standards and rules. The gap arises from a rule written by the Board about twenty years ago. This rule only permits the PCAOB to bring an action against an auditor when that person acted recklessly or intentionally when participating in or contributing to an audit firm’s violations.

As a practical matter, of course, only individuals can take actions that violate laws, rules, and standards. The PCAOB, however, lacks the ability to ensure that all individual auditors face the consequences. The PCAOB currently cannot bring an action against negligent auditors whose direct and substantial contributions furthered an audit firm’s violations. This creates an obvious gap in the Board’s ability to protect investors and public markets, as Table 1 in the economic analysis suggests. Today’s proposal would close this oversight gap, thus emphasizing the obligations under the auditing standards that auditors act with reasonable care and competence.

The proposed rule would also align the PCAOB’s authority so that no individual who contributes to a firm’s violations is beyond reach. It will no longer matter if the person is associated with the audit firm committing the violation or is associated with another registered firm that helped with the audit. In today’s complex business environment, a number of firms may participate in the audit of a single public company, and the Board’s rules should apply uniformly to each firm’s personnel.  

I support the staff’s proposal to amend Rule 3502, and I look forward to receiving feedback from investors and other stakeholders.

I want to thank the staff from the Office of the General Counsel for their work and recommendation. I would also like to thank the Office of Economic and Risk Analysis, the Division of Enforcement and Investigations, and others who contributed to this proposal.