Statement in Support of Amendment to PCAOB Rule 3502 Governing Contributory Liability

Remarks as prepared for delivery

Good afternoon, and thank you again, Chair Williams.

I support this recommendation. After careful consideration, I believe that this rule amendment will serve to protect investors while designed to minimize potential drawbacks.

Since becoming a Board Member, I have emphasized in many of my remarks that the auditing profession is vibrant, resilient, and noble, and that I am privileged to count myself a member of it. As a profession, we hold ourselves to high standards, and rightly so. At its core, the value that the auditing profession provides to the capital markets is trust. Any act that impairs this trust does not operate in isolation; it ultimately undermines the value of the profession. This cannot be taken lightly. Acts that discredit the profession do a disservice to us all, and call audit quality into question.

The PCAOB’s enforcement program’s guiding principle is the protection of investors. Enforcement actions hold auditors accountable and operate as a deterrent. This amendment aligns with those goals. It will allow us to better hold accountable associated persons who directly and substantially contribute to their firms’ violations. This rule applies when those persons act or fail to act in such a way that, in the language of the rule, they “knew or should have known would contribute to such violation.” That is the new language before us today. It is short and it is clear. By focusing associated persons more on the duties they must uphold, this amendment will protect investors and will promote ethical behavior and ultimately help to ensure the profession maintains its vital position of trust.

This amendment’s other main advantage is that it makes our enforcement provisions more internally consistent, and more consistent with those of the U.S. Securities and Exchange Commission (“SEC”), as the staff detailed in their presentation. The amended rule offers additional deterrence without subjecting auditors to any new or different standard to govern their conduct in light of the SEC’s authority. Such consistency is particularly important because it allows for clearer understanding about how rules and standards will be enforced. Rules that are clear are more equitable, because they put all auditors on equal footing to understand and integrate them into their operations.

As I reflected on the many comment letters submitted, it is clear the proposal has raised concerns. I acknowledge these concerns and was reassured by the release’s lengthy discussion of those comments. Ultimately, the Board is not adopting a negligence standard for the purpose of facilitating an increase in penalties; rather, the Board is adopting a negligence standard to facilitate an increase in accountability and deterrence. As the release states, accountability frequently improves outcomes.

The release underscores how the rule as amended is tailored to serve its purpose. This has been done primarily through the retention of the requirement that misconduct must “directly and substantially” contribute to the underlying violation. I believe this requirement is an important and appropriate limitation to make sure that culpable misconduct remains the focus. Furthermore, the release specifically states that the amendment does not target mere errors in judgement, but rather unreasonable conduct. This should minimize certain unintended consequences raised by commenters.

Similarly, the release discusses how the interaction of PCAOB and SEC enforcement activities was considered, to avoid needless duplication and meet the needs of each organization’s program in the ultimate protection of investors. In other words, the rule aims to strike the right balance in the context of that larger enforcement framework.

Conclusion

I am grateful for those commenters who took the time and effort to contribute their views by submitting comment letters. The recommendation has been updated in response to that input, most notably by removing the proposed language that would have allowed an associated person to be liable for contributing to a violation by any registered firm, not just a firm they are associated with. I appreciate the staff’s thoughtful consideration exhibited on this and other important questions raised by commenters.

Let me end with where I began – with trust in the profession. Nothing is more important than ensuring that trust remains intact. Even a small contribution to that cause is worthy.

My thanks to the staff for all of their hard work on this project, and in particular, their diligence in meeting with me to address my questions. I extend my gratitude to James Cappoli, Connor Raso, Drew Dropkin, Damon Andrews, and Vince Meehan from the Office of the General Counsel; to Martin Schmalz, Rahsan Inget, Tasneem Raihan, John Cook, Shayna Vereen, and Federico Garcia from the Office of Economic and Risk Analysis; and to Bob Rice, Mike Davis, John Abell, and Bill Ryan from the Division of Enforcement and Investigations.