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

Remarks as prepared for delivery

Thank you, Chair Williams. I support amending PCAOB Rule 3502 to strengthen the Board’s ability to hold associated persons accountable for misconduct. 

When Rule 3502 was adopted in 2005, the Rule codified certain ethical obligations of associated persons. The Rule sets forth a recklessness standard of liability for associated persons who directly and substantially contribute to a firm’s violations. 

We have had a considerable amount of time to assess the Rule’s efficacy in advancing investor protection and driving audit quality. During this time, we have observed certain anomalous results in our enforcement regime relating to holding associated persons accountable. Specifically, we have observed instances where a firm is charged for acting negligently, yet persons who directly and substantially contributed to the violations are not charged under Rule 3502 if their conduct is not deemed to meet the recklessness standard. Thus, the Board may sanction a firm but is constrained with respect to the associated person or persons who contribute to the firm’s violative conduct. 

We well know that both reckless conduct and negligent conduct can lead to investor harm. Investor confidence in the reliability of financial statements is shaken when auditors fail to be effective gatekeepers, when they fail to faithfully execute their roles and responsibilities under PCAOB rules and standards. While there are circumstances under which it is appropriate to hold only an entity accountable for violations of PCAOB rules and standards, there are other circumstances when certain persons play such a significant role in the conduct resulting in a firm’s violations, that such persons also should be held accountable. 

The Sarbanes-Oxley Act granted the PCAOB authority to hold firms and associated persons accountable for negligent misconduct. As such, accountability under the PCAOB’s enforcement regime should be possible when the misconduct of associated persons, not just firms, meets the negligence threshold. With that in mind, it is important that we recalibrate Rule 3502 in the interest of investor protection and to encourage associated persons to execute their roles with due professional care and competence. 

I am cognizant that auditors often are required to execute extensive and complicated procedures to amass audit evidence in order to conclude that it is sufficient and appropriate to support their audit opinions. As such, the amendment to Rule 3502 is not intended as a means to second guess auditors’ good faith judgements, which was a commenter concern. The Rule continues to pertain to associated persons who directly and substantially contribute to a firm’s violations. This amendment is not a “gotcha” tool!  It is designed to close a gap in accountability in our enforcement regime. As discussed in the release, we do not anticipate that this amendment will drive a tremendous surge in new Rule 3502 charges. The amendment to Rule 3502 would strengthen our enforcement authority by providing another tool whereby we can advance investor protection and elevate audit quality by holding negligent actors accountable for unreasonable conduct. The Board remains judicious about how it utilizes enforcement resources and will pursue cases that it believes effectively drive deterrence.

Importantly, being subject to a negligence standard for violative contributory conduct is not a new construct for auditors. The SEC has had the ability to apply this standard to auditor misconduct for years. This amendment merely solidifies that the PCAOB also may bring disciplinary actions under a negligence framework. 

Compliance with PCAOB rules and standards is crucial to the right functioning of our capital markets. Investors take comfort in the reasonable assurance that auditors provide that financial statements are free of material misstatement. Auditors who negligently fail to fulfill their responsibilities with fidelity, fail investors. The PCAOB was established to stand in the gap and protect investors. The action that we will take today is in furtherance of that mission. 

Notably, this amendment reflects our consideration of comments that we received from a cross-section of stakeholders. As such, I want to express my gratitude to commenters for engaging in the rulemaking process and providing thoughtful and incisive viewpoints. 

As I draw to a close, I want to acknowledge concerns raised that the amendment will adversely impact the pipeline for audit professionals. The position that the regulatory environment is driving talent away from the profession, I believe, is unproven. The competition for talent in the current labor market is fierce and has impacted many professions. 

Based on my engagements with college and university students and faculty, the “talent crisis” in the audit profession is a multi-dimensional challenge. It is driven by, among other things, starting salaries compared to other professions, the lack of diversity, the 150-hour CPA credit requirement, considerable workloads, and an overall decline in the number of college graduates. 

The pipeline challenge is significant, and a sea change is needed. Attracting new talent to the audit profession will require commitment from various stakeholders, including firms, academics, and regulators, who can educate today’s talent pool about the fundamental function and critical importance of the profession in our capital markets. Auditors are essential gatekeepers and students should be able to see that this profession is essential and can be rewarding. The PCAOB’s role as a regulator – whether we are modernizing standards or striving to deter misconduct – helps ensure that the value and luster of the profession can be preserved.

In closing, I would like to thank the dedicated staff from across the PCAOB for their thoughtful contributions, keen insights, and steadfast attention to this project. Specifically, from the Office of the General Counsel, my sincere thanks to James Cappoli, Connor Raso, Drew Dropkin, Damon Andrews and Vince Meehan. From the Office of Economic and Risk Analysis, my sincere thanks to Martin Schmalz, Rahsan Inget, Tasneem Raihan, John Cook, Shayna Vereen, and Federico Garcia. From the Division of Enforcement and Investigations, my sincere thanks to Bob Rice, Mike Davis, John Abell and Bill Ryan. Additionally, I would like to thank my fellow Board members and my staff for their contributions to this process and project. And finally, I also would like to thank the staff in the SEC’s Office of the Chief Accountant for their assistance with this project as well.