Statement on Proposed Amendments to PCAOB Rule 3502 Governing Contributory Liability

Remarks as prepared for delivery

Good morning, everyone. I want to join Chair Williams in expressing my appreciation to the staff for their expertise and efforts in developing today’s proposal, including spending substantial time with me and my team throughout the process.  

I support seeking public comment on today’s proposal to amend the PCAOB’s Rule 3502 on contributory liability.  

Integrity and accountability are essential to high quality audits and to investor trust and protection.   

Rule 3502 has been an important tool at our disposal to hold persons accountable when they recklessly contribute to violations by registered firms with which they are associated.   

Today, Staff is proposing to lower the threshold standard of conduct for contributory liability from recklessness to negligence.  

On its face, the proposal seems appropriate and reasonable as we all agree auditors and other players in the financial reporting ecosystem should act with due care.   

However, I am concerned that the nature of auditing presents unique challenges for making this a workable and fair framework for contributory liability.  

It is important to recall that in 2004 the Board initially proposed Rule 3502 as a negligence-based framework.¹ At that time, many questions were raised as to whether the negligence standard would be appropriate in the context of an audit.  

Audits are complex and require significant input and judgment from a wide array of professionals with distinct responsibilities, expertise, and experience, all working collaboratively to comply with complex laws, professional standards, and rules.  

Commenters expressed concern that under a negligence framework, contributory liability could be imposed on a potentially large number of individuals, including anyone who was in any way involved in the chain of events leading to a firm’s primary violation, even if acting in good faith or involved only remotely or tangentially.  

One commenter noted that a negligence standard “would place intolerable pressure on the difficult judgment calls that those who operate in this highly technical field must make on a regular basis. A ‘negligence’ rule is particularly ill-suited for retrospective judgments about compliance with ‘professional standards,’ and such a rule would operate as an invitation for after-the-fact attacks on conduct that was, at the time, objectively reasonable.”²  

Ultimately, in adopting the final Rule in 2005, the Board raised the liability threshold from negligence to recklessness.  The Board explained that it “does not seek to create through this rule a vehicle to pursue compliance personnel who act in an appropriate, reasonable manner, that in hindsight, turns out to have not been successful.”³  

The Board also determined that associated persons should be subject to contributory liability only if their action or omission “directly and substantially” contributes to the firm’s primary violation, explaining it did not seek to “reach those whose conduct, unbeknownst to them, remotely contributes to a firm’s violation.”⁴  

Crucially, in my view, today’s proposal retains the direct and substantial requirements to link a contributory actor’s conduct to a registered firm’s primary violation.   

Even so, I am interested in commenters’ views as to whether there are other concerns or considerations regarding the proposed negligence threshold that the Board should consider in the current audit environment. If anything, audits have become more complex, involve greater judgment, and include more participants than in 2004 when Rule 3502 was first contemplated.  

I am also interested, related to Question 9 in the proposal, whether other potential limitations should be applied to an associated person’s level of accountability in a negligence framework.  

For example, would it be appropriate for the Board to hold an associated person accountable for contributory negligent conduct in instances where a firm acts recklessly or knowingly in committing the primary violation? What about if a third-party engages in intentional misconduct that might otherwise break the chain of causation to a firm's primary violation?  

Given these questions and the other concerns I have highlighted, I wonder whether it is appropriate to move forward in establishing a negligence threshold for contributory liability.   

Your feedback on the proposal is therefore essential to ensure the Board fully considers all aspects and potential unintended consequences of the proposed changes.  

I would like to recognize and thank all the staff from across the PCAOB’s Divisions and Offices who have contributed to today’s proposal, especially James Cappoli, Connor Raso, Drew Dropkin, Vince Meehan and Damon Andrews in the Office of General Counsel and Martin Schmalz, Michael Gurbutt, John Cook, Tian Liang, and Federico Garcia in the Office of Economic and Risk Analysis.

I also thank Chair Williams and my other fellow Board Members and their staffs; Brent Simer, Katie Driscoll, and Lucia Carromba from my team; and the staff from the SEC’s Office of the Chief Accountant for their collaboration and sharing of perspectives on this project.