Statement on Proposed Amendments to PCAOB Rule 3502 Governing Contributory Liability

Remarks as prepared for delivery

Thank you, Chair Williams. I support issuing this proposal, which relates to further aligning Rule 3502 with the PCAOB’s statutory authority to investigate and discipline registered firms and persons associated with such firms. 

PCAOB Rule 3502 was adopted in 2005, during the infancy of the organization, as a means for the PCAOB to hold responsible those persons who contribute to violations of laws, rules or standards that the Board has authority to enforce. Since the rule became effective, the PCAOB has been able to assess the efficacy of Rule 3502, and has discerned a need to strengthen this enforcement tool because, in too many cases, those persons who play an integral role in firm violations are not charged under Rule 3502. The current proposal, which is informed by many years of PCAOB oversight, seeks to address this need.   

The proposed amendments to Rule 3502, if adopted, would advance the PCAOB’s ability to hold associated persons accountable for conduct that falls short of their professional responsibilities. Through our enforcement program, we have exercised our authority to investigate and discipline firms and associated persons. In fact, consistent with our 2022-2026 Strategic Plan, in the past eighteen months, we have been “more assertive” in pursuing enforcement actions, including imposing in 2022 the highest total amount of monetary penalties in one year, over $11 million. However, in a significant number of cases where we have charged a firm with a violation, a contributory actor has not been charged. In reviewing case data from 2009 to 2022, we determined that this was true in almost two-thirds of the cases brought against firms. 

Firms cannot act unless individuals act. If a firm acts negligently, an individual likely acted negligently as well. The PCAOB can hold a firm accountable for negligently violating PCAOB rules and standards; however, an associated person who directly and substantially contributes to such violations is held to a recklessness standard, which is a higher threshold.  This discrepancy is inconsistent with our investor protection mission. 

This rulemaking seeks to ensure that persons who orchestrate or facilitate firm violations cannot continue to perpetuate such conduct uncharged and unsanctioned. As we know, such conduct can erode investors’ perception of the quality of audits and their confidence in the capital markets. The proposed amendments, if adopted, would institute a negligence standard for contributors; thus, those who knew or should have known that their actions would contribute to a violation of applicable rules and standards by a primary actor can be held responsible by the PCAOB. If adopted, this enhanced enforcement tool, that is, the ability to sanction persons who negligently cause firms to commit primary violations (and not just persons who act recklessly), has the potential to be a powerful deterrent of misconduct. 

The proposed amendments contemplate how audits and firms’ organizational structures have evolved over time. Given that multiple firms often participate in the execution of an audit, and that audit personnel can have various roles and assignments, the amendments seek to clarify that associated persons contributing to a violation by any firm, not just a firm with which one is associated, are subject to our oversight and could face liability as a contributory actor. 

Lastly, the proposed amendments are measured and appropriate. They are informed by our oversight activities in the years since Rule 3502 became effective. And, importantly, the proposed amendments would establish a standard of liability with which auditors already are familiar, given that the SEC has held auditors accountable for their negligent contributions to primary violations by others.

The PCAOB’s investor protection mandate requires more accountability for contributory actors and more rigorous Board enforcement.

As such, I reiterate my support for the issuance of the proposed amendments to Rule 3502 and welcome stakeholder input on this important project.

I would like to thank the PCAOB staff involved in this rulemaking project, including from the Office of General Counsel:  James Cappoli, Connor Raso, Drew Dropkin, Vince Meehan, and Damon Andrews; and from the Office of Economic and Risk Analysis: Martin Schmalz, Michael Gurbutt, Tian Liang, John Cook, and Federico Garcia.

I also would like to thank my fellow Board members and my staff for their efforts on this project.  Finally, I would like to thank the Securities and Exchange Commission’s (SEC) staff, including the staff of the SEC’s Office of the Chief Accountant, for their support and assistance.