Statement on the Amendment to PCAOB Rule 3502 Governing Contributory Liability

Thank you, Chair Williams.

On September 19, 2023, I supported the release of the proposal with reservations.  For example, I expressed concern that the proposal is silent as to whether the Board expects to bring charges under the proposed negligence standard against individuals holding junior audit positions like associates and senior associates.  My concern stemmed in part from the accounting talent crisis and whether lowering the contributory liability standard from recklessness to negligence would not only exacerbate the accounting talent crisis but also cause smaller audit firms to exit the public company auditing business. ¹ A number of commenters expressed similar concerns.  For example, one commenter wrote that the proposed changes, if adopted, “would serve as a catalyst for highly competent auditing professionals and for college students to choose other opportunities outside the accounting profession, further disrupting an already strained pipeline of professionals.” ²  Another commenter expressed concern about the proposal’s effect on smaller, triennially inspected firms, and how it could exacerbate “the declining number of firms willing to conduct issuer and/or broker-dealer audits,” noting that “over the last ten years, the number of PCAOB registered and inspected firms that provide audit reports for issuers has declined from about 650 to 450 . . . .” ³

The adopting release addresses my reservations and lessens my concerns.  Specifically, the adopting release states that “the Board does not anticipate that a change in the liability standard for contributory conduct will be used to sanction isolated, good-faith errors in professional judgment – let alone be wielded as a ‘blunt’ or ‘draconian’ instrument, . . . including with respect to less senior engagement team members.”  Emphasis added.  The adopting release also states that “the Board emphasizes that it is not the Board’s intent to pursue . . . ‘foot-faults’ or ‘unintentional slips, pure errors of judgment, and innocuous errors on technicalities.’  Nor do the Board’s standards require that auditors exercise ‘perfect judgment at all times’ . . . to avoid an enforcement action (under Rule 3502 or otherwise).”  The adopting release’s economic analysis estimates “that the amendment would result in an average of two to three more cases per year.”  In addition, the adopting release also states that “the Board anticipates that conduct occurring more than 60 days after Commission approval would be subject to Rule 3502, as amended, but that conduct occurring prior to, or within 60 days after, Commission approval would not be subject to the amendment to Rule 3502.”

While the language I quoted from the adopting release is not binding on this Board or future Boards, it serves as a helpful signal.  As a result, I will support the adopting release.  However, I will be vigilant to make sure that we follow through on what we say in the adopting release so that we do not make the public company auditing profession so risk-ridden that the best and the brightest pursue careers elsewhere.  If we make the public company auditing profession so unattractive in the name of investor protection, we will be doing a disservice in the long run to the investors we are sworn to protect.

I want to thank the Office of General Counsel staff, particularly Damon Andrews, and the Office of Economic & Risk Analysis staff, particularly Tasneem Raihan, for their hard work and their responsiveness to my questions.

Thank you. Back to you, Chair Williams.