Investor Bulletin - Opportunity to Comment on Proposal to Strengthen Accountability for Contributing to an Audit Firm’s Violations
September 20, 2023
The Public Company Accounting Oversight Board’s (PCAOB or “the Board”) Office of the Investor Advocate is alerting investors to the opportunity to comment on the PCAOB’s proposed amendments to PCAOB Rule 3502 governing contributory liability.
This document represents the views of the PCAOB Office of the Investor Advocate and not necessarily those of other PCAOB staff or the Board. It is not a rule, policy, or statement of the Board.
On September 19, 2023, the Board issued for public comment a proposal that would strengthen protections for investors when individual auditors and others associated with PCAOB-registered accounting firms contribute to firms’ violations of the laws, rules, or standards enforced by the Board. The proposal is part of the Board’s commitment to strengthen accountability for those who put investors at risk and to advance its mission to protect investors and further the public interest in the preparation of informative, accurate, and independent audit reports.
- Read the full proposal here.
The existing rule requires an extreme departure from the standard of ordinary care (i.e., “recklessness”) by an individual auditor or other associated person who directly and substantially contributes to a firm’s violation before the Board can consider imposing sanctions. The proposal would change the liability standard from “recklessness” to “negligence.” Specifically, under the proposal:
- Individual auditors or other associated persons who did not take “reasonable care” in performing their duties (i.e., were negligent) could be held liable for directly and substantially contributing to a violation by a PCAOB-registered accounting firm, and
- Individual auditors or other associated persons could be held liable for directly and substantially contributing to a violation by any PCAOB-registered accounting firm, not just a firm with which they are associated.
The proposed rule would enhance accountability for violations.
As a result of the current recklessness standard, firms – acting through individuals – can currently commit a violation under a negligence standard, but those same individuals may escape liability and accountability under the existing rule because negligence is not enough for individual violations. The proposal addresses this regulatory incongruity.
The PCAOB has identified instances where an update to this rule would better protect investors. For example, the PCAOB has observed quality control violations by firms where individuals negligently, directly, and substantially contributed to the firms’ violations but did not engage in “extreme misconduct.” While the firms could be held accountable for the violations, under the existing rule the individuals whose negligence directly and substantially contributed to the firms’ violations could not be sanctioned. The proposal strengthens the PCAOB’s ability to protect investors by preventing actors engaged in such unprofessional conduct from escaping liability and accountability.
How to Comment on the Proposal
The Board is seeking public comment – including from investors – on the proposal. Comments are due by November 3, 2023.
The Office of the Investor Advocate encourages investors and others to submit comments on this proposal.