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As Promised to Congress, PCAOB Schedules Roundtable on Proposal on Noncompliance With Laws and Regulations

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 6 minute read

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 6 minute read

Following a strong opposition by the auditing profession, public company management, lawyers, and Republican lawmakers on the Public Company Accounting Oversight Board’s proposal that would strengthen the auditor’s role on their clients’ noncompliance with laws and regulations (NOCLAR), the PCAOB has scheduled a virtual roundtable for March 6, 2024, to get additional feedback for the standard-setting project.

The PCAOB issued the proposal in early June 2023 to strengthen its standard and require public company auditors to more proactively identify, evaluate, and communicate instances of a company’s NOCLAR. But it proved to be controversial: the board, as of February 26, got 140 comment letters—an extremely high number for the board as it usually gets about three dozen comment letters on a proposal.

Criticisms from Auditors and Companies

Business organizations banded together to also write a joint comment letter saying that the proposal would drive new liability concerns among auditors that would drive audit costs even higher.

The proposal turns “financial statement audits into wide-ranging investigations of potential instances of NOCLAR,” the joint letter states. “These new auditor responsibilities would fundamentally alter the audit function and would insert auditors into core legal and management decisions.”

Moreover, “auditors may be put into a position to second-guess a company’s own legal counsel regarding whether noncompliance may have occurred,” the letter states.

Even the NYSE Group and Nasdaq, Inc. wrote comment letters—which is highly unusual for stock exchanges to do so on PCAOB projects. Nasdaq, for example, noted that the “proposal massively expands the scope of an audit and drastically re-writes what is relevant to financial reporting, which impacts federal securities laws…, and other critical common law protections far outside the purview of the PCAOB.”

Investors Want Strong NOCLAR Standard

But the PCAOB has a single mission to protect investors, and advocates largely supported the proposal. Its own Investor Advisory Group (IAG) suggested improvements that would make the standards even more robust. A renewed focus on the auditor’s responsibilities regarding NOCLAR originally came amid a string of high-profile cases in the past several years, including unauthorized creation of bank accounts by Wells Fargo & Co., whose auditor is KPMG LLP, which has denied any wrongdoing.

IAG pointed out that its members are worried that auditing standards have not changed even though the business and financial reporting environment has evolved. Members of IAG include the Council of Institutional Investors (CII) and the CFA Institute.

Sandra Peters, senior head for global financial reporting policy advocate of the CFA Institute, wrote a comment letter, saying NOCLAR is “a top priority” for investors as they see it as part of management’s and auditor’s existing responsibilities under the Sarbanes-Oxley Act of 2002 and related to the accounting for contingencies under US GAAP and IFRS. Sarbanes-Oxley created the PCAOB to supervise the public company auditing profession following accounting scandals at Enron and WorldCom.

In a 2018 survey of CFA Institute members, investors rated auditor consideration of NOCLAR as their third-highest priority for regulators and standard-setters, she wrote.

“We believe its high priority reflects the frequency and magnitude of investors losses from NOCLAR through settlements, fines, sanctions, reputational losses with customers, and necessary changes in business models and practices to bring a company into compliance,” wrote Peters, who also serves on the SEC’s Investor Advisory Committee.

“NOCLAR can pose existential risks that can result in total losses for investors, such as the fraud committed by Wirecard,” she continued. “Investors bear the cost of companies’ noncompliance but are often the last informed because management is incentivized to withhold negative information from investors entirely or for as long as possible.”

She explained that investors make complex judgment and need to price these risks. Investors understand that in many instances, potential noncompliance is not straightforward and require court or other adjudicative body to determine if violations occurred. Moreover, investors understand that complex judgments are required and thus often engage with subject matter experts.

“Investors are not seeking to eliminate all uncertainty, avoid all risks, or to replace management’s business judgment with compliance procedures,” Peters wrote. “Rather, investors need accurate, timely, and complete disclosures regarding contingencies to price risks and make appropriate investment decisions.”

Intense Lobbying

However, with intense industry lobbying, House Republicans during a December hearing asked PCAOB Erica Williams about the concerns of the proposal. She said the board carefully weighs all comment letters and told lawmakers that a roundtable will be held to do further outreach.

Reopening Comment Period and Briefing Paper

Because the PCAOB is holding the roundtable, it opened up the comment period, which was originally closed in August. The new deadline is March 18.

This time around, the board is particularly interested in a set of questions and topics in the roundtable briefing paper. But commenters can address any part of the proposal.

Question About Who Will Participate

The PCAOB said that PCAOB Chief Auditor Barbara Vanich will co-chair the roundtable with Chief Economist Martin Schmalz.

However, the board in its announcement does not name who will be participating other than to say that they “will include commenters with diverse viewpoints, including those representing investors, auditors, issuers, and audit committees; subject matter experts in the fields of economics, corporate and securities law, and auditing; and commenters and experts who serve on the PCAOB’s advisory groups.”

The briefing paper has a section about panelist selections, but this, too, does not name who the panelists are.

“After considering comments received, staff have identified and invited three cohorts of panelists to participate in the roundtable. Each of these cohorts consists of individuals who represent an array of perspectives and viewpoints,” the staff paper states.

It is unclear why the names are not listed with the roundtable only a week away, and the PCAOB did not immediately respond to a query by Thomson Reuters.


This article originally appeared in the February 27, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.

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