Despite coming administration change in early 2025, the Public Company Accounting Oversight Board (PCAOB) plans to press ahead with its controversial standard-setting project on the auditor’s consideration of the company’s noncompliance with laws and regulations (NOCLAR) by the end of 2024.
When the PCAOB unveiled its updated standard-setting agenda one day before the November 5 presidential election, the board stuck to its previous plans to adopt the standard this year. The proposal had generated strong opposition by auditors and businesses because it would widen the scope of what auditors should do.
However, with Republican Donald Trump’s victory as President, some have speculated that the PCAOB may not go through with the project as the incoming administration as of January 20, 2025, is expected to pursue a deregulatory agenda, perhaps even more so than during his first term, given the popular sentiment against the administrative state and the conservative majority Supreme Court rulings that curtailed government power over regulated entities in recent years.
But during a November 12 meeting of the Standards and Emerging Issues Advisory Group (SEIAG), PCAOB Chief Auditor Barbara Vanich said her office intends to follow-through as laid out on the November 4 agenda refresh, including recommendations to the board to adopt NOCLAR this year.
“We’ve always been guided by our expert staff when it comes to standard setting,” a PCAOB spokesperson said in an emailed statement. “That has not changed. And we will always take whatever time it takes to get it right.”
PCAOB Can Sure Adopt, But What About SEC?
While the PCAOB can try to push through and adopt the final standard, the question remains whether the Securities and Exchange Commission (SEC), which oversees the board, will approve it in time before the commission will be recomposed to reflect the current party in power.
As part of its oversight, the SEC must approve auditing standard changes that the PCAOB adopts.
Three commissioners will be Republican appointees, including the chair during the Trump administration. Current SEC Chair, Gary Gensler, who was appointed by Democratic President Joe Biden, is expected to step down before January 20.
And the SEC must follow due process if the PCAOB adopts to approve and sends over the rules for commission approval.
The SEC has 45 days to act after publishing the board’s rules for public comment in the Federal Register under Section 19(b)(2)(A) of the Securities Exchange Act of 1934. The provision allows the SEC to extend the period for up to additional 45 days if the agency determines that a longer period is appropriate.
The SEC can also decide to institute proceedings, giving opportunity for hearing, which needs to be concluded within 180 days after the agency publishes the notice of the filing of the proposed rule change.
When the SEC receives the rule change filing from the PCAOB, the commission publishes it for public comment.
Daniel Goelzer, former PCAOB chair who previously served as general counsel of the SEC, said that the comment periods are usually 21 days. The Act also provides that the commission may not approve a proposed standard earlier than 30 days after the date of publication in the Federal Register unless the commission finds “good cause” for doing so.
“I don’t think ‘good cause’ exists here,” Goelzer said. “A majority of the commission would then have to vote to approve the standard. So, basically, the PCAOB would have to submit the NOCLAR standard to the commission in time for it to be published in the Federal Register no later than 30 days before inauguration day, assuming that will be Gensler’s last day as chair. That probably means the board would need to act by early December at the latest.”
Goelzer also pointed out a couple of other important details.
“First, if the commission fails to approve or disapprove a standard within 45 days of Federal Register publication, the standard takes effect,” he said. “That could possibly happen if Gensler leaves before there is a vote on approval/disapproval, and the remaining commissioners split 2-2.”
“Second, even if the SEC approves NOCLAR, it’s possible that it will be sued. A new SEC might decide not to defend the approval,” he said.
The U.S. Chamber of Commerce, with a history of suing the SEC—and winning 100% of the time so far—will likely sue if it is adopted as proposed. In a recent interview, Tom Quaadman of the Chamber said he would prefer to see the PCAOB altogether drop the proposal. If not, the business organization wants to see a second proposal as auditors have called on the PCAOB to do.
Even if the SEC were to somehow approve it, and the version of final rules adopted are opposed by businesses, they could lobby lawmakers. And the Congressional Review Act allows lawmakers to overturn certain federal agency actions with a simple majority. Republicans will have majority votes in both chambers of the new Congress.
‘You’ve Got to Be Kidding Me’
In the meantime, at a conference, a moderator was incredulous that the PCAOB is pushing ahead.
“I was like shocked that this was still on the agenda when I heard about it. I mean you’ve got to be kidding me. Like you said, nobody has responded in my view against the PCAOB rule so strongly that I would think that they would have to go back to the drawing board,” Brian Breheny a partner with Skadden, Arps, Slate, Meagher & Flom LLP who served as a deputy director in the SEC’s Division of Corporation Finance, said at securities regulation conference hosted by the Practising Law Institute on November 13 in New York.
At a different conference hosted by the Financial Executives International on November 13, PCAOB member Christina Ho said the board has received 189 comment letters, which is now the third highest in the board’s history.
During a press briefing, Ho did not answer directly answer a question about the board’s thinking on the NOCLAR given the election results.
“Aside from the fact that it’s still on our agenda, I can’t say more about that,” Ho told reporters. “As far as the impact of election, the PCAOB structure, we are not part of the federal agency, and based on the bylaws of the PCAOB, which gives the PCAOB chair wide authority to do many things, so, I don’t see any direction change unless the PCAOB chair changes.”
In a follow up question about whether potentially new leaderships will provide a better opportunity to have her views heard, Ho said: “I don’t know; I hope so.”
Ho, for example, voted against the PCAOB’s NOCLAR proposal. She also voted down the PCAOB’s final quality control standard, which large audit firms in particular opposed. But SEC was able to approve in September by a 3-2 vote.
In the meantime, former PCAOB member Goelzer said that he hoped that NOCLAR is not rushed through in the closing days of the Gensler SEC.
“However one feels about the proposal, it would be a major change in auditor responsibilities,” he said. “I am concerned that pushing something through on the eve of a change in leadership at the SEC—and perhaps at the PCAOB as well—would detract from the board’s credibility as a standard setter. In my view, it would be better to make some changes in response to comments on the proposal and republish the revised version for comment.”
What the Proposal Entails
The PCAOB in June 2023 issued the proposal that would strengthen the auditor’s role on their clients’ NOCLAR by requiring auditors to more proactively identify, evaluate, and communicate instances of a company’s NOCLAR.
As drafted, critics say that some parts of the proposal are unclear while other parts of the proposal are unworkable or out of scope. For example, the amended standard would cover all ranges of non-compliance—intentional or unintentional—from outright financial statement fraud to non-compliance matters that may have a material effect on the financial statements.
Opponents say that it would likely put auditors in a legal compliance role outside their purview. 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 without commensurate benefits.
Following industry outcry, even from some lawmakers, the PCAOB held a roundtable in March to get more feedback. But audit firms and the Chamber said the roundtable mainly highlighted what they see as flaws of the proposal.
Investor Advocates Want Reforms
However, the PCAOB’s sole mission is to protect investors, and investor advocates who had been pushing for rule change for several years, want the board to amend the existing standard. The PCAOB adopted the current standard on a temporary basis from the AICPA when the board was set up over two decades ago by Congress following accounting scandals like Enron and WorldCom.
“The PCAOB has been working on updating new rules that were decades old when they adopted them two decades ago,” former SEC chief accountant Lynn Turner who is a well-known investor advocate, criticized. “They have also been working for over a decade on rules for recommendations they received from the U.S. Treasury in 2008,” referring to the Advisory Committee on the Auditing Profession.
“The compensation for the PCAOB is at the highest levels in Washington and their performance and accomplishments have been some of the worst, as Senators recently pointed out,” said Turner who serves on the PCAOB’s advisory groups.
While pay has remained constant for 15 years, the PCAOB chair earns almost $673,000, and other members are paid almost $547,000.
In terms of the senators, Turner was talking about a letter by Democratic senators Elizabeth Warren and Sheldon Whitehouse that had a blistering critique of the PCAOB.
“And 22 years after the PCAOB was created, the quality of audits today, despite paying $17 billion a year for them, have a high rate of serious deficiencies,” Turner said.
The PCAOB audit inspections found a deficiency rate of 40% in 2022 and 46% in 2023.
This article originally appeared in the November 14, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.
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