The Public Company Accounting Oversight Board (PCAOB) will no longer consider finalizing 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, according to a board spokesperson.
“Following the recent issuance of staff guidance, the PCAOB will not take additional action on NOCLAR this year,” the spokesperson said in an emailed statement on November 18, 2024. “We will continue engaging with stakeholders, including the SEC, as we determine potential next steps. As our process has demonstrated, the PCAOB is committed to listening to all stakeholders and getting it right.”
As capital markets regulator, the Securities and Exchange Commission oversees the board, and its standards must be approved by the commission.
The PCAOB spokesperson was referring to the staff spotlight report that explains existing requirements for auditors to detect, evaluate, and communicate illegal acts by a company under audit, published on November 12. The staff put the guide together following feedback on the NOCLAR, noting that they believe that an overview of existing responsibilities may be beneficial.
It appears that the decision to put NOCLAR on the back burner at this juncture was made on Friday, November 15.
The decision also comes as some observers have questioned whether the SEC will be able to approve the standard as it would be seen as midnight regulations. The incoming Trump administration in January 2025 is expected to make a sharp turn, pulling back on regulations that businesses deem burdensome.
And when the PCAOB issued the NOCLAR proposal in June 2023, auditors, public companies, and even stock exchanges strongly opposed it, arguing that the board is trying to fix a rule that they believe is not broken. Unlike existing standards, the proposal would have covered 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 said that it would likely put auditors in a legal compliance role outside their purview. And auditors and business groups, including the U.S. Chamber of Commerce, asked the board to either drop the proposal or at least do another round of proposal.
“The Chamber has repeatedly recommended that the Public Company Accounting Oversight Board rescind its unwarranted proposal on” NOCLAR, Tom Quaadman, U.S. Chamber of Commerce Senior Vice president of Economic Policy, said in an emailed statement on November 18. “We look forward to working with the new SEC leadership to ensure that the PCAOB’s actions protect investors and adhere to economic and legal guidelines.”
On November 14, when the PCAOB met to consider adopting part of a proposal on firm registration, board member Christina Ho said she was “deeply concerned” that the PCAOB could be adopting a series of rules in the coming weeks, overwhelming “institutional review process” both at the PCAOB and the SEC, “that helps ensure that regulations have been carefully considered, are based on sound evidence, and can justify their costs.”
“Modernizing our standards and rules is important, but if we rush to get things done before any changes in the composition of the Commission, we could end up wasting taxpayer dollars by adopting ill-considered rules and running our professional staff ragged while at the same time undermining the democratic process,” Ho added.
The PCAOB had started the project as members of the board’s Investor Advisory Group over the years have pressed the board to strengthen the current standards, which was put in place temporarily.
When the PCAOB was established over two decades ago following accounting scandals at companies like Enron and Worldcom, it had adopted standards from the AICPA on an interim basis. While a few were updated, many more were not updated, and one of the current board’s goals is to modernize its standards, including NOCLAR.
Moreover, the Consumer Federation of America in a comment letter said that under existing requirements, auditors often do not detect NOCLARs and investors end up paying for the price. The group cited a study that in normal times only one-third of corporate frauds are detected.
“Combining fraud pervasiveness with existing estimates of the costs of detected and undetected fraud, the study’s authors estimated that corporate fraud destroys 1.6% of equity value each year, equal to $830 billion in 2021,” the organization wrote. “The proposal would help to address these shortcomings in the current standards.”
And Lynn Turner, former SEC chief accountant who sits on the board’s advisory groups, was unhappy with the latest development.
“Unfortunately, this is a total capitulation to the large auditing firms who refuse to inform investors when they become aware of,” he said. “Companies breaking laws.”
Pressing Ahead With Other Rules
In the meantime, the PCAOB on November 15 announced that it is still going ahead to consider finalizing a pair of proposals intended to increase auditor transparency on November 21.
The board will consider adopting “requirements for reporting of specified firm-level metrics on new Form FM, Firm Metrics, and specified engagement-level metrics on an amended and renamed Form AP, Audit Participants and Metrics.”
It will also consider adopting “amendments to PCAOB annual and special reporting requirements to facilitate the disclosure of more complete, standardized, and timely information by registered public accounting firms.”
The two proposals were issued at the same time in April this year. The first one was previously called audit quality indicators, and the PCAOB proposed a requirement for firms to disclose a set of 11 standardized metrics that are intended to give some insight into the performance of audits, which reform and investor advocates have pushed the board to do so since at least 2008.
The other proposal would require firms to provide more disclosure, such as financial data and governance information in annual and special reporting forms filed with the PCAOB. This was also recommended by reform advocates in 2008.
While some investors may have been disappointed that NOCLAR is no longer under consideration for now, others believe that increasing firm transparency is more important.
“Providing more public information about the company’s external audit and external auditor to inform shareholder voting for the election of audit committee chairs and members and the ratification of external auditor may be the most important action the PCAOB can take as part of its auditing standard setting responsibilities,” said Jeff Mahoney, general counsel of the Council of Institutional Investors who serves on the board’s advisory groups.
On November 21, the PCAOB will also consider its 2025 budget.
The approved spending for 2024 was $384.7 million, which was a significant increase of 11% over its revised 2023 spending plan of $347.3 million.
Much of the budget is allocated to the PCAOB’s inspections program, which has been credited for improving audit quality over the long run.
This article originally appeared in the November 19, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.
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