Despite calls by auditors and businesses to issue a revised proposed auditing standard on so-called noncompliance with laws and regulations (NOCLAR), the Public Company Accounting Oversight Board (PCAOB) is moving ahead to finalize the standard in 2024 as previously planned without doing another round of proposals.
“We expect to provide the board a recommendation to adopt a new standard” on NOCLAR “before the end of the year,” PCAOB Chief Auditor Barbara Vanich said during a meeting of the board’s Investor Advisory Group (IAG) in Washington on September 26, 2024.
The PCAOB in June 2023 issued a 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 U.S. Chamber of Commerce said the roundtable mainly highlighted what they see as flaws of the proposal.
Tom Quaadman, an executive vice president with the U.S. Chamber, in early September said the PCAOB “should leave the existing rule in place” and just drop the proposal.
“Under the existing standard…it’s is there a violation of law that is material in nature that should be disclosed. So, using the materiality definition and screen to determine whether or not something should be disclosed,” he said. “This now changes … any violation of any rule or regulation in any jurisdiction.”
For example, “if I run a delivery service in New York City, how much do you think I pay in parking tickets a year? It could be tens of millions of dollars. Those are violations of law,” Quaadman said. “Is that an audit issue? It’s called frankly cost of doing business.”
However, when the PCAOB voted to propose the standard last year, Chair Erica Williams stressed that this proposed requirement does not mean that auditors must know every single rule and regulation. The proposal states: “These laws and regulations would necessarily be relevant to the company or its operations but would not represent every law or regulation to which the company is subject.”
Today, existing audit standards require auditors to have the technical expertise and proficiency to conduct an audit, and this includes an understanding of the company’s regulatory environment. And the companies know what laws and regulations they must follow, and which ones pose the greatest risks. Thus, a NOCLAR which could reasonably affect materially a company’s financial statements is readily available to the auditor.
While auditors and company management are opposed to the proposed standard as written, investor advocates believe that the existing standard—adopted on a temporary basis from the accounting profession—must be revised because only about one third of corporate fraud is detected, according to a 2023 study. Frauds—detected and undetected combined—cause an estimated loss of 1.6% in equity value each year. In 2021 the loss was $830 billion.
“By finalizing the NOCLAR standard, the PCAOB is appropriately continuing to prioritize standard setting that benefits investors by replacing the interim standards with higher quality standards,” said Jeffrey Mahoney, general counsel of the Council of Institutional Investors (CII) and a member of the IAG.
In pushing for reform, former SEC chief accountant Lynn Turner, also an IAG member, had harsh words about the auditing profession.
“Auditors have turned a blind eye to companies breaking securities, medicare, banking and tax laws, to name a few,” Turner said. “A PCAOB rule requiring auditors to open their eyes and report these infractions to investors, and the SEC and other law enforcement agencies is long overdue.”
This article originally appeared in the September 30, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.
Get all the latest tax, accounting, audit, and corporate finance news with Checkpoint Edge. Sign up for a free 7-day trial today.
