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PCAOB Proposes Expanded Liability for Individual Auditors Involved in Firm Violations

Sept. 19, 2023 

The U.S. audit watchdog wants to widen its scope to impose fines or other penalties to contributors to violations

The Public Company Accounting Oversight Board proposed expanding liability for individual auditors and certain accounting firms when they contribute to violations by the primary firms handling an audit, widening the scope of whom the U.S. audit regulator can charge.

The current rule, which dates to 2005, centers on the liability of contributors to registered accounting firms’ violations of auditing standards. The contributors are typically partners in charge of an audit or another accounting firm that assisted in the work.

Under these rules, the PCAOB can hold contributors liable for firm violations if they act recklessly, meaning they took an extreme departure from the standard of ordinary care either known to them or so obvious they must have been aware. If the PCAOB finds the contributors acted recklessly, they need to have directly and substantially contributed to the firm’s violation to face sanctions such as a fine or other penalty.

The PCAOB on Tuesday voted 5-0 to issue a proposal that would lower the threshold for liability to negligence from recklessness for contributors in these situations. The audit watchdog defines negligence as the failure to exercise reasonable care or competence, covering a wider range of potential behavior in carrying out an audit. Auditors are already held to this standard in other situations.

“Firms don’t make the decisions or take the actions that lead to these violations on their own,” Chair Erica Williams said. “People participate in these decisions and actions.”

The proposed requirements aren’t expected to pose significant time, resources or money to auditors, Williams said. “If you are doing what you are already supposed to be doing, this proposal won’t affect you,” Williams said. “If you are not, there may be consequences.”

The Securities and Exchange Commission, which oversees the PCAOB, already has the ability to seek civil penalties against these parties when they negligently cause firm violations, but the audit watchdog doesn’t. The SEC obtained this ability under the 2010 Dodd-Frank Act, which Congress passed five years after the adoption of the PCAOB rule.

The proposal would, for example, allow the PCAOB to penalize partners or assisting firms that played a direct and substantial role in conflicts of interest, as well as failures related to the controls that firms use to assess the quality of audits. In an unrelated move, the regulator last November proposed tightening rules around quality control.

The proposal would also clarify the primary firm committing the violation and the contributors. To be held liable, the individual auditor or assisting firm would have to be in a position to directly and substantially contribute to the violation of the primary firm. The clarification aims to prevent potential future loopholes as firms’ relationships become more complex, the PCAOB said.

Board members Duane DesParte and Christina Ho said they supported the proposal but expressed concerns. DesParte said the proposal might not present a workable or fair framework for contributors’ liability due to unique challenges from the nature of auditing.

Ho said the consequences of the proposed changes could spur junior auditors to leave the profession, prompting less qualified people to rise to fill important audit roles. “I am concerned that a failure to signal audit expectations [about future charges] upfront in the proposal may exacerbate the accounting talent crisis,” Ho said, referring to a widening shortage of U.S. accountants.

The public has until Nov. 3 to submit feedback on the proposal.

[The Wall Street Journal]

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