Proposed changes would strengthen auditor requirements, which lawmakers say conflict with existing rules.
08/25/2023 12:25 P.M.
3 minute read
Lawmakers on the House Financial Services Committee are urging the Public Company Accounting Oversight Board (PCAOB) to reevaluate its proposed changes to audit standards used for companies related to noncompliance with laws and regulations standards.
The PCAOB proposal would “amend PCAOB auditing standards related to the auditor’s responsibility for considering a company’s noncompliance with laws and regulations, including fraud,” according to a news release.
The PCAOB, established by Congress to oversee the audits of public companies, seeks to “strengthen auditor requirements to identify, evaluate, and communicate possible or actual noncompliance with laws and regulations.”
Its proposal would also require auditors to identify and communicate noncompliance sooner.
House Financial Services Committee Chair Patrick McHenry, R-N.C., and U.S. Rep. Ann Wagner, R-Mo., chair of the Capital Markets Subcommittee, sent a letter to the PCAOB stating the “proposed changes are in direct conflict with existing rules and risk undermining audit quality, auditor independence, and the materiality standard,” according to a news release.
“The proposed amendments, if adopted, would encourage companies to take more timely remedial actions and thereby reduce investor harm caused by legal and regulatory penalties. Another potential benefit would be to lower the likelihood that financial statements are materially misstated due to noncompliance with laws and regulations,” according to the PCAOB.
Proposed duties for auditors, according to PCAOB include:
- Identifying laws and regulations that apply to the company and could have a significant impact on financial statements due to noncompliance.
- Strengthening requirements in the auditor’s evaluation for noncompliance and, if noncompliance occurs, the possible effects on financial statements and other components of the audit.
- Requiring the auditor to communicate to management and the audit committee when they learn there is noncompliance with laws or regulations.
McHenry and Wagner say in the letter that these proposals to company noncompliance with laws and regulations (NOCLAR) would risk undermining the quality of audits and shift auditors’ focus away from their responsibility to closely evaluate financial statements.
“Auditors are not legal professionals and should not be expected to function as law enforcement agents. Notably, the Securities and Exchange Commission has long-established rules for auditor independence. These rules prohibit auditors in the U.S. from offering services to audit clients that fall under the purview of legal experts,” they say in the letter.
Overall, McHenry and Wagner request for the PCAOB to reevaluate if the NOCLAR standards are suitable and align with the board’s mission.
ACA Signs on to Comments
On behalf of its members that are publicly traded companies, ACA International signed on to comments (PDF) led by the U.S. Chamber of Commerce on the PCAOB proposal.
The comments from the U.S. Chamber of Commerce and a coalition of business trade associations argue the proposed changes would lower audit quality and make the process more complex, increasing the cost and scope without a clear benefit to investors.
“The proposal outlines a series of complex duties, without adequate justification, that are not encompassed within the audit and therefore are beyond the remit of the PCAOB,” according to a news release from the Chamber.
The Chamber’s comments also note the proposal lacks precise terminology in the auditor requirements and that it is turning the financial statement audits into expansive examinations of possible noncompliance.
The proposal is duplicative of existing internal company processes and auditors’ work, according to the Chamber.