The Public Company Accounting Oversight Board issued a proposal Tuesday to amend its existing auditing standards to toughen the requirements for the auditor’s responsibility to consider a company’s noncompliance with laws and regulations, including fraud.
If the proposal is adopted, it would strengthen auditor requirements to identify, evaluate, and communicate possible or actual noncompliance with laws and regulations. The PCAOB is asking for comments on the proposal by Aug. 7, 2023.
“By catching and communicating noncompliance sooner, auditors can help companies course correct and better protect investors from risk,” said PCAOB chair Erica Williams in a statement Tuesday.
“A company’s noncompliance with laws and regulations, including fraud, can have devastating consequences for investors,” she said during an open board meeting on the proposed standard. “When sanctions, fines and civil settlements directly affect a company’s bottom line, or reputational damage causes a company’s stock value to decline, innocent investors pay a price.”
She pointed to the example of Wells Fargo, which agreed last month agreed to pay $1 billion to settle a class-action lawsuit from investors alleging it made misleading statements about compliance with consent orders imposed by federal regulators
The PCAOB proposal aims to strengthen and enhance auditor obligations related to a company’s noncompliance with laws and regulations in three main ways:
Identify: The proposal would set specific requirements for auditors to proactively identify — through inquiry and other procedures — laws and regulations applicable to the company and that could have a material effect on the financial statements, if they’re not complied with properly. The proposal explicitly says financial statement fraud is a type of noncompliance with laws and regulations.
Evaluate: The proposal would beef up requirements related to the auditor’s evaluation of whether noncompliance with laws and regulations has occurred, and if so, the possible effects on the financial statements and other aspects of the audit. For instance, the proposed standard would require the auditor to consider whether specialized skill or knowledge is needed to assist the auditor in evaluating information indicating noncompliance has or may have occurred.
Communicate: The proposal would require auditors to communicate to the appropriate level of management and the audit committee as soon as they are made aware that noncompliance with laws or regulations has or may have occurred. In addition, the proposal would create a new requirement that the auditor must communicate to management and the audit committee the results of the auditor’s evaluation of that information. The communication would specifically need to address which matters are probably noncompliance and the effect on the financial statements for those matters that are likely noncompliance.
By requiring auditors to identify and communicate noncompliance sooner, the proposed amendments, if adopted, would spur companies to take more timely remedial actions and thus decrease investor harm caused by legal and regulatory penalties. Another potential advantage would be to reduce the likelihood that financial statements are materially misstated due to noncompliance with laws and regulations.
The PCAOB is asking for comments on specific issues in the proposal. The board is asking for people to answer those questions, as well as comment on any aspect of the proposal, and to provide their reasoning and relevant data supporting their views.
