PCAOB Proposes Amendment to Strengthen Accountability for Contributing to Firm Violations

PCAOB Proposes Amendment to Strengthen Accountability for Contributing to Firm Violations


The Public Company Accounting Oversight Board (PCAOB) has released a proposal aimed at enhancing accountability for individuals who contribute to violations committed by registered public accounting firms. The proposed amendment seeks to update PCAOB Rule 3502, Responsibility Not to Knowingly or Recklessly Contribute to Violations, originally enacted in 2005. This move is intended to better protect investors and align the rule with industry expectations.

The key highlight of the proposal is the adjustment of the threshold for liability under Rule 3502. Currently, the rule only holds auditors accountable if they "recklessly" contribute to a firm's violations. This standard goes beyond negligence. The proposed amendment seeks to realign the liability standard from recklessness to negligence, bringing it in line with the standard of reasonable care already expected of auditors during the execution of their professional duties.

This change ensures that auditors can be held responsible for firm violations if their negligence directly and substantially contributes to the violation, which is consistent with their existing duty of reasonable care. The U.S. Securities and Exchange Commission (SEC) also possesses the authority to take enforcement actions against associated persons when they negligently cause firm violations.

The proposal maintains the requirement that an associated person must have contributed to a firm's violation both "directly and substantially" to be held liable. This provision ensures that individuals are not held accountable for minor or tangential contributions to a violation.

Clarifying Accountability Across Firms

As the complexity of arrangements among firms and the evolving nature of technology continue to increase, the proposal clarifies that associated persons of any firm can be held liable. This liability extends to individuals whose conduct, at least negligently, directly and substantially, contributes to any firm's violation, regardless of their direct association with that particular firm.

Throughout the proposal, the PCAOB requests feedback on specific aspects of the proposed amendments. Interested parties, including industry professionals and stakeholders, are encouraged to provide comments addressing the Board's questions and to share insights and relevant data supporting their views.

The public has until November 3, 2023, to submit comments on the proposal. PCAOB Chair Erica Y. Williams emphasized that this proposal aligns with investors' expectations that auditors should exercise reasonable care when performing their duties and ensures that the PCAOB has the tools necessary to hold them accountable when their negligence leads to firm violations, ultimately safeguarding investor interests.