New PCAOB standards would expand auditors’ responsibilities

On Tuesday, the Public Company Accounting Oversight Board (PCAOB) proposed changes to auditing standards that would increase auditors’ responsibility for uncovering and alerting stakeholders to fraud and other types of noncompliance with laws and regulations (NOCLAR), in an effort to better protect investors.

The proposed amendment would revise Auditing Standard (AS) 2110, Identifying and Assessing Risks of Material Misstatement and replace AS 2405, Illegal Acts by Clients, with a new standard titled A Company’s Noncompliance With Laws and Regulations, among other changes.

The proposed amendment, the PCAOB said, would primarily affect how auditors identify and evaluate instances of NOCLAR, and how they communicate with management and the audit committee around NOCLAR. Some significant changes include:

• Identifying NOCLAR: Under current standards, auditors need to identify noncompliance with laws and regulations that “have a direct and material effect on financial statements,” according to PCAOB. The proposal would instead require auditors to identify noncompliance with laws and regulations that “could reasonably result in a material effect” on financial statements. (Emphasis ours.)
• Evaluating NOCLAR: Under the proposed amendment, auditors would need to assess whether NOCLAR took place and how it might affect the financial statements and the remainder of the audit. They would have to formally consider using the help of legal experts and other specialists in transactions beyond the ones they’re auditing, in which they lack sufficient information to determine whether anything illegal has occurred.
• Communicating around NOCLAR: The proposed amendment would require auditors to alert management and the audit committee “as soon as practicable” once they become aware that noncompliance “has or may have occurred.” It would also introduce a new requirement for auditors to communicate with management and the audit committee after performing their evaluation.

“By catching and communicating noncompliance sooner, auditors can help companies course correct and better protect investors from risk,” PCAOB Chair Erica Williams said in a press release.

The proposal is open for public comment until August 7.

The PCAOB passed the proposal on a 3–2 vote, Reuters reported, with board members Duane DesParte and Christina Ho dissenting. The proposal “unreasonably and at great cost expands the scope of the audit,” DesParte told Reuters, arguing that it would “require legal acumen and expertise well beyond the auditor’s core competency.”