The Public Company Accounting Oversight Board (PCAOB) has expanded liability for individuals involved in firm violations such as financial misstatements, lowering the personal liability standard to a showing of negligence and down from recklessness.

And the Financial Accounting Standards Board (FASB) plans to set requirements on how companies account for environmental credits such as renewable energy certificates and carbon offsets.

Lower standard for personal liability

The PCAOB expanded liability for individuals involved in firm violations and proposed tighter rules around one of the ways auditors gather evidence to detect financial misstatements.

Last Wednesday, the audit watchdog voted 5-0 to change the threshold for liability for “contributors” to accounting firms’ violations of auditing standards, lowering it to negligence from recklessness. (Such contributors are usually partners in charge of an audit or executives at another firm that assisted in the work.)

Under the existing rule, the PCAOB can hold contributors liable for firm violations if they act recklessly, defined as “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, it means they directly and substantially contributed to the firm’s violation to face a fine or other penalty.

Now the PCAOB will be able to find individual liability for negligence, with negligence defined as “the failure to exercise reasonable care or competence, covering a wider range of potential behavior in carrying out an audit.”

PCAOB Chair Erica Williams said in a news release: “With today’s adoption, the board has aligned PCAOB rules to what investors already expect: that when an associated person’s negligence directly and substantially contributes to firm violations, the PCAOB has tools to hold them accountable.”

If the SEC approves the amended rule, it becomes effective 60 days after that approval.

Standards in enviro accounting

The accounting and audit industry standard setter the FASB voted on the same day by 7-0 to propose that US public and private companies apply one model to various credits that companies obtain for their compliance programs or voluntary use.

There are no specific environmental accounting rules companies must follow when recording such transactions. 

“[I[t’s a good time for us to fill that hole and to do it in a way that is going to improve the information for investors and reduce diversity in practice.”

FASB member Christine Botosan

Wednesday’s proposal covers carbon offsets, cap-and-trade programs and renewable-energy credits. Companies obtain certain environmental credits for producing or selling products aimed at removing or reducing pollution or generating energy from renewable sources. Businesses are also granted emissions allowances and cap-and-trade credits from regulators.

Companies would have to recognize an environmental credit when the credit likely will be used to settle an obligation or be sold to a customer. They would need to record the value of the credits at their cost regardless of whether they expect to settle the obligation. But if they don’t expect to settle it, they also have to test whether to reduce the value of the credits on the balance sheet. 

In addition to the accounting requirements, companies would have to disclose significant holdings, compliance obligations and information supporting revenue and expense amounts tied to the credits on the income statement.

Carbon offsets

Carbon offsets are credits companies buy and count toward reducing the overall climate impact of their activities. Renewable-energy credits are certificates regulators provide to energy suppliers when they deliver wind, solar or hydroelectric energy to a power grid.

Mandatory compliance programs around environmental credits are scarce in the US and are the domain of only a handful of US states right now. California, Washington State, New York, Massachusetts and a few others in the northeast area have systems that limit emissions in certain industries over time.

“While there’s not a ton of activity yet as best we can tell, it’s a good time for us to fill that hole and to do it in a way that is going to improve the information for investors and reduce diversity in practice,” FASB member Christine Botosan said.

The FASB aims to issue a formal proposal by the end of the year and ask the public for feedback over a 90-day period, a spokeswoman told news outlets.