The SEC has approved the Public Company Accounting Oversight Board’s (PCAOB) “proposals updating audit standards regarding general responsibilities of the auditor and use of technology-assisted analysis in conducting an audit.”
Pursuant to Section 107(b)1 of the Sarbanes-Oxley Act of 2002, SEC approval is required for the auditing oversight company’s rules and standards to go into effect.
Auditing standards proposals
The PCAOB’s auditing standards (AS) proposals came in a few packages:
- AS 1000: General Responsibilities of the Auditor in Conducting an Audit: the PCAOB proposed a new set of standards that comprehensively outline the judgment, independence, skepticism and care that must be observed by auditors. The PCAOB stated that this new document replaces a series of standards that had not been substantially updated in over 20 years.
The following standards will be also be amended “to address the use of technology-assisted data analysis in audit procedures:”
Threshold for individual violations lowered
The SEC also approved PCAOB’s amendment to its Rule 3502: Responsibility Not to Knowingly or Recklessly Contribute to Violations.
Adopted in 2005, the ethics rule covers “direct and substantial” contributions to registered public accounting firms’ violations of standards, rules, and laws by individuals associated with them.
The standard for contributory liability has now been lowered from recklessness to negligence. No longer will violations need to be an “extreme departure” from the ordinary standard of care for contributors to misconduct to be held liable.
In its proposal to amend the rule, the PCAOB said that it was “incongruous” that firms could be held liable for negligent conduct while the individual actors who facilitated it are held to a different standard.
However, approval of the rule change has not been universal. “The PCAOB already can and does pursue individual misconduct under existing rules,” said Republican Commissioner Hester Peirce. “The SEC, state accountancy boards and audit firms already can respond to individuals’ negligent contributory conduct.”
Conversely, SEC chair Gary Gensler welcomed the negligence-based rule amendment and said that it would put the PCAOB’s standards in line with those of other regulatory bodies, including its own.
“I am pleased that the PCAOB is fulfilling its obligations under the Sarbanes-Oxley Act by updating its standards and rules regarding the practice of auditing,” he said.
The SEC ultimately approved the rule change in a 3-2 vote.
The new rule will go into effect 60 days after its date of approval. The amendment is prospective and will not apply to past instances of misconduct.
