Welcome back to the Capital Markets Pulse, a monthly newsletter from the Center for Audit Quality designed to bring you insights, resources, and tools on the latest issues impacting capital markets.
This month, I’m using this newsletter to spotlight a proposal from the PCAOB, AS 2405, A Company’s Noncompliance with Laws and Regulations, or “NOCLAR” for short. This is the most significant PCAOB proposal since their concept release on mandatory firm rotation (MFR) which received nearly 700 comment letters, including more than 200 letters directly from audit committee members or chairs.
AS 2405 is framed as intending to modernize and strengthen auditing standards related to the auditor’s consideration of a company’s noncompliance with laws and regulations. But a deeper read of the proposal finds that the language used by the PCAOB would result in a dramatic expansion in the auditor’s scope of work. At the CAQ, we are concerned that:
- The proposed scope is too broad.
- The proposal does not sufficiently take into account a company’s existing compliance function and the shared responsibility of the board of directors, the audit committee, the chief compliance officer, and the general counsel.
- Auditors are not lawyers and as a result the proposed amendments would expand the auditor’s role to include knowledge and expertise outside their core competencies.
- The proposal will substantially increase the cost of the audit without a commensurate benefit.
Proponents of the proposal argue that it is simply an expansion of the auditor’s existing fraud detection role by improving the auditor’s identification, evaluation, and communication requirements. As they say, the devil is in the details, and the details of the proposal show this is not true. The proposal, as written, would fundamentally change the auditor’s role, by requiring them to obtain legal knowledge and expertise outside of their core competencies. Beyond this, it would substantially increase the cost of the audit. Requiring auditors to expend more time and resources on work outside of their scope is a concerning ask, particularly during a time when Chair Williams herself has raised questions about audit quality based on recent trends in audit deficiencies identified by the PCAOB through its inspection process.
Some have asked us why we’re “mobilizing” an effort to bring awareness to this proposal. The answer is because at the CAQ, audit quality is our top priority, and we believe that this proposal would fail to meet its objectives, distract auditors from material audit issues, and ultimately have a negative impact on audit quality.
And we know we’re not alone in this sentiment. Not only have two members of the Board – and notably the only two CPAs – shared their own objections to the proposal (see public statements from Board Members Duane DesParte and Christina Ho), but audit committee members, lawyers, public company management, and other stakeholders have also expressed their concerns about AS2405. It takes all these stakeholders – and more – working in concert to foster a system that supports both high-quality financial reporting and audits.
We have particularly heard from the audit committee community. If you are part of this community and would like to express your views, consider submitting your comments to the PCAOB. We know the PCAOB is open to your feedback, and your voice matters on this important issue.
Thanks for reading this far. I’ll be back next month with more timely public company audit news and resources.
Please note that these perspectives are my own. If this email was forwarded to you, subscribe here so that you never miss a public company auditing update.
Julie Bell Lindsay
Chief Executive Officer, CAQ