Business groups oppose PCAOB's NOCLAR standard

The U.S. Chamber of Commerce is joining the Center for Audit Quality and several other prominent business trade groups objecting to the Public Company Accounting Oversight Board's proposed changes in auditing standards related to noncompliance with laws and regulations.

The CAQ organized a letter-writing campaign to generate comments pushing back on the PCAOB's so-called NOCLAR proposal (see story). The PCAOB proposed the amendments in June as a way to encourage auditors to be on the lookout for signs of fraud and rule breaking at the companies they audit and asked for comments through Aug. 7. The U.S. Chamber of Commerce's Center for Capital Markets Competitiveness sent its own comment letter last week, urging the PCAOB to withdraw and reconsider the proposal. 

"Unfortunately, the proposal represents neither a modernization nor an update of the extant PCAOB auditing standard — AS 2405 on Illegal Acts by Clients," wrote Tom Quaadman, executive vice president of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness. "Instead, the proposal sweeps aside the existing standard and completely transforms the nature and scope of auditor responsibilities. Simply put, the proposal turns the financial statement audit into a search to ferret out non-compliance with laws and regulations ("NOCLAR") — without due consideration that such an assignment is the purview of lawyers."

The letter argues that the PCAOB hasn't explained its reasoning for the proposal nor given commenters a sufficient cost-benefit analysis. If enacted, the Chamber contends the proposal could degrade audit quality, harm investor protection, weaken attorney-client privilege protections, and impose additional audit costs on issuers by an estimated $36 billion, far above implementation of the Sarbanes-Oxley 404(b) requirements for internal control audits.

The Chamber of Commerce also led a coalition of other business groups on a joint letter Monday to the PCAOB just in time for the comment deadline. Other signatories include ACA International, the American Bankers Association, the American Exploration and Production Council, the American Gas Association, the American Petroleum Institute, the Association of Corporate Counsel, the Bank Policy Institute, the Business Roundtable, the Center for Audit Quality, the Federation of American Hospitals, the International Association of Drilling Contractors, the Investment Company Institute, the Marcellus Shale Coalition, Nareit, NIRI: The Association for Investor Relations, the Petroleum Alliance of Oklahoma, the Reinsurance Association of America, the Retail Industry Leaders Association and the Western Energy Alliance.

They argue that the PCAOB proposal would establish an obligation for auditors to plan and perform procedures to identify all laws and regulations with which noncompliance "could reasonably" have a material effect on financial statements, and then would create a duty for auditors to assess and respond to the risks of material misstatements related to those regulations to determine whether noncompliance has or may have occurred. 

"This 'could reasonably' standard is unbounded and imprecise and would not provide auditors with a practical filter or guide for which laws and regulations to evaluate," said the letter. "Further, the conditional terminology employed by the proposal — such as 'likely,' 'may,' and 'might,' including a requirement to report to the audit committee 'information indicating that noncompliance . . . may have occurred' — would create serious challenges in determining precisely which instances of NOCLAR to prioritize. The vague and intentionally expansive terminology used by the exposure draft would drive new liability concerns among auditors, creating a more unfocused and ineffective risk mitigation environment that would push legal, compliance and audit costs even higher."

The PCAOB said it will be considering the comments it has received on the proposal. "The public comment period is an integral part of our standard setting process, and we appreciate and consider all perspectives shared with the PCAOB as we work to ensure our standards effectively protect investors," said a PCAOB spokesperson.

The PCAOB has received a number of positive comments favoring the proposal from various groups like the AFL-CIO, AARP, the Consumer Federation of America and the Council of Institutional Investors.

"This proposal very much demonstrates how auditing standards can evolve in a manner that will improve the quality of, and improve investor trust in, financial statements of public companies and broker-dealers," said the AFL-CIO.

"We generally support the PCAOB's continued efforts to update auditing standards, particularly the legacy standards held over from the period prior to the creation of the PCAOB," said AARP. "PCAOB's proposed amendments would update the standard in place since 1988 to reflect changes needed to better protect investors and savers from potential wrongdoing by companies."
 
"I am writing on behalf of the Consumer Federation of America (CFA) in strong support of the above-captioned proposal regarding amendments to PCAOB auditing standards related to an auditor's responsibility for considering a company's noncompliance with laws and regulations, including fraud, in an audit," said the Consumer Federation of America.

"Consistent with our policy on financial gatekeepers, we agree with [PCAOB] Chair [Erica] Williams that 'auditors are gatekeepers in our capital markets, and that they have an important role to play' with respect to company noncompliance with laws and regulations (NOCLAR)," said the Council of Institutional Investors. "We further agree with Chair Williams that the proposal could strengthen that role by improving how auditors as gatekeepers 'identify, evaluate, and communicate' NOCLAR. And by issuing the proposal, we believe the board is appropriately continuing to prioritize standard setting that benefits investors by replacing the interim standards with higher quality standards consistent with the recommendation in the September letter."