CAQ pushes back against PCAOB NOCLAR proposal

The Center for Audit Quality is spearheading an effort to convince the Public Company Accounting Oversight Board to water down a proposed update in the standards for auditors to be on the lookout for fraud and other signs of noncompliance with laws and regulations.

The PCAOB proposed the updated "NOCLAR" auditing standard in June, also known as AS 2405, as a way to deter fraud and is asking for comments until Aug. 7 (see story).

The CAQ is concerned that the proposed scope is too broad and doesn't 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 aren't lawyers, and as a result the proposed changes would expand the auditor's role to include knowledge and expertise outside their core competencies, the CAQ argues, and the proposal would substantially increase the cost of an audit without a comparable benefit. 

The CAQ is urging others to submit their comments to the PCAOB and has created a sample comment letter to send to the board before the deadline. 

Courtesy of the Center for Audit Quality

"Some have asked us why we're 'mobilizing' an effort to bring awareness to this proposal," said CAQ CEO Julie Bell Lindsay in a newsletter Wednesday. "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."  

She pointed out that two members of the PCAOB who happen to be the only CPAs on the five-member board have also voiced objections to the proposal in statements from Duane DesParte and Christina Ho. "Audit committee members, lawyers, public company management and other stakeholders have also expressed their concerns about AS2405," Bell Lindsay wrote. "It takes all these stakeholders — and more — working in concert to foster a system that supports both high-quality financial reporting and audits."

The PCAOB is still listening to the comments it receives 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 board has been working to update some of its older standards, many of which it inherited decades ago from the American Institute of CPAs after passage of the Sarbanes-Oxley Act of 2002.

In its proposal, the PCAOB noted that currently, AS 2405, Illegal Acts by Clients, prescribes the nature and extent of the consideration the auditor should give to the possibility of illegal acts by an audit client in an audit of financial statements. The existing AS 2405, which operates in conjunction with the illegal acts provisions of the Securities Exchange Act of 1934, for the audits of issuers. It states that normally, an audit in accordance with PCAOB auditing standards does not include audit procedures designed to detect illegal acts with an indirect effect on the financial statements. The proposed amendments would change that presumption and strengthen existing practice by enhancing identification and communication obligations that are in addition to the baseline identification and communication requirements in Section 10A of the Securities Exchange Act. The PCAOB also wants the rules to apply to auditors of SEC-registered brokers and dealers, and to change the term "illegal acts" to "noncompliance with laws and regulations" to broaden the meaning.