PCAOB updates strengthen auditor accountability

The Public Company Accounting Oversight Board adopted a number of amendments and proposed updates to strengthen some of its rules and standards — including some that haven't been looked at in nearly 20 years.

To start, the board adopted an amendment to Rule 3502 on auditors' responsibility not to contribute to violations, which was first adopted in 2005.

The updated rule allows the board to hold auditors responsible when they "negligently" contribute to a firm's violation of its laws, rules and standards. Previously, auditors had to "recklessly" contribute to a violation — a higher standard.

In either case, the auditor's contribution had to be direct and substantial; lowering the other criterion from "recklessness" to "negligence" brings it in line with the same standards of reasonable care that auditors already have to meet in their professional duties, according to the PCAOB.

"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," said PCAOB Chair Erica Williams in a statement. "We are grateful for the comments we received from investors and other stakeholders on this change, and we look forward to monitoring the impact of the updated rule."

The board also adopted amendments to two standards — AS 1105, "Audit Evidence," and AS 2301, "The Auditor's Responses to the Risks of Material Misstatement" — that aim to clarify auditors' responsibilities when they use technology-assisted analysis, to make sure they obtain sufficient appropriate audit evidence.

The changes touch on a number of areas, including: 

• Reliability of information. The updates reinforce the need for auditors to evaluate how reliable the electronic information they receive and use as audit evidence actually is.
• Using audit evidence for multiple purposes. The updates specify that if an auditor uses an audit procedure for more than one purpose, they should achieve each objective of the procedure. 
• Performing tests of details. Auditors may use technology-assisted analysis to identify certain types of transactions and balances; the updates clarify that they should determine "whether the identified items individually or in the aggregate indicate misstatements or control deficiencies."

Courtesy of PCAOB

Following approval by the Securities and Exchange Commission, the new standard and related amendments will take effect for fiscal years beginning on or after Dec. 15, 2025.  

A new proposal

Finally, the board proposed a replacement for an interim standard on analytical procedures that hasn't been changed much since 1989.

The new proposal, AS 2305, "Designing and Performing Substantive Analytic Procedures," aims to strengthen and clarify auditors' responsibilities around those procedures. The board developed it in recognition of the changes in standards and the significant increase in the use of technology in auditing over three decades.

Among other things, the proposed standard:

• Strengthen and clarify the requirements for determining whether the relationship(s) to be used in the substantive analytical procedure is sufficiently plausible and predictable;
• Specifies that auditors should create their own expectations, and not rely on the company's amount or information that is based on the company's amount (so-called circular auditing);
• Strengthens and clarifies requirements for determining when the difference between an auditor's expectation and a company's amount requires further evaluation;
• Strengthens and clarifies requirements for evaluating the difference between an auditor's expectation and the company's amount.
• Clarifies what affects the persuasiveness of audit evidence obtained from a substantive analytical procedure; and,
• Clarifies the elements of a substantive analytical procedure.

"The world has changed over the last 30 years, and it is past time this standard caught up," said Williams (who was recently appointed to a second term as chair) in a statement. "These changes are designed to reduce the risk a material misstatement goes undetected, improve overall audit quality, and leave investors better protected."

Public comments on the proposal will be accepted until Aug. 12, 2024.