PCAOB Modernizes Its Rules by Strengthening Accountability for Contributing to Firm Violations

The PCAOB (Public Company Accounting Oversight Board) has recently modernized Rule 3502, originally enacted in 2005, to enhance accountability for individuals associated with registered public accounting firms who contribute to firm violations.

Rationale for the Amendment:

The updated rule aligns the PCAOB’s standards with investor expectations and industry norms. It reflects a shift from ‘holding associated persons accountable only when their actions were reckless’ to now ‘also encompassing cases of negligence’. This change aims to strengthen accountability by ensuring that associated persons are held responsible if their negligent actions significantly contribute to firm violations.

Updates & Implications:

Here are the key updates and implications of the amendment:

• Change in Liability Standard: The updated rule shifts the liability standard from “recklessly” to “negligently.” Previously, an associated person could be held accountable only if they contributed to firm violations recklessly, which is a higher standard than negligence. Now, negligence—defined as failing to exercise reasonable care—is sufficient for accountability.
• Direct and Substantial Contribution: The amended rule maintains the requirement that an associated person must have directly and substantially contributed to the firm’s violation to be held liable. This ensures that there is a clear and significant link between the actions of the associated person and the firm’s non-compliance.
• Stakeholder Input and Feedback: The PCAOB considered extensive feedback from stakeholders, including investors and other interested parties, before finalizing the amendment. This input helped shape the updated rule to better reflect expectations of accountability and responsibility in the auditing profession.
• Alignment with SEC Standards: The change aligns PCAOB standards with those of the U.S. Securities and Exchange Commission (SEC), which already has provisions for holding associated persons accountable for negligent actions contributing to firm violations.
• Implementation Timeline: The amendment to Rule 3502 is pending approval by the SEC. Once approved, it will become effective 60 days thereafter, marking the formal implementation of the updated standards for accountability.

Conclusion: 

Overall, this update signifies a significant regulatory change aimed at enhancing accountability within the auditing profession. It underscores the PCAOB’s commitment to maintaining rigorous standards and ensuring that associated persons are held accountable for their roles in contributing to firm violations.

Tamanna Bansal, Audit Associate, SW