Statement in Support of Amendments to Update Accountability for Contributing to Firm Violations

I am happy to be here today to discuss three important rules coming out of the Public Company Accounting Oversight Board (“PCAOB”). The work of auditors is crucial to investor confidence in the market. Auditors are external accountants that provide the public with assurance that a company’s financial statements, and the controls that produce those statements, are reliable. They exercise due professional care, skepticism, and are subject to independence requirements to mitigate conflicts of interest—conflicts that exist by virtue of clients paying them to conduct audits. Because the work of auditors is such an important cornerstone of market confidence and integrity, it is equally important that we have in place a meaningful system of rules and regulations for the audit profession. Without such rules, the accuracy and reliability of financial statements would disintegrate – eroding with it investor trust in our entire market. The PCAOB, with its specialized expertise, independently oversees that system of rules, and in so doing, also provides a crucial market function.

Today, the Commission will vote on three matters. In reaching this stage in each matter, the PCAOB has: engaged stakeholders and its investor advisory groups, issued proposing and adopting releases, held an open comment period, reviewed and incorporated comments received, and explained thoroughly the rationales for these actions.[1] As part of our statutory oversight function,[2] the SEC staff has reviewed each of these matters, held an additional comment period, and provided us with their recommendations following in-depth consideration of comments submitted. These rules and standards are the product of a strong and robust process, and I am thankful to the staff at the SEC and the PCAOB for their hard work and dedication, and to the members of the public who have provided their input. The end result benefits from this iterative process and engagement.

The first of the three matters on the agenda today concerns the PCAOB’s amendments to its contributory liability rule.[3]

The PCAOB proposed and then adopted an amendment to its rule governing an individual auditor’s ethical obligations to act in accordance with laws, rules, and standards and to not contribute to violations of those requirements when conducting an audit under PCAOB standards.[4] The amendment aligns the standard of accountability for an individual auditor with the standard applied to audit firms.

Currently, the relevant rule requires a showing of recklessness for an individual to be held liable for a registered firm’s negligent conduct.[5] Recklessness requires a showing of an extreme departure from the standard of ordinary care.[6] However, as we all know, an audit firm does not act unless the people within it do so. Therefore, the current formulation means that even though a person’s action could contribute – even in large part – to a firm’s negligent conduct, that individual would not necessarily be held liable or subject to sanction by the PCAOB because of the application of the higher standard. The matter before us resolves this incongruity and is informed by years of PCAOB investigation and enforcement experience.⁷

Today’s rule also eliminates an incongruity in authority. The SEC currently has the ability to bring actions against, and seek remedial relief and penalties from, individuals associated with audit firms who have acted negligently, while the PCAOB currently does not.[7] The difference in the SEC’s authority and the PCAOB’s authority is also resolved by the passage of today’s new rule.

In closing, I want to echo a point made by several of the Board members and Chair Williams – the amendments do not provide regulators with the ability to play “gotcha” or to supplant the reasonable, if mistaken, judgment of the auditor. Rather, by employing a negligence standard, the PCAOB will be required to make a showing that an individual did not exercise reasonable care. An auditor would have to act unreasonably and then also directly and substantially contribute to the firm’s violation in order to be held liable under these standards. Junior professionals or other auditors who are executing their responsibilities in good faith and with due care would not incur liability under this amended rule and the PCAOB underscored this in its Adopting Release.[8]

I want to thank all of those who worked on the rule. The process and the rules and standards that result from it represent thousands of hours worked and a tireless effort from many dedicated public servants. Thank you to the Office of the Chief Accountant, the members of the PCAOB and its staff, and the members of the public who participated in this process.