Harmonizing Liability Standards for Auditing Firms and Associated Persons

Nearly two decades ago, the PCAOB (the “Board”) adopted an auditing standard as part of a package of proposed ethics and independence rules, setting out the liability of persons associated with registered public accounting firms.

Under this standard, a registered firm can be liable for a violation of certain laws, rules, or standards by acting negligently. But a person associated with that firm who directly and substantially contributed to that same violation must have acted at least recklessly to be liable.

This inconsistency results in associated persons having less of an incentive to exercise the appropriate level of care in their audit work.

Harmonizing these differing liability standards would allow the Board to fulfill its congressional mandate more effectively. This is especially useful at a time when audit deficiencies and an overall drop in audit quality continue to persist.

Data provided by the Board in its release show that since 2009, in over two-thirds of the cases in which a firm has been sanctioned, no individual was held accountable under the Board’s contributory liability rule.

In the past five years, on average only 18 percent of all cases in which a firm has been sanctioned included individuals charged under this rule.

This amendment will benefit investors by increasing the likelihood of misconduct being detected and sanctioned. While the Sarbanes-Oxley Act requires the Commission and the Board to coordinate their enforcement efforts, their respective mandates are distinct and enforcement resources are finite. The Board’s amendment will prevent duplication of efforts in cases where the Board, under the current outdated rule, might need to refer one piece of a broader case to the Commission to take action as appropriate against a negligent individual.  

Public company audits can be complex, requiring auditors to make significant judgements about emerging and evolving risks. But this is not a reason to allow individuals to, by definition, act unreasonably in contributing directly and substantially to a firm’s violations without ever facing any consequences. Updated liability standards for associated persons will strengthen accountability and prevent negligent behavior. 

The Commission’s staff has determined that the PCAOB’s amendment to the contributive liability standard is consistent with Title I of the Sarbanes-Oxley Act and associated rules and regulations. Following its own thorough review of the PCAOB’s efforts, Commission staff has also determined that the amendment is necessary or appropriate in the public interest or for the protection of investors and is recommending Commission approval.

Because the amendment will help deter negligent auditing practices by associated persons, provide for more effective enforcement by both the Board and the Commission, and potentially contribute to increasing audit quality, I am pleased to support the staff’s recommendation.