HFS Leaders Criticize PCAOB Proposal to Expand Auditors' Responsibilities
Commentary by Steven Lofchie
House Financial Services Committee Chair Patrick McHenry (R-NC) and Capital Markets Subcommittee Chair Ann Wagner (R-MO) expressed opposition to a PCAOB proposal to require auditors, as part of their assignments, to identify material legal and regulatory compliance risks in the clients’ businesses.
PCAOB Proposal
The PCAOB proposed amending standards regarding an auditor’s responsibility to assess a company’s potential noncompliance with laws and regulations where such noncompliance "could reasonably have a material effect on the financial statements." Under the proposal, auditors would be required to identify laws and regulations for which noncompliance could create a material risk, identifying whether there is information available indicating potential noncompliance and ultimately evaluating whether the auditor believes that noncompliance with these laws and regulations may have occurred.
Committee Letter
The legislators argued that auditors should "not be expected to function as law enforcement agents" and that the proposal could "entangle auditors in legal and managerial decisions beyond their scope." They also stated that the proposal conflicts with SEC rules for auditor independence, including prohibitions on "offering services to audit clients that fall under the purview of legal experts." The legislators urged the PCAOB to "refrain from conflating its role as the ‘auditor of the auditors’ with the mission of other prudential regulators." The legislators argued that by "broadening [the] purview [of auditors] to encompass noncompliance with all laws," the PCAOB could potentially "blur the lines between legal, managerial, and audit functions."
Further, the members said the rule change, if adopted, would "divert auditors’ attention" from evaluating financial statements and weaken overall audit quality.
Commentary
One of the problems with financial regulation is that, contrary to the advice of Bill Belichick, the regulators do not seem adequately focused on doing their job. Recent findings showed that major regional banks failed because, among other things, the regulators were slow to respond to warning signs as to very old-fashioned risks, interest rate mismatches. The SEC seems to be pushing accountants to develop standards to climate issues and other "non-traditional financial information." Now the PCAOB proposes that auditors should develop expertise in legal interpretation and risk.
There may have once been individuals who "knew everything." This article suggests Athanasius Kircher, Thomas Young and Joseph Leidy (none of whom lived into the 20th century) as candidates for the last man on earth who knew everything. This is not to deride the desire to have a broad range of knowledge, but one cannot expect numerous professionals in highly technical areas to maintain even a moderate level of knowledge in other technical areas.
According to the PCAOB, "With a few notable exceptions, deficiency rates observed in 2022 inspections generally increased or remained elevated across engagement types and areas." (See, PCAOB Reports on Deficiencies in the Audits of Broker-Dealers.) Auditors straining to perform their existing obligations should not be tasked with mastering whole new domains of expertise.
According to its website, the SEC proposed over 30 new rules in 2022. Multiply that by numerous other regulators both domestically and globally. Even if accountants could obtain expertise in diverse bodies of law, how would they maintain it?