US Audit Board Shelves Rule Rewrite on Flagging Illegal Acts (1)

A hotly contested proposal that would require auditors to dig far deeper into their clients’ potential lawbreaking activities won’t be finalized this year, the US audit regulator said on Friday.

The Public Company Accounting Oversight Board had planned to adopt a major overhaul of its rules spelling out how auditors consider the financial risks of any legal or regulatory violations as they vet corporate revenues and balance sheets.

But now the board must grapple with the prospect of new leadership and a fresh set of priorities for financial regulators following President-elect Donald Trump’s win in the Nov. 5 US election.

And instead, the PCAOB has paused the project and won’t take further action until the regulator has consulted with the Securities and Exchange Commission under the incoming presidential administration, a source familiar with the audit regulator’s process said.

Investors supported the plan, but it faced pushback from auditors and corporate leaders.

“We will continue engaging with stakeholders, including the SEC, as we determine potential next steps,” a PCAOB statement said. “The PCAOB is committed to listening to all stakeholders and getting it right.”

Board leaders face a quickly closing window to push through regulatory reforms before the second Trump administration takes control of the SEC, which must approve any changes in US audit standards. However, the commission is unlikely to take action on major rule changes in the coming months until a new chair is sworn in.

The delay will ensure that the full commission has sufficient time to review the complex standard-setting project, the source said.

Under PCAOB Chair Erica Williams, the board has pursued an ambitious agenda, setting a higher bar for auditors by overhauling an outdated rulebook and aggressively enforcing its requirements. But a Republican-led SEC could overhaul the PCAOB’s leadership for the third time since 2017 and reset its agenda.

This week PCAOB member Christina Ho, a frequent critic of the board’s approach, advised the regulator against rushing through a “series of midnight regulations” and urged it to respect the “democratic process.”

Project Pushback

Investors have long demanded that auditors shed more light on corporate crimes that could sink stock values. They argue that the current rules, which date to 1988, don’t capture serious internal failures like high-pressure sales tactics at Wells Fargo & Co. or emissions cheating by Volkswagen AG.

“This was really the shining light out of rules that they were proposing and one that would have had the biggest bite to increase auditors’ vigilance,” said Mekedas Belayneh, a policy advocate with consumer advocacy group Public Citizen. “It’s a disappointment that the agency is leaving a rule that would have emboldened their duties to serve not only investors” but also guard against corporate fraud and misconduct.

Auditors and corporate leaders, however, have panned the 2023 proposal, known as noncompliance with laws and regulation or NOCLAR, and demanded that the project be dropped or re-issued for another round of public comment.

“Our expectation is that any NOCLAR amendments that the Board seeks to adopt would have to be substantially revised, and, as such, the public should have the opportunity to comment on any such revised proposal,” the Center for Audit Quality wrote to the board in a Nov. 11 letter.

In the meantime, the board continues to evaluate feedback including input from auditors about how they comply with current rules, the source familiar with the PCAOB’s process said. Staff guidance issued this week reminds auditors of their responsibilities under the illegal acts standards.

Despite the pending political transition, the board continues to advance other aspects of its rule-writing agenda. Next week, the PCAOB plans to adopt another set of rule changes that would expand disclosures that auditors provide to their regulator and the public. The board adopted this week a narrow change to its registration process.