Core Summary

  • The U.S. Securities and Exchange Commission (SEC) approved stricter audit rules, enabling federal regulators to penalize auditors under the lower standard of "negligence" rather than the higher standard of "recklessness."
  • This marks the first update in over two decades to PCAOB Rule 3502, allowing the Public Company Accounting Oversight Board (PCAOB) to hold audit firm employees and independent contractors accountable if their negligent actions "directly and substantially contributed" to a violation. PCAOB Chair Erica Williams stated this in a release on Tuesday, August 20.
  • "I am proud to support the PCAOB's proposed reforms to enhance investor and issuer trust in our markets," SEC Chair Gary Gensler said in a separate statement. He predicted the updated rules would "encourage accounting professionals to exercise greater care and diligence in their work."

In-Depth Analysis

The new standard received "no" votes from two of the SEC's five commissioners, both of whom are Republicans.

"This change is neither required by the securities laws nor in the public interest or for investor protection," Commissioner Hester Peirce said in a statement before the vote. She argued the update "could have the unintended consequence of reducing audit quality and may exacerbate the trend of talent attrition in the audit profession."

SEC Commissioner Mark Uyeda noted that "the negligence standard would align with the standard of conduct the Commission must prove when bringing cease-and-desist proceedings against individuals for violating SEC reporting requirements." However, he worried the rule could "have a chilling effect on collaboration among auditors within the same firm." Uyeda opposed the rule without assurances that it would "strike the right balance between holding unreasonable conduct accountable and mere errors in judgment."

Since taking the helm of the PCAOB in January 2022, Williams has pushed for the development of new audit standards and strengthened the agency's enforcement efforts. Her goals align with those of Gensler, who, after becoming SEC Chair in 2021, reorganized the five-member commission and called for stronger oversight of accounting firms that audit public companies.

On Tuesday, the SEC also approved a PCAOB proposal to consolidate several rules focused on ensuring professional skepticism, independence, competence, and judgment into a single standard.

Additionally, the agency supported a PCAOB amendment clarifying auditors' responsibilities when using data analytics techniques.

"These changes will support high-quality audits and protect investors," SEC Chief Accountant Paul Munter said in a statement.