SEC approves tougher rules targeting auditor 'negligence'

By Jim Tyson for CFODive.com

• The Securities and Exchange Commission approved tougher audit rules, enabling a federal watchdog to sanction auditors for negligence rather than the higher criterion of recklessness.

• The first update to Rule 3502 in more than two decades allows the Public Company Accounting Oversight Board to hold an audit firm’s employees and independent contractors liable for negligence that “directly and substantially contributes” to violations, PCAOB Chair Erica Williams said Tuesday in a statement.

• “I’m proud to support the PCAOB’s proposed changes to instill greater trust among investors and issuers in our markets,” SEC Chair Gary Gensler said in a separate statement. The updated rule will “encourage accounting professionals to be more deliberate and careful in fulfilling their duties,” he predicted.

The new standard drew “no” votes from two of the five SEC commissioners, both Republicans.

“This change is neither consistent with the requirements of the securities laws nor necessary or appropriate in the public interest or for the protection of investors,” Commissioner Hester Peirce said in a statement before the vote.

The update “could have the unintended consequence of lowering audit quality and could worsen the trend toward fewer talented individuals entering the audit profession,” she said.

SEC Commissioner Mark Uyeda said the “negligence standard would be consistent with the standard of conduct the commission needs to prove its cease-and-desist proceedings against” violators of the SEC’s reporting requirements.

However, the rule could “have a chilling effect on collaboration among auditors within the same firm,” Uyeda said.

Uyeda opposed the rule in the absence of assurances that it “will strike the right balance when it comes to holding people accountable for unreasonable conduct, as opposed to simply errors in judgment.”

Since taking the PCAOB’s leadership role in January 2022, Williams has championed several new audit standards and sharpened agency enforcement. Her aims align with those of Gensler who, after becoming SEC chair in 2021, shook up the five-member board and called on it to strengthen oversight of the accounting firms that audit publicly listed companies.

The SEC on Tuesday also approved a PCAOB proposal to unify into a single standard several rules that are focused on ensuring professional skepticism, independence, competence and judgment.

In addition, the agency backed a PCAOB amendment clarifying the responsibilities of an auditor when using technology for data analysis.

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