Rep. Ann Wagner
Proposed changes by the Public Company Accounting Oversight Board (PCAOB) to specific noncompliance standards are in direct conflict with existing rules and risk undermining audit quality, auditor independence, and the materiality standard, according to U.S. Rep. Ann Wagner (R-MO).
Specifically, the proposed changes to Company Noncompliance with Laws and Regulations (NOCLAR) standards risk undermining audit quality and are likely to divert auditors’ attention, dedication, and resources away from their principal responsibility of rigorously evaluating financial statements, according to an Aug. 23 letter Rep. Wagner and U.S. Rep. Patrick McHenry (R-NC) sent to PCAOB Secretary Phoebe Brown.
Rep. McHenry and Rep. Wagner, in their roles as chairman of the U.S. House Financial Services Committee and chairman of the U.S. House Financial Services Capital Markets Subcommittee, respectively, urged the board to reevaluate the proposed changes in its exposure draft regarding NOCLAR standards.
“Preventing fraud and maintaining financial reporting integrity are paramount to the effective functioning of U.S. capital markets,” wrote the lawmakers. “This concern comes at a critical time, as the PCAOB is emphasizing the need to enhance audit standards…. The proposed realignment will likely have the opposite effect resulting in a weakening of audit quality and increasing the risk of investor harm.”
Rep. Wagner and her colleague pointed out that U.S. companies are already burdened with numerous compliance obligations and are overseen by federal and state authorities that already “competently address” instances of noncompliance, according to their letter.
And while auditors have traditionally been responsible for detecting illicit activities as part of financial audits, broadening their purview to encompass noncompliance with all laws and regulations could blur the lines between legal, managerial, and audit functions, they wrote.
“Put succinctly, the responsibilities of auditors must not be confused for the role of law enforcement, and the PCAOB must refrain from conflating its role as the “auditor of the auditors” with the mission of other prudential regulators,” they wrote.
The members said that the PCAOB should reevaluate the suitability of its proposed NOCLAR standards and revise any final standards to more effectively align with the PCAOB’s mission.
“Striking a delicate equilibrium between fraud prevention, audit quality, and preserving essential financial reporting duties is imperative,” they wrote.