July 11, 2023

NOCLAR Proposal: Audit Committee Impact

I blogged last month about the PCAOB’s “NOCLAR” proposal – which stands for “non-compliance with laws or regulations.” If adopted, the standard will significantly expand auditors’ role in analyzing legal issues and communicating them to audit committees. It will likely also affect the cost of audits. The deadline for public comment on the proposal is August 7th.

This update from Dan Goelzer – who is a former SEC General Counsel and a former PCAOB Chair, among other roles – summarizes the pros & cons of the proposal, as well as the PCAOB’s proposal from earlier this year on the general responsibilities of the audit committee. Dan also predicts how these standards will affect audit committees. Here’s an excerpt:

Comment: As discussed above, both PCAOB proposals could, if adopted, affect audit committees by expanding the scope and nature of financial reporting and legal compliance issues that auditors would be required to bring to the committee’s attention. In some ways, audit committees might benefit from this wider range of input and insight from the auditor. For example, while it may be difficult for auditors to reach conclusions as to whether GAAP financial statements are “appropriate” and optimally informative, these are the kinds of questions that audit committees (and of course management) should consider. On the other hand, as Board Member DesParte’s comments suggest, the NOCLAR proposal seems to have the potential to flood audit committees with a mass of information concerning possible legal violations that may or may not have occurred and that may or may not be significant from a financial reporting perspective. Shifting through these types of matters – which would likely be necessary once the committee is on notice of them – does not seem like an effective use of audit committee time and resources.

Because of their potential impact, audit committees may wish to ask their auditor or legal counsel to keep the committee informed of the progress of these two PCAOB initiatives.

Liz Dunshee