TheCorporateCounsel.net

Liz recently blogged about some of the notable comment letters that were submitted to the PCAOB on its “NOCLAR” proposal.  We can now add the ABA’s Business Law Section to that list of commenters. This excerpt from its comment letter highlights a number of concerns that the Business Law Section has about the implications of the proposal:

[W]e are concerned about the scope and impact of the Proposed Standards, which effectively would impose an affirmative obligation on auditors to detect and evaluate all noncompliance by an audit client with law and regulations that may have a direct or indirect effect on the financial statements, even where untethered to existing accounting standards.

Among other concerns, the Proposed Standards (i) place an unworkable responsibility upon accountants to make subjective assessments of often complex and uncertain legal matters, the probability of future events, and the potential impact of those events, all of which are outside the scope of auditors’ typical responsibilities, (ii) endanger the confidentiality and protections of client communications that are foundational components of the lawyer-client relationship and our legal system and which are designed to promote legal compliance, (iii) risk diluting the audit function that is at the core of ensuring the integrity of financial reporting, (iv) would disrupt the separate roles played by the legal and accounting professions that benefit clients, and (v) would do the foregoing by adding costs to the audit process that will far outweigh any limited and speculative perceived benefits.

The comment letter contrasts the proposal with the existing auditing standard and the requirements of Section 10A of the Exchange Act, and says that those standards “take a balanced approach” that addresses the need to ensure and enhance a public company’s compliance with applicable laws and regulations by imposing obligations on auditors when they become aware of illegal acts.

The letter argues that the existing requirement that auditors not ignore “red flags” that come to their attention is very different from the NOCLAR proposal, which would effectively require auditors to conduct a legal audit of a company’s compliance with laws and regulations.

– John Jenkins