TheCorporateCounsel.net

The PCAOB recently proposed amendments to its rules governing when an individual accountant will be deemed to have contributed to a firm’s primary violations of professional standards. This excerpt from Dan Goelzer’s blog on the proposal summarizes its implications:

The Public Company Accounting Oversight Board has proposed to amend its rule governing the liability of a person associated with an accounting firm whose conduct causes the firm to violate a professional standard. The Board’s proposal would lower the level of conduct that can result in an individual’s “contributory liability” for a firm’s violation from recklessness to negligence.

If the change is adopted, the PCAOB would be able to bring disciplinary proceedings against an individual auditor (and potentially bar him or her from public company auditing) for failing to exercise reasonable or ordinary care. Under its current rules, the Board would have to show that the individual’s conduct was intentional or reckless, not merely negligent.

The proposal is unlikely to be welcomed by your friendly neighborhood auditor. Most audit firms have a black belt in “CYA” and already go to extraordinary lengths to protect themselves during the course of an audit engagement. Lowering the bar for enforcement actions against individual accountants will undoubtedly spur increased efforts on their behalf to protect their firms & themselves.

When you consider the possibility that a change like this could come on the heels of the adoption of the PCAOB’s demanding NOCLAR proposal, it sure looks like dealing with your outside auditors could become an even more difficult, painstaking, and expensive process in the near future.

– John Jenkins