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Last month, the House Financial Services Committee’s Capital Markets Subcommittee held a hearing on “Examining the Agenda of Regulators, SROs, and Standards-Setters for Accounting, Auditing” – with testimony from PCAOB Chair Erica Williams, FASB Chair Richard Jones, and FINRA President & CEO Robert Cook. The livestream is here – and at approximately the 30-minute mark, Subcommittee Chair Ann Wagner (R-Missouri) recaps “deep concerns” with the costs & diversion of attention that are likely to occur if the PCAOB moves forward with its recently proposed standards on “Noncompliance with Laws & Regulations” and individual accountant liability.

In her testimony, PCAOB Chair Erica Williams defended the proposals and says that the PCAOB is considering feedback that has been provided. Here’s an excerpt:

We also proposed a new standard on noncompliance with laws and regulations, or NOCLAR. When auditors fail to identify noncompliance with laws and regulations that have a material impact on a company’s financial statements – or fail to take the proper steps to evaluate and communicate that noncompliance – investors pay the price.

Unfortunately, the current standard is 35 years old, and we have seen far too many examples of investors getting hurt due to noncompliance with laws and regulations since it was adopted.

Well-publicized issues relating to Wells Fargo offer just one example. Earlier this year, Wells Fargo agreed to pay $1 billion to settle a class-action lawsuit from investors alleging it made misleading statements about compliance with consent orders imposed by federal regulators. A lawyer for those investors underscored just who gets hurt when these incidents happen: “state employees, nurses, teachers, police, firefighters and others – whose critical retirement savings were impacted by Wells Fargo’s fraudulent business practices.”

When these kinds of incidents happen, the question almost inevitably follows, “where was the auditor?” In fact, our PCAOB advisory groups, made up of investors and other stakeholders, have cited to at least one study that shows auditors are currently only finding about 4% of fraud – which is certainly not consistent with what most investors expect.

In the fall, we issued a proposal on a rulemaking project that would hold associated persons accountable when they negligently, directly, and substantially contribute to firms’ violations. The proposal is designed to make sure PCAOB rules match what investors already expect: that when an associated person’s negligence directly and substantially contributes to firm violations that can put investors at risk, the PCAOB has the tools to hold them accountable.

The Q&A portion of the meeting suggests that the PCAOB will be holding a public roundtable for additional feedback on the NOCLAR proposal. Stay tuned!

– Liz Dunshee