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We’ve previously blogged about some notable comment letters on the PCAOB’s NOCLAR proposal, but just before the holidays, I came across this analysis of NOCLAR comments from the Center for Audit Quality (CAQ). The CAQ shared this summary of the general themes behind the concerns in comment letters:

– The proposed scope is overly broad. Investors and investor associations had inconsistent views. Some believe the proposed requirements are sufficiently clear while others expressed concerns about the scope of proposal and the potential negative impact on auditor effectiveness.

– The proposed requirements blur the roles of the auditor and a company’s management and legal functions creating auditor independence concerns. The investor community had mixed views on this topic as well. While some investor associations view the proposed requirements as a function of management, others do not view the proposed auditor responsibilities as a replacement or duplication of management’s functions.

– Auditors are not lawyers: The business community expressed strong and consistent views that auditors are not legal experts. Audit committee members, preparers, and business associations raised concerns the proposal will significantly increase risk to a company’s legal privilege. The investor community’s views continued to be mixed. Certain investors and investor associations do not believe that the proposal requires auditors to function as lawyers; whereas other investor associations believe that auditors are not trained in law nor qualified to make the legal judgments that would be required by the proposal.

– Costs and benefits: The business community believes that the anticipated benefits of the proposal do not justify the costs and that the economic analysis is inadequate. The investor community’s views varied. Some investor associations commented that the benefits would outweigh the costs, while others expressed the opposite view, that the risks of financial misstatements and NOCLAR far outweigh the costs of audits.

– Need for further study and evaluation: The broad consensus among the majority of stakeholder groups is that there is a need for multi-stakeholder engagement and further evaluation before acceptable alternatives to the proposal can be developed, and that the PCAOB needs to conduct more research and engage in an open standard-setting process involving roundtable discussions and public meetings with various stakeholder groups before issuing a revised proposal.

The concern expressed under “Auditors are not lawyers” was more fully fleshed out by Jay Knight of Barnes & Thornburg in a recent podcast with John. John asked Jay about the most significant concerns from a lawyer’s perspective. Jay replied:

[T]hat the proposed standards do not adequately take into account the importance of protecting confidential client information, attorney-client privilege and attorney work product. As your listeners know, the confidentiality of attorney-client communications is a bedrock principle of the legal system. […] To satisfy the expansive requirements under the proposed standards, however, auditors would likely need to seek information and analysis from their audit client regarding information protected as confidential under the rules of professional conduct, legal advice that has been communicated and is protected by the attorney-client privilege and protected attorney work product that has been prepared to enable them to assess compliance with any given set of regulations. […] The release fails to consider these important protections and the risk of eroding these protections if the proposed standards are adopted.

On the last point from the CAQ regarding the need for further engagement, it appears that the PCAOB is already moving in this direction. Liz blogged last week about PCAOB Chair Erica Williams’s defense of the NOCLAR proposal during testimony before the House Financial Services Committee’s Capital Markets Subcommittee. In that testimony, she suggested that the PCAOB would be holding a public roundtable for additional feedback on the proposal.

– Meredith Ervine