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John previously shared CAQ’s criticism of the PCAOB’s roundtable addressing the NOCLAR proposal, specifically that “the roundtable failed to address the concerns outlined in 78% of the comment letters the PCAOB received, including from those investors, audit committee members, auditors, academics and others who are concerned with the PCAOB’s proposal.” This Troutman Pepper memo goes into more detail on the issues that were raised during the roundtable.

Having missed the roundtable myself since I was engrossed in the SEC’s open meeting at the time, I was happy to read that some of the issues raised by lawyers in the earlier comment period were at least touched on during the roundtable. Here are snippets on a few topics from the memo:

– During the roundtable, a divergence of opinions emerged on whether the proposal’s “could reasonably have a material effect” threshold is overly broad. Ironically, even among proponents of this threshold, there was no consensus on its meaning, with some equating it to a “reasonably possible” scenario and others to a “reasonably likely” one. This lack of clarity underscores the argument that the proposed language might be too ambiguous, potentially leading to inconsistent application across audits.

– Remarks by several panelists and commenters emphasized PCAOB’s lack of detailed cost analysis. For example, the proposal itself states the anticipated additional costs will be “substantial,” but fails to put forth any meaningful economic analysis demonstrating the impact of the added costs. For some, this absence of specificity in outlining the financial implications of compliance raises questions about the feasibility and reasonableness of the proposed standards. Several roundtable panelist and commenter insights further illuminated the tangible impact of these costs, particularly on Emerging Growth Companies and other smaller and newly-public companies, as well as smaller audit firms, who have borne the brunt of increased auditing costs as a result of recent SEC rulemaking.

– The roundtable discussion underscored the inherently fact-intensive nature of privilege analysis. This complexity necessitates that auditors, in their efforts to comply with the proposal, may need to navigate the delicate task of assessing the credibility of sources, such as legal counsel, without infringing upon protected communications. This is particularly challenging given the proposal’s perceived requirement for auditors to independently evaluate NOCLAR and make definitive conclusions regarding such noncompliance.

– A critical issue often discussed in comment letters and during the roundtable is that the proposed standard would require auditors to delve into complex regulatory matters without the necessary expertise. As Nasdaq stated in its comment letter, ”[t]he Proposal would require auditors to duplicate a significant amount of work already done by a company’s legal and compliance team.” The proposal thus raises questions about the value such duplication would bring to investor protection or financial statement accuracy. Nasdaq’s comment letter also aptly articulates this concern, stating, ”[a]uditors will need to develop or hire legal experts in every area of law in virtually every country and jurisdiction in the world in order to fulfill their duties under the Proposal.”

Keep in mind that the roundtable isn’t the only way the PCAOB sought additional feedback. It also reopened the comment period through March 18, 2024. I count 43 more comment letters submitted in March 2024 (preceded by 140 in 2023).

– Meredith Ervine