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On Wednesday, the PCAOB announced that it approved the adoption of an amendment to PCAOB Rule 3502 to provide that an individual accountant can be held liable for substantially and negligently contributing to their firm’s violations of PCAOB laws, rules, and standards. Here’s the explanation of the change from the PCAOB’s press release:

For decades under PCAOB and predecessor auditing standards, auditors have been required to exercise reasonable care any time they perform an audit, and the failure to do so constitutes “negligence.”

Previously, however, Rule 3502 allowed the PCAOB to hold associated persons liable for contributing to a registered firm’s violation only when they did so “recklessly” – which represents a greater departure from the standard of care than negligence. This means even when a firm commits a violation negligently, an associated person of that firm who directly and substantially contributed to the firm’s violation could be sanctioned by the PCAOB only if the PCAOB were to show that the associated person acted recklessly.

As adopted, the updated rule changes Rule 3502’s liability standard from recklessness to negligence, aligning it with the same standard of reasonable care auditors are already required to exercise anytime they are executing their professional duties. Similarly, the U.S. Securities and Exchange Commission already has the ability to bring enforcement actions against associated persons when they negligently cause firm violations.

At the same time, the updated rule maintains Rule 3502’s requirement that an associated person must have contributed to the firm’s violation both “directly and substantially” in order to be held liable.

I’m sure John wasn’t the only person who, when this amendment was proposed, had concerns that lowering the bar for actions against individuals might spur increased efforts by auditors to protect their firms & themselves — with attendant increased costs for public companies. Wednesday’s statement by PCAOB Chair Erica Williams tried to assuage those concerns with this comment:

– Meredith Ervine