The Public Company Accounting Oversight Board (PCAOB) proposed standard updates that would require auditors to enhance scrutiny toward potential instances of company noncompliance, including fraud, in their audit work.
The proposal addresses a controversial topic of responsibility for the audit community that has received renewed interest of late with recent corporate scandals, most notably Wirecard in Germany. The chief accountant at the Securities and Exchange Commission, which oversees the PCAOB, said in a statement last year auditors must embrace their role in fraud detection.
The PCAOB’s proposal seeks to establish this as a requirement for auditors through identification, evaluation, and communication. The proposal would amend AS 2405, currently titled “Illegal Acts by Clients,” to be renamed “A Company’s Noncompliance with Laws and Regulations.”
“When an auditor signs an audit opinion on a company’s financial statements, they are signing their name to the fact that the financial statements ‘present fairly, in all material respects’ the company’s financial position and results of operations,” said PCAOB Chair Erica Williams in a statement Tuesday. “Investors expect that all means all, including material respects impacted by noncompliance.
“Unfortunately, the current standard on illegal acts fails to meet that expectation. In fact, it says an audit in accordance with PCAOB auditing standards does not include audit procedures specifically designed to detect all illegal acts that could have a material effect on the financial statements. Today, we are proposing to change that and ensure that the protection investors expect—the protection they deserve—matches the requirements in the standard.”
The proposal would require auditors to identify laws and regulations applicable to a company that could have a material effect on financial statements in instances of noncompliance, including financial statement fraud. Regarding evaluations, auditors would need to consider whether specialized skill or knowledge is necessary to assist their assessment of whether noncompliance might have occurred.
The proposal would also “make it clear that the auditor is required to communicate to the appropriate level of management and the audit committee as soon as they are made aware that noncompliance with laws or regulations has or may have occurred,” the PCAOB said in a press release.
“The PCAOB has grappled with the need to strengthen AS 2405 for nearly two decades,” stated Williams. “… [W]e’ve seen far too many examples of investors getting hurt due to noncompliance with laws and regulations. We’ve seen changes in federal securities laws. And we’ve heard calls from investors for auditors to live up to their responsibilities to ensure financial statements are presented fairly, in all material respects. It’s time we answer those calls.”
Public comments on the proposal are due by Aug. 7.