Home Society The Centre for Audit Quality opposes Public Company Accounting Oversight Board initiative

The Centre for Audit Quality opposes Public Company Accounting Oversight Board initiative

The largest accounting firms in the US are urging their clients to join them in resisting new proposals from the PCAOB (Public Company Accounting Oversight Board) that would hold accountants more accountable for compliance with laws and regulations and for detecting fraud in audit clients.

The Financial Times reports on this matter. On August 7th, the PCAOB will close the consultation on proposals that would expand the role of accountants in investigating whether a company is in compliance with laws and regulations, including fraud.

The revised regulation, referred to as AS 2405, A Company’s Noncompliance with Laws and Regulations (NOCLAR), is said to have been prompted by frustration among politicians in Washington that accounting firms fail to protect investors from misconduct by their clients.

The existing rules only require accountants to detect and report on matters directly impacting the accuracy of financial statements. However, the new regulation also aims to have accountants look at elements that may have indirect effects, such as risky behavior that could lead to significant fines, according to the newspaper.

In the meantime, the major accounting firms are urging their clients to respond critically to the consultation, arguing that audit costs will increase significantly if the PCAOB’s changes are implemented. The Centre for Audit Quality (CAQ), led by the big four but representing other accounting firms as well, asks corporate directors to sign a letter attacking the PCAOB’s proposal.

According to the sample letter, available on the CAQ’s website, accountants are not lawyers, and the proposed changes assume an excessive broadening of the accountant’s role “beyond their core competencies.” The PCAOB’s plans would also “significantly increase the costs of the audit, without a proportional benefit.” The CAQ claims it is not against rule reform, but it believes that the current proposals go too far.

There is also resistance to the plans within the PCAOB itself, as only three out of five PCAOB board members support the proposals. Two members who previously worked at a big four firm are opposing the proposals. One of the two describes it as a “breathtaking expansion” of the accountant’s responsibilities.

Lynn Turner, advisor to the PCAOB and former member of the Securities and Exchange Commission (SEC), argues, however, that the existing rules give accountants too much leeway to avoid confrontation with management when they observe potentially illegal behavior. Turner speaks of a “war” and sees the proposals as a significant test of the backbone of the remaining three PCAOB board members.

The Financial Times expects that lobbying organizations and accountants will strongly resist the proposals before the consultation deadline. According to an involved attorney, the regulator’s plans are an attempt to turn accountants into fraud investigators. By imposing “forensic standards,” even the smallest deviation would have to be investigated. There is fear that accountants will never be able to meet the stricter standards.

Tony Thompson, one of the three PCAOB board members supporting the proposals, told the Financial Times that accountants don’t have to become lawyers. “But if they come across matters of concern, they should not ignore them either.”

About the author: John Campbell

John Campbell is the godfather of Polimedia and the oldest author from the whole team. His occasional guidance is crucial for everyone he advises.

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