PCAOB amends auditor requirements for reporting noncompliance

The PCAOB on Tuesday issued an amendment designed to strengthen auditor requirements to identify, evaluate, and communicate noncompliance with laws and regulations.

Comments on the proposal will be accepted through Aug. 7.

“By catching and communicating noncompliance sooner, auditors can help companies course-correct and better protect investors from risk,” PCAOB Chair Erica Williams said in a news release.

The proposal would amend Auditing Standard (AS) 2110, Identifying and Assessing Risks of Material Misstatement, and other auditing and related professional practice standards. The proposal also would replace AS 2405, Illegal Acts by Clients, and retitle the standard A Company’s Noncompliance With Laws and Regulations.

Additionally, it would rescind the following:

• AS 6110, Compliance Auditing Considerations in Audits of Recipients of Governmental Financial Assistance;
• Auditing Interpretation (AI) 13, Illegal Acts by Clients: Auditing Interpretations of AS 2405; and
• AI 21, Management Representations: Auditing Interpretations of AS 2805.

The proposal, according to the PCAOB, would strengthen auditor obligations related to a company’s noncompliance with laws and regulations in three aspects:

• Identify: The proposal would establish specific requirements for auditors to proactively identify — through inquiry and other procedures — laws and regulations that apply to the company and that could have a material effect on the financial statements.
• Evaluate: The proposal would strengthen requirements related to the auditor’s evaluation of whether noncompliance with laws and regulations has occurred and, if so, the possible effects on the financial statements and other aspects of the audit.
• Communicate: The proposal would 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.

By requiring auditors to identify and communicate noncompliance sooner, the proposed amendments, if adopted, “would encourage companies to take more timely remedial actions and thereby reduce investor harm caused by legal and regulatory penalties,” according to the release. “Another potential benefit would be to lower the likelihood that financial statements are materially misstated due to noncompliance with laws and regulations.”

More information on the project can be found on the PCAOB’s standard-setting project page.

— To comment on this article or to suggest an idea for another article, contact Kevin Brewer at Kevin.Brewer@aicpa-cima.com.