PCAOB tightens liability standard

The PCAOB on Wednesday took three actions to update auditing standards and procedures, including the adoption of a change to an almost 20-year-old rule that tightens the standard of liability to “negligent” from “reckless” for an associated person who contributes to a firm’s violations.

The PCAOB approved an amendment to Rule 3502, previously titled Responsibility Not to Knowingly or Recklessly Contribute to Violations. The rule, originally enacted in 2005, governs the liability of an associated person of a registered public accounting firm who contributes to that firm’s violations of the laws, rules, and standards that the PCAOB enforces.

“With today’s adoption, the board has aligned PCAOB rules to what investors already expect: that when an associated person’s negligence directly and substantially contributes to firm violations, the PCAOB has tools to hold them accountable,” PCAOB Chair Erica Williams said in a news release.

If the SEC approves the amended rule, it becomes effective 60 days after that approval.

Also on Wednesday, the PCAOB approved amendments to two auditing standards that grew out of the board’s research on the use of data and technology. It also agreed to seek public comment on a proposal to replace its existing auditing standard related to an auditor’s use of substantive analytical procedures with a new standard. The existing standard has not changed significantly since 1989, the PCAOB said.

The update to Rule 3502 requires that an associated person who contributes to the firm’s violation directly, substantially, and negligently be held liable.

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.”

But Rule 3502 also allowed the PCAOB to hold associated persons liable for contributing to a registered firm’s violation only when they did so “recklessly.” This meant the PCAOB could only sanction an associated person if they had acted recklessly when the firm committed a violation negligently.

The update aligns the rule with the same standard of reasonable care auditors are required to exercise anytime they are executing professional duties, the PCAOB said. The SEC already can 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” to be held liable.

Details of other PCAOB actions

The amendments to the auditing standards — AS 1105, Audit Evidence, and AS 2301, The Auditor’s Responses to the Risks of Material Misstatement — address procedures involving technology-assisted analysis of information in electronic form, the PCAOB said.

The amendments are meant to provide detail and clarity that will reduce the risk that auditors using technology-assisted analysis might issue an opinion without obtaining sufficient appropriate audit evidence. They also should address some auditors’ reluctance, which the PCAOB has observed, to use technology-assisted analysis at all under existing standards, the board said.

If approved by the SEC, the changes would be effective for audits of financial statements for fiscal years beginning on or after Dec. 15, 2025.

In its third action to update PCAOB standards, the board said it is seeking public comment on a proposal to update AS 2305, Designing and Performing Substantive Analytical Procedures.

If adopted, the new standard would strengthen and clarify the auditor’s responsibilities when designing and performing substantive analytical procedures, the board said. It’s meant to increase the likelihood the auditor will obtain relevant and reliable audit evidence that will improve overall audit quality and better protect investors.

The deadline for public comment is Aug. 12.

Also, the SEC announced Tuesday that it has appointed Williams to a second term beginning Oct. 25 and continuing through Oct. 24, 2029.

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