Better Markets filed a comment letter with the Comment Letter to the Public Company Oversight Board (PCAOB) in response to the Board’s proposed rule to amend PCAOB Rule 3502, which governs the liability of associated persons who contribute to a registered public accounting firm’s violation of accounting standards:

Why it Matters. High auditing standards are vital for a well-functioning, robust, and trustworthy financial system that attracts investment and maintains market stability. Auditors are critical gatekeepers in our capital markets.

What we said. Better Markets strongly supports the PCAOB’s proposal to lower the threshold of liability for individuals who contribute to a firm’s violations of accounting standards from ‘recklessness’’ to ‘negligence.’ Under the current recklessness standard, individuals may only be found liable if their contributory negligence rises to the level of ‘an extreme departure from the standard of ordinary care for auditors,’ a threshold that requires a showing of knowledge or intent. However, under the new standard, individuals who directly and substantially contribute to a firm’s violation can be held liable where their negligent acts or omissions demonstrate a ‘failure to exercise reasonable care or competence.’ In other words, if they ‘knew or should have known’ that their conduct could contribute to a violation, they can be held liable, even with no showing of knowledge or intent.  This is good policy and it aligns with the standard that applies to firms.

Bottom Line.  The PCAOB’s proposal will ensure that those who contribute to violations of the rules governing accounting are held appropriately accountable.  Our comment submitted to the PCAOB highlights how the proposed changes would advance the public interest by improving auditing quality, strengthening PCAOB enforcement, incentivizing compliance, and enhancing investors’ confidence in the reliability of companies’ financial statements.

You can find the full comment letter here.