WASHINGTON, D.C.— Stephen Hall, Better Markets’ Legal Director and Securities Specialist, issued the following statement on the filing of Better Markets’ 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:
“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. 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.
“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.
“In addition, the proposed rule amends Rule 3502 to provide that an associated person contributing to a violation need not be an associated person of the registered firm that commits the primary violation. This is a welcome revision to Rule 3502 that better takes into account the complexity of many contemporary audits and the multiple firms involved in them. As the Proposal rightly notes, ‘contributory liability for an associated person who directly and substantially contributes to a firm’s primary violation shouldn’t be contingent upon the individual’s formal role or relationship with that firm, so long as the individual is an associated person of any registered firm.’
“We applaud the PCAOB for this important proposal, and we look forward to seeing the final rule in place.”
The full Better Markets comment letter is available here.
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Better Markets is a non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again. Better Markets works with allies—including many in finance—to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more. To learn more, visit www.bettermarkets.org.
