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Why the profession needs to say no to NOCLAR

March 18, 2024

The viability of the CPA profession is under pressure from significant demographic and regulatory forces. Now, we have to contend with the Public Company Accounting Oversight Board's recent calls for more punitive regulatory enforcement actions and an aggressive standard-setting agenda. The PCAOB's Non-Compliance with Laws and Regulations (NOCLAR) proposal is disconnected from the realities of our profession and will impose undue strain on an already thinly stretched workforce of CPAs.

The PCAOB is closing the second comment period for its NOCLAR proposal on March 18. We at the Pennsylvania Institute of CPAs (PICPA) feel compelled to express our most urgent concerns regarding the PCAOB's plans.

If passed, NOCLAR rules will radically transform our profession. The regulatory and standard-setting landscape for the accounting profession should evolve, but it must do so sensibly. We acknowledge the need for modernization and the importance of staying vigilant against noncompliance and fraud. However, the PCAOB's current approach with the NOCLAR proposal feels rushed, muddied, and ill-considered.

The PCOAB aims to enhance audit quality by requiring auditors to identify and evaluate any noncompliance that violates any laws or regulations that could materially affect financial statements. While the intention behind promoting greater audit quality is understandable, the scope and implications of this particular proposal are troubling.

As noted by Duane DesParte, a respected voice in the profession and former PCAOB member, "This proposal risks expanding the audit scope to an extent that demands legal expertise far beyond the auditor's core competencies, at a significant cost."

First and foremost, the proposed NOCLAR rule is not an enhancement to improve audit quality; it is an overhaul of existing audit procedures. By extending the auditor's responsibilities to identifying and evaluating a company's noncompliance with a broad spectrum of laws and regulations, the PCAOB is asking auditors to step beyond their role and expertise. It expects them to transform into quasi-legal experts responsible for interpreting every conceivable law and regulation that could impact a client's financial statements.

The expectation that auditors should possess an encyclopedic knowledge of all laws and regulations, as suggested by the proposal, sets an impossible standard. Auditors cannot, and should not, analyze every law and regulation, both domestic and foreign, to identify all those that could have a material impact on the financials and then identify whether there has been any noncompliance. Such an expansion is more than broadening the auditor's responsibilities; it's transforming the role into something it was never meant to be. Auditors are tasked with rendering an opinion on the reasonable assurance that financial statements are fairly presented.

The potential effects of this proposal would cascade down to every publicly traded company and the accounting firms they work with. Take consumer products companies as an example. An audit team would have to focus their attention on regulations from federal agencies such as the U.S. FDA, FTC, EPA, OSHA, NLRB and CPSC, as well as regulations of the states, localities and foreign countries in which the company's products are manufactured and sold. Privacy and security law compliance would also have to be considered. And these are just the start of a lengthy list that could consume considerably more time than the current financial statement audit. The audit team would then have to identify whether an instance of noncompliance occurred, for example a toxic chemical leak, and evaluate the potential impact of the noncompliance. Financial statement audits are not, and should not be, regulatory compliance audits.

Beyond auditing – NOCLAR's wider impact

The proposal also poses a risk to the fundamental relationship between auditors, their clients and the legal system. By making auditors responsible for detecting and reporting legal non-compliance, the PCAOB is blurring the lines between auditing and legal advisory. This could compromise attorney-client privilege, erode trust between auditors and clients, and thrust auditors into a confrontational role that could lead to contentious and litigious situations while posing independence challenges.

What does this mean for the profession? Accounting firms would need to hire additional auditors, add legal and compliance experts, retrain the audit staff, overhaul audit methodologies and practice aids, develop new regulatory and compliance audit systems and resources, revise quality control systems, and prepare for a completely new business model.

The implications of the NOCLAR proposal extend far beyond the practical challenges. The potential economic impact is staggering. PCAOB staff presented commentary in the NOCLAR proposal indicating that audit efforts and costs "could be substantial." This isn't a marginal increase; businesses, especially small to medium enterprises, could see their audit expenses sharply increase. Businesses will also have to spend considerable extra time and effort complying with the expanded auditor requests, which could stifle business growth and innovation.

The burden of reshaping an already struggling profession feels extremely ill-timed. Under the PCAOB's proposed changes, the entire accounting curriculum taught at universities would need to be amended. The CPA exam, too, will need to be reconfigured to address regulatory and legal compliance standards for which our profession has never before been responsible.

The question is challenging: Is radical transformation of the audit good for the future of our profession? The answer is simple: No. This proposed change is nothing but disruptive.

As representatives for stakeholders in this profession — accountants, regulators and business executives alike — it is our duty to voice our concerns and advocate for regulations that enhance, not hinder, the integrity and effectiveness of financial audits. We urge the PCAOB to reconsider this proposal, taking into account the profound implications it holds for the future of auditing. The path to improving audit standards should be paved with practical, well-considered standards that bolster the profession's ability to serve the public interest, not with impossible standards that threaten to erode its very foundation.

[Accounting Today]

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