Statement On Amendment To PCAOB Rule 3502 Governing Contributory Liability, SEC Commissioner Mark T. Uyeda, Washington D.C., Aug. 20, 2024

Thank you, Chair Gensler. Today, the Commission considers whether to approve two standards and one rule that have been adopted by the Public Company Accounting Oversight Board (the “PCAOB” or the “Board”).[1] Before discussing the first item on amendments to the contributory liability rule, I would like to share some general thoughts on the Commission’s oversight of rulemaking by the PCAOB.

In the Sarbanes-Oxley Act of 2002, Congress vested the Commission with this oversight responsibility when it created the PCAOB.[2] It is a responsibility that the Commission should not take lightly, but in carrying out such oversight, the Commission must also recognize that the PCAOB was created as by Congress as a separate organization.

In that respect, the PCAOB should not operate as a subordinate reporting unit of the Commission’s Office of the Chief Accountant or to the individual Commission Chair. The PCAOB reports to the Commission, not to the Commission’s staff. While I appreciate the regular and constructive engagement between the PCAOB staff and the Commission staff – and, indeed, I am very appreciative of the regular conversations that I have with Board Chair Erica Williams and each of the Board members throughout the year – we cannot lose sight of the Congressional directive that the PCAOB operates under the oversight of the Commission as a whole.

Thus, I am disappointed that the PCAOB is not part of today’s meeting. The core function for oversight is to inquire “what are you doing and why” and there is nobody from the PCAOB to answer these or other questions from me or my fellow commissioners. I do not view this approach as an effective method for the Commission to carry out its oversight function, even if it is legally permissible. I fail to understand why the persons with the technical expertise most central to today’s decisions are not at the discussion table.

I have been told that having someone from the PCAOB speak at today’s meeting may raise procedural issues.[3] However, the Commission’s procedures governing consideration of PCAOB rules specifically authorize the Commission to call for oral presentations if they would facilitate consideration of relevant issues.[4] Unfortunately, the Commission chose not to exercise this authority today.

I hope that the Commission re-visits this approach for future rules from the PCAOB.

In deciding whether to approve a PCAOB rulemaking, I consider factors similar to those when I evaluate a Commission rulemaking. These include:

1. Has the final rule or standard identified the problem that it is trying to solve? Is there data to show that the “problem” exists or is the PCAOB regulating by hypothesis?
2. Does the final rule or standard represent a logical outgrowth of the proposal? Have the concepts in the rule or standard been adequately exposed for market participants to evaluate and comment?
3. Has the PCAOB adequately evaluated, and quantified to the extent possible, the costs of the rule or standard? Costs can be both financial and non-financial and can be borne by the auditing profession, audit firms, companies and broker-dealers subject to an audit, and, most importantly, investors.
4. Related to costs, has the PCAOB considered the aggregate impact of its rules and standards that will become effective at or around the same time? Or has it adopted tunnel vision to focus only on a particular rule or standard?

I have been involved in rulemaking for over 20 years, both at the state and federal levels. Consideration of these factors and thoughtful responses to them are the hallmark of a high-quality rulemaking process.

Turning to the first item – amendments to the PCAOB’s contributory liability rule. Holding persons responsible is an important goal of any regulatory regime. Audit firms violate PCAOB standards when they operate in a negligent manner. However, while audit firms may be responsible for acting negligently, audit firms operate through individuals. What should their responsibility be towards ensuring that the audit firm does not act negligently?

Lowering the standard of conduct for individuals from recklessness to negligence would reverse the PCAOB’s 2005 decision to establish a recklessness standard for contributory liability.[5] Audits have become only more complex since 2005. While the PCAOB should have the tools to hold persons accountable, would lowering the standard of conduct for liability do more harm than good to the auditing profession? As some commenters noted, a negligence standard could discourage auditors from taking on more advanced audit roles, have a chilling effect on collaboration among auditors within the same firm, and hinder efforts to reverse the decline in new accountants.[6]

However, a negligence standard would be consistent with the standard of conduct that the Commission needs to prove for its cease-and-desist proceedings against associated persons for contributing to a firm’s violations of the Commission’s reporting requirements.[7] Furthermore, a negligence standard would create a parallel standard for liability under the PCAOB’s rules. Currently, a firm can commit a primary violation of a standard by acting negligently, but an associated person’s secondary liability for that violation is based on a recklessness standard.[8]

Whether a liability rule strikes the right balance between being prophylactic and having no bite will depend on how it is enforced. The PCAOB’s adopting release states that the Board “does not anticipate that [the rule change] will be used to sanction isolated, good-faith errors in professional judgment—let alone be wielded as a ‘blunt’ or ‘draconian’ instrument…including with respect to less senior engagement team members.”[9] I hope that the Board and its staff acts in accordance with that intent in the future.

However, I have not received sufficient assurances that the amendments will strike the right balance when it comes to holding people accountable for unreasonable conduct, as opposed to simply errors in judgment. Accordingly, I will not support these amendments. I thank the PCAOB’s members and staff and the Commission staff, especially those from the Office of the Chief Accountant and the Office of the General Counsel.