Today, the Securities and Exchange Commission is considering whether to approve an amendment to the Public Company Accounting Oversight Board’s (PCAOB) ethics rule related to the liability of individuals who directly and substantially contribute to a registered public accounting firm’s violations. I am pleased to support this rule amendment because it would strengthen accountability for individual auditors who fail to uphold their responsibilities to the investing public.
An accounting firm, like any organization, is made up of a collection of people. Thus, when an accounting firm commits a violation of the public’s trust, an accompanying question arises: When and how might we hold people individually responsible for their roles in that violation?
For decades, the American Institute of Certified Public Accountants (AICPA) has maintained a Code of Professional Conduct.[1] To this day, it is an ethics violation when an accountant engages in an “act discreditable to the profession.” This includes making or permitting misstatements on an entity’s financial statements by virtue of the accountant’s negligence.
Congress addressed the question of individual professional misconduct by auditors in the Sarbanes-Oxley Act of 2002. The Act authorized the PCAOB to impose an array of sanctions on registered accounting firms and their associated persons who commit securities law violations or engage in professional misconduct while engaged in public company audits.[2]
In 2005, the PCAOB adopted an ethics rule establishing that associated persons are liable when they “take or omit to take actions knowing, or recklessly not knowing, that the act or omission” directly and substantially contributed to a firm’s violation. On the other hand, when registered firms commit a violation, they are potentially liable when they do so negligently.[3]
Under the federal securities laws, the SEC has enforcement authority with respect to any person “that is, was, or would be” the cause of another’s primary violation where that person “knew or should have known” their acts “would contribute to such violation.”[4]
This SEC standard relating to cause is negligence-based, enabling the Commission to hold individual auditors that negligently fail to comply with PCAOB audit standards responsible for their actions that cause firm violations.
This leads to inconsistency with regard to the standard for liability. First, there’s an inconsistency within the PCAOB’s own standards regarding audit firms versus the people who work there. Second, there's an inconsistency regarding individual liability between the current PCAOB rule and the AICPA’s longstanding Code of Professional Conduct, which is based in negligence.[5] Further, there's an inconsistency with the SEC’s negligence-based approach to contributory liability in administrative cease-and-desist proceedings against individuals.
Again, accounting firms are just collections of people. It’s important to be consistent.
When firms violate their obligations, the associated persons who directly and substantially contributed to such violations should be held to the same standards of accountability by the PCAOB.
By updating the PCAOB ethics rules, today's proposed amendments would encourage accounting professionals to be more deliberate and careful in fulfilling their duties.
I’m glad to support the approval of this amendment, which is consistent with the liability standards of the SEC.
I’d like to thank members of the SEC staff for their work on this proposal, including:
- Paul Munter, Natasha Guinan, Anita Doutt, Shaz Niazi, Greg Hillson, Mai-Khoi Nguyen-Thanh, Fariba Nasary, Taylor Pross, and Jeanne Riggs in the Office of the Chief Accountant.
- Megan Barbero, Bryant Morris, Peggy Kim, and Eduardo Aleman in the Office of the General Counsel.
- Jessica Wachter, Lauren Moore, Oliver Richard, Charles Woodworth, Lyndon Orton, Vladimir Ivanov, and Mahdi Mohseni in the Division of Economic and Risk Analysis.
- Ryan Wolfe and Charles Wright in the Division of Enforcement.
- Vanessa Countryman, Matthew DeLesDernier, Kesha Hardin, Barbara Volpe, and Crystal Wilson in the Office of the Secretary.
[1] See The American Institute of CPAs, “Code of Professional Conduct,” (December 2023) available at https://pub.aicpa.org/codeofconduct/ethicsresources/et-cod.pdf.
[2] See United States Congress, “H.R.3763 — 107th Congress (2001-2002),” available at https://www.congress.gov/bill/107th-congress/house-bill/3763. Section 105 empowers the Board to impose disciplinary or remedial sanctions upon registered public accounting firms, associated persons, and accountants.
[3] See Securities and Exchange Commission, “Public Company Accounting Oversight Board...” (April 2006), available at https://www.sec.gov/files/rules/pcaob/2006/34-53677.pdf
[4] See Securities and Exchange Act of 1934, available at https://www.nyse.com/publicdocs/nyse/regulation/nyse/sea34.pdf. Section 21C(a) provides liability for one who “causes” a primary violation if it is shown that “(1) a primary violation occurred, (2) there was an act or omission by the respondent that was a cause of the violation, and (3) the respondent knew, or should have known, that his conduct would contribute to the violation.”
[5] See The American Institute of CPAs, “Code of Professional Conduct,” (December 2023) available at https://pub.aicpa.org/codeofconduct/ethicsresources/et-cod.pdf. Section 501.05(a), Negligence in the Preparation of Financial Statements or Records, recodified at Section 1.400.040.01.
