August 7, 2023

Submitted electronically to: [email protected]
Ms. Phoebe W. Brown
Secretary
PCAOB
1666 K Street, NW
Washington, DC 20006-2803

Re: PCAOB Rulemaking Docket 051: Amendments to PCAOB Auditing Standards related to a Company’s Noncompliance with Laws and Regulation

Dear Ms. Brown,

SIFMA1 appreciates the opportunity to provide feedback to the Public Company Accounting Oversight Board (“PCAOB” or “Board”) regarding its proposal to revise auditing standards relating to companies’ potential noncompliance with laws and regulations.

I. Executive Summary
In its proposal, the PCAOB states that its goals are to promote audit quality by enhancing the identification, evaluation, and communication of noncompliance with laws and regulations; to promote consistency in practice; and to improve investor protection on a real-time and ongoing basis.

As described in more detail below, the proposed changes to auditing standards are not appropriate measures to achieve these purposes, for at least the following reasons:

• The proposal would dramatically expand the auditor’s role to matters outside its area of competency, and thus would not be optimally effective while also being time-consuming, adding unnecessary expense (which ultimately will be borne by shareholders), and distracting from the important core function.
• The proposal would create significant ambiguity for auditors and companies, further increasing time and expense, and diminishing auditor effectiveness.
• The proposal is not sufficiently clear because the auditor is not permitted to perform management functions and is not in possession of all relevant information about the current and planned future operations of the business necessary to identify all laws and regulations that could potentially be applicable to the company and with which noncompliance could reasonably have a material effect on the financial statements.
• The proposal would undermine the attorney-client relationship, at the risk of depriving companies of expert guidance regarding their compliance with laws and regulations, and thereby materially increasing exposure to investors.
• The proposal would add an unnecessary and complicated oversight regime for industries that are already required by law to design, establish, and maintain a supervisory system and employ licensed supervisory personnel to achieve compliance with laws and regulations, including antifraud provisions of state and federal jurisdictions.
• As written, the proposed changes are not necessary and, in fact, may well undercut the very goals the PCAOB seeks to achieve.

The Board should not adopt the proposal because the existing audit standards appropriately address risks that are material to users of financial statements, while balancing the proper roles of auditors, companies, and companies’ legal counsel.

SIFMA’s primary concerns are discussed below.

II. The proposal would dramatically expand the role of the independent auditor into areas well outside its role in the financial reporting process, compromising the auditor’s competence and diverting attention from its core functions.

Audit firms have neither the expertise nor the infrastructure to determine consistently and accurately when a company may be in violation of complex, varied, and numerous laws and regulations in a way that “could,” even “indirectly” (as the PCAOB proposes), materially impact the company’s financial statements. Proposed AS2405 would significantly expand requirements for existing audit procedures by requiring auditors to take new proactive steps to identify and consider noncompliance with laws and regulations which could reasonably have a material impact on the financial statements. In practice, this could lead to a thorough examination of nearly all laws and regulations to which a company may be subject. For companies that are global enterprises, auditors will be required to understand, consider, and analyze laws and regulations across multiple jurisdictions (including, potentially, internationally). Such a drastic expansion of the auditor’s role is not only outside the auditor’s qualifications, but also outside the PCAOB’s authority itself, as the proposal goes far beyond establishing basic auditing standards.

The examples provided in the proposal illustrate this point. For example, the proposal suggests that an auditor would be responsible for investigating whether any waste disposal regulations exist that, if violated, might conceivably have a material impact on a chemical company’s financial statements. Doing so would require auditors to research and interpret (often highly technical) laws and regulations, and make judgment calls on whether noncompliance with those laws and regulations could result in a material impact on the company’s financial statements. Auditors, however, are not extensively trained in the law, and thus unqualified to perform these types of tasks, let alone make such judgments as to potentially immaterial items.

Auditors would likely need to engage specialists to assist with such surveys of the legal and regulatory landscape. However, this is not a viable process for a variety of reasons. First, lawyers engaged by auditors as specialists would have an attorney-client relationship with the auditors and not with the company subject to audit. Accordingly, any information provided by the company to such lawyers would not have the protection of attorney-client or work product privileges, thus creating great risks for the company whose financial statements are being audited, and potentially causing a chilling effect on a company’s willingness to provide complete information and analyses. Second, any attempt to solve against these risks by having such lawyers analyze the laws and regulations applicable to the company without complete information could frustrate the auditors’ efforts to identify potentially applicable laws and regulations and analyze their potential impact on the company’s financial statements. Third, even if non-lawyer specialists could be identified with appropriate expertise to accomplish the PCAOB’s objectives, it would quickly become cost-prohibitive to the company to pay for the auditor to engage these specialists to achieve the objectives stated in the proposal (especially when the company is already investing resources to secure advice from its own legal counsel and other experts retained to assist the company’s legal counsel in complying with laws and regulations,  hich advice is subject to attorney-client privilege and work product protections).

Moreover, auditors’ involvement of experts will consume significant time of, and distract, company management, including by responding to information and document requests as well as discussing complex analyses. This is particularly true given that, as discussed above, many companies subject to these audit procedures operate across multiple jurisdictions and thus are subject to legal regimes across the United States and across the world. As a result, auditors would likely need to retain, and company management would need to engage with, multiple experts across such jurisdictions in order to conduct the type of analyses contemplated by the PCAOB’s proposal. This, along with the cost involved, would have a negative impact on companies (and their shareholders) that already have robust procedures intended to ensure their compliance with laws.

To summarize, because the proposal would require ongoing and continuous policing by auditors, it, by definition, would add significant burdens on the auditors and add substantial time to the audit process, potentially lessening the effectiveness of the overall audits (while further increasing cost to the companies). Auditors would almost certainly need to hire additional personnel to address this expanded role, which would be challenging given that there is a recognized shortage of qualified auditors and fewer candidates taking the CPA exam each year.2

1 SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s nearly 1 million employees, we advocate for legislation, regulation, and business policy, affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA).

2 See, e.g., Society for Human Resource Management, The CPA Shortage (May 6, 2023) (stating “[t]he declining number of people entering and staying in the accounting field is posing a significant challenge for public and private organizations. More than 300,000 U.S. accountants and auditors left their jobs in the past two years— a 17 percent decline in employed accountants and auditors from a 2019 peak, according to The Wall Street Journal in a December 2022 article.”), available at https://www.shrm.org/hr-today/news/all-things-work/pages/the-cpa-shortage.aspx.