The Public Company Accounting Oversight Board (PCAOB) has recently wrapped up its comment period concerning a proposal intended to notably enhance the role and accountability of audit firms. The proposal, which pertains particularly to a public company’s non-adherence to laws and regulations – frequently referred to as NOCLAR – encompasses the in-depth evaluation and revelation of such instances by the audit firm. Bass, Berry & Sims PLC reported on these developments.
It poses intriguing questions and potentially wide-ranging ramifications for both, law firms and corporations, where the matter of legal compliance is of utmost relevance and import. Broadly speaking, the key idea behind the proposal is an expansion of auditor responsibility for detecting noncompliance with laws and regulations. However, such an initiative potentially blurs the distinction between legal duties primarily belonging to the company’s legal counsel and those incumbent on the auditors.
There are two main aspects to the proposed challenge. Firstly, the proposal aims to expand the scope of laws and regulations to which auditors must pay attention during their evaluations. This could result in auditors needing to examine a broader range of operations and transactions than they currently do.
Secondly, the proposal suggests an enhancement in auditors’ responsibility to disclose identified noncompliance instances, irrespective of whether these non-compliances could have material financial statement implications. This represents a change from the current standard where auditors’ primary responsibility is identifying material misstatements in the financial statements.
This recent proposal by the PCAOB, and the comment period that has followed it, represent an important step in the ongoing conversation about the role of auditors and the degree to which they should be involved in ensuring legal compliance. As legal professionals working across corporations and law firms, it is imperative to critically understand these changes and weigh their implications for your practice or organization.