PCAOB Amendments to PCAOB Auditing Standards related to a Company’s Noncompliance with Laws and Regulations (NOCLAR) [ED]
The comment period has been reopened from February 26, 2024 through March 18, 2024 |
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Next steps: |
TBD pending analysis of comment letters on June 6th proposal. |
Last updated: |
March 2024 |
Overview
On June 6, 2023, the Public Company Accounting Oversight Board (PCAOB) issued for public comment a proposal to replace AS 2405, Illegal Acts by Clients, in its entirety with AS 2405, A Company’s Noncompliance with Laws and Regulations, together with conforming amendments to PCAOB auditing standards. The comment period is open through August 7, 2023.
In brief, the Board’s proposal would:
- Replace the term “illegal acts” with “noncompliance with laws and regulations” and expressly include fraud, as defined by PCAOB standards, within the definition of noncompliance with laws and regulations.
- Expand the auditor’s obligation to plan and perform audit procedures to (1) identify laws and regulations with which noncompliance could reasonably have a material effect on the financial statements; (2) assess and respond to risks of material misstatement of the financial statements due to noncompliance with those laws and regulations; and (3) identify whether there is information indicating such noncompliance with those laws and regulations has or may have occurred.
- Enhance the auditor’s procedures for obtaining an understanding of the company and the auditor’s risk assessment procedures related to a company’s noncompliance with laws and regulations, and improve identification of noncompliance with laws and regulations, through targeted amendments to AS 2110, Identifying and Assessing Risks of Material Misstatement.
- Enhance the requirements related to the auditor’s evaluation of information related to noncompliance, including evaluating the timeliness and appropriateness of management’s remedial actions.
- Clarify and expand the auditor’s requirements to communicate information indicating noncompliance has or may have occurred to management and the audit committee, including for the auditor to communicate the results of the auditor’s evaluation.
- Align the requirements in the proposed auditing standard with the illegal acts provisions of Section 10A of the Securities Exchange Act of 1934 to help auditors to discharge their obligations under Section 10A.
- Enhance coordination and communications concerning noncompliance when auditor’s specialists or other auditors participate in the audit.
- Enhance the risk assessment requirements by expanding the sources of information the auditor looks to when assessing risks of material misstatement in the financial statements, through other targeted amendments to AS 2110.
- Clarify the auditor’s obligations to evaluate the implications for the audit when transactions or relationships with a related party indicate noncompliance has or may have occurred regardless of how the auditor becomes aware of such transactions or relationships (that is, whether or not such transactions or relationships were disclosed by the company to the auditor) through amendments to AS 2410, Related Parties.
- Expand the auditor’s consideration of noncompliance with laws and regulation in reviews of interim financial information by providing specific procedures, including additional inquiries, related to potential noncompliance, through amendments to AS 4105, Reviews of Interim Financial Information.
- Make conforming amendments to other PCAOB auditing standards.
For further details see the press release , the proposal, the project page on the PCAOB’s Web site and a comparison of current standard with ISA 250 and AICPA AU-C Section 250.
Other Developments
March 2024
On March 6, 2024, the Center for Audit Quality (CAQ) released a statement regarding the recent roundtable conducted by the PCAOB on its NOCLAR proposal, indicating that the event did not unfold as anticipated. As per its statement, the CAQ believes that the recent roundtable conducted by the PCAOB regarding its proposal on NOCLAR fell short of the principles of transparency and accountability essential for effective public policy development.
February 2024
On February 26, 2024, the PCAOB announced that it will host a public virtual roundtable regarding the proposal to amend PCAOB auditing standards related to the auditor’s responsibility for considering NOCLAR on March 6, 2024.The objective of the roundtable is to obtain additional insight from commenters, stakeholders, and experts as the PCAOB’s staff works toward a final recommendation to the Board. The roundtable will include three panels focused on the proposal’s requirements relating to auditors’ identification of laws and regulations and assessment of those laws and regulations, as well as costs and benefits of the proposal. In light of the roundtable, the Board is reopening the comment period from February 26, 2024 through March 18, 2024.