On June 6, 2023, the Public Company Accounting Oversight Board (PCAOB, or the Board) proposed amendments to its auditing standards related to a Company’s Noncompliance with Laws and Regulations (NOCLAR).1 The Proposal aims to significantly expand auditors’ responsibilities by requiring more proactive identification, evaluation, and communication of instances where an issuer may not be complying with laws and regulations. The Proposal argues that these rules can prompt timely action by issuers to address noncompliance, ultimately reducing harm to investors and the public.2 The Proposal posits that these changes can boost investor confidence in financial statements and capital markets.
The Proposal is expected to raise audit and potentially litigation costs for issuers and audit firms. It discusses fixed costs, such as updating audit methodologies and staff training, and variable costs associated with identifying relevant laws and regulations, assessing risks, and formulating audit responses. Issuers would likely incur costs by engaging with auditors to respond to requests and increased audit fees.
We were commissioned by the U.S. Chamber of Commerce to assess the thoroughness of the economic analysis (EA) accompanying the Proposal. As we explain below, the EA falls short of the Board’s own stated criteria for conducting economic analyses in support of standard setting. While the Proposal acknowledges a significant increase in compliance costs, it fails to quantify these costs or provide empirical data to justify such extensive modifications. Moreover, as we discuss below, the PCAOB’s mission is not to oversee enforcement of all laws and regulations at the federal, state, and local levels, across all jurisdictions where issuers operate. 3 Instead, they are tasked with overseeing audit reports of financial statements and internal control over financial reporting (ICFR).
The Board’s failure to provide a comprehensive cost-benefit analysis and quantify outcomes disregards its own guidelines for conducting economic analyses. Implementing the proposed standards is expected to generate significant costs for auditors and issuers, which will ultimately be passed on to investors. Further economic analyses are necessary to determine whether the benefits outweigh these substantial costs. Moreover, the Board’s guidelines for economic analysis stipulate a post-implementation review to evaluate the effectiveness of new standards. Yet the Proposal lacks any substantive discussion regarding the Board’s post-implementation review plan.
Read the analysis here.
