Proposed PCAOB rule would prohibit auditors from making false or misleading statements about PCAOB registration and oversight

The PCAOB has issued for public comment a proposal for a new PCAOB Rule 2400, False or Misleading Statements Concerning PCAOB Registration and Oversight. 

The proposed rule would address how a registered firm and its associated persons present the firm’s PCAOB registration status, including the scope of the PCAOB’s oversight of their work. If adopted, the rule would prohibit false or misleading statements regarding firms’ registration status to clients, potential clients, or the public. The proposal also includes a new procedural mechanism that would enable the Board, under specified conditions, to treat a PCAOB-registered firm’s failures both to file annual reports and to pay annual fees for at least two consecutive reporting years as a constructive request for leave to withdraw from PCAOB registration and to deem the firm’s registration withdrawn. 

The deadline for public comment on the proposal is April 12, 2024. 

PCAOB oversight is aimed at improving audit quality and registration of audit firms with the PCAOB is a critical component of the PCAOB’s oversight. Under the Sarbanes-Oxley Act, public accounting firms must register with the PCAOB before they can prepare or issue an audit report for an issuer or a broker-dealer or play a substantial role in those audits. When they perform such work, PCAOB-registered firms must follow PCAOB auditing standards and are subject to PCAOB inspection and potential enforcement actions. 

While it is a linchpin of PCAOB oversight, registration in and of itself does not indicate that a firm provides high-quality service. Furthermore, the PCAOB does not endorse registered firms or their services. Nevertheless, the PCAOB has observed instances where registered firms have misrepresented PCAOB registration as a “seal of approval” or a “mark of excellence.” 

Currently, nearly half of the firms registered with the PCAOB do not engage in any audit-related work for issuers or broker-dealers that is subject to PCAOB oversight. Some of these firms promote their PCAOB registration in a manner that could lead investors and other market participants to mistakenly think that their work is subject to PCAOB oversight. 

Adding complexity for investors and others, while some registered firms may perform a portion of their work within the scope of PCAOB oversight, they may also do certain other work that falls outside the PCAOB’s jurisdiction, including auditing the financial statements of clients that are not issuers or broker-dealers. 

Although there is a risk that false or misleading statements concerning a firm’s PCAOB registration and oversight might mislead clients, potential clients, and the public, no specific PCAOB rule now expressly prohibits auditors from making such statements. 

Proposed Rule 2400 seeks to strengthen investor protection and confidence in three principal ways. 

1. Establishing a general prohibition on false or misleading statements concerning registration. The proposal would generally prohibit a registered firm and its associated persons from making false or misleading statements concerning the firm’s PCAOB registration status, including the extent of the PCAOB’s oversight over the firm’s services. 

2. Providing specificity about the application of the general prohibition. The proposal sets forth a non-exhaustive list of scenarios that would violate the general prohibition. These include certain statements regarding PCAOB registration and oversight that (i) state or imply the PCAOB sponsors, recommends, or otherwise endorses the firm or its services; (ii) are made by a firm that is not currently subject to PCAOB oversight; (iii) refer to particular services that are not subject to PCAOB oversight; (iv) appear in auditor’s reports for clients other than issuers or broker-dealers; or (v) are made about a firm with a pending request to withdraw from PCAOB registration. 

3. Codifying the Board’s practice of considering false or misleading statements during the registration process. The final provision would codify the Board’s current practice of considering any prior false or misleading statements made by an applicant firm or its personnel regarding the firm’s PCAOB registration status, including the extent of PCAOB oversight of the firm, when reviewing an application for registration with the PCAOB from the firm. 

The proposal also includes a new procedural mechanism, proposed new paragraph (h), Constructive Withdrawal Requests, of existing PCAOB Rule 2107, Withdrawal from Registration, that would permit the Board, under specified conditions, to (i) treat a PCAOB-registered firm’s failures both to file annual reports to the PCAOB and to pay annual fees to the PCAOB for at least two consecutive reporting years as a constructive request for leave to withdraw from PCAOB registration and (ii) to deem the firm’s registration withdrawn. 

Throughout the proposal, the Board requests comments on specific aspects of the proposed rule and related amendments. Readers are encouraged to answer the Board’s questions, to comment on any aspect of the proposal, and to provide reasoning and relevant data supporting their views. 

The public can learn more about submitting comments on PCAOB proposals at the Open for Public Comment page.