PCAOB modernizes its rules by strengthening accountability for contributing to firm violations

The PCAOB has approved the adoption of an amendment to PCAOB Rule 3502, previously titled Responsibility Not to Knowingly or Recklessly Contribute to Violations. The rule, originally enacted in 2005, governs the liability of an associated person of a registered public accounting firm who contributes to that firm’s violations of the laws, rules and standards that the PCAOB enforces. 

The updated rule requires that an associated person must have contributed to the firm’s violation directly, substantially and negligently in order to be held liable. 

For decades under PCAOB and predecessor auditing standards, auditors have been required to exercise reasonable care any time they perform an audit, and the failure to do so constitutes “negligence.” 

Previously, however, Rule 3502 allowed the PCAOB to hold associated persons liable for contributing to a registered firm’s violation only when they did so “recklessly” – which represents a greater departure from the standard of care than negligence. This means even when a firm commits a violation negligently, an associated person of that firm who directly and substantially contributed to the firm’s violation could be sanctioned by the PCAOB only if the PCAOB were to show that the associated person acted recklessly. 

As adopted, the updated rule changes Rule 3502’s liability standard from recklessness to negligence, aligning it with the same standard of reasonable care auditors are already required to exercise anytime they are executing their professional duties. Similarly, the U.S. Securities and Exchange Commission already has the ability to bring enforcement actions against associated persons when they negligently cause firm violations. 

At the same time, the updated rule maintains Rule 3502’s requirement that an associated person must have contributed to the firm’s violation both “directly and substantially” in order to be held liable. 

Following its September 2023 proposal to update Rule 3502, the Board received input from a wide range of commenters, which helped inform the amended rule as adopted. 

Specifically, the proposal would have specified that an associated person can be liable for contributing to a violation by any registered firm, while the current formulation references associated persons who contribute to a violation by a registered firm they are associated with. After weighing input on this provision, the amended rule maintains the current formulation, which the Board believes already encompasses all plausible scenarios. 

More information on the history of this project, including historical documents and comments received, can be found in Rulemaking Docket 053. 

The amendment to Rule 3502 is subject to approval by the SEC. If approved by the SEC, the amended rule will become effective 60 days after such approval.