Dear Ms. Brown:
We, the undersigned representatives of the American business community, write regarding the Public Company Accounting Oversight Board’s (“PCAOB” or “Board”) Exposure Draft (“Exposure Draft” or “Proposal”) on Company’s Noncompliance with Laws and Regulations (“NOCLAR”).[1] While we appreciate the opportunity to comment, the Exposure Draft raises a series of significant concerns for the business community.
First, the Proposal does not use precise terminology or otherwise reasonably limit or clarify the Proposal’s NOCLAR requirements. The Proposal would establish an obligation for the auditor to plan and perform procedures to identify all laws and regulations with which
noncompliance “could reasonably” have a material effect on financial statements, and then would create a duty for auditors to assess and respond to the risks of material misstatements related to those regulations to determine whether noncompliance has or may have occurred.[2] This “could reasonably” standard is unbounded and imprecise and would not provide auditors with a practical filter or guide for which laws and regulations to evaluate. Further, the conditional terminology employed by the Proposal – such as “likely,” “may,” and “might,” including a requirement to report to the audit committee “information indicating that noncompliance . . . may have occurred”[3] – would create serious challenges in determining precisely which instances of NOCLAR to prioritize. The vague and intentionally expansive[4] terminology used by the Exposure Draft would drive new liability concerns among auditors, creating a more unfocused and ineffective risk mitigation environment that would push legal, compliance, and audit costs even higher.[5]
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[1] Proposing Release: Amendments to PCAOB Auditing Standards related to a Company’s Noncompliance with Laws and Regulations and Other Related Amendments. Available at: https://assets.pcaobus.org/pcaob- dev/docs/default-source/rulemaking/docket-051/pcaob-release-no.-2023-003—noclar.pdf.
[2] Exposure Draft, p. A1-2.
[3] Exposure Draft, p. A1-7.
[4] Exposure Draft, p. 24 (“As with the existing definition of ‘illegal acts,’ the Board intends ‘noncompliance with laws and regulations’ to have a broad meaning and to encompass violations of any law or any regulation having the force of law. We expect the auditor to focus on all types of noncompliance, whether the violations concern financial or operational issues or involve intentional or unintentional conduct.”).
[5] According to the National Bureau of Economic Research (NBER), the average U.S. firm spent between 1.3 and 3.3 percent of its total wage bill on regulatory compliance between 2002 and 2014, reflecting a growth rate of 1 percent a year, roughly half of the average annual GDP growth rate over the period. For specific industries, such as transit, manufacturing, and financial services, these rates were even higher. Moreover, the research conducted focused only on the labor costs of regulatory compliance, not the capital expenditure costs, lost profits by creating compliance risk, and outsourced compliance costs such as accounting services. See: NBER, “Tracking the Cost of Complying with Government Regulation.” Feb. 2023. Available at: https://www.nber.org/digest/20232/tracking-cost-complying- government-regulation.
