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Are We Turning Auditors into Compliance Officers?

Are We Turning Auditors into Compliance Officers?

by Starling Insights

Starling Insights Editorial Board

May 09, 2024


In a recent opinion piece published in CFO Dive, Brian Croteau, Chief Auditor at PwC US, offered a warning about the US Public Company Accounting Oversight Board's (PCAOB) proposal that external auditors should take responsibility for detecting regulatory and legal noncompliance.

In June 2023, the PCAOB proposed a new auditing standard focused on Noncompliance with Laws and Regulations (referred to as the "NOCLAR" standard). NOCLAR would require auditors to identify — and even prevent — their clients' noncompliance with a wide range of laws. "This is in contrast to current standards today, where auditors focus on laws and regulations that have a direct and material impact on a company's financial statements," Croteau explained.

Croteau questioned the reasonableness of such an expansion, particularly regarding laws tangential to financial reporting, which could lead to increased costs and complexity for public companies. However, he stipulated that some expansion of responsibility may be appropriate. "It would be reasonable for the PCAOB to adopt a rule expanding the auditor's responsibilities by requiring us to perform additional risk-based procedures related to those laws and regulations that are central or critical to a company's operations," he noted.

While recognizing the objective of investor protection behind the proposed rule, he suggested that the current proposal may not align well with the auditor's role and could lead to misunderstandings. He called for revisions that balance costs and benefits, ensuring that changes are scalable and beneficial across companies of all sizes.

Croteau highlighted the importance of maintaining trust in the financial reporting system and urged regulators to consider the perspectives of various market participants before implementing significant changes. He stressed the need for standards that enhance audit quality and the understanding of auditors' roles, while providing tangible benefits to investors. This should be done without unduly burdening companies with increased costs and complexity, he argued.

"Auditors know that our work is part of the fabric of trust upon which American capital markets operate," Croteau concluded. "Our ability to contribute to that trust relies on our focus on relevant risk, independence and objectivity. I welcome measured steps forward that carefully balance costs and benefits and are scalable to audits of companies of all sizes and complexity."

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