IMA FRC comment letter response to PCAOB proposed standard regarding noncompliance with laws and regulations (NOCLAR)
Monday, August 7, 2023
The IMA® (Institute of Management Accountants) Financial Reporting Committee (FRC) issued a comment letter in response to the Public Company Accounting Oversight Board (PCAOB) Release No. 2022-003, Amendments to PCAOB Auditing Standards related to a Company’s Noncompliance with Laws and Regulations (Proposal or Release).
The PCAOB states that if adopted, the proposal would amend PCAOB auditing standards related to an auditor’s responsibility for considering a company’s noncompliance with laws and regulations (NOCLAR), including fraud.
The FRC, as expressed in its response letter, strongly disagrees, and its comment letter raises, among others, the following concerns:
- The proposal is inconsistent with the expertise of accountants as it calls for assessments regarding compliance with federal, state, and local laws as well as those of international jurisdictions.
- To satisfy the requirements, as written, auditors would need to identify all relevant laws and regulations that may apply to a reporting entity. Therefore, auditors would need to engage lawyers with expertise in a broad diversity of legal topics, including (but not limited to) worker safety, consumer safety, cybersecurity, environmental, money laundering, and intellectual property.
- Operationalizing the proposal, if adopted, would require reconsideration of lawyers’ current responsibilities regarding confidentiality, privilege, and work product.
- Current insurance policies for professional liability, as currently written, may exclude coverage for responsibilities called for by the proposal, and renegotiation of coverage in light of the amendments, if adopted, would likely raise premiums significantly.
- Small audit firms may find themselves at a significant competitive disadvantage in providing the resources for expanded responsibilities, and the auditing field will become even more concentrated.