The Public Company Accounting Oversight Board (PCAOB) delayed the adoption of a final rule with respect to its June 2023 proposal (Proposal) to increase auditors’ responsibility to evaluate and disclose a public company’s noncompliance with laws and regulations (NOCLAR). While the PCAOB originally indicated the Proposal would be adopted in 2024, the PCAOB’s website now states there will be no further action on the Proposal until 2025.
A PCAOB spokesperson was quoted stating “the PCAOB will not take additional action on NOCLAR this year,” likely due to the recent 2024 elections. The Proposal requires Securities and Exchange Commission (SEC) approval to be effective, and there are expected to be leadership changes at the SEC that will significantly affect rulemaking activity.
Key Implications of the NOCLAR Proposal for Auditors and Public Companies
The Proposal was one of the most controversial proposals issued by the PCAOB, and it generated an unusually high number of comment letters received. The Proposal would alter the existing auditing standard by requiring audit firms to identify and report a public company’s NOCLAR that has a direct and material effect on its financial statements, resulting in auditors having to undertake complex legal analyses and public companies having to incur additional costs. Please see our previous discussion of the Proposal for further details, accessible here: PCAOB Closes Comment Period on Controversial Proposal to Expand Auditor Responsibility for Legal Compliance.
Next Steps for Public Companies
Although there will not be further action by the PCAOB until 2025, the PCAOB recently issued staff guidance affirming the existing responsibilities of auditors to focus on detecting, evaluating and communicating about illegal acts by a company under audit. Therefore, it remains important for public companies to consider how the audit committee will evaluate the information that auditors provide regarding NOCLAR and determine how to respond to auditor requests for information about NOCLAR.
