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”). 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. 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” – would create serious challenges in determining precisely which instances of NOCLAR to prioritize. The vague and intentionally expansive 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.