A Flurry of Audit Activity at PCAOB, FASB

There is no indication of the typical “summer slowdown” at the Public Company Accounting and Oversight Board or the Financial Accounting Standards Board. In fact, the PCAOB and FASB have been quite active in June, approving a slew of rule changes. Here is a round-up of their recent activity.

PCAOB

Perhaps the biggest story in the audit world was the PCAOB’s 5-0 vote on June 12 to expand liability for individuals who contribute to accounting firms’ violations of audit standards. Essentially the board changed the threshold for liability from recklessness to negligence. This puts the standard in line with the one that already applies to auditors when performing their professional duties.

The updated rule still requires that for an associated person to be held liable, they must have contributed to the firm’s violation both “directly and substantially.” If you’re a partner who manages audits at an accounting firm, consider yourself warned. The same goes for other firms that assist in audit work.

Additionally, the PCAOB put forward a new proposed standard to strengthen and clarify auditors’ responsibilities when designing and performing substantive analytical procedures. These procedures apply when comparing amounts recorded by companies with the amounts auditors expect in cases of potential financial misstatements. The PCAOB expects the proposal to result in more relevant and reliable audit evidence, given that the rule in question that has barely changed since 1989.

Lastly, the PCAOB voted in favor of amendments to two existing standards that cover audit procedures involving technology-assisted analysis of information in electronic form. The changes were borne from the board’s research on auditors’ use of data and technology, and are designed to bring greater clarity to auditor responsibilities in areas such as using reliable information in audit procedures; using audit evidence for multiple purposes; and performing tests of details.

If approved by the Securities and Exchange Commission, the changes will take effect for audits of financial statements for fiscal years beginning on or after December 15, 2025.

FASB

Meanwhile, at a FASB meeting on June 12, the action focused on environmental credits. Specifically, board members are trying to establish requirements for how companies account for things like carbon offsets, cap-and-trade programs, and renewable-energy credits.

At present, companies are not subject to any specific rules when accounting for such transactions. The board voted unanimously in favor of proposing that U.S. public and private companies use one method of recording them.

Don’t forget about the SEC

This month’s developments at the PCAOB and FASB came on the heels of SEC Chief Accountant Paul Munter lambasting the leadership of auditing firms. In a public statement issued in May, Munter bemoaned auditors’ unwillingness to hold their firms’ leaders accountable in the face of regulatory action. Instead, he implied that profit chasing motivated auditors to shirk their professional responsibilities.

Could the SEC be planning a crackdown on auditing firms in the second half of the year? Stay tuned.