(Article from Registered Funds Regulatory Update, October 2024)
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The SEC recently approved an amendment to the PCAOB’s ethics rule governing the liability of “associated persons” of a registered public accounting firm who “directly and substantially” contribute to a registered public accounting firm’s violations of the laws, rules, and standards that the PCAOB enforces.
The amendments to Rule 3502, Responsibility Not to Knowingly or Recklessly Contribute to Violations, lower the bar for the liability of associated persons from recklessness to negligence, while affirming that an associated person must have contributed “directly and substantially” to a registered public accounting firm’s violation of the law, rules and standards enforced by the PCAOB. As the SEC noted in its order approving the amendment to Rule 3502, in this context, negligence is “the failure to exercise reasonable care or competence,” while “recklessness” is an “extreme departure from the standard of ordinary care” that “presents a danger to investors or to the markets that is either known to the (actor) or is so obvious that the actor must have been aware of it.” The amendments are intended to align the PCAOB’s liability standard with other negligence-based professional conduct standards (e.g., state licensing requirements and the SEC’s standard for sanctions on individuals contributing to firm violations), as well as the standard of reasonable care required for auditors in executing their professional duties.
The amendments to Rule 3502 will become effective in 60 days. Notably, the amendment will only apply to conduct after the effective date.
Public Company Accounting Oversight Board; Order Granting Approval of Amendment to PCAOB Rule 3502 Governing Contributory Liability, Release No. 34-100772 (Aug. 20, 2024), available at: https://www.sec.gov/files/rules/pcaob/2024/34-100772.pdf.