Current standards only require auditors to identify and report illegal activities that directly impact the accuracy of financial statements, while the new rules will mean that auditors must also examine actions that may have indirect impacts. The Big Four firms have stated that if the proposal is approved, audit fees will skyrocket.
A new regulation targeting audit firms in the United States is facing a joint resistance from the Big Four accounting firms, indicating the government's determination to reform the capital market. As audit firms engage in intense legal maneuvering with regulatory bodies, the proposal put forth by the Public Company Accounting Oversight Board (PCAOB) in June, which requires audit firms to assume more responsibilities, is nearing the end of the consultation period. The Big Four accounting firms have recently begun lobbying their clients to oppose this proposal, stating that "if the proposal is approved, audit fees will skyrocket."
According to Proposal No. 2023-003, the PCAOB aims to expand the scope of auditors' responsibilities by requiring them to inform the board when they discover any illegal activities by their clients.
The new objectives proposed by the PCAOB are as follows:
Protect investors from damages caused by non-compliance with laws and regulations when such actions have a significant impact on a company's financial statements.
Enhance audit quality by having auditors identify non-compliance with laws and regulations that may have a significant impact on financial statements.
Under the current standards, auditors are only required to detect and report unlawful activities that directly affect the accuracy of financial statements. However, the new rules would mean that auditors must also examine actions that may have indirect impacts.
In the current system, auditors have relatively limited responsibilities. For unlawful activities beyond the scope of a company's financial reporting and accounting functions, such as non-compliance with regulations related to company operations, audit firms are essentially "turning a blind eye."
In response to the proposed new rules by the PCAOB, the Center for Audit Quality, led by Deloitte, PricewaterhouseCoopers, Ernst & Young, and KPMG, issued an open letter stating:
"Auditors are not lawyers, and this proposal expands auditors' roles, requiring them to apply knowledge and expertise beyond their core competencies. The proposal will significantly increase audit costs without corresponding benefits."
According to the Financial Times, there are also doubts within the PCAOB regarding the proposal. Among the five directors, only three support the new rules, while two directors who previously worked at the Big Four firms explicitly oppose them.
Tony Thompson, one of the directors who voted in favor of the proposal, stated to the Financial Times that he is willing to listen to feedback, especially from smaller audit firms that may not have the resources of the Big Four. He said:
"We are not asking auditors to become lawyers, nor are we asking them to spend a significant amount of resources hiring experts.
There may be legal issues that you come across during an audit and are asked to comment on. If you see concerning phenomena, don't pretend you didn't see them."