The Public Company Accounting Oversight Board has issued a formal policy statement in an effort to get more cooperation from public accounting firms in assisting with the PCAOB’s investigations of their audits, offering extra credit for cooperating with PCAOB investigations and self-reporting violations.
The policy statement describes what the PCAOB may consider to be “extraordinary cooperation” and how credit might be reflected for such cooperation. The policy is generally consistent with the board’s existing practices, but spells out details.
“This policy provides benefits to investors and real, tangible incentives to cooperate to firms and persons associated with firms,” said PCAOB chairman James R. Doty in a statement. “Extraordinary cooperation permits the board to more quickly and efficiently address wrongdoing for the protection of investors, and may earn parties credit in connection with the board’s disciplinary processes.”
According to the policy statement, extraordinary cooperation is voluntary and timely action beyond compliance with legal or regulatory obligations. Cooperation that could result in credit includes self-reporting violations before the conduct comes to the attention of the PCAOB or another regulator. Self-reporting is more valuable the earlier it is provided, the PCAOB noted.
The other types of extraordinary cooperation that could result in credit are taking remedial or corrective action to reduce the risk of similar violations recurring, and providing substantial assistance in the PCAOB’s investigative processes.
Credit for cooperation may result in reduced charges or sanctions in a disciplinary proceeding, the PCAOB noted. In some cases, extraordinary cooperation may lead to language in settlement documents noting the cooperation and its effect. In exceptional cases, extraordinary cooperation could lead to no disciplinary action at all.
“Extraordinary cooperation can help streamline and expedite PCAOB investigations, which allows the board to turn its attention and resources to other potential auditor misconduct,” said Claudius B. Modesti, director of the PCAOB Division of Enforcement and Investigations. “This policy statement is an important step in encouraging auditors to go above and beyond what is required by law.”
The policy statement notes that “crediting extraordinary cooperation may shorten investigations and reduce the burdens on the board’s resources, thus allowing the board to focus on other potential auditor misconduct for the protection of investors. Providing this guidance and publicly acknowledging extraordinary cooperation may encourage firms and associated persons to provide extraordinary cooperation, and may provide insights into how extraordinary cooperation is credited.”
The PCAOB is also trying to create a different set of incentives that would encourage greater auditor independence, objectivity and professional skepticism. In a recent speech at the William & Mary Mason School of Business Norfolk Southern Excellence in Financial Reporting Conference earlier this month, Doty remarked, “We are looking closely at auditor incentives, especially in light of the fact that auditors are in the position of being paid by the very companies that they audit. This is a structural conflict that over time has worried auditors, users of financial statements, and regulators. We are looking at the source of the auditor's objectivity. We are exploring ways to free them from client pressures.”
The PCAOB also offers members of the public a way to report potential violations of law or PCAOB rules. Whistleblowers and tipsters can contact the board through the Tip and Referral Center on the PCAOB’s Web site.