Proposed rules that would require auditors to dig deeper to uncover corporate lawbreaking would transform the role of the auditors but wouldn’t benefit investors, US companies and corporate directors say.

The cost to sort through numerous laws and regulations across various states and countries could add billions to the total cost of auditing publicly-traded companies, audit committee members, and the US Chamber of Commerce told the Public Company Accounting Oversight Board in letters submitted since the end of July.

Instead, those and other corporate stakeholders urged the regulator to focus auditors on the riskiest crimes and rule violations and to rely more heavily on the work of internal compliance programs as the PCAOB looks to update rules for how auditors ferret out corporate crimes that could result in hefty penalties and costly legal settlements. The feedback was among more than 120 letters submitted to the board.

“The proposal is a far-reaching and costly departure from the auditor’s core responsibilities,” the Chamber’s Tom Quaadman said in his group’s letter. “As it stands, the proposal risks undermining the credibility of the PCAOB as a fair, reasonable, and proportionate audit regulator.”

Under draft rules the PCAOB released in June, auditors would have to consider which laws or regulations pose risks to a company’s financial health and identify possible violations of those laws and regulations.

The proposal responds to investor demands for auditors to shed more light on a broader range of corporate legal risks that ultimately hurt the value of their holdings like evading environmental laws or high-pressure sales tactics that resulted in billions worth of penalties for Volkswagen and Wells Fargo.

But such high-profile cases don’t “justify a drastic transformation of the nature of the financial statement audit or the role of the auditor,” the National Association of Corporate Directors told the board. “The auditor would effectively no longer be performing a financial statement audit but rather an audit of a company’s compliance function.”

Opponents argue the draft rules, known as noncompliance with laws and regulations, would force auditors to turn to teams of lawyers to identify the vast number of laws at play for each company, whether any has been broken before considering the impact on corporate accounting.

“Audit professionals are not adequately trained to navigate, assess and render judgment on complex laws and regulations or handle privileged information,” chemical producer Dow Inc. Controller Ronald Edmonds told the audit board. “The proposal language can be translated to require auditors to provide independent validation of a company’s compliance with all laws and regulations.”

Marathon Oil Corp.’s Controller Rob White said auditors would “insert” themselves into legal and management responsibilities. And auditors’ additional information requests could put companies “in the difficult position of either waiving the attorney-client privilege or risking that the audit would not be completed.”

Costly Expansion

Paying for teams of lawyers to scour company records for possible infractions and analyzing whether the significance of any financial toll would be costly.

The draft rules could triple the cost of audit fees resulting in an increase of $36 billion annually, according to the Chamber. The Center for Audit Quality’s Audit Committee Council said the increase could exceed $74 billion.

Auditors should focus on laws that pose the greatest financial risk and should also consider the work of the company’s internal compliance program to uncover legal and rule violations that pose a material threat to the financial statements, the council said.

Healthcare giant Cigna’s chief accounting officer Mary Agoglia Hoeltzel warned that under the draft rule, auditors would not be able to rely on those internal systems, forcing companies to abandon existing risk-based monitoring of legal compliance.

“The auditor may exceed even management’s involvement in this area, potentially compromising independence in the interest of obtaining a greater level of assurance than that required by the objectives of an audit,” Agoglia Hoeltzel said.

Investors urged the board to focus auditors’ attention on the types of law violations that could cause billions in economic costs, lost shareholder value, and insurance claims.

“This does not, as some have suggested, require auditors to identify all the laws and regulations applicable to the public company,” Brandon Rees, deputy director of corporations and capital markets for the AFL-CIO, said in his letter. “The vast majority of laws and regulations will have no reasonable capacity to materially affect the financial statements.

The board should go further than its proposal and require the largest audit firms to assess each company’s internal compliance systems and report their findings to the audit committee, Rees said.

Jon Lukomnik, who served on the creditor committees for collapsed companies WorldCom and Adelphia, urged the board to focus on systemic abuses and compliance failures condoned by top executives. He’s currently managing director of Sinclair Capital, a consultant to institutional investors.

“Where we are today is not adequate,” said Lukomnik, who added “it’s not even in the neighborhood of adequate.”

“Investors want two things from an audit: to know that the numbers are right, and to know that there was no fraud or noncompliance that will explode the financial statements and market value when it becomes public,” he said.

The board has not said how quickly it might finalize the rule changes after scrutinizing feedback. The project is among a trio of updates to its requirements the board has floated this year with four more proposals set to be released by December.


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