BILLING CODE 8011-01p
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100429; File No. PCAOB-2024-04]
Public Company Accounting Oversight Board; Notice of Filing of Proposed Rules on
Amendment to PCAOB Rule 3502 Governing Contributory Liability

June 26, 2024
Pursuant to Section 107(b) of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley" or the
"Act"), notice is hereby given that on June 20, 2024, the Public Company Accounting Oversight
Board (the "Board" or the "PCAOB") filed with the Securities and Exchange Commission (the
"Commission") the proposed rules described in items I and II below, which items have been
prepared by the Board. The Commission is publishing this notice to solicit comments on the
proposed rules from interested persons.
I.

Board's Statement of the Terms of Substance of the Proposed Rules
On June 12, 2024, the Board adopted an amendment to PCAOB Rule 3502,

Responsibility Not to Knowingly or Recklessly Contribute to Violations (collectively, the
“proposed rules”). The text of the proposed rules appears in Exhibit A to the SEC Filing
Form 19b-4 and is available on the Board’s website at https://pcaobus.org/about/rulesrulemaking/rulemaking-dockets/docket-053 and at the Commission’s Public Reference Room.
II.

Board's Statement of the Purpose of, and Statutory Basis for, the Proposed Rules
In its filing with the Commission, the Board included statements concerning the purpose

of, and basis for, the proposed rules and discussed any comments it received on the proposed
rules. The text of these statements may be examined at the places specified in Item IV below.
The Board has prepared summaries, set forth in sections A, B, and C below, of the most
significant aspects of such statements. In addition, to the extent that Section 103(a)(3)(C) of the

Act applies to the proposed rules, the Board is requesting that the Commission approve the
proposed rules, pursuant to that provision, for application to audits of emerging growth
companies ("EGCs"), as that term is defined in Section 3(a)(80) of the Securities Exchange Act
of 1934 ("Exchange Act"). The Board's request is set forth in section D.
A.

Board's Statement of the Purpose of, and Statutory Basis for, the Proposed Rules
(a) Purpose
Congress authorized the Board to promulgate rules and standards to govern auditor

conduct.1 To that end, in 2005, the Board codified auditors’ longstanding ethical obligation not
to contribute to firms’ violations in PCAOB Rule 3502, Responsibility Not to Knowingly or
Recklessly Contribute to Violations.2 For well over a decade now, the Board has brought
enforcement proceedings against associated persons pursuant to Rule 3502.
Yet Rule 3502’s current formulation contains an incongruity that places negligent
contributors to firms’ violations beyond the rule’s reach. That incongruity stems from the notion
that registered firms, like any legal entity, can act only through natural persons. It logically
follows that when a registered firm is found to have acted negligently, it is likely that such
negligence is attributable to at least one natural person’s negligence.
Rule 3502, however, at present requires a level of culpability higher than negligence—at
least recklessness—before the Board can impose sanctions against associated persons who
directly and substantially contribute to firms’ negligence-based violations. Put another way,
Rule 3502 requires a showing of more than negligence by individuals for the Board to sanction
them for conduct resulting in negligence by firms. Thus, under current Rule 3502, associated
persons who do not exercise reasonable care and contribute to firms’ violations may escape
liability and accountability—even while the firms committing the violations do not. The Board

See Section 103(a)(1) of Sarbanes-Oxley; see also, e.g., id. 101(c)(2), (c)(4), (c)(6) & (g)(1).

Ethics and Independence Rules Concerning Independence, Tax Services, and Contingent Fees,
PCAOB Release No. 2005-014, at 9 (July 26, 2005), available at https://pcaobus.org/Rulemaking/Docket017/200507-26_Release_2005-014.pdf (“The Board proposed [Rule 3502] to codify the ethical obligation of associated
persons of registered firms not to cause registered firms to commit [ ] violations.”).
believes that amending Rule 3502 addresses this incongruity, and therefore better protects
investors and promotes quality audits.
(b) Statutory Basis
The statutory basis for the proposed rules is Title I of the Act.
B.

Board's Statement on Burden on Competition
Not applicable. The Board's consideration of the economic impacts of the proposed rules

is discussed in section D below.
C.

Board's Statement on Comments on the Proposed Rules Received from Members,
Participants or Others
The Board released the proposed rule amendment for public comment in PCAOB Release

No. 2023-007 (September 19, 2023). The Board received 28 written comment letters; one
comment letter was subsequently withdrawn. The Board has carefully considered all comments
received. The Board’s response to the comments it received and the changes made to the rules in
response to the comments received are discussed below.
INTRODUCTION
In the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley” or the “Act”), Congress
established the Board in the wake of a series of high-profile corporate collapses that laid bare
auditor misconduct and the need for a new type of oversight of the public accounting industry.3
As part of its comprehensive, multipronged approach to such oversight, Congress authorized the
Board to investigate, bring charges against, and sanction (when appropriate) registered public
accounting firms and associated persons4 thereof for violations of the laws, rules, and standards

3
Pub. L. No. 107-204, 15 U.S.C. 7201 et seq.; see S. Rep. No. 107-205, at 3 (2002) (“The purpose
of [Sarbanes-Oxley] is to address the systemic and structural weaknesses affecting our capital markets which were
revealed by repeated failures of audit effectiveness and corporate financial and broker-dealer responsibility in recent
months and years.”). As the Senate Report notes, “the frequency of financial restatements by public companies
ha[d] dramatically increased” in the run up to the passage of Sarbanes-Oxley. S. Rep. No. 107-205, at 15; see id.
(“From 1990-97, the number of public company financial restatements averaged 49 per year, but jumped to an
average of 150 per year in 1999 and 2000.”).

An associated person is “any individual proprietor, partner, shareholder, principal, accountant, or
professional employee of a public accounting firm, or any independent contractor or entity that, in connection with
the preparation or issuance of any audit report . . . (1) shares in the profits of, or receives compensation in any other
that Congress charged the Board with enforcing.5 That enforcement authority covers a wide
array of auditor conduct, including negligent conduct.
Congress also authorized the Board to promulgate rules and standards to govern auditor
conduct.6 To that end, in 2005, the Board codified auditors’ longstanding ethical obligation not
to contribute to firms’ violations in PCAOB Rule 3502, Responsibility Not to Knowingly or
Recklessly Contribute to Violations.7 For well over a decade now, the Board has brought
enforcement proceedings against associated persons pursuant to Rule 3502.
Yet Rule 3502’s current formulation contains an incongruity that places negligent
contributors to firms’ violations beyond the rule’s reach. That incongruity stems from the notion
that registered firms, like any legal entity, can act only through natural persons. It logically
follows that when a registered firm is found to have acted negligently, it is likely that such
negligence is attributable to at least one natural person’s negligence.
Rule 3502, however, at present requires a level of culpability higher than negligence—at
least recklessness—before the Board can impose sanctions against associated persons who
directly and substantially contribute to firms’ negligence-based violations. Put another way,
Rule 3502 requires a showing of more than negligence by individuals8 for the Board to sanction
them for conduct resulting in negligence by firms. Thus, under current Rule 3502, associated
persons who do not exercise reasonable care and contribute to firms’ violations may escape
liability and accountability—even while the firms committing the violations do not. The Board

form from, that firm; or (2) participates as agent or otherwise on behalf of such accounting firm in any activity of
that firm.” PCAOB Rule 1001(p)(i). The definition of an “associated person” does not include persons engaged
only in clerical or ministerial tasks. See id.
See Sections 105(b) & (c) of Sarbanes-Oxley.

See id. 103(a)(1); see also, e.g., id. 101(c)(2), (c)(4), (c)(6) & (g)(1).

Ethics and Independence Rules Concerning Independence, Tax Services, and Contingent Fees,
PCAOB Release No. 2005-014, at 9 (July 26, 2005) (“2005 Adopting Release”), available at https://pcaobus.org/
Rulemaking/Docket017/2005-07-26_Release_2005-014.pdf (“The Board proposed [Rule 3502] to codify the ethical
obligation of associated persons of registered firms not to cause registered firms to commit [ ] violations.”).
For ease of reference, this release sometimes refers to associated persons who are the contributory
actors for purposes of Rule 3502 as “persons” or “individuals.” The Board notes, however, that both natural persons
and entities can be associated persons, and therefore Rule 3502 charges can be brought against both natural persons
and entities, consistent with the meaning of the term “person associated with a registered public accounting firm.”
believes that amending Rule 3502 addresses this incongruity, and therefore better protects
investors and promotes quality audits.
Accordingly, following notice and comment, the Board has amended Rule 3502 by
changing from recklessness to negligence the liability standard for associated persons’
contributory conduct. As explained in greater detail below, the Board believes, based on its
experience and having considered the comments received, that the amendment better aligns Rule
3502 with the scope of the Board’s enforcement authority under Sarbanes-Oxley, thus further
advancing the Board’s mission of investor protection.
RULEMAKING HISTORY
On September 19, 2023, the Board proposed to amend Rule 3502 in two ways: (1) by
changing from recklessness to negligence the standard of conduct for associated persons’
contributory liability and (2) by providing that, to be charged with violating Rule 3502, an
associated person contributing to a registered firm’s violation need not be an associated person of
the firm that commits the primary violation (i.e., that an associated person of one registered firm
can contribute to a primary violation of another registered firm).9 The Board received 28
comment letters on the Proposal from commenters across a range of affiliations.10 In general,
commenters recognized the importance of an effective PCAOB enforcement program and in
holding individuals accountable when there are violations of applicable laws, rules, and
professional standards. The final rule amendment—which, as detailed below, does not include
the second aspect of the Proposal—is informed by the comments received on the Proposal,
which are discussed throughout this release.

Proposed Amendments to PCAOB Rule 3502 Governing Contributory Liability, PCAOB Release
No. 2023-007 (Sept. 19, 2023) (“2023 Proposing Release” or the “Proposal”), available at https://assets.pcaobus.
org/pcaob-dev/docs/default-source/rulemaking/053/pcaob-release-no.-2023-007-rule-3502-proposal.pdf?
sfvrsn=7d49cc51_9.
Comment letters on the Proposal, as well as a staff white paper regarding characteristics of
emerging growth companies, are available on the Board’s website in Rulemaking Docket No. 053, available at
https://pcaobus.org/about/rules-rulemaking/rulemaking-dockets/docket-053/comment-letters. One of the comment
letters was withdrawn.
BACKGROUND
PCAOB Rule 3502 codifies associated persons’ ethical obligation not to contribute to a
registered firm’s violations of the laws, rules, and standards that the Board is charged with
enforcing. The rule provides grounds for secondary liability when an associated person of a
registered firm acts at least recklessly to directly and substantially contribute to such a violation.
Although the rule as adopted in 2005 incorporated a recklessness standard, the rule as proposed
in 2004 required that individuals only negligently contribute to a firm’s violation to be subject to
liability.11 Whereas negligence “is the failure to exercise reasonable care or competence,”12
recklessness requires “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.”13 Indeed, Sarbanes-Oxley characterizes “reckless conduct” as
a subset of “intentional or knowing conduct,”14 whereas negligence is an “objective” standard
that is not measured by “the intent of the accountant.”15
The Board has adopted negligence as the liability standard for actionable contributory
conduct under Rule 3502. And for good reason: A negligence standard is appropriate based on
the Board’s extensive experience with Rule 3502 since the rule’s adoption nearly two decades
ago, it closes a gap in the PCAOB’s regulatory framework that can lead to anomalous results,
and it advances certain objectives in the Board’s 2022-2026 Strategic Plan in furtherance of the
Board’s overall mission.

See Proposed Ethics and Independence Rules Concerning Independence, Tax Services, and
Contingent Fees, PCAOB Release No. 2004-015, at 18 & n.40 (Dec. 14, 2004) (“2004 Proposing Release”),
available at https://pcaobus.org/Rulemaking/Docket017/2004-12-14_Release_2004-015.pdf.
In re S.W. Hatfield, C.P.A., SEC Release No. 34-69930, at 35 n.169 (July 3, 2013) (citation and
quotation marks omitted).
Id. at 29 (citation and quotation marks omitted); see also Marrie v. SEC, 374 F.3d 1196, 1204
(D.C. Cir. 2004); 2005 Adopting Release at 13 (“[T]he phrase ‘knew, or was reckless in not knowing’ is a wellunderstood legal concept, and the Board intends for the phrase to be given its normal meaning.”).
14

See Section 105(c)(5)(A) of Sarbanes-Oxley.

15
In re Melissa K. Koeppel, CPA, PCAOB File No. 105-2011-007, at 166 (Dec. 29, 2017) (quoting
In re Kevin Hall, CPA, SEC Release No. 34-61162, at 12 (Dec. 14, 2009) (quotation marks omitted)).

In the first subsection below, the Board reviews the Board’s 2004 proposal and 2005
adoption of Rule 3502. Then, the Board details the reasons for the amendment the Board has
adopted to modernize and strengthen the rule.
A.

History of Rule 3502

As part of a package of proposed ethics and independence rules, the Board proposed
PCAOB Rule 3502 in 2004.16 In issuing the proposal, the Board observed that “[w]hile certain
types of violations, by their nature, may give rise to direct liability only for a registered public
accounting firm, the firm’s associated persons bear an ethical obligation not to be a cause of any
violations by the firm.”17 Accordingly, through Rule 3502, the Board sought to “codify that
obligation” and “make it clear that the obligation is enforceable by the Board.”18 Using language
“intended to articulate a negligence standard,” the proposed version of Rule 3502 subjected
associated persons to potential contributory liability if they “knew or should have known” that an
act or omission by them would contribute to a firm’s primary violation.19
Following a public comment period,20 the Board adopted Rule 3502 with two
modifications from the proposal. First, while affirming its authority to promulgate a negligence-

See generally 2004 Proposing Release at 18-19. As originally proposed (and adopted), Rule 3502
was entitled Responsibility Not to Cause Violations. See id. at A-4; 2005 Adopting Release at A-5. Shortly after
adoption, however, the Board changed the title of the rule to its current title, Responsibility Not to Knowingly or
Recklessly Contribute to Violations. The Board made the change “[a]fter discussions with the SEC” and “to avoid
any misperception that the rule affects the interpretation of any provision of the federal securities laws.” Ethics and
Independence Rules Concerning Independence, Tax Services, and Contingent Fees, PCAOB Release No. 2005-020,
at 2 (Nov. 22, 2005), available at https://pcaob-assets.azureedge.net/pcaob-dev/docs/default-source/rulemaking/
docket017/2005-11-22_release_2005-020.pdf?sfvrsn=69338fcd_0. In so doing, however, the Board clarified that
“[t]he rule, as amended, should be interpreted and understood to be the same as the rule adopted by the Board.” Id.
17

2004 Proposing Release at 18.

Id.

Id. at 18 n.40; see id. at A-4 (proposed rule text).

20
“Several commenters supported the rule as proposed and noted that they saw the rule as essential
to the Board’s ability to carry out its disciplinary responsibilities under the Act,” 2005 Adopting Release at 9, while
others did not fully endorse it. Their objections were based principally on the view that negligence might be an illsuited liability standard “in light of the complex regulatory requirements with which auditors must comply” and out
of concern that such standard “would allow the Board, or the SEC, to proceed against associated persons who in
good faith, albeit negligently, have caused a registered firm to violate applicable laws or standards.” Id. at 9, 13.
Certain commenters “also questioned the Board’s authority to adopt the proposed rule, or at least the proposed rule
with a negligence standard.” Id. at 9.

based ethics rule prohibiting contributory conduct,21 the Board revised the liability standard from
negligence to recklessness, which the Board at that time believed would “strike[ ] the right
balance in the context of th[e] rule.”22 Second, the Board modified “contribute”—the verb that
describes the connection between the associated person’s conduct and the firm’s primary
violation—by adding the words “directly and substantially.”
The latter modification was made due to commenters expressing concern that, because of
the collaborative nature of accounting work, each individual involved in formulating a decision
or other action that ultimately leads to a firm violation could be held liable for causing the
violation.23 The Board explained that the addition of “directly” means, among other things, that
an associated person’s conduct must “either essentially constitute[ ] the [firm’s] violation” or be
“a reasonably proximate facilitating event of, or a reasonably proximate stimulus for, the
violation.” But, the Board clarified, “directly” does not place outside the scope of Rule 3502
contributory conduct “just because others also contributed to the violation, or because others
could have stopped the violation and did not.” “Substantially,” the Board explained, means that
an associated person’s conduct must “contribute[ ] to [a] violation in a material or significant
way,” though it need not be “the sole cause of the violation.”24
B.

Reasons for the Amendment

As the Board previously recognized, when an associated person causes a firm to commit
a violation, such conduct “operates to the detriment of the protection of investors.”25 The
following subsections explain why the modification to Rule 3502 is appropriate in furtherance of
the Board’s mission to protect the interests of investors and further the public interest in the
preparation of informative, accurate, and independent audit reports.

See id. at 12 n.23.

2005 Adopting Release at 13; see id. at 12 & n.23.

See id. at 9, 13.

Id. at 13.

2005 Adopting Release at 10.

1.

Aligning Rule 3502 with the Board’s Enforcement Authority

As the Board previously has explained, a registered firm “can only act through the natural
persons who serve as its agents, including its associated persons.”26 Accordingly, “a natural
person’s actions may render both the [firm] primarily liable and the natural person secondarily
liable.”27 Yet under the current formulation of Rule 3502, an incongruity exists between the
respective requisite mental states for liability of a registered firm resulting from an associated
person’s conduct and for liability of the associated person: A firm can commit a primary
violation of certain laws, rules, or standards by acting negligently, but an associated person who
directly and substantially contributed to that violation must have acted at least recklessly to be
secondarily liable.
This incongruity means that associated persons may have weaker incentives to exercise
the appropriate level of care in their audit work. They may not exercise reasonable care (the
standard for negligence) if they know that they cannot be held individually liable by the PCAOB
for a firm’s primary violation unless an act or omission by them amounts to an “an extreme
departure from the standard of ordinary care for auditors” (the standard for recklessness).28 The
modification to Rule 3502’s liability standard from recklessness to negligence closes this
regulatory gap, which should incentivize associated persons to be more deliberate and careful in
their actions. Indeed, “accountability frequently improves outcomes.”29

26
2004 Proposing Release at 18; see 2005 Adopting Release at 12 (“[Registered] firms . . . can only
act through the natural persons that comprise them, many of whom are ‘associated persons’ subject to the Board’s
ethics standards and disciplinary authority.”). Indeed, as one commenter on the Proposal put it, a firm is the sum of
its parts.
27
In re Timothy S. Dembski, SEC Release No. 34-80306, at 13-14 n.35 (Mar. 24, 2017) (quoting
SEC v. Koenig, 2007 WL 1074901, at *7 (N.D. Ill. Apr. 5, 2007)).

Marrie, 374 F.3d at 1204; see Russell G. Pierce & Eli Wald, The Relational Infrastructure of Law
Firm Culture and Regulation, 42 Hofstra L. Rev. 109, 129 (2013) (explaining how rules from the legal industry’s
governing body that would restrict lawyers’ limited liability “will encourage lawyers to devote more energy to
maintaining the quality of the firm because they could potentially face personal liability for poor quality services”);
see also Colleen Honigsberg, The Case for Individual Audit Partner Accountability, 72 Vand. L. Rev. 1871, 1885
(2019) (arguing that “existing deterrence mechanisms have failed to produce optimal audit quality” and “are
ineffective”).
29

Honigsberg, supra, at 1902.

Numerous commenters agreed with the Board’s regulatory concerns noted above. These
commenters generally noted that the Board’s concerns were valid and clear, and that a
negligence standard would better align Rule 3502 with the scope of the Board’s enforcement
authority under Sarbanes-Oxley and provide a tool to eliminate incongruous results in liability
between individuals and firms. Indeed, one commenter characterized the difference between
negligence and recklessness as “substantial” and “consequential” and noted that the current gap
in liability standards directly impacts the Board’s ability to fulfill its statutory mission.30
Another commenter remarked that a negligence standard will enable the PCAOB and the
U.S. Securities and Exchange Commission (SEC or “Commission”) to more efficiently and
effectively pursue enforcement cases regardless of which entity has the resources to bring the
case. Commenters also stated that a negligence standard would appropriately align Rule 3502’s
liability threshold with the standard of care that auditors currently should be exercising when
performing their professional responsibilities and that both the Commission and civil plaintiffs in
private litigation currently can pursue cases against auditors for negligence. In encouraging the
PCAOB to adopt the Proposal, one commenter further noted that the change to negligence would
bolster investors’ expectations that accountants will be independent and diligent in their audit
work.
Other commenters, however, believed that the Proposal did not present a sufficient
rationale for moving to a negligence standard after the Board previously declined to do so in
2005. These commenters opined that the same concerns about a negligence standard that existed
in 2005 exist today and questioned whether there were significant enough developments to merit
the change.31 Indeed, certain commenters acknowledged the incongruity discussed in the

Comment Letter from Better Markets at 3 (Nov. 3, 2023).

31
In support of such assertion, one commenter cited F.C.C. v. Fox Television Stations, Inc., 556 U.S.
502 (2009). The rationale articulated in the Proposal and this adopting release, however, more than satisfies Fox’s
criteria for a conscious change in policy. See id. at 515 (“[I]t suffices that the new policy is permissible under the
statute, that there are good reasons for it, and that the agency believes it to be better, which the conscious change of
course adequately indicates.”). As to auditors’ reliance on the standard in the current rule, as in Fox, the Board is
not “punishing [auditors] without notice of the potential consequences of their action.” Id. at 518. That is so

Proposal but contended either that it is not significant or problematic, that it is not an impediment
to enforcement, or that closing the gap in liability standards would not change auditor conduct.32
One commenter stated explicitly that no incongruity or gap exists.
Several commenters also stated that auditors are subject to sufficient oversight under the
current framework, including via the PCAOB’s inspection program, enforcement in Commission
proceedings, and enforcement by state regulatory agencies. Certain of these commenters further
stated that a negligence standard would risk, among other things, disturbing the PCAOB’s
inspection process by upsetting inspection dynamics and threatening the cooperative and
constructive nature of the process that has developed over time.
The Board is mindful of the efficiencies gained through open dialogue with firms and
individuals alike during the inspection process. Given that firms and individuals already are
subject to a negligence standard for primary violations, however, the Board does not believe that
the incremental change of moving from recklessness to negligence for contributory conduct will
have a chilling effect on inspections, especially given that the Board will continue to exercise
discretion about when to bring Rule 3502 charges.33

because the adoption of a negligence standard, by itself, does not impose any civil money penalty or other sanction;
rather, sanctions are available only if Rule 3502 is violated after the amended rule becomes effective.
32
One commenter stated that the Proposal failed to articulate how the change to negligence would
align Rule 3502 with Sarbanes-Oxley and questioned whether there were cases where the current recklessness
standard did not suffice to hold persons accountable. The Proposal, however, made both of these points clear. See
2023 Proposing Release at 7 (describing the current misalignment with Sarbanes-Oxley); id. at 24-25 (discussing
estimated cases in 2022). That commenter and one other also noted that the PCAOB has been able to assess
significant penalties under the current Rule 3502 formulation and that the Board’s disciplinary proceedings have
resulted in collateral consequences for firms and individuals. While that may be the case, the Board did not adopt a
negligence standard for the purpose of facilitating an increase in penalties; rather, as the Proposal explained, the
Board proposed—and has adopted—a negligence standard to facilitate an increase in accountability and deterrence.
See 2023 Proposing Release at 7.

One commenter expressed concern over whether the inspection process is sufficiently robust to
conclude that an associated person has contributed to a firm’s negligence-based violation, and relatedly, another
asserted that auditors believe that the Board is holding them to an inspections bar that constantly evolves. Inspection
staff’s findings, however, are not conclusive for purposes of imposing legal liability under Rule 3502 (or any
PCAOB rule). See PCAOB Inspection Procedures: What Does the PCAOB Inspect and How Are Inspections
Conducted?, available at https://pcaobus.org/oversight/inspections/inspection-procedures (“[A]ny references in [an
inspection] report to violations or potential violations of law, rules, or professional standards are not a result of an
adjudicative process and do not constitute conclusive findings for purposes of imposing legal liability.”). Rather,
whether there is legal liability for a violation and whether conduct merits sanctions (and if so, what the sanctions
are) are determined through the adversarial process involving the Board’s Division of Enforcement and
Investigations and only after respondents have been afforded the opportunity to present a defense.
Commenters also opined that amending Rule 3502 is unnecessary because the Board’s
then-proposed (now-adopted34) QC 1000 standard provides clearer expectations with regard to
individuals in quality control (QC) roles.35 Although the Board agrees that QC 1000 crystallizes
the responsibilities of certain individuals serving in QC roles, Rule 3502 applies more broadly
than to just those particular individuals. Thus, although QC 1000 and Rule 3502 could overlap
to cover the same conduct in some circumstances, there are other circumstances in which there
would not be overlap.36
Commenters similarly expressed mixed views about whether the change to negligence
would incentivize auditors to more fully comply with applicable laws, rules, and standards that
the Board is charged with enforcing. Multiple commenters remarked in the affirmative, noting
that such incentivization is foreseeable and that a negligence standard will encourage individuals
and firms to maintain a high level of quality in their audit work, which in turn benefits investors
and financial markets alike. Indeed, one commenter remarked that the current recklessness
standard inadequately incentivizes associated persons to exercise the appropriate level of care in
their audit work. This commenter also noted that, beyond incentivizing individuals’ compliance,
a negligence standard also would incentivize firms to ensure, through training and other
measures, that their employees are complying with applicable professional standards.
By contrast, other commenters argued that a negligence standard will not incentivize
compliance, for a variety of reasons. Multiple commenters premised such view on the
downstream effects that oversight with respect to firms has on individuals. According to certain
of these commenters, such effects (e.g., reduced responsibility on audits, compensation- and

34
This release references several professional standards that the Board has adopted but which are
pending Commission approval, and which therefore are subject to change. See Section 107(b) of Sarbanes-Oxley.
35
See generally A Firm’s System of Quality Control and Other Amendments to PCAOB Standards,
Rules, and Forms, PCAOB Release No. 2024-005 (May 13, 2024) (“QC 1000 Release”).

See, e.g., Herman & MacLean v. Huddleston, 459 U.S. 375, 383 (1983) (“While some conduct
actionable under Section 11 may also be actionable under Section 10(b), it is hardly a novel proposition that the
1934 [Securities Exchange] Act and the 1933 [Securities] Act ‘prohibit some of the same conduct.’ ‘The fact that
there may well be some overlap is neither unusual nor unfortunate.’” (citations omitted)).
promotion-related consequences), as well as other firm policies and preventative measures (such
as training), are sufficient to guard against negligence and incentivize individual compliance.
Another commenter opined that the auditor reporting model and the identification of auditors in
Form AP suffice to address individual accountability.
While the Board agrees that each of the above factors may play a role in driving
individual accountability in certain respects, none is a form of regulatory accountability that is
akin to the Board’s authority to bring enforcement proceedings and impose publicly a range of
disciplinary sanctions as remedial measures. Moreover, the market-driven consequences relating
to the auditor reporting model and identification of auditors on Form AP are felt primarily (if not
exclusively) by the engagement partner on an audit, while Rule 3502 applies more broadly.
Another commenter questioned whether a negligence standard would have a deterrent
effect (or close any gap) given that auditors already are subject to a negligence standard for
contributory liability in Commission actions. One commenter noted that, given that auditors
already are subject to negligence actions by other entities (including the Commission and state
regulators), empirical evidence should be provided to support how auditor behavior would
change under a negligence standard for Rule 3502.37 As the Board previously noted, however,
an increase in the number of regulators on alert for the same or similar violative conduct
increases the likelihood of that conduct being detected and, consequently, the likelihood that the
conduct would be sanctioned.38
In other commenters’ views, a negligence standard would not incentivize compliance
because sanctions are ineffective to deter mere errors in judgment. As explained below,
however, the amendment does not target mere errors in judgment, but rather unreasonable
conduct. Multiple commenters also posited that a lower threshold for auditor liability may have

This commenter did not provide the source of any data or propose any methods by which to
generate empirical evidence on this subject.
38

2023 Proposing Release at 14 n.51.

a negative impact on audit quality, including at smaller firms. Indeed, one commenter asserted
that the impact of the proposed rule change (and proceedings brought pursuant to it) would be
felt more acutely by firms that are not affiliated with the largest global networks, despite those
firms having a significantly smaller share in auditing the market capitalization of U.S. issuers.
These commenters generally attributed what they view as a potential loss in audit quality to
several factors, including recruiting, retention, and staffing challenges; reduced collaboration
among auditors; and auditors engaging in unproductive, excessive self-protective behavior. The
Board addresses below commenters’ concerns about the amendment’s potential impacts on audit
quality and smaller firms, respectively.
2.

The Board’s Implementation Experience

Although the Board viewed Rule 3502’s recklessness liability threshold as “strik[ing] the
right balance in the context of th[e] rule” at the time of the rule’s adoption in 2005, the threshold
had not yet been tested in practice by the PCAOB, and experience has shown that it prevents the
Board from executing its investor-protection mandate to the fullest extent that Congress
authorized in Sarbanes-Oxley.
In the instances in which the Board has instituted proceedings against firms for
negligence-based violations, the Board has not been able to charge Rule 3502 violations against
the individuals that negligently contributed to those firms’ violations. Although the decision not
to bring charges against individuals varies case by case and is at the Board’s discretion, it
remains that the Board has been legally barred by the current formulation of Rule 3502 from
holding accountable under Rule 3502 individuals who negligently, directly, and substantially
contributed to the firms’ violations.39
The Board’s application of Rule 3502 in various contexts supplies experience-based
reasons for the proposed amendment to the liability standard. For example, when dealing with

As the 2005 Adopting Release notes, however, Rule 3502 “is not the exclusive means for the
Board to enforce applicable Board rules and standards against associated persons.” 2005 Adopting Release at 14
n.25.
the design and implementation of firm QC policies and procedures under applicable QC
standards, the Board has observed that registered firms that commit a QC violation often have
multiple individuals with overlapping QC responsibility but that no single individual was
reckless in failing to act, and thus no individual can be held personally accountable for the firm’s
QC failure.40 And yet, individuals with QC responsibility at a firm are often in some of the most
important decision-making roles within the firm because a compliant QC system serves as the
backstop to ensure that all other professional standards are followed.41
Multiple commenters suggested that a negligence standard should not apply to
enforcement of QC matters because the Board’s inspection function already provides it with
transparency into a firm’s QC system. Inspections (and, relatedly, remediation) of QC matters,
however, are distinct from enforcement, including with respect to the available potential
consequences for firms and individuals, respectively. Yet Congress also expressly envisioned
that the Board’s inspections program would inform its enforcement activities.42 Such
entwinement is therefore a feature of Sarbanes-Oxley—not a flaw or a reason not to adopt a
negligence standard.
One commenter also appeared to interpret the Proposal as the Board suggesting that
having multiple people with overlapping responsibility for a firm’s QC system is an obstacle to
investor protection or enhanced audit quality and that a single individual needs to be held
accountable for a QC violation in the absence of reckless behavior. That was not the Board’s

The Board’s recently adopted QC 1000 standard mitigates this concern to an extent by requiring
firms to assign one or more individuals to certain roles with designated responsibilities within a firm’s QC system.
See QC 1000 Release at 82-86. The concern remains, though, because “[a] firm may have multiple individuals or
multiple layers of personnel supporting these roles.” Id. at 83.
See QC § 20.03, System of Quality Control (“A firm has a responsibility to ensure that its
personnel comply with the professional standards applicable to its accounting and auditing practice. A system of
quality control is broadly defined as a process to provide the firm with reasonable assurance that its personnel
comply with applicable professional standards and the firm’s standards of quality.”); QC 1000 Release at 70-71
(setting forth, in QC 1000.05, the objective of a firm’s QC system).
See, e.g., Section 104(c)(3) of Sarbanes-Oxley (requiring the Board, “in each inspection,” to
“begin a formal investigation or take disciplinary action, if appropriate, with respect to any [potential] violation
[identified during an inspection], in accordance with this Act and the rules of the Board”).
intent; rather, the Board meant simply what it said: When there are multiple individuals involved
in the QC function, it could be that no individual’s conduct rose to the level of recklessness
despite a firm’s QC failure, thus allowing persons who negligently, directly, and substantially
contribute to a QC failure to avoid individual accountability under Rule 3502.43
Moreover, the Board did not mean to imply that a single person “needs” to be held
individually accountable in all circumstances for negligence contributing to a firm’s QC
failure.44 The Board exercises discretion about whom to charge and what charges to bring, and
even in the absence of a charge, the potential to be held individually liable for contributory
negligence may increase the amount of care and attention dedicated to QC by responsible
individuals. Indeed, while reflecting only a modest change, the Board anticipates that the
amendment will have a positive impact on audit quality as a result of its deterrent effect.
Another comment letter posited that a negligence standard would place an unfair burden
on national office partners responsible for a firm’s QC functions and engagement quality review
partners, who the comment letter asserted typically do not have the authority to establish firm
strategies or allocate resources. This commenter expressed concern that the Board would pursue
enforcement actions against a single individual when a firm’s partners collectively are
responsible for the strategy and resource allocation decisions that led to a firm’s violation.
Regardless of whether collective responsibility is uniformly the practice, the Board should not be
precluded from exercising its discretion to pursue a Rule 3502 charge against an individual who
failed to exercise reasonable care and competence, even in cases involving a firm’s strategy or
resource-allocation decisions that led to a QC failure.
In addition to the QC context, Rule 3502 also arises in sole-proprietorship cases, in which
the sole owner and sole partner of a firm causes the firm to commit a violation. Yet for some
types of violations, there is not always sufficient evidence of reckless behavior. A negligence

See 2023 Proposing Release at 9.

Comment Letter from PricewaterhouseCoopers LLP at A4 (Nov. 2, 2023).

standard thus would promote greater accountability by the sole proprietor and prevent that
person from being shielded from individual liability under Rule 3502.
One commenter sought clarity regarding how Rule 3502 might be applied to sole
proprietors. The Board notes that examples include instances in which firms fail to obtain an
engagement quality review45 or fail to file (or file timely) required PCAOB forms.46 In each
scenario, the respective primary violations can be committed only by a firm because the
obligations are imposed solely on the firm,47 yet a sole proprietor of a firm could negligently,
directly, and substantially contribute to the firm’s violation of the relevant PCAOB rules and
standard.
Another commenter identified independence violations as a common type of case not
mentioned above and for which the commenter believes that a negligence standard of
contributory liability would promote greater individual accountability. The Board agrees.48
Another commenter identified a data compilation regarding cases and fact patterns that the
commenter said could be a resource in confirming and validating the change to Rule 3502.49
3.

Advancing the Board’s Investor-Protection Mandate

In the Board’s 2022-2026 Strategic Plan, the Board expressed a rejuvenated focus on the
PCAOB’s investor-protection mandate and stated its intent “to modernize and streamline our

E.g., In re Jack Shama, PCAOB Release No. 105-2024-004 (Jan. 23, 2024); In re Robert C.
Duncan Accountancy Corp., PCAOB Release No. 105-2022-010 (June 22, 2022); In re Tamba S. Mayah, CPA,
PCAOB Release No. 105-2021-007 (Sept. 13, 2021).
See, e.g., In re Jeffrey T. Gross, Ltd., PCAOB Release No. 105-2019-016 (July 23, 2019) (primary
violation of PCAOB Rule 3211 relating to Form AP).
47
See AS 1220, Engagement Quality Review; PCAOB Rule 2200, Annual Report (Form 2 filing
rule); PCAOB Rule 2203, Special Reports (Form 3 filing rule); PCAOB Rule 3211, Auditor Reporting of Certain
Audit Participants (Form AP filing rule).
48
Indeed, as the Board has previously stated, Rule 3502 is “essential to the proper functioning of the
Board’s independence rules.” 2004 Proposing Release at 19; see 2005 Adopting Release at 14.

The resource is available at https://wp.nyu.edu/compliance_enforcement/category/artificialintelligence. PCAOB staff’s review indicates that what the commenter referred to as qualitative data mainly consists
of blog posts written on a wide array of legal issues and news articles that are much broader in scope, cannot be
analyzed readily in their entirety, and are not directly relevant to the Board’s analysis.
existing standards . . . where necessary to meet today’s needs.”50 The Board also expressed an
intent to “engag[e] in vigorous and fair enforcement that promotes accountability and
deterrence,” including by “tak[ing] a more assertive approach to bringing enforcement actions”
and “hold[ing] accountable” those who commit “violations that result from negligent conduct.”51
The amendment to Rule 3502 is consistent with those goals.
When Congress enacted Sarbanes-Oxley, it empowered the Board to promulgate and
adopt certain standards and rules, to inspect registered firms for compliance with those standards
and rules, and to enforce compliance by firms and their associated persons. Among the tools that
Congress provided to the Board for enforcement is the ability to impose certain sanctions for
negligent conduct, including single instances of negligence.52 That liability threshold serves a
dual function: It incentivizes auditors to conduct their work knowing that reasonable care is the
standard for assessing it (i.e., deterrence), and it allows the Board to publicly discipline auditors
who were found to have not exercised an appropriate degree of care (i.e., accountability).53 Each
of those functions—one ex ante to auditors’ conduct and the other ex post—goes to the core of
the Board’s mission of protecting investors and promoting high-quality audits.

PCAOB, Strategic Plan 2022-2026, at 10, available at https://assets.pcaobus.org/pcaob-dev/
docs/default-source/about/administration/documents/strategic_plans/strategic-plan-2022-2026.pdf
?sfvrsn=b2ec4b6a_4/.
51
Id. at 3, 13; see also id. at 8 (“[W]e are focused on aggressively pursuing all statutory legal
theories for charging respondents and remedies available in executing our enforcement program, which is central to
protecting investors and promoting the public interest.”).
52
See Sections 105(c)(4) & (c)(5) of Sarbanes-Oxley; Rules on Investigations and Adjudications,
PCAOB Release No. 2003-015, at A2-58 (Sept. 29, 2003), available at https://assets.pcaobus.org/pcaobdev/docs/default-source/rulemaking/docket_005/release2003-015.pdf?sfvrsn=35827b4_0 (“The Act plainly
contemplates that disciplinary proceedings can be instituted for a violation based on a single negligent act.”). The
Board received multiple comments regarding its authority to pursue enforcement proceedings based on single
instances of negligence, and the Board addresses those comments below.

See Honigsberg, supra, at 1899 (“Individual accountability could provide a counterweight to the
current incentive structure. . . . [A]udit partners do not internalize the full consequences of an audit failure.
Promoting individual brands will better address this inefficiency and reduce externalities by causing audit partners to
internalize these failures.”); see also Gina-Gail S. Fletcher, Deterring Algorithmic Manipulation, 74 Vand. L. Rev.
259, 268-69 (2021) (“[I]f the applicable laws are narrow, only capturing the most blatant misconduct, wrongdoers
may not be deterred from breaking the law. . . . [D]eterrence is effective if regulators have strong, suitable tools to
enforce the regime and market actors know whether they are violating the law.”).
The current formulation of Rule 3502, however, stops short of deploying the Board’s
authority to sanction negligent conduct to the fullest extent by requiring at least reckless conduct
before an associated person can be held secondarily liable. The amendment that the Board has
adopted to Rule 3502’s liability standard removes this constraint and makes the rule both a more
effective deterrent and a more effective enforcement tool, and in so doing, better aligns the rule
with Sarbanes-Oxley.54
Several commenters stated that it is clear and understandable how the amendment to Rule
3502 advance the Board’s statutory mandate to protect investors, including by promoting the
twin goals of accountability and deterrence. One such commenter remarked that a negligence
standard “may be needed” to enhance accountability to investors,55 while another noted that such
standard “fall[s] squarely” within the scope of the Board’s mission and “clearly and
unambiguously advances” the Board’s cause.56 Still another opined that the amendment would
ensure consistency between the liability standard and investor expectations and that “it makes no
sense” to have differing standards for firms and individuals.57
As to deterrence, multiple commenters stated that the amendments should result in
auditors being more likely to comply with their respective legal requirements. One commenter
further opined that a negligence standard “sends a strong message” to auditors regarding the
requisite level of care that they should be applying in their work.58
Other commenters expressed a different view of the amendments relative to investor
protection. One commenter stated that, should the amendment discourage certain individuals
from accepting important QC roles for fear of being held liable, the public’s interest would not

See PCAOB, Strategic Plan 2022-2026, at 10 (“Effective auditing, attestation, quality control,
ethics, and independence standards advance audit quality and are foundational to the PCAOB’s execution of its
mission to protect investors.”).
55

Comment Letter from Council of Institutional Investors at 5 (Oct. 26, 2023).

Comment Letter from Better Markets at 8.

Comment Letter from Center for American Progress at 2 (Nov. 3, 2023).

Comment Letter from Better Markets at 5.

be served by having less cautious or less qualified individuals fill those roles. Another opined
that the amendments would incentivize high-quality talent to avoid the audit profession, which
could lead to lower audit quality, increased audit fees, and a large number of delistings. As
certain other commenters pointed out and as the Board observed in the Proposal, however,
auditors already are subject to liability and disciplinary schemes that encourage them to
comply—and not just avoid reckless noncompliance—with applicable statutory, regulatory, and
professional standards.
Still another commenter expressed uncertainty about how a change to negligence will
achieve further investor-protection benefits. This commenter remarked that the Board currently
has means to hold accountable individuals who are negligent in various contexts and that
investors are best protected when noncompliance is avoided in the first place. While the Board
agrees that avoiding noncompliance in the first instance promotes audit quality and benefits
investors, the Board views the addition of another enforcement tool to deter negligent conduct
(including conduct that currently is beyond the Board’s reach), and to hold accountable those
who engage in such conduct, as a complement to—not mutually exclusive from—avoiding
noncompliance.
Beyond deterrence and accountability, multiple commenters remarked that the
amendments should enhance investors’ confidence, both in audits and in the information
provided in companies’ financial statements. Some commenters noted that a change to a
negligence standard would protect investors by encouraging auditors to be more careful about
their work and positively affecting capital-market efficiency. Another commenter offered
several additional downstream investor-protection benefits, including that as audit quality
improves, the likelihood of auditors being subjected to meritorious litigation, and the risks and
costs to investors resulting from that litigation (as well as misstatements and omissions in audited
financial statements), should be reduced.
DISCUSSION OF THE AMENDMENT

As discussed above, the Board has amended PCAOB Rule 3502 by changing the liability
standard from recklessness to negligence. The details of the amendment are discussed in the
following subsections.
A.

Text of the Amended Rule and the Negligence Standard Generally

The Board has amended Rule 3502’s liability standard as proposed by deleting the phrase
“knowing, or recklessly not knowing” (and certain ancillary surrounding text) and inserting
elsewhere into the rule the phrase “knew or should have known” (and certain ancillary
surrounding text). The outgoing phrase describes conduct that amounts to at least recklessness,59
whereas the incoming phrase sets a negligence standard using “classic negligence language.”60
Consequently, the Board is changing the standard for contributory liability from an “extreme
departure from the standard of ordinary care”61 (recklessness) to “the failure to exercise
reasonable care or competence” (negligence).62
Such a change addresses the incongruity and related issues noted above. Specifically, it
aligns the requisite mental states for liability of a registered firm and for liability of an associated
person whose conduct directly and substantially contributed to the firm’s violation.63 In so
doing, the modification should better incentivize associated persons to exercise the appropriate
level of care, thus promoting investor protection.

See 2005 Adopting Release at 12 n.23.

60
In re KPMG Peat Marwick LLP, SEC Release No. 34-43862 (Jan. 19, 2001) (“Ordinarily, the
phrase ‘should have known’ . . . is classic negligence language.”), pet. for review denied, KPMG, LLP v. SEC, 289
F.3d 109 (D.C. Cir. 2002); see also Erickson Prods., Inc. v. Kast, 921 F.3d 822, 833 (9th Cir. 2019) (“‘[S]hould
have known’ . . . is a negligence standard. To say that a defendant ‘should have known’ of a risk, but did not know
of it, is to say that he or she was ‘negligent’ as to that risk.”); KPMG, 289 F.3d at 120 (“knew or should have
known” is language that “virtually compel[s]” a negligence standard).
Marrie, 374 F.3d at 1204 (citation and quotation marks omitted).

S.W. Hatfield, SEC Release No. 34-69930, at 35 n.169 (citation and quotation marks omitted).

However, the sanctions to which a contributory actor may be subject upon being found to have
violated Rule 3502—including whether the Board may impose any of the heightened sanctions in Section 105(c)(5)
of Sarbanes-Oxley—depend on the associated person’s conduct and not that of the firm that commits the primary
violation.
Numerous commenters remarked that a change to negligence is appropriate, and with
limited exception, commenters remarked that the proposed language to effectuate that change—
which the Board has adopted—is clear and understandable.
One commenter called the proposed rule text (“knew or should have known”) “overly
vague and broad” and asserted that, in contrast to an accountability framework that sets forth
clear expectations, the proposed rule does not provide notice of specific conduct that may lead to
a violation.64 As the Proposal explained (and as repeated above), however, the “knew or should
have known” phrasing is “classic negligence language,” and negligence is “the failure to exercise
reasonable care or competence.”65 Indeed, one commenter remarked that such language is
“familiar in the American legal system.”66 Moreover, as discussed in the 2005 Adopting Release
and the Proposal (and as discussed below), the Board has delineated through its explanation of
“directly and substantially” the nexus and magnitude that an auditor’s conduct must have to a
firm’s primary violation to be actionable. The Board is thus satisfied that such a well-known
standard in the law, supplemented by additional parameters that have been in place for nearly
two decades, is neither vague nor overly broad.
Several commenters sought clarity over how the adopted text of Rule 3502 (“knew or
should have known”), as well as the definition of negligence (“failure to exercise reasonable care
or competence”), would interact with other standards of conduct applicable to auditors, and in
particular the obligation of exercising due professional care under then-proposed (now-adopted)
AS 1000, General Responsibilities of the Auditor in Conducting an Audit.67 To be sure, due

Comment Letter from RSM US LLP at 1 (Nov. 3, 2023).

2023 Proposing Release at 13 & n.45.

Comment Letter from Center for Audit Quality at 11 (Nov. 2, 2023).

See General Responsibilities of the Auditor in Conducting an Audit and Amendments to PCAOB
Standards, PCAOB Release No. 2024-004, at 30-39 (May 13, 2024) (“AS 1000 Release”) (subject to Commission
approval); see also AS 1015, Due Professional Care in the Performance of Work.
professional care and reasonable care and competence are largely overlapping concepts.68
However, the Board wishes to emphasize three points.
First, while there may be overlap, AS 1000 does not apply to all conduct for which the
Board has enforcement authority69; thus, there is a need for a separate rule with a negligence
standard. Second, because Rule 3502 includes the “directly and substantially” modifier, it will
not always be the case that conduct that violates the obligation of due professional care also
violates Rule 3502; thus, Rule 3502 is not duplicative of AS 1000, even if conduct violating the
latter may also violate the former in certain circumstances. Third, Rule 3502—located within the
“Ethics and Independence” section of the Board’s rules regarding professional practice
standards—reflects an overarching ethical obligation, and the Board believes it appropriate to
codify that general obligation, even if it overlaps with more specific provisions in particular
professional standards.
A substantial number of commenters did not appear to support the change. In general,
these commenters stated that they do not believe that negligence is an appropriate standard for
assessing conduct and compliance on complex audit engagements, which commenters said
require a wide range of judgments. For instance, one commenter opined that what could be
labeled as a “violation” of professional standards instead may be only a difference of opinions
between accountants about a particular pronouncement(s). That commenter further opined that,
by proposing a negligence standard, the Board misunderstands the nature of audits. Several
other commenters opined that it is bad policy to penalize errors in judgment and for the PCAOB
to second-guess auditors’ good-faith decisions in situations involving the application of
professional judgment.

68
See AS 1000 Release at A1-3 (“due professional care” includes “acting with reasonable care and
diligence”); see also QC 1000 Release at 81 (“We are adopting this provision [QC 1000.10] with modifications to
align with the descriptions of due professional care and professional skepticism being adopted in AS 1000.”).
69
See AS 1000 Release at 30-31 (delineating the parameters of “all matters related to the audit” to
which AS 1000’s requirement to exercise due professional care applies).

As noted above, however, firms and associated persons already are subject to a
negligence standard for their primary violations, including for single instances of negligence that
violate professional standards.70 The amendment to Rule 3502 therefore affects only an
incremental (albeit important) change, and only for contributory conduct. Given the Board’s
nearly two decades of experience distinguishing isolated, good-faith errors in professional
judgment from conduct that warrants disciplinary action, as well as the modest estimated
increase in Rule 3502 cases that would result from the amendment, the Board does not anticipate
that a change in the liability standard for contributory conduct will be used to sanction isolated,
good-faith errors in professional judgment—let alone be wielded as a “blunt” or “draconian”
instrument, as one commenter suggested71—including with respect to less senior engagement
team members.72 The amendment focuses on unreasonable conduct; it does not impose strict
liability.73
One commenter opined that a Rule 3502 charge could cause associated persons to “lose
their livelihood” due to “career-ending penalties” under the Proposal.74 Several other
commenters expressed a similar concern about the negligence threshold and the potential
collateral effects and impacts on auditors’ careers. While the Board appreciates that disciplinary
orders have consequences—as they should—research suggests that auditors remain gainfully
employed following a culpability finding.75 And in all events, the Board emphasizes that it is not
See, e.g., In re Sassetti, LLC, PCAOB Release No. 105-2024-018 (Mar. 28, 2024); In re Berkower,
LLC, PCAOB Release No. 105-2024-016 (Mar. 28, 2024).
71

Comment Letter from U.S. Chamber of Commerce at 2 (Nov. 7, 2023).

72
To iterate what the Board said in 2005, Rule 3502 is not “a vehicle to pursue compliance
personnel who act in an appropriate, reasonable manner that, in hindsight, turns out to have not been successful.”
2005 Adopting Release at 14.
73
“Strict liability is imposed upon a defendant without proof that he was at fault. In other words,
when liability is strict, neither negligence nor intent must be shown.” Dobbs’ Law of Torts § 437.
Comment Letter from RSM US LLP at 1, 2.

See J. Krishnan, M. Li, M. Mehta & H. Park, Consequences for Culpable Auditors, available at
https://ssrn.com/abstract=4627460. In their working paper studying audit professionals subject to Commission or
PCAOB enforcement proceedings between 2003 and 2019, the authors make three key findings:
First, a substantial number of culpable auditors remain gainfully employed by their firms one year after the
enforcement event (26% of Big 4 and 43% of non-Big 4 culpable auditors). Second, culpable individuals leaving
Big 4 firms primarily move to the corporate sector and secure senior or mid-level executive positions at private

the Board’s intent to pursue, through Rule 3502 charges, what one commenter described as
“foot-faults” or “unintentional slips, pure errors of judgment, and innocuous errors on
‘technicalities.’”76 Nor do the Board’s standards require that auditors exercise “perfect judgment
at all times,” as one commenter put it,77 to avoid an enforcement proceeding (under Rule 3502 or
otherwise).78
Some commenters expressed concern over the notion that, as a result of the amendment,
the Board would be able to pursue conduct that is not itself a violation but that merely
contributes to a violation. One commenter characterized this as a “significant change from
current PCAOB enforcement policy,”79 but in fact it is no change at all; under the current version
of Rule 3502, the Board can bring charges for conduct that is not itself a primary violation. The
amendment merely changes the standard for when an individual’s contributory conduct becomes
actionable; it does not alter whether the contributory conduct must be an independent violation
apart from the firm’s underlying primary violation.
Several commenters expressed concern regarding a negligence standard in Rule 3502 in
light of the current regulatory environment—specifically amidst the Board’s other standardsetting projects, including the then-proposed (now-adopted) quality control standard, QC 1000.
These commenters opined that new requirements in proposed and adopted other standards may

firms. By contrast, culpable auditors departing from non-Big 4 firms tend to join other non-Big 4 public accounting
firms, often as partners. Third, . . . the large majority of culpable auditors do not engage in liquidity-increasing real
estate transactions around enforcement.
Comment Letter from U.S. Chamber of Commerce at 9, 10.

Comment Letter from RSM US LLP at 3.

See AS 1015.03, Due Professional Care in the Performance of Work (quoting a treatise describing
the obligation of due care as: “[N]o man, whether skilled or unskilled, undertakes that the task he assumes shall be
performed successfully, and without fault or error; he undertakes for good faith and integrity, but not for infallibility,
and he is liable to his employer for negligence, bad faith, or dishonesty, but not for losses consequent upon pure
errors of judgment.” (citation omitted)); AS 1000 Release at 31 (“We continue to believe that the description of due
professional care in the final standard is consistent with the description in AS 1015.03 (and the reference in the
current standard to the legal treatise, Cooley on Torts), which uses the terms ‘reasonable care and diligence’ and
‘good faith and integrity but not infallibility’ to describe due care.”).
79

Comment Letter from U.S. Chamber of Commerce at 2.

put auditors at greater risk of violating Rule 3502, including based on the introduction or
modification of key concepts and their interrelation to negligence.
The Board appreciates that audits, especially of large enterprises, have the potential to be
quite complex and can require input from various individuals, including individuals not on the
engagement team. QC systems likewise can be quite complex and require input from numerous
people. And as in 2005, “[t]he Board also recognizes that persons subject to its jurisdiction must
comply with complex professional and regulatory requirements in performing their jobs.”80 But
complexity is not a reason to allow negligent auditors—individuals who by definition have acted
unreasonably—to contribute directly and substantially to firms’ violations without consequence.
Indeed, as one commenter noted, the complexity of audits and the current environment in which
companies operate—which is rapidly changing and subject to emerging risks—supports
amending Rule 3502 because audited financial statements are becoming increasingly important.
The Board also recognizes that it recently has adopted amendments to several standards81
and has proposed amendments to other standards82 and to certain PCAOB rules.83 This is
consistent with the Board’s Strategic Plan, which states: “We expect to propose and adopt
numerous amendments and new standards over the coming years, in accordance with our
standard-setting and research agendas. We also plan to evaluate certain existing standards to

2005 Adopting Release at 14.

See generally Amendments Related to Aspects of Designing and Performing Audit Procedures
that Involve Technology-Assisted Analysis of Information in Electronic Form, PCAOB Release No. 2024-007
(June 12, 2024) (subject to Commission approval); QC 1000 Release; AS 1000 Release; The Auditor’s Use of
Confirmation, and Other Amendments to PCAOB Standards, PCAOB Release No. 2023-008 (Sept. 28, 2023);
Planning and Supervision of Audits Involving Other Auditors and Dividing Responsibility for the Audit with
Another Accounting Firm, PCAOB Release No. 2022-002 (June 21, 2022).
See, e.g., Proposed Auditing Standard – Designing and Performing Substantive Analytical
Procedures and Amendments to Other PCAOB Standards, PCAOB Release No. 2024-006 (June 12, 2024);
Proposing Release: Amendments to PCAOB Auditing Standards related to a Company’s Noncompliance with Laws
and Regulations And Other Related Amendments, PCAOB Release No. 2023-003 (June 6, 2023).
See, e.g., Proposing Release: Firm Reporting, PCAOB Release No. 2024-003 (Apr. 9, 2024); Firm
and Engagement Metrics, PCAOB Release No. 2024-002 (Apr. 9, 2024); Proposals Regarding False or Misleading
Statements Concerning PCAOB Registration and Oversight and Constructive Requests to Withdraw from
Registration, PCAOB Release No. 2024-001 (Feb. 27, 2024).
determine whether they are outmoded.”84 Many of the newly adopted standards, moreover, have
staggered effective dates, and thus auditors will not be required to come into compliance with
each of them at the same time.85 And in all events, as firms make efforts to comply with new
standards, it necessarily follows that individuals who could be subject to Rule 3502 also would
be making such efforts because firms can act only through their natural persons.
The Board does not intend for any of its new or revised standards, either alone or in
conjunction with the amendment the Board has adopted, to “create[ ] a trap for the unwary,” as
one commenter opined.86 Far from it, the Board’s standard-setting agenda seeks to modernize
standards in a way that promotes high-quality audits through compliance in the first instance.
Enforcement proceedings promote this same ex ante focus on compliance insofar as they serve as
a deterrent to other auditors from engaging in the same or similar misconduct.
Finally, some commenters expressed concern about whether an associated person could
be liable for negligence under Rule 3502 in situations where a primary violation by a firm
requires a standard higher than negligence. One commenter remarked that holding an associated
person liable in such circumstances would be “unprecedented (and unlawful)” and stated that the
Board should consider specifically exempting violation-causing conduct when a primary
violation involves intentional conduct.87 Another commenter sought clarity from the Board on
the issue and asked whether the Board believes that individual liability in such a scenario would
be appropriate. Although the Board will continue to evaluate whether to bring Rule 3502
charges on a case-by-case basis, when the firm’s primary violation requires more than

PCAOB, Strategic Plan 2022-2026, at 10.

85
See PCAOB Release No. 2022-002, at 58 (effective for audits of financial statements for fiscal
years ending on or after December 15, 2024); PCAOB Release No. 2023-008, at 96 (effective for audits of financial
statements for fiscal years ending on or after June 15, 2025); AS 1000 Release at 96 (with limited exception,
effective for audits of financial statements for fiscal years beginning on or after December 15, 2024); QC 1000
Release at 378 (effective December 15, 2025); PCAOB Release No. 2024-007, at 61 (effective for audits of
financial statements for fiscal years beginning on or after December 15, 2025).
Comment Letter from U.S. Chamber of Commerce at 10.

Comment Letter from RSM US LLP at 3.

negligence, the Board does not anticipate charging individuals for negligently contributing to
such violations.88
B.

Retention of “Directly and Substantially”

As proposed, the Board has decided to retain the “directly and substantially” modifier to
describe the connection between a contributory actor’s conduct and a registered firm’s primary
violation.89 Thus, for conduct to “directly” contribute to a primary violation, it must “either
essentially constitute[ ] the violation”—in which case the conduct necessarily is a direct cause of
it90—or be “a reasonably proximate facilitating event of, or a reasonably proximate stimulus for,
the violation”; but it need not “be the final step in a chain of actions leading to the violation.”91
Moreover, “directly” does not excuse an associated person who negligently “engages in conduct
that substantially contributes to a violation, just because others also contributed to the violation,
or because others could have stopped the violation and did not.”92 Nor would it necessarily
excuse an associated person’s conduct when another actor engages in intentional misconduct that
might otherwise break the chain of causation—in particular where the associated person’s
conduct is at least negligent and created the situation for the other actor to engage in intentional

88
See Howard v. SEC, 376 F.3d 1136, 1141 (D.C. Cir. 2004) (“Although we held in KPMG, LLP v.
SEC, that the ‘knew or should have known’ language in § 21C embodied a negligence standard for purposes of that
case, it does not necessarily follow that negligence is the standard” where “scienter [is] an element of the primary
violations.”); KPMG Peat Marwick, SEC Release No. 34-43862 (“We hold today that negligence is sufficient to
establish ‘causing’ liability under Exchange Act Section 21C(a), at least in cases in which a person is alleged to
‘cause’ a primary violation that does not require scienter.”).

See 2005 Adopting Release at 13. As discussed above, the “directly and substantially” modifier
was added in response to commenters’ concerns that a negligence standard might sweep too broadly. See also 2005
Adopting Release at 13. Because the Board is retaining “directly and substantially,” as explained herein, the
guardrails that the Board put in place in 2005 in response to such concerns remain in Rule 3502.
Cf. Paul F. Newton & Co. v. Tex. Commerce Bank, 630 F.2d 1111, 1118 (5th Cir. 1980)
(“[C]ommon law agency principles, including the doctrine of respondeat superior, remain viable in actions brought
under the Securities Exchange Act and provide a means of imposing secondary liability for violations of the Act
independent of § 20(a). The federal securities statutes are remedial legislation and must be construed broadly, not
technically and restrictively.”).
91

See 2005 Adopting Release at 13.

Id.

misconduct, and where the associated person realized or should have realized the potential for,
and likelihood of, such third-party intentional misconduct.93
For its part, “substantially” continues to require that the associated person’s conduct
“contribute[ ] to the violation in a material or significant way,” though it “does not need to have
been the sole cause of the violation.”94 The Board stresses that Rule 3502 is not intended to
“reach an associated person’s conduct that, while contributing to the violation in some way, is
remote from, or tangential to, the firm’s violation.”95
Commenters generally encouraged the Board to retain the “directly and substantially”
modifier, including one commenter remarking that the Board’s reasons for retaining it “remain
valid.”96 Multiple commenters, moreover, stated that these terms are clear and understandable.
One commenter posited that the Board should not retain “directly and substantially” as part of
Rule 3502.
Several commenters sought additional clarity around the terms “directly and
substantially.” For instance, one commenter noted that the terms are not defined in Rule 3502
and claimed that the purported lack of clarity will make the rule inoperable. This commenter
suggested that the Board instead import a more established legal doctrine of causation. Another

See Restatement (Second) of Torts § 448 (“The act of a third person in committing an intentional
[violation] is a superseding cause of harm to another resulting therefrom, although the actor’s negligent conduct
created a situation which afforded an opportunity to the third person to commit such a [violation], unless the actor at
the time of his negligent conduct realized or should have realized the likelihood that such a situation might be
created, and that a third person might avail himself of the opportunity to commit such a [violation].”).
94

2005 Adopting Release at 13.

Id.; see also id. at 14 (the Board does not “seek to reach those whose conduct, unbeknownst to
them, remotely contributes to a firm’s violation”). One commenter opined that the distinction between obligations
placed on individuals and firms, respectively, should not be disturbed insofar as there may be instances where it is
appropriate for a firm to be sanctioned for a violation but where no particular individual played a sufficient role in
that violation. This commenter urged the Board to not use Rule 3502 to “collapse this distinction.” Comment Letter
from Center for Audit Quality at 9. The Board agrees—there are indeed instances where it is appropriate to sanction
a firm but not any individual(s) (under Rule 3502 or otherwise). The amendment the Board has adopted does
nothing to collapse that distinction: It changes only the actionable standard of conduct, but does nothing to alter the
nexus and magnitude requirements of “directly and substantially,” i.e., it does not alter the requisite sufficiency of an
individual’s role relative to a firm’s violation.
96

Comment Letter from Ernst & Young LLP at 4 (Nov. 3, 2023).

commenter called the terms “subjective” and asked for a clearer articulation of them,97 and
another asked whether the terms “will be applied differently moving forward.”98
Having considered all commenters’ views, the Board is satisfied that the modifier
“directly and substantially” is sufficiently clear and operable and believes that no further
delineation of the terms is needed at this time. The Board notes that, going back to the 2005
Adopting Release, the explanation of “directly and substantially” includes concepts from
established legal principles (e.g., “directly” includes circumstances where an individual’s
conduct is a “reasonably proximate facilitating event of, or a reasonably proximate stimulus for,
the [firm’s] violation”).
The Board further notes that, based on the amended rule text, “directly and substantially”
would apply only to the sufficiency of the connection between an associated person’s conduct
and a firm’s violation. Thus, to be liable under Rule 3502, a person must have known, or should
have known, that an act or omission by them would contribute—but not that it would directly
and substantially contribute—to a firm’s violation.
One commenter remarked that the Board failed to explain its intention behind this aspect
of the amendment and that the wording creates potential ambiguities and unfairness. The Board,
however, sees it differently—by eliminating the need for any inquiry into individuals’ mental
states regarding the manner in which their conduct contributes to the firm’s violation, the Board
believes that the rule has the potential to be applied more uniformly (and thus more fairly).
Moreover, if an associated person knew or should have known that his or her conduct would
contribute to a violation in any way, then that individual should not be able to evade liability
simply because the individual did not know the extent of the nexus and magnitude of such
contribution. But in all events, the Board iterates that, absent conduct “directly and

97
Comment Letter from Accounting & Auditing Steering Committee of the Pennsylvania Institute of
Certified Public Accountants at 5 (Nov. 2, 2023).
(Nov. 2, 2023).

Comment Letter from Audit and Assurance Services Committee of the Illinois CPA Society at 3

substantially” contributing to a firm’s violation, an individual’s actions or omissions are not
subject to discipline under Rule 3502.
Two commenters opined that the Proposal suggested that the Board was open to a tertiary
liability theory, in which a first associated person’s conduct contributes to the conduct of a
second associated person, which in turn contributes to a registered firm’s violation. But as those
commenters also recognized, the rule still would require the first person’s conduct to directly and
substantially contribute to the firm’s violation.99 Thus, contrary to those commenters’ concerns,
the definition of “directly” is not stretched beyond what it would be if there were no second
person involved, let alone beyond common usage of the word.
Finally, some commenters suggested other phrases or concepts to incorporate into the
rule to modify “contribute.” One commenter called for limiting liability to “egregious
actions.”100 Such a standard, however, more aptly describes conduct that is reckless (as opposed
to negligent),101 which would be contrary to what the Board intends for the amendment to
accomplish.
That same commenter expressed the view that the negligence standard should not apply
to a professional who spends only a de minimis amount of time on an engagement, and further
suggested that the Board add language to clarify that liability would only extend to a professional
having a substantive level of participation on the engagement. Another commenter similarly
suggested that the Board require that an associated person’s conduct be a “substantial factor” in
bringing about the firm’s violation.102 The Board, however, believes that the contours of

See 2023 Proposing Release at 17 n.65; e.g., In re Shandong Haoxin Certified Public Accountants
Co., Ltd., PCAOB Release No. 105-2023-045, at ¶65 (Nov. 30, 2023) (multiple individuals violated Rule 3502 in
connection with the same primary violation by the firm through different (though related) contributory conduct).
Comment Letter from Accounting & Auditing Steering Committee of the Pennsylvania Institute of
Certified Public Accountants at 5.
101
See, e.g., In re Gately & Assocs., LLC, SEC Release No. 34-62656, at 18 (Aug. 5, 2010)
(“Recklessness can be established by an ‘egregious refusal to investigate the doubtful and to see the obvious.’”
(citation omitted)).
Comment Letter from RSM US LLP at 7.

“substantially” (in “directly and substantially”) suffice to help ensure that Rule 3502 is applied
only to those individuals with a substantive level of participation or responsibility on an
engagement with respect to a firm’s violation in connection with an audit. And as the Board
previously has expressed—in the 2005 Adopting Release, in the Proposal, and above—Rule
3502 is not intended to reach an associated person’s conduct that, while contributing to the
violation in some way, is remote from, or tangential to, the firm’s violation.
C.

No New Liability Standard in Light of the Commission’s Authority

As explained in the Proposal, associated persons already are subject to potential
liability—including money penalties—for negligently contributing to registered firms’ violations
of numerous laws and rules governing the preparation and issuance of audit reports via the
Securities Exchange Act of 1934 (“Exchange Act”). Specifically, Section 21C of the Exchange
Act authorizes the Commission to institute cease-and-desist proceedings against any “person that
is, was, or would be a cause of [a] violation [of the Exchange Act or any rule or regulation
thereunder], due to an act or omission the person knew or should have known would contribute
to such violation,”103 and Section 21B further authorizes the Commission to “impose a civil
penalty” upon finding that such person “is or was a cause of [such] violation.”104 Section 3(b)(1)
of Sarbanes-Oxley, in turn, provides that “[a] violation by any person of . . . any rule of the
Board shall be treated for all purposes in the same manner as a violation of the [Exchange Act]
or the rules and regulations issued thereunder.” Thus, the amendment to Rule 3502’s liability
threshold does not subject auditors to any new or different standard to govern their conduct in
light of the Commission’s authority.105

15 U.S.C. 78u-3(a); see also 15 U.S.C. 77h-1(a), 80a-9(f)(1), 80b-3(k)(1).

104
15 U.S.C. 78u-2(a)(2). The Commission’s Section 21B authority to impose civil penalties for
violations in Section 21C cease-and-desist proceedings was added in 2010 as part of the Dodd-Frank Wall Street
Reform and Consumer Protection Act. See Pub. L. 111-203.
105
Nor does the Commission’s authority to sanction associated persons’ negligent contributory
conduct detract from the proposed amendment’s deterrent effect. As previously noted, as an increase in the number
of regulators on the lookout for the same or similar violative conduct increases the likelihood of that conduct being
detected and, consequently, the likelihood that the conduct would be sanctioned. See Anton R. Valukas, WhiteCollar Crime and Economic Recession, 2010 U. Chi. Legal F. 1, 12 (2010) (“One of the most powerful deterrents to

Numerous commenters seemed to disagree with that proposition for several reasons.
Some commenters pointed out that the Commission cases cited in footnote 52 of the Proposal,
while each a proceeding under Section 21C of the Exchange Act, were also proceedings under
Commission Rule of Practice 102(e), which requires either “[a] single instance of highly
unreasonable conduct that results in a violation” or “repeated instances of unreasonable conduct,
each resulting in a violation of applicable professional standards.”106 Sanctions are not available
under Rule 102(e) when an auditor engages in a single instance of unreasonable (but not highly
unreasonable) conduct.107 Thus, certain commenters said that the cases were not “on par” with
what the Board intends through the amendment to Rule 3502.108
To be sure, those commenters are correct that the cases cited in footnote 52 of the
Proposal involve proceedings under Commission Rule 102(e), as well as under Section 21C.
Commenters, however, did not appear to contest that the Commission has the authority to bring
proceedings for single acts of ordinary negligence under Section 21C, including for civil money
penalties (authorized by Section 21B), without also proceeding under Commission
Rule 102(e).109 Rather, commenters instead suggested only that the Commission rarely exercises

misconduct is an increased threat of prosecution. . . . A ‘can do’ accountant is less likely to provide questionable
opinions if there is a substantial certainty that he will be caught and punished.”); see also Fletcher, supra, at 268
(“Certainty of punishment”—including “the possibility of detection, apprehension, conviction, and sanctions”—is
one of two “primary factors” that drive deterrence.).
106
17 CFR 201.102(e); see In re David S. Hall, P.C., SEC Initial Decision Release No. 1114 (Mar. 7,
2017) (ALJ Op.), decision made final, SEC Release No. 34-80949 (June 15, 2017); In re Gregory M. Dearlove,
CPA, SEC Release No. 34-57244 (Jan. 31, 2008); In re Philip L. Pascale, CPA, SEC Release No. 34-51393 (Mar.
18, 2005).
107
See Amendment to Rule 102(e) of the Commission’s Rules of Practice, SEC Release No. 34-40567
(Oct. 26, 1998) (“[T]he Commission is not adopting a standard that reaches single acts of simple negligence.”).

Comment Letter from Center for Audit Quality at 7; Comment Letter from Moss Adams LLP at 3
(Nov. 3, 2023). One commenter observed that the Commission proposed but ultimately declined to adopt an
ordinary negligence standard for contributory conduct by accountants under Rule 102(e). But as that commenter
also recognized, the Commission did so while expressly acknowledging that an ordinary negligence standard in Rule
102(e) would have been duplicative of authority that it already possessed. See SEC Release No. 34-40567
(“Moreover, the Commission possesses authority, wholly independent of Rule 102(e), to address and deter such
errors through its enforcement of provisions of the federal securities laws that impose liability on persons, including
accountants, for negligent conduct.”). The Board, by contrast, lacks ability to pursue contributory negligent conduct
based on the current formulation of Rule 3502.
Indeed, civil money penalties are not available under Commission Rule 102(e)—only censure or
denial (temporary or permanent) of the privilege of appearing or practicing before the Commission.
such authority in practice. While that may be the case, the Board’s point nonetheless remains:
The amendment to Rule 3502’s liability threshold does not subject auditors to any new or
different standard to govern their conduct.
The Commission release cited by certain commenters when advancing the contrary
argument makes this point abundantly clear. In it, the Commission stated that a single act of
negligence “may result in a violation of the federal securities laws” and that “the person
committing such an error, though not subject to discipline under Rule 102(e), would be exposed
to the sanctions available under [such] other provisions.”110 The Commission noted elsewhere in
its release that a single act of ordinary negligence “could have legal consequences.”111
One commenter suggested that Section 21C proceedings are an inapt analog for charges
under Rule 3502 because Section 21C was intended to quickly enjoin conduct that may lead to
violations, but was not designed to be a sanctions-imposing provision. Whether that was the
original intent of Section 21C,112 Section 21B now indisputably allows for sanctions (in the form
of monetary penalties) in a proceeding under Section 21C when an auditor or any other person
was negligent in causing violations by others. Indeed, much like Section 21B’s direct-violation
provision, the text of the secondary-violation provision in Section 21B expressly contemplates
the imposition of a penalty based on conduct that already occurred.113

17 CFR201.102(e). Thus, the Commission would not need to meet Rule 102(e)’s “highly unreasonable conduct”
standard to impose a civil money penalty for a single act of negligence under Section 21B of the Exchange Act.
110
SEC Release No. 34-40567 at n.28; see also id. at n.38 (“In other instances, the federal securities
laws expressly subject auditors to liability without requiring intentional misconduct. . . . [S]ection 21C of the
Exchange Act imposes liability when a person is a ‘cause’ of a violation ‘due to an act or omission the person knew
or should have known would contribute to such violation.’”).
Id. at n.47.

The commenter’s cited authority does not appear to support that view. See Andrew M. Smith,
SEC Cease-and-Desist Orders, 51 Admin. L. Rev. 1197, 1226 (1999) (“The legislative history of the [statute that
includes Section 21C] is not clear as to whether Congress intended to require the SEC to find a reasonable likelihood
of future violation before imposing a cease-and-desist order, although a strong argument can be made that Congress
did not intend to require the SEC to make such a finding. In addition, most, if not all, of the proponents and
architects of cease-and-desist authority, and many who have commented on the [relevant statute] and its predecessor
legislative proposals, believe that such a finding is not necessary.”).
113
15 U.S.C. 78u-2(a)(2)(B) (“In any proceeding instituted under [Section 21C] against any person,
the Commission may impose a civil penalty, if the Commission finds, on the record after notice and opportunity for
hearing, that such person . . . is or was a cause of the violation of any provision of this chapter, or any rule or
regulation issued under this chapter.” (emphasis added)); see also Smith, supra, at 1199 (“[Section 21C’s] plain

This commenter also posited that, in addition to a primary violation, Section 21C also
requires a finding of harm to the public that was in part caused by a contributory negligent act.
While that may be the case for issuance of a temporary order pursuant to Section 21C(c), no such
finding is required for imposition of a monetary penalty under Section 21B.114 And regardless,
although harm is not an element of proof for a Rule 3502 violation, inherent in any proceeding
under Rule 3502 is the foundational principle that the Board is bringing the proceeding and
imposing sanctions “to protect the interests of investors and further the public interest in the
preparation of informative, accurate, and independent audit reports.”115
Another commenter remarked that in a Commission proceeding for ordinary negligence
under Section 21C (and not also for highly unreasonable conduct under Rule 102(e)), the
Exchange Act limits what sanctions the Commission can impose, and in the commenter’s view,
the Commission lacks the authority to impose certain sanctions that the Board can impose. But
while the available sanctions for a single act of negligence might be different in a proceeding
under Rule 3502 compared with one under Section 21C—indeed, the Commission can seek
certain sanctions that the Board cannot116—Sarbanes-Oxley does place express limits on what
sanctions the Board can impose.117 In the Board’s view, that the limitations on sanctions in the

language—‘has violated’—appears to authorize the SEC to base a cease-and-desist order upon a single past
violation, without any showing that the violator is likely to break the law in the future.” (emphasis added)).
114
Compare 15 U.S.C. 78u-3(c)(1), with id. 78u-2(a)(2). In any event, it would appear that harm to
the public interest is sufficient, but not required, for a temporary restraining order under Section 21C, as that
provision allows the Commission to enter a temporary restraining order “[w]henever the Commission determines
that the alleged violation or threatened violation . . . is likely to result in significant dissipation or conversion of
assets, significant harm to investors, or substantial harm to the public interest.” Id. 78u-3(c)(1) (emphasis added).
115
Section 101(a) of Sarbanes-Oxley. As the Commission has recognized, moreover, even
“unreasonable, or negligent, accounting or auditing errors . . . could undermine accurate financial reporting.” SEC
Release No. 34-40567.
116
The Commission’s authority is more expansive in other ways, as well. For example, as noted in
the Proposal, the Commission is not limited to holding accountable auditors for contributory conduct with respect to
primary violations committed only by registered firms; rather, the Commission also may hold accountable auditors
who cause violations by any other person, including issuers. See 2023 Proposing Release at 9 n.33. Additionally,
while Rule 3502 applies only to associated persons of registered firms, the Commission’s authority under Section
21C is not so limited; it applies to “any person,” including nonaccounting professionals. 15 U.S.C. 78u-3(a); see
also id. 78c(a)(9) (defining “person”).

See Section 105(c)(5) of Sarbanes-Oxley. One commenter sought clarity with respect to footnote
48 of the Proposal, and specifically the circumstances under which the Board would be permitted to impose
heightened sanctions. The Board takes this opportunity to clarify that, although the amendment to Rule 3502 allows
Exchange Act and in Sarbanes-Oxley, respectively, might not be the same in all respects does
not render the Board’s enforcement authority “unprecedented.”118
D.

Authority for the Amendment

Several commenters expressed doubt regarding the Board’s statutory authority for the
amendment in two respects: They questioned whether the Board has the authority to sanction
single acts of ordinary negligence as a general matter (i.e., in cases of direct violations or
otherwise), and they questioned the Board’s authority to promulgate a contributory liability rule
at the negligence standard. In general, these commenters asserted that the Board’s authority in
these respects is either unclear or rests on questionable interpretations of Sarbanes-Oxley. One
commenter further opined that the Proposal ignores congressional intent and that the Board’s
authority is “not as settled as the Proposal assumes,”119 and still another comment letter posited
that Sarbanes-Oxley is clear that in the absence of repeated negligence, sanctions should not be
imposed.
Although the Board believes that its authority in both respects is well-settled for reasons
the Board has previously explained,120 the Board nonetheless addresses these commenters’
views.
1.

Authority to Sanction Single Acts of Negligence Generally

the Board to sanction single instances of negligent contributory conduct, the heightened sanctions referenced in
Section 105(c)(5) of Sarbanes-Oxley—specifically, those sanctions listed in subparagraphs (A) through (C) and
(D)(ii) of Section 105(c)(4)—would not be available for a Rule 3502 violation absent a finding that the individual
who violated Rule 3502 acted at least recklessly or committed repeated acts of negligence each resulting in a
violation of an applicable statutory, regulatory, or professional standard.
Comment Letter from Center for Audit Quality at 8. This commenter also sought to cast as
inappropriate a negligence standard for Rule 3502 in light of the mental state required for aiding and abetting
liability. The Board agrees with the commenter that aiding and abetting generally requires knowing conduct, which
is why the Board has not relied on that theory of liability—in 2004, in 2005, in the Proposal, or now—as an analog
or basis for Rule 3502. See, e.g., 2005 Adopting Release at 11 n.20 (“Rule 3502, of course, differs from an aidingand-abetting cause of action in important respects. Among other things, the rule does not apply whenever an
associated person causes another to violate relevant laws, rules and standards. Rather, Rule 3502 applies only when
an associated person causes a violation by the registered firm with which the person is associated.”).
119

Comment Letter from U.S. Chamber of Commerce at 2.

120
See 2004 Proposing Release at 18; 2005 Adopting Release at 10-12; see also 2023 Proposing
Release at 12 n.43.

The text of Section 105 of Sarbanes-Oxley plainly permits the Board to impose liability
for single acts of negligence. Specifically, Section 105(c)(4) authorizes the Board to impose an
array of sanctions—listed in subparagraphs (A) through (G)—upon finding that a registered firm
or associated person engaged in violative conduct, without reference to the level of culpability
required but “subject to applicable limitations” in Section 105(c)(5). Section 105(c)(5), in turn,
provides that “[t]he sanctions and penalties described in subparagraphs (A) through (C) and
(D)(ii) of [Section 105(c)(4)] shall only apply to [ ] intentional or knowing conduct, including
reckless conduct,” or “repeated instances of negligent conduct each resulting in a violation of the
applicable statutory, regulatory, or professional standard.” Section 105(c)(5) thus does not
restrict the Board’s authority to impose for single acts of negligence certain sanctions—those in
subparagraphs (D)(i) and (E) through (G) of Section 105(c)(4).
The Board has long recognized this grant of authority,121 as did multiple commenters.
One commenter agreed that the Board has had authority to bring enforcement proceedings for
negligence “[s]ince the PCAOB’s creation,”122 and another posited that Congress “clearly”
intended for the Board to sanction associated persons for negligent conduct.123 Still another
asserted that Sarbanes-Oxley “empowers” the Board to sanction associated persons in instances
“when their conduct was not intentional or reckless.”124 Indeed, this latter commenter opined

Two decades ago, the Board stated:

The Act plainly contemplates that disciplinary proceedings can be instituted for a violation based
on a single negligent act. Section 105(c)(5) of the Act provides that the Board may impose the more severe
sanctions authorized by section 105(c)(4) only in cases that involve intentional or knowing conduct (including
reckless conduct) or repeated instances of negligent conduct. Implicit in that provision is that a violation based on a
single instance of negligent conduct is sufficient to warrant a disciplinary proceeding to impose lesser sanctions.
PCAOB Release No. 2003-015, at A2-58-59 (emphases added); see also id. at A2-76 (“[S]ection 105(c)(5)
of the Act requires scienter or repeated negligence for imposition of the most severe sanctions. The Act does not
limit the standard that must be met for imposition of other sanctions.”); 2005 Adopting Release at 12 n.23.
Comment Letter from North American Securities Administrators Association, Inc. at 1 (Nov. 13,

Comment Letter from Center for American Progress at 3.

Comment Letter from Ernst & Young LLP at 2.

2023).

that the Proposal created a “misimpression” that associated persons currently can only be
sanctioned for intentional or reckless misconduct.125 This of course was not the Board’s intent.
Other commenters, however, took the opposite view. One comment letter opined that,
when read together, the provisions of Sections 105(c)(4) and (c)(5) discussed above make clear
that unless negligent conduct is repeated, sanctions and penalties “should not be applied.”126 If
Congress had intended for all sanctions listed in Section 105(c)(4) to be unavailable absent
reckless conduct or repeated acts of negligence, however, then it would have had no reason to
make the specific carve-outs that it did in Section 105(c)(5); there would be no point to them.
Such an interpretation thus runs contrary to both Section 105(c)(5)’s text and the bedrock
principle of statutory construction to not read a statute in a way that renders language
superfluous.127
2.

Authority for a Negligence-Based Contributory-Liability Rule

Congress intended to grant to the Board “plenary authority” to establish or adopt ethics
standards.128 To that end, Section 103(a)(1) of Sarbanes-Oxley mandates that the Board
shall, by rule, establish . . . and amend or otherwise modify or alter, such auditing
and related attestation standards, such quality control standards, such ethics
standards, and such independence standards to be used by registered public
accounting firms in the preparation and issuance of audit reports . . . as may be
necessary or appropriate in the public interest or for the protection of investors.129

Id.

Comment Letter from Eight Accounting Professors (Cannon, et al.) at 4 (Nov. 2, 2023).

127
See, e.g., FCC v. NextWave Personal Cmmc’ns Inc., 537 U.S. 293, 302 (2003) (“[E]ven § 525(a)
itself contains explicit exemptions for certain Agriculture Department programs. These latter exceptions would be
entirely superfluous if we were to read § 525 as the Commission proposes—which means, of course, that such a
reading must be rejected.”); see also TRW Inc. v. Andrews, 534 U.S. 19, 31 (2001) (“[W]ere we to adopt
[respondent’s] construction of the statute, the express exception would be rendered insignificant, if not wholly
superfluous.” (citation and quotation marks omitted)).
S. Rep. 107-205, at 8.

See also Section 101(c)(2) of Sarbanes-Oxley.

As the Board twice recognized nearly two decades ago—once when it proposed Rule 3502 and
again when the Board adopted it—a contributory liability rule merely codifies auditors’
longstanding ethics obligations.130
Some commenters nonetheless expressed doubt about whether the statutory authority to
regulate ethical conduct equates to a statutory authority to sanction negligent conduct. In doing
so, one such commenter appeared to interpret the Proposal’s discussion of the Commission’s
authority under Section 21C of the Exchange Act to mean that the Board was relying on that
provision as authority for the amendment. The Board, however, did not rely (and is not relying)
on Section 21C of the Exchange Act as a source of authority for its negligent contributoryliability standard; rather, the Board agrees with the commenter that such provision applies only
to the Commission. The Proposal’s discussion of Section 21C instead was meant to show that,
by adopting a negligence threshold in Rule 3502, the Board would not be subjecting auditors to
any new standard to govern their contributory conduct.131
As the Board previously explained, “an associated person’s ethical obligation is not
merely to refrain from knowingly causing a violation but also to act with sufficient care to avoid
negligently causing a violation.”132 Such obligation has deep historical roots. For instance, the
AICPA’s Code of Professional Conduct at the time that Sarbanes-Oxley was enacted (and still
today) made it an “act discreditable to the profession”—and therefore a violation of its ethics

2004 Proposing Release at 18; see 2005 Adopting Release at 9. Beyond codifying auditors’ ethics
obligations, Rule 3502 is also “essential to the proper functioning of the Board’s independence rules.” 2004
Proposing Release at 19; see also 2005 Adopting Release at 14. As the Board previously explained:
For example, Rule 3521 provides, in part, that a registered firm is not independent of its audit client if the
firm provides that audit client with a service for a contingent fee. When an associated person causes . . . the
registered firm to provide that service for a contingent fee, Rule 3502 would allow the Board to discipline the
associated person for that conduct.
2005 Adopting Release at 14.
131
2023 Proposing Release at 14 (discussing Section 21C and concluding: “Thus, the proposed
amendment to Rule 3502’s liability threshold would not subject auditors to any new or different standard to govern
their conduct.”).
2005 Adopting Release at 9.

rules133—for a member accountant to “permit[ ] or direct[ ] another to make[ ] materially false
and misleading entries in the financial statements or records of an entity” “by virtue of his or her
negligence.”134 Just the same if a member were to “permit[ ] or direct[ ] another to sign[ ] a
document containing materially false and misleading information” “by virtue of his or her
negligence.”135
Congress clearly had in mind the AICPA Code of Professional Conduct when it
authorized the Board to promulgate ethics standards. The AICPA had a prominent presence
during the drafting of Sarbanes-Oxley and in the run up to its passage,136 and beyond Congress
empowering the Board to write its own ethics standards, it also empowered the Board to “adopt
as its rules[ ] . . . any portion of any statement of auditing standards or other professional
standards” and to “modify, supplement, revise, or subsequently amend, modify, or repeal, in
whole or in part, any portion of any [such] statement.”137 In other words, Congress authorized
the Board to adopt (and later amend or modify) parts of the AICPA’s Code of Professional
Conduct as the Board’s ethics standards, and at the time of Sarbanes-Oxley’s enactment, that
Code included prohibitions on negligent contributory conduct.

The AICPA’s Ethics Rulings are a body of decisions made by the AICPA’s professional ethics
division’s executive committee that “summarize the application of Rules of Conduct and Interpretations to a
particular set of factual circumstances.” Introduction, Code of Professional Conduct (as Adopted January 12, 1988),
available at https://us.aicpa.org/content/dam/aicpa/research/standards/codeofconduct/downloadabledocuments/2014
december14codeofprofessionalconduct.pdf; see also AICPA Code of Professional Conduct § 0.500.01 (updated
June 2020) (“The code is the only authoritative source of AICPA ethics rules and interpretations.” (italics omitted)).
134
AICPA Code of Professional Conduct, ET § 501.05(a), Negligence in the Preparation of
Financial Statements or Records (emphases added), recodified at Section 1.400.040.01.
Id. § 501.05(c) (emphases added).

During committee hearings for Sarbanes-Oxley, the Senate heard testimony from five individuals
who were serving, or previously had served, in leadership roles within the AICPA (including the AICPA’s thencurrent Chair and its former Chair), and also relied on data provided by the AICPA. See S. Rep. 107-205, at 3-4, 61,
63; see also H.R. Rep. No. 107-414, at 19 (2002) (noting that the AICPA’s then-President and CEO provided
testimony to a House of Representatives committee on a related bill).
Section 103(a)(3) of Sarbanes-Oxley (emphasis added). In 2003, the Board adopted parts of the
AICPA Code of Professional Conduct as its interim ethics standards, Establishment of Interim Professional Auditing
Standards, PCAOB Release No. 2003-006, at 10 (Apr. 18, 2003), and the Commission approved such adoption “as
consistent with the requirements of [Sarbanes-Oxley],” Order Regarding Section 103(a)(3)(B) of the SarbanesOxley Act of 2002, SEC Release No. 34-47745 (Apr. 25, 2003).
One commenter cited a provision of the AICPA Code of Professional Conduct that has a
“knowingly” standard for contributory conduct (Section 0.200.020.04). This commenter also
cited the Board’s then-proposed (now-adopted) EI 1000, Integrity and Objectivity, to note that
the definition of “integrity” in that standard includes “[n]ot knowingly or recklessly
misrepresenting facts,” without reference to negligence.138 However, this commenter did not
acknowledge that the AICPA Code also has contributory-conduct provisions at the negligence
standard, as discussed above.
Certain commenters compared the Board’s authority for a contributory negligence
standard in Rule 3502 to private plaintiffs’ inability to bring suit under Section 10(b) of the
Exchange Act139 for aiding and abetting securities fraud. To be sure, in Central Bank of Denver,
the U.S. Supreme Court held that “there is no private aiding and abetting liability under § 10(b)”
“[b]ecause the text of § 10(b) does not prohibit aiding and abetting.”140 But that holding
regarding an implied private right of action has little bearing on the Board’s authority for the
amendment.
The Board draws its authority for the amendment from different text in a different statute.
As explained above, Congress empowered the Board to promulgate ethics standards pursuant to
Section 103(a) of Sarbanes-Oxley, which is distinct from any congressional grant of authority to
the Commission, including those in Sections 10(b) or 21C of the Exchange Act.141 There is no

QC 1000 Release at A4-1.

15 U.S.C. 78j.

Cent. Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 191 (1994).

141
Section 105 of Sarbanes-Oxley also supplies authority to adopt the proposed amendment. See
2005 Adopting Release at 12; 2023 Proposing Release at 12 n.43. As the Board previously explained, “Section 105
authorizes the Board to investigate and, when appropriate, discipline registered firms and their associated persons,”
and because (1) “[c]ertain types of violations, by their nature, may give rise to direct liability only for a registered
public accounting firm,” and (2) “[s]uch firms . . . can only act through the natural persons that comprise them,” it
follows that (3) “[w]hen one or more of those associated persons has caused that firm to” commit a violation, “it is
appropriate, and consistent with the Board’s duty to discipline registered firms and their associated persons under
Section 101(c)(4) of the Act, that the Board be able to discipline the associated person for that misconduct.” 2005
Adopting Release at 12.

analogous statutory mandate for the Commission to “establish . . . ethics standards” in the area of
auditors’ professional responsibility.
The Board, however, indisputably does have such a mandate in Section 103(a)(1) of
Sarbanes-Oxley,142 and with that distinct mandate comes distinct authority.143 Indeed, as the
Commission recognized when approving the Board’s adoption of Rule 3502 in 2006, “the rule is
within the scope of the PCAOB’s authority, particularly its authority to establish ethical
standards.”144 Section 103(a)(1), moreover, is an enabling (or authorizing) statute that permits
the Board to establish standards to govern the preparation and issuance of audit reports “as may
be necessary or appropriate in the public interest,” which text provides broad rulemaking
authority.145
So, too, is Section 101(g)(1) of Sarbanes-Oxley—yet another source of authority for the
amendment. That provision authorizes the Board to promulgate rules to “provide for . . . the
exercise of its authority, and the performance of its responsibilities under this Act,” which
142
One commenter remarked that Section 103 “is not untethered” from the rest of Sarbanes-Oxley.
Comment Letter from U.S. Chamber of Commerce at 4. The Board agrees: Section 103 tethers directly to Section
101(c)(2), which mandates that the Board “establish or adopt, or both, by rule, auditing, quality control, ethics,
independence, and other standards . . . in accordance with section 7213 [103] of this title.” Indeed, doing so is an
express “Dut[y] of the Board” under Section 101(c). Section 101(c)(2) is thus another source of authority for the
Board’s amendment.

Nor does Section 103(a) of Sarbanes-Oxley include the telltale terms of a statute that requires a
mental state higher than negligence, as does Section 10(b) of the Exchange Act. See Ernst & Ernst v. Hochfelder,
425 U.S. 185, 197 (1976) (“Section 10(b) makes unlawful the use or employment of ‘any manipulative or deceptive
device or contrivance’ in contravention of Commission rules. The words ‘manipulative or deceptive’ used in
conjunction with ‘device or contrivance’ strongly suggest that § 10(b) was intended to proscribe knowing or
intentional misconduct.”); id. at 199 (“The argument simply ignores the use of the words ‘manipulative,’ ‘device,’
and ‘contrivance’ [are] terms that make unmistakable a congressional intent to proscribe a type of conduct quite
different from negligence.”).
144
Order Approving Proposed Ethics and Independence Rules Concerning Independence, Tax
Services, and Contingent Fees and Notice of Filing and Order Granting Accelerated Approval of the Amendment
Delaying Implementation of Certain of these Rules, SEC Release No. 34-53677, at 9 (Apr. 19, 2006).

See, e.g., AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 377-78 & n.5 (1999) (construing a
provision allowing the FCC to “prescribe such rules and regulations as may be necessary in the public interest to
carry out” the relevant statute as a “general grant of rulemaking authority” sufficient for the FCC to promulgate the
regulations at issue); Metrophones Telecommc’ns, Inc. v. Global Crossing Telecommc’ns, Inc., 423 F.3d 1056, 1068
(9th Cir. 2005) (“Given the reach of the [FCC’s] rulemaking authority under § 201(b)”—which granted to the FCC
the “broad power to enact such ‘rules and regulations as may be necessary in the public interest to carry out the
provisions of this Act’”—“it would be strange to hold that Congress narrowly limited the Commission’s power to
deem a practice ‘unjust or unreasonable.’”); Brown v. Azar, 497 F. Supp. 3d 1270, 1281 (N.D. Ga. 2020) (“[W]hen
an agency is authorized to ‘prescribe such rules and regulations as may be necessary in the public interest to carry
out the provisions of the Act,’ Congress’ intent to give an agency broad power is clear.”), appeal dismissed as moot,
20 F.4th 1385 (11th Cir. 2021) (mem.).
include “enforc[ing] compliance” with applicable laws, rules, and standards; “conduct[ing]
investigations and disciplinary proceedings”; and “impos[ing] appropriate sanctions where
justified.”146 Section 101(g)(1) thus empowers the Board to implement the Board’s “ultimate
purposes” under Sarbanes-Oxley of “protect[ing] the interests of investors and further[ing] the
public interest in the preparation of informative, accurate, and independent audit reports.”147 The
amendment, and Rule 3502 generally, do precisely that.
STATEMENT REGARDING THE PROPOSED AMENDMENT TO CLARIFY THE
RELATIONSHIP BETWEEN CONTRIBUORY ACTOR AND PRIMARY VIOLATOR
As noted above, in addition to proposing a change in Rule 3502’s liability standard, the
Proposal also contemplated amending Rule 3502 to provide that an associated person
contributing to a violation need not be an associated person of the registered firm that commits
the primary violation (i.e., that an associated person of one registered firm can contribute to a
primary violation of another registered firm).148 Specifically, the Board proposed changing the
word “that” to “any” immediately before the reference to the registered public accounting firm
that commits the primary violation. After due consideration, the Board has decided not to adopt
any changes to Rule 3502 to implement this aspect of the Proposal, for two primary reasons.
First, as the Proposal explained, the Board’s rules already contemplate that associated
persons can be associated with more than one registered firm at the same time.149 Specifically,
PCAOB Rule 1001(p)(i)’s definition of an “associated person” provides that if a firm reasonably
believes that one of its associated persons is primarily associated with another registered firm,

Sections 101(c)(4) and (6) of Sarbanes-Oxley.

147
Section 101(a) of Sarbanes-Oxley; In re Permian Basin Area Rate Cases, 390 U.S. 747, 780
(1968) (“We are, in the absence of compelling evidence that such was Congress’ intention, unwilling to prohibit
administrative action imperative for the achievement of an agency’s ultimate purposes.”); see Doe v. FEC, 920 F.3d
866, 870-71 (D.C. Cir. 2019) (“When an agency’s ‘empowering provision’” permits the agency “‘to make, amend,
and repeal such rules … as are necessary to carry out the provisions of’” the statute, “the courts will sustain a
regulation that is ‘reasonably related’ to the purposes of the legislation.” (citations omitted)).
See 2023 Proposing Release at 16-17.

See id. at 10 n.36.

then that person is excluded from the definition of an “associated person,” but only “for purposes
of completing a registration application on Form 1, Part IV of an annual report on Form 2, or
Part IV of a Form 4 to succeed to the registration status of a predecessor.” For all other
purposes, that carveout does not apply, thus underscoring that, in the context of Rule 3502’s
reference to an “associated person,” a person can be associated with two or more registered firms
at once.
Second, an individual who “directly and substantially” contributes to a firm’s violation
(consistent with the meaning of that phrase in Rule 3502, as described above) in all instances
likely also will have “participate[d] as agent or otherwise on behalf of such [ ] firm in any
activity of that firm” “in connection with the preparation or issuance of any audit report,” and
thus be an “associated person” of that firm.150 In the Board’s view, this definition of “associated
person,” in combination with the notion that a person can be associated with multiple firms at the
same time, renders unnecessary the proposed change from “that” to “any” in Rule 3502.
The Board appreciates commenters’ feedback on this aspect of the Proposal. As one
commenter surmised, this aspect of the Proposal was aimed at providing for equal accountability
by associated persons as firm structures evolve. Based on the two points noted above, however,
the Board believes that such accountability currently exists.151 It was not the Board’s intent
through this aspect of the Proposal to deter collaboration or the sharing of perspectives between
firms. And, to the extent that commenters believe that this aspect of the Proposal would
exacerbate their concerns with respect to a negligence standard, the Board’s decision not to adopt
any amendment in this regard should help to alleviate those concerns.
EFFECTIVE DATE

See Section 2(a)(9) of Sarbanes-Oxley (emphases added); PCAOB Rule 1001(p)(i).

Beyond these two points, one commenter opined that “in most, if not all, cases,” an auditor’s
direct and substantial contribution to a primary violation by a firm with which the auditor is not associated also
would have at least negligently, directly, and substantially contributed to a primary violation by a firm with which
the auditor is associated. Comment Letter from Ernst & Young LLP at 4. This proposition further underscores the
point that no clarifying amendment is needed given the current regulatory framework.
If the amendment to PCAOB Rule 3502 is approved by the Commission, then (as
proposed) the Board intends that it would become effective 60 days from the date of
Commission approval.152 In that regard, the Board anticipates that conduct occurring more than
60 days after Commission approval would be subject to Rule 3502, as amended, but that conduct
occurring prior to, or within 60 days after, Commission approval would not be subject to the
amendment to Rule 3502.
Commenters expressed mixed views regarding the effective date. One commenter agreed
that 60 days after Commission approval is appropriate, and another stated that it did not disagree
with the Board’s basis for an effective date 60 days after Commission approval. Another
commenter stated that it could not comment on an appropriate effective date because the Board
should redeliberate and repropose amendments to Rule 3502. Other commenters encouraged the
Board to delay the effectiveness until the Board more fulsomely assesses the costs of the
amendment and considers the amendment’s impact on the profession and audit quality.
Several commenters suggested that the Board delay the effectiveness of any amendment
to Rule 3502 to provide for time to gauge the impact of other then-pending proposals, including
QC 1000 and AS 1000 (both of which have since been adopted). In general, these commenters
opined that the impact of the amendment to Rule 3502 could depend on how the amendment
interacts with, and the potential unintended consequences of, changes to other professional
standards. Another commenter encouraged the Board to delay the effectiveness of the
amendment for medium-sized and smaller firms, including those in non-U.S. jurisdictions, to
appropriately understand the amendment’s ramifications and to respond accordingly.
The Board recognizes that it is in various stages of the process of modernizing several of
its standards and rules to protect the interests of investors and further the public interest. Those
updates (both adopted and proposed) reflect that, over the years, audits and the audit industry

See 2023 Proposing Release at 31.

have evolved, and the Board’s standards and rules should as well.153 The Board also appreciates
that its revised standards and rules may require adjustment by individuals and firms, which is
why each of those standards also includes (or proposes to include, in the case of proposals) a
delay in its respective effective date following the date of Commission approval.154 The notion
that multiple standards are being modernized in parallel, however, is not a basis for permitting
individuals—regardless of the size of the firm(s) with which they are associated—to negligently,
directly, and substantially contribute to firms’ primary violations. And as noted above, as firms
make efforts to comply with new standards, it necessarily follows that individuals who could be
subject to Rule 3502 also would be making such efforts (because firms can act only through their
natural persons).
Accordingly, having considered the comments and for the reasons above, the Board
continues to believe that 60 days after Commission approval is an appropriate effective date for
the amendment to Rule 3502. That period provides sufficient time for associated persons to
familiarize themselves with the applicable legal standards and to increase their diligence as
necessary and appropriate, which enhances audit quality and therefore serves the interests of the
public and better protects investors.

153
See PCAOB, Strategic Plan 2022-2026, at 10 (“[A]s important as [auditing, attestation, quality
control, ethics, and Independence] standards are, some of them were written by the audit profession prior to the
PCAOB’s establishment and have not been updated since we adopted them in 2003 on what was intended to be an
interim basis. The world has changed since 2003, and our standards must adapt to keep up with developments in
auditing and the capital markets. We intend to modernize and streamline our existing standards and to issue new
standards where necessary to meet today’s needs.”).

See PCAOB Release No. 2022-002, at 58 (effective for audits of financial statements for fiscal
years ending on or after December 15, 2024); PCAOB Release No. 2023-008, at 96 (effective for audits of financial
statements for fiscal years ending on or after June 15, 2025); AS 1000 Release at 96 (with limited exception,
effective for audits of financial statements for fiscal years beginning on or after December 15, 2024); QC 1000
Release at 378 (effective December 15, 2025); PCAOB Release No. 2024-007, at 61 (effective for audits of
financial statements for fiscal years beginning on or after December 15, 2025); see also PCAOB Release No. 2024006, at 61 (contemplating effectiveness for audits of fiscal years beginning on or after December 15 in the year of
approval by the Commission); PCAOB Release No. 2024-003, at 89 (proposing effective dates of 90 days after
Commission approval for certain aspects and no earlier than March 31, 2026, or one year after Commission
approval, whichever is later, for other aspects); PCAOB Release No. 2024-002, at 186 (proposing phased effective
dates beginning no earlier than October 1 in the year after Commission approval); PCAOB Release No. 2024-001,
at 63 (proposing an effective date of six months after Commission approval to comply with certain aspects);
PCAOB Release No. 2023-003, at 94 (contemplating effectiveness for audits of fiscal years beginning in the year
after approval by the Commission, or if Commission approval occurs in the fourth quarter of a calendar year,
effectiveness for audits of fiscal years beginning two years after the year of Commission approval).
D.

Economic Considerations and Application to Audits of Emerging Growth Companies
The Board is mindful of the economic impacts of its rulemaking. This section describes

the baseline for evaluating the economic impacts of the amendment to Rule 3502, the need for
rulemaking, its expected economic impacts (including benefits, costs, and potential unintended
consequences), and reasonable alternatives considered. Due to data limitations, much of the
economic analysis is qualitative; however, it incorporates quantitative information, including
PCAOB enforcement data and academic and industry research, where feasible.
The Board sought information relevant to the economic analysis throughout this
rulemaking and has carefully considered the comments submitted, including the data and studies
suggested by the commenters.
A.

Baseline

Section C above describes the important components of the baseline against which the
amendment’s economic impacts are considered, including the current formulation of Rule 3502
and the Board’s implementation experience. The Board discusses below the Board’s
enforcement activities. Table 1 presents PCAOB enforcement data on Rule 3502 charges from
2009-2024.155 This table provides historical information on how frequently individuals have
been charged under the current formulation of Rule 3502.

155
Table 1 contains data through April 30, 2024. The Board brought the first Rule 3502 charge in
2009 for conduct committed after the effective date of Rule 3502 in April 2006.

Table 1. Number and Incidence of Rule 3502 Charges, 2009-2024
Year

Cases with Rule
3502 Charges
(A)

Firms
Sanctioned
(B)

2

Incidence of
Rule 3502
Charges
C=A/B
40%

2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
Total

0
2
3
5
2
17
14
15
8
8
2
3
6
5
4
2
6
4
10
20
37
30
42
13
19
13
14
30
43
20
0%
33%
75%
50%
10%
46%
47%
36%
62%
42%
15%
21%
20%
12%
20%
31%

Source: Settled and Adjudicated Disciplinary Orders Reported by the Board to the Public
Pursuant to Section 105(d) of Sarbanes-Oxley, available at
https://pcaobus.org/oversight/enforcement/enforcement-actions
Column A shows the number of cases in which associated persons were found to have
violated Rule 3502 (includes settled and adjudicated cases); column B shows the number of
cases in which registered firms were sanctioned (for any violation); and column C is the ratio of
the two, expressed as a percentage to reflect the proportion of firm cases when an associated
person was charged with Rule 3502 by the Board.
From 2009 through April 30, 2024, there have been a total of 96 cases with Rule 3502
violations. At an average of six per year, the number of Rule 3502 cases was highest in 2015 at
17 and lowest in 2010, when no Rule 3502 violations were found.156 The 96 cases represent 31

Column Year refers to the year the firms were sanctioned. Column A reflects Rule 3502 cases
involving sanctions of one or more respondents as one instance. Some firms were sanctioned in different years than
percent of the total number of cases in which the Board sanctioned firms for violations from
2009-2024. The data presented in the table does not predict how many Rule 3502 violations the
Board might find because of the amendment; it indicates that in over two-thirds of the cases in
which a firm was sanctioned, no contributory actor was held accountable under Rule 3502.157
Commenters suggested alternative means of assessing the baseline for this amendment.
Some commenters suggested that the Board consider the Commission’s enforcement data.
However, PCAOB enforcement data is a more relevant comparison because this data is limited
to cases brought by the PCAOB, offering a more precise perspective for understanding the
baseline of the amendment. Although the Commission’s enforcement data is valuable, it is
impacted by various factors, including the Commission’s case mix, prosecutorial discretion,
resource allocation decisions, and enforcement priorities. While the Commission and the
PCAOB coordinate enforcement efforts as required by Sarbanes-Oxley, their respective
mandates are separate from each other. Given these separate mandates, inclusion of the
Commission’s data herein would not contribute to a fuller understanding of the PCAOB’s
historical practices.
Other commenters suggested that, rather than the comparison provided in Table 1 of
individual Rule 3502 cases to firm cases, a more relevant comparison would be PCAOB
enforcement proceedings against firms to PCAOB enforcement proceedings against individuals
(under Rule 3502 and otherwise). One of these commenters acknowledged, however, that such a

associated persons were sanctioned for the corresponding Rule 3502 violations. In such cases, Rule 3502 violations
by associated persons are counted in the same year the firms were sanctioned. Therefore, column A can be
interpreted as a subset of cases in Column B.
One commenter asserted that Table 1 in the Proposal did not illuminate whether the cases without
Rule 3502 charges would have merited or supported a Rule 3502 charge for individual negligence had that option
been available, and suggested that the PCAOB perform that analysis, even if for a shortened period of 5 years.
Another commenter also suggested that this analysis does not indicate cases where a Rule 3502 charge would have
been inappropriate or where the absence of charges was supported by the Board’s exercise of prosecutorial
discretion. However, the Board notes that staff has already performed an analysis of that nature for the immediately
preceding two years, which forms the basis of the estimated increase in the number of cases discussed below. See
also 2023 Proposing Release at 24-25 (providing estimate for 2022). Performing an analysis for additional older
years may be potentially less robust, given the extremely fact-based nature of the evaluation; staff recollections of
whether all of the available investigatory evidence could have supported a negligence claim are naturally less
reliable for older matters; and relevant staff may have since departed the PCAOB.
comparison would not shed meaningful light on the need for the proposed change, and the Board
agrees. Because contributory liability under Rule 3502 is distinct from primary liability,
aggregating individual liability for all types of violations would not contribute to an
understanding of the PCAOB’s historical application of Rule 3502. Column A in Table 1
focuses on contributory liability only and therefore more clearly illuminates the baseline of the
PCAOB’s use of Rule 3502 as currently formulated.
Another commenter suggested conducting a survey regarding the resulting internal
impact of PCAOB enforcement proceedings at the firm level on associated individuals. While a
well-designed survey may provide additional insights, the Board believes that staff analysis
based on PCAOB enforcement activities provides a sufficiently reliable basis for assessing the
need for and scope of the amendment to Rule 3502.158
B.

Need

This section discusses the problem the amendment intends to address and how the
amendment addresses the problem.
1.

Problems to Be Addressed

The need for the amendment arises from a current gap in the PCAOB’s regulatory
framework. Specifically, as described in detail in section C above, the gap in the PCAOB’s
regulatory framework relates to a misalignment between the liability standard for firms that
commit violations resulting from an associated person’s conduct and the liability standard for the
associated person who contributes directly and substantially to the firm’s violation. Under the
current formulation of Rule 3502, while firms can be held accountable by the PCAOB for
violations due to negligence, individuals can be held liable for their contributory conduct only if
their conduct was at least reckless, a more stringent standard than negligence. That is, Rule

Further, the suggested survey would have shed light on firms’ internal disciplinary measures taken
against associated individuals, which, as discussed below, are important but not equivalent in effect to public
proceedings.
3502’s current formulation places negligent individual contributors to firms’ violations beyond
Rule 3502’s reach.
The gap discussed above creates regulatory inefficiency and undermines the PCAOB’s
regulatory objectives, including furthering the public interest in the preparation of informative,
accurate, and independent audit reports. Inefficiency arises under the current regulatory
framework because the PCAOB cannot hold individuals accountable for negligent contributory
conduct while the Commission can, and therefore the PCAOB would have to refer one part of a
broader case to the Commission to take action (as it deems appropriate) against the negligent
individual. If the Commission decided to move forward with a separate case against the
individual, Commission staff may need to familiarize themselves with the case, potentially
reinterview witnesses, and undertake (as needed) additional investigative steps. This could result
in delays and, given that these activities would relate to substantially the same set of facts that
the PCAOB is seeking to establish with respect to the firm, would render duplicative the
PCAOB’s prior work in these areas, thereby creating inefficiencies. Moreover, if the
Commission chooses not to pursue the case (for example, due to resource constraints or
competing priorities), the individual’s negligent conduct may go unsanctioned.159 This lack of
individual accountability could hinder the effectiveness of the PCAOB’s enforcement
proceedings and may lead to under-deterrence among individuals within the industry, as they
observe only the firm being penalized without consequences for the individuals responsible for
the negligent conduct.
2.

How the Amendment Addresses the Need

See, e.g., Samuel B. Bonsall IV, Eric R. Holzman & Brian P. Miller, Wearing out the Watchdog:
The Impact of SEC Case Backlog on the Formal Investigation Process, 99 Acct. Rev. 81, 81 (2024) (“We find that
higher office case backlog decreases the likelihood of an investigation into a restating firm. . . . Backlog also impacts
pursued investigations, leading to more prolonged investigations, a lower Accounting and Auditing Enforcement
Releases likelihood, and smaller SEC penalties. Our evidence suggests that busyness undermines the SEC’s
investigation process.”).
The amendment to Rule 3502 addresses the need by aligning the liability standards for
firms and associated persons. It changes the liability standard for individual contributory
conduct from recklessness to negligence. Doing so closes the regulatory gap described above
and allows the Board to hold individuals accountable when they directly and substantially
contribute to a firm’s violation if their contributory act or failure to act was negligent but not
reckless. By closing the gap, the amendment eliminates the obstacles in the public enforcement
framework and helps improve regulatory efficiency.
The amendment does not result in a novel expansion of liability to reach conduct that is
currently not subject to enforcement, as the Commission already has authority to discipline
associated persons who negligently cause a firm’s violation. Instead, it merely provides the
PCAOB with the ability to hold individuals accountable similar to the Commission.
Some commenters agreed that the amendment would address the regulatory gap within
the existing framework. However, other commenters challenged the need for the amendment.
Some commenters asserted that the PCAOB already has tools for disciplining individuals and
that the absence of Rule 3502 charges does not imply a lack of individual accountability. To be
sure, the PCAOB currently has the authority to hold individuals accountable for violations of
rules that contemplate individual responsibility, and the Board actively brings cases to hold
individuals accountable for wrongdoing. But Rule 3502 is a distinct authority that creates and
enforces a distinct obligation, and currently, the PCAOB is unable to hold individuals
accountable under that rule when they act unreasonably but not recklessly. The amendment thus
is not “duplicative,” as some commenters suggested,160 and the Board’s analysis therefore
centers on the need to close this particular regulatory gap to give the PCAOB the appropriate tool
for these sets of circumstances.

Quality at 6.

Comment Letter from U.S. Chamber of Commerce at 7; Comment Letter from Center for Audit

Other commenters asserted that the PCAOB’s need was not sufficient to justify the
amendment to Rule 3502 that these commenters considered profound, with its attendant costs
and consequences. Certain of these commenters suggested that any change in auditor behavior
that the PCAOB hopes to accomplish has already been accomplished by the Commission’s
ability to bring cases for negligent conduct, and that therefore the PCAOB has not shown a
convincing need. As discussed in section C above, the amendment to Rule 3502 is not a
significant shift in the liability landscape. Rather, it allows the PCAOB to discipline associated
persons for negligently contributing to firms’ violations, which is misconduct that the
Commission currently can pursue. The Board recognizes, however, that this incremental
increase in the PCAOB’s enforcement capability may in turn generate certain incremental effects
on auditor behavior, as discussed further below.
Some commenters also asserted the absence of adequate evidence to support the need for
the amendment. However, the comments received did not offer data that can be used to
supplement the analysis meaningfully, and the Board is not aware of additional data or
quantitative analysis that could be performed. Thus, as noted at the outset, the Board has
performed limited quantitative analysis where possible but relies largely on qualitative analysis
to inform this rulemaking.
One comment letter noted that the PCAOB’s current inspection program is effective in
enhancing audit quality, citing academic research to support that view.161 While the Board
acknowledges that the PCAOB’s inspection program plays a vital role in enhancing audit quality,
the PCAOB’s enforcement program plays a distinct but complementary role in holding firms and
associated persons accountable for violations, and thereby sanctioning and deterring unlawful

For example, the commenter cited Lindsay M. Johnson, Marsha B. Keune & Jennifer Winchel,
U.S. Auditors’ Perceptions of the PCAOB Inspection Process: A Behavioral Examination, 36 Contemp. Acct. Res.
1540, 1557 (2019) (“Overall, participants described substantial modifications in their audit approach in response to
inspection findings and the anticipation of inspections. These modifications are consistent with auditors and their
firms actively working to comply with PCAOB expectations . . . .”). This behavioral study examined auditors’
observations and behaviors in response to the PCAOB inspection process, focusing on factors such as perceived
power and trust in the regulatory body.
conduct. The amendment aims to fill a gap in that latter program by helping to ensure that
individuals negligently contributing to a firm’s violations are held accountable and that the
integrity of the audit process is strengthened. The continued persistence of a high rate of audit
deficiencies also suggests that, while the inspections and enforcement processes may be effective
at enhancing audit quality, as the commenter describes, additional efforts are needed, including
through this rulemaking.162
In general, commenters did not introduce arguments or data that caused the Board to
rethink its assessment of the need: there is a regulatory gap, the gap is small because the
Commission already has the ability to bring negligence-based secondary-liability cases, but the
gap can nonetheless result in regulatory inefficiencies or an incremental absence of deterrence
and accountability, respectively. The amendment would close this gap, yielding the economic
impacts discussed further below.
C.

Economic Impacts

This section discusses the expected benefits and costs of the amendment and potential
unintended consequences.
A critical component of the Board’s assessment of the economic impacts of this
amendment is the Board’s assessment of the likely number of PCAOB enforcement cases that
would be brought under the amended rule. For the Proposal, staff examined enforcement matters
from 2022 to assess the potential increase in recommended cases had Rule 3502 included the
proposed amendment. Staff estimated two to three instances in 2022 where the amendment
could have prompted staff to recommend a Rule 3502 charge.163 Staff also indicated that, based
on its expertise, that number would be broadly consistent with other years.
162
See, e.g., PCAOB Report: Audits with Deficiencies Rose for Second Year in a Row to 40% in 2022
(July 25, 2023), available at https://pcaobus.org/news-events/news-releases/news-release-detail/pcaob-report-auditswith-deficiencies-rose-for-second-year-in-a-row-to-40-in-2022.
163
See 2023 Proposing Release at 25. This is an estimate of cases in which staff would
likely have recommended Rule 3502 charges against natural persons. Because Rule 3502 charges can be brought
against associated persons, which include both natural persons and legal entities, it is possible that the estimate could
be higher if it were to include potential additional cases against legal entities. However, due to the complexity of the
fact patterns presented in such cases, staff could not estimate the number of additional cases that would have been

For this release, staff updated its analysis to include an additional year (2023); for 2023,
staff also believes that, had negligence been the standard in Rule 3502, two or three instances
could have prompted staff to recommend a Rule 3502 charge.164 The Board continues to note
that this estimate may vary to the extent that there are modifications to other Board standards or
changes in enforcement priorities.
This analysis influenced, and continues to influence, the Board’s assessment of the likely
benefits, costs, and potential unintended consequences of the amendment—namely, that auditors
are already held to a contributory negligence standard, that the change here is only adding the
PCAOB as an enforcer, and that this change therefore would have meaningful but incremental
benefits. As discussed further below, it would result in more efficient enforcement in specific
cases, and it may prompt individuals to exercise the appropriate level of care and to make firms
more efficiently allocate resources, which would raise audit quality. It would also have some
incremental anticipated costs, and unintended consequences that parallel the anticipated costs,
including litigation, liability, and opportunity costs, and potential inefficiencies in terms of selfprotective behavior.
One commenter agreed with the Board’s expectation that the economic impact will be
modest while others challenged this analysis. They took issue with the estimate of only a few
additional cases for 2022 resulting from the amendment, questioning the basis and relevance of
this prediction. Based on extensive experience, staff believes that this number is a fair average
representation across other years and provides an estimate of the additional cases resulting from

brought against such entities. Additionally, although the Proposal’s estimate included the second aspect of the
Proposal, staff has confirmed that the estimate remains appropriate without that aspect.
164
Staff were limited in the ability to perform further analysis given the intensively fact-specific
nature of investigatory and charging decisions. Further, the availability (or unavailability) of potential charges can
itself shape the investigatory process. Finally, determining whether all the available facts and circumstances would
have supported a staff recommendation against an individual for negligent contributory conduct also depends on an
intimate familiarity with the entire investigatory file as it pertains to that individual’s conduct and the relevant
standard of care. As recollections fade over time, a case-specific analysis of what charges could have been
supported becomes less reliable. Other staff have moved to different roles within the PCAOB or departed the
organization entirely. The Board therefore focused its analysis on the most recent time period where relevant staff
members are available and their knowledge is the freshest, and then confirmed staff’s view of whether it has any
reason to believe that this time period would not be representative of the broader trend.

the Board pursuing charges under the amendment. In fact, as discussed above, staff updated its
analysis to include data from 2023 and that analysis generated an estimate of two to three
additional cases in 2023, consistent with that for 2022. Overall, the estimation approach
espoused here (with respect to both 2022 and 2023) applies expert judgment to the PCAOB’s
recent case data to offer a pragmatic perspective.165
Moreover, the PCAOB has existing authorities to bring charges against individuals—both
for primary violations and for at least reckless contributory conduct;166 the amendment therefore
would close a gap regarding one particular type of conduct (negligent contributory conduct)
rather than supplanting these other forms of accountability. Staff’s estimate of two to three
additional cases thus appears objectively reasonable.
In terms of the potential variability in the future of other standards, including QC 1000
and AS 1000, commenters took issue with the uncertainty that poses. But standards and
regulatory priorities are always evolving in a bid to keep pace with developments in the relevant
environments (e.g., developments within the regulated industry, legal developments, etc.).
Indeed, there could be benefits to amending Rule 3502 in tandem with other standards if it means
that individuals, in determining how their registered firm should implement the new standards,
are more sharply aware of the standard of care that is expected of them and can design their
firm’s implementation strategies accordingly. Moreover, if the Board assumes that the number of
Rule 3502 cases increases more significantly in the future because the facts and circumstances of
those matters show that individuals are failing to act reasonably under newer PCAOB

An alternative approach would involve providing an upper bound of the number of cases, i.e., the
total number of firm cases that were brought each year. This can be easily derived from Table 1. However, not every
firm case would be associated with individual contributory liability, and some cases would involve individual
primary liability too. Therefore, the Board declined to engage in this alternative approach and rather relied on staff’s
expertise in terms of providing a more pragmatic perspective on the additional number of cases under the
amendment.
166
Here, the Board agrees with commenters who pointed out that the PCAOB has alternative means
of bringing charges against individuals.

requirements, and thereby contributing to firms’ violations of other standards, then the Board
expects that both the benefits and costs of Rule 3502 would be higher.167
Some commenters posited that the amendment would represent a profound change in
liability and have significant impacts on the profession and far-reaching unintended
consequences. As previously discussed, the amendment does not effectuate a fundamental shift
in the liability landscape, but rather aligns the PCAOB’s secondary liability standard with that of
the Commission. And thus, as discussed below, the Board has assessed that there would be
recognizable but not significant benefits, or costs, attributable to enhanced compliance with other
PCAOB rules and standards.
The Board has considered this discrepancy between commenters’ assertions of the
significance of the amendment and the Board’s analysis of the amendment’s incremental effect.
This discrepancy could be the result of unstated assumptions on commenters’ parts:
●

One possibility is that commenters are aware of (but do not acknowledge
expressly) a more significant deficit in associated persons failing to act
reasonably, which the Board has not detected through its oversight, such that there
will be considerably more opportunities for enforcement under the amended rule
than the Board has assumed in its analysis. In that case, the Board would expect
to see more cases potentially being brought, with more benefits from enhanced
compliance with PCAOB standards, and more costs from the actions that
individuals would take to come into compliance and demonstrate the
reasonableness of their actions if challenged.

●

Another possibility is that commenters believe that the PCAOB would exercise its
discretion under the amended rule irresponsibly—choosing to pursue cases
against individuals over differences in reasonable judgments, or cases where an

Conversely, if the number of additional cases declines over time due to changes in auditor
behavior in response to the Rule 3502 enforcement risk, this may translate into an increase in benefits discussed
below.
individual had only a remote connection to, or was responsible for only a small
fraction of, the decision-making process that led to a firm’s violation—and thus
they believe that the unintended consequences (e.g., self-protective behaviors)
would be more significant than staff estimates. The Board does not believe that
commenters’ concerns are warranted. As described, the Board intends to deploy
its prosecutorial discretion responsibly, informed by the recommendations of its
staff, and any sanctions imposed by the Board are subject to de novo review by
the Commission,168 all of which guides the Board’s exercise of discretion in
determining what matters to pursue.
The Board discusses these points in more detail below.
1.

Benefits

This subsection presents the expected benefits of the amendment, particularly
enhancements in regulatory efficiency and individual accountability, as well as positive impacts
on capital markets. Several commenters agreed with the Board’s analysis, while others
disagreed with certain aspects of the Board’s assessment of the benefits. The Board discusses
these in more detail below.
One commenter asserted that the benefits discussion in the Economic Analysis section of
the Proposal is high-level and lacks application of the specifics of the amendment. The benefits
discussions—in the Proposal and in this release—however, touch upon a crucial aspect of the
amendment, which involves expanding the PCAOB’s enforcement authority to discipline
associated persons for negligently contributing to violations of a firm. While the discussion may
appear broad, it is intended to highlight the overarching benefits of this expansion, including
enhancing individual accountability, strengthening investor protection, and promoting greater
adherence to applicable laws, rules, and professional standards.

69930, at 2-3.

See Section 107(c) of Sarbanes-Oxley; see also, e.g., S.W. Hatfield, C.P.A., SEC Release No. 34-

The following sections discuss regulatory efficiency and individual accountability and
expected impacts on capital markets.
i.

Regulatory Efficiency and Individual Accountability

The amendment can improve regulatory efficiency by enabling the PCAOB to bring a
case involving negligence against a firm and the responsible relevant associated person(s), rather
than referring part or all of the case to the Commission or charging only the firm. Under the
status quo, the Commission (as well as other authorities such as a state board of accountancy),
but not the PCAOB, can bring such cases. By contrast, the PCAOB can only sanction the firm
and defer to the Commission to take action against the negligent individual (as the Commission
deems appropriate).
By enabling the PCAOB to address violations by a firm and contributory violations by its
associated persons concurrently, the amendment ensures that individuals who fail to meet their
responsibilities with reasonable care are held accountable. This method of reinforcing individual
accountability and facilitating improvement among practitioners elevates overall audit quality,
benefiting both firms and investors by reducing the likelihood of negligent conduct.
a.

Effects on Associated Persons

Enabling the PCAOB to hold individuals accountable can lead to more deterrence among
all individual associated persons. Currently, individuals may act inappropriately if they discount
the likelihood of public sanction because the PCAOB lacks the ability to bring charges for
negligent contributory conduct, although they may not be able to avoid sanction by the
Commission or private sanction by their firms. However, the imposition of a firm’s disciplinary
action against individuals depends on the detection and investigation of the individuals’
misconduct. Detection, in turn, may depend on the frequency and efficacy of external review
processes, e.g., PCAOB inspections. Additionally, without a noncompete agreement, a firm
cannot prevent a partner from associating with a different registered public accounting firm and
performing issuer or broker-dealer audit work, or from becoming employed by an issuer or

broker-dealer in an accountancy or financial management capacity; in contrast, a PCAOB
sanction may do so.169 Finally, a firm cannot suspend an individual’s CPA license, but a
PCAOB sanction can lead to collateral consequences with relevant state accountancy
authorities.170
Because of the reasons discussed above, adding the PCAOB as an additional enforcer
may increase auditors’ perception that negligent conduct may be detected, investigated, and
effectively sanctioned; doing so therefore can provide additional deterrence against misconduct,
even though the risk of liability resulting from the additional deterrence is not a large one insofar
as the Commission currently has the authority to discipline associated persons for negligently
causing a firm’s violations. Academic literature also suggests that public authorities’ sanctioning
tools (e.g., public censure, fines, associational prohibitions) deter future misconduct more
effectively than private reprimands by a firm.171
By increasing individual accountability and the potential for liability, the amendment can
provide incremental deterrence against future violations and, hence, enhance incentives for
individuals to perform important roles with reasonable care. Individuals that exercise reasonable

See Section 105(c)(7) of Sarbanes-Oxley.

See, e.g., N.Y. State Rules of the Board of Regents § 29.10(f); see also Section 105(d)(1) of
Sarbanes-Oxley (requiring the Board to report disciplinary sanctions it imposes to, among others, “any appropriate
State regulatory authority or any foreign accountancy licensing board with which [a sanctioned] firm or person is
licensed or certified”).
Also, a firm may expel a partner, but such an action is unlikely to be public (e.g., a private settlement may
contain nondisclosure and antidisparagement clauses) and thereby is less likely to be an effective deterrent to
associated persons of other firms as compared to a public sanction. Similarly, a firm may be able to inflict a private
financial penalty (e.g., through a claw-back or forfeiture of paid-in capital or deferred compensation). However, a
firm may not have effective provisions in its partnership agreements or may view enforcing those clauses as
uneconomical if forced to litigate them as a contractual dispute.
171
See, e.g., John T. Scholz, Enforcement Policy and Corporate Misconduct: The Changing
Perspective of Deterrence Theory, 60 Law & Contemp. Probs. 253, 265 (1997). Scholz states:

When corporations have the means of punishing subordinates for illegal behavior, punishing the
corporation rather than individuals responsible for wrongdoing may serve to strengthen the corporation’s private
enforcement system. Criminal prosecution of individuals will be necessary, however, whenever the potential gains
to the individual from illegal behavior far exceed the worst punishment the firm could impose.
See also Michelle Hanlon & Nemit Shroff, Insights Into Auditor Public Oversight Boards: Whether, How,
and Why They “Work”, 74 J. Acct. & Econ. 1, 4 (2022) (“We find that the majority of respondents think that POB
[Public Oversight Board] inspectors have greater authority (enforcement options) than peer-reviewers and that the
culture at POBs is more conducive to detecting auditing deficiencies.”).

care, in turn, may contribute to better compliance practices in their firms. This change is
expected to lead to more diligent adherence to professional standards. In fact, in support of the
amendment, one commenter contended that the heightened level of deterrence would reduce the
risk of substandard audits by encouraging auditors to adhere to professional standards and
regulations to avoid liability.
The amendment’s effect as a deterrent to auditor misconduct generated different
viewpoints from commenters. Some commenters indicated that reducing the liability threshold
from recklessness to negligence would deter misconduct, lead to more careful work by auditors,
and enhance audit quality. These commenters also indicated the proposed change in liability
would boost public confidence, increase investors’ confidence in financial statements, and
strengthen the financial markets. One commenter suggested that improvements in audit quality
will reduce financial misstatements and omissions as well as auditor litigation risk and costs to
investors resulting from such litigation. This is consistent with the Board’s analysis presented
here.
By providing incremental deterrence and, hence, enhancing individual auditors’
incentives in the performance of their audits, the amendment can improve audit quality.
Academic literature suggests that auditors’ incentives to perform high-quality audits can increase
with greater enforcement.172 Furthermore, in general, academic research provides evidence that
enforcement proceedings have a deterrent effect173 and can potentially improve audit quality of
non-sanctioned entities that are aware of sanctions imposed on others.174 Other related literature

See, e.g., Ralf Ewert & Alfred Wagenhofer, Effects of Increasing Enforcement on Financial Reporting
Quality and Audit Quality, 57 J. Acct. Res. 121, 123 (2019) (“Our main finding is that auditing and enforcement are
complements in a low-intensity enforcement regime but can become substitutes in a strong regime. The auditor’s
incentives to perform a high-quality audit increase with greater enforcement because the expected penalty rises, and
they decrease with lower anticipated earnings management.”).
See Robert H. Davidson & Christo Pirinsky, The Deterrent Effect of Insider Trading Enforcement
Actions, 97 Acct. Rev. 227, 227 (2022) (“Insiders who have witnessed [a Commission] enforcement action have a
lower probability for future conviction than their unexposed peers.”).
174
See, e.g., Phillip Lamoreaux, Michael Mowchan & Wei Zhang, Does Public Company Accounting
Oversight Board Regulatory Enforcement Deter Low-Quality Audits? 98 Acct. Rev. 335, 339 (2023) (“We find that
audit firm responses to PCAOB enforcement only occur following sanctions of like-sized firms. That is, small firm
responses only follow sanctions of small firms and large firm responses only follow sanctions of large firms.

also discusses the role of regulation in providing auditors with incentives for improving audit
quality.175
By contrast, one commenter asserted the amendment does not deter conduct because
penalties are not an effective method to deter one-time mistakes, inadvertence, and errors in
judgement. Another commenter expressed a concern that the PCAOB did not explain how the
amendment would result in Rule 3502 becoming a more effective deterrent than the current
formulation of Rule 3502. Other commenters expressed skepticism that the amendment will
incentivize individuals or change behavior. One commenter expressed concern that the
amendment may not incentivize the negligent or reckless auditors as intended because those
individuals may be the least risk averse. The Board considered these commenters’ perspectives
as well as academic research noted above that suggests enforcement proceedings have a deterrent
effect.176 The Board believes that there is sufficient support for the Board’s belief that the
amendment would enhance deterrence (albeit incrementally) and that the deterrence would lead
to benefits.
One commenter stated that the Proposal implied that “the discipline imposed by a firm
(whether financial penalty or even expulsion) is less likely to be an effective deterrent to others’”
misconduct compared to public sanction, but that there was a lack of evidence in the Proposal to
support such a claim.177 Unlike internal disciplinary measures, public sanctions are visible to

Specifically, following the PCAOB sanction of a small audit firm, the likelihood of misstatement is 2.2 percentage
points lower for clients of competing non-sanctioned small audit firm offices in the same [Metropolitan Statistical
Area]. In contrast, following PCAOB sanctions of a large audit firm, the likelihood of misstatements decreases by
2.6 percentage points for clients of non-sanctioned audit offices within the sanctioned audit firm.”).
See, e.g., A.C. Pritchard, The Irrational Auditor and Irrational Liability, 10 Lewis & Clark L.
Rev. 19, 19 (2006) (“Audit quality is promoted by three incentives: reputation, regulation, and litigation.”).
176
See, e.g., Ralf Ewert & Alfred Wagenhofer, Effects of Increasing Enforcement; Robert H.
Davidson & Christo Pirinsky, The Deterrent Effect of Insider Trading Enforcement Actions; Lamoreaux, et al., Does
Public Company Accounting Oversight Board Regulatory Enforcement Deter Low-Quality Audits?
177
Comment Letter from National Association of State Boards of Accountancy at 2 (Oct. 24, 2023).
Another commenter expressed that the firm’s approach to prevent and respond to instances of negligence in
response to inspection findings may impact the individual more, as the firm’s actions may more directly dictate an
individual’s future. But as discussed above, while the Board acknowledges that the PCAOB’s inspection program
plays a vital role in enhancing audit quality, the PCAOB’s enforcement program plays a distinct but complementary
role in holding firms and associated persons accountable for violations, and thereby punishing and deterring

everyone, including potential clients and employers.178 This public visibility may result in all
associated individuals exercising greater care while carrying out their responsibilities.
Therefore, as discussed in more detail above, the Board believes that public discipline can
enhance the deterrence effect beyond what internal discipline can achieve, making it a key tool
for enforcing accountability and upholding high standards in the audit profession.179
b.

Effects on Firms

Some firms choose to invest in staffing and resources voluntarily to comply better with
regulatory requirements. Yet, competitive pressures from other firms that prefer not to make
similar investments may lead these firms to reconsider their investment decisions. With the
amendment, however, all firms lacking adequate staffing and resources would now face
enhanced possibility of sanctions of their associated persons, prompting them to make additional
investments. This change is expected to improve audit quality by counteracting underinvestment
of staffing and resources, thereby reducing noncompliance by audit firms. This collective uplift
mitigates any single firm’s competitive concerns and promotes broader societal benefits by
fostering a more robust and reliable compliance environment resulting in improved overall audit
quality.
Individual auditors, perceiving greater litigation and liability risks, are likely to change
their behavior and take their professional responsibilities more seriously, ensuring that their

unlawful conduct. In other words, there is a distinction to be made between firm’s quality control and private
sanctions deterring misconduct.
On one hand, if a person receiving a private sanction remains an associated person of the same
firm, such a firm may have incentives (e.g., to win new business or keep existing business) not to disclose the
private sanction to clients, prospective clients, or the public, or may have agreed not to do so. On the other hand, if
a person receiving a private sanction leaves the firm, whether as part of the sanction or voluntarily, and then seeks,
for example, to join a new firm (or an issuer or broker-dealer in an accountancy or financial management capacity),
the prior firm might not disclose details about the sanction to the new prospective firm or employer, whether per
nondisclosure or anti-disparagement provisions or as a matter of general policy.
Furthermore, the sufficiency of private sanctions is hard to square with the PCAOB’s authority to discipline
formerly associated persons of firms, as provided by Section 929F of the Dodd-Frank Wall Street Reform and
Consumer Protection Act. See Section 2(a)(9)(C) of Sarbanes-Oxley. If a private sanction (i.e., expelling the
associated person from the firm) were sufficient, Congress presumably would not have given to the PCAOB the
power to impose a public sanction against an individual who is no longer associated with a registered firm.
See, e.g., Scholz, Enforcement Policy and Corporate Misconduct 265.

actions are objectively reasonable under the circumstances. This shift in individual behavior can
lead to greater compliance by firms with their respective legal requirements, including auditing
standards, quality control standards, and ethics and independence standards, which were enacted
to promote audit quality and investor interests. In other words, by preventing individual
negligence, the amendment can also mitigate firm negligence, as individuals’ actions directly
impact firm actions, such as implementing better quality control systems.180 One commenter
agreed that the amendment will result in firms being more likely to comply with their respective
legal requirements.
ii.

Capital Market Impact

As explained above, the amendment can introduce an incremental deterrent effect, which
could lead to improvements in audit quality. Increased audit quality can improve financial
reporting quality and enhance investors’ confidence in the information provided in companies’
financial statements. Because auditors have a responsibility to provide reasonable assurance
about whether the financial statements are free of material misstatement, higher audit quality
could increase the likelihood that the auditor would discover a material misstatement or would
qualify its audit opinion when a material misstatement exists and is not corrected by
management. If a Commission registrant were to include such a qualified audit opinion in a
filing with the Commission, then Commission staff may deem the registrant’s filing to be
deficient.181 Furthermore, a qualified audit opinion may evoke negative market reactions. For
these reasons, higher audit quality could incentivize issuers to take steps to ensure their financial
statements are free of material misstatement. Issuers could take these steps proactively, prior to
the audit, or in response to adjustments requested by the auditor.

180
Quality control systems play a fundamental and widespread role in overall audit quality. These
systems are essential in ensuring the audit process adheres to professional standards. A robust quality control
system can help firms to detect and address factors that compromise audit quality.
181
See 17 CFR 210; see also Financial Reporting Manual § 4220, Division of Corporation Finance,
SEC, available at https://www.sec.gov/divisions/corpfin/cffinancialreportingmanual.pdf.

Financial statements that are free of material misstatement are of higher quality and more
useful to investors. In particular, more reliable financial information allows investors to improve
the efficiency of their capital allocation decisions. Investors may also perceive less risk in
capital markets generally, leading to an increase in the supply of capital.182 An increase in the
supply of capital could increase capital formation while also reducing the cost of capital to
companies.183 A reduction in the cost of capital reflects a welfare gain because it implies
investors perceive less risk in the capital markets.
Commenters agreed that the amendment will enhance investors’ confidence both in
audits and in the information provided in companies’ financial statements, as well as have an
incremental positive effect on capital-market efficiency.
2.

Costs

This section discusses the expected costs of the amendment. Because the amendment is
expected to lead to an increase in the number of enforcement cases by the PCAOB, the Board
discusses costs to firms and individuals, and costs to issuers.
The Board’s assessment of the degree of the anticipated costs is affected by the Board’s
estimate of the number of additional cases to be brought, as discussed at the outset of this
section. As discussed there, the amendment is expected to result in a slight increase in the
number of PCAOB enforcement cases (two to three per year) due to the changed liability
threshold. Any additional cases due to the amendment will involve legal costs, which could

182
See, e.g., Hanwen Chen, Jeff Zeyun Chen, Gerald J. Lobo & Yanyan Wang, Effects of Audit
Quality on Earnings Management and Cost of Equity Capital: Evidence from China, 28 Contemp. Acct. Res. 892
(2011); Richard Lambert, Christian Leuz & Robert E. Verrecchia, Accounting Information, Disclosure, and the Cost
of Capital, 45 J. Acct. Res. 385 (2007).
183
Cost of capital is the rate of return investors require to compensate them for the lost opportunity to
deploy their capital elsewhere. Equivalently, cost of capital is the discount rate investors apply to future cash flows.
Cost of capital depends on, among other factors, the riskiness of the underlying investment. Accordingly, the rate of
return required by equity holders—cost of equity capital—and the rate of return required by debt holders—cost of
debt capital—may differ to the extent equity and debt securities expose investors to different levels of risks. For
theoretical discussion on the link between the greater availability of information to investors and cost of capital, see,
for example, Richard A. Lambert, Christian Leuz & Robert E. Verrecchia, Information Asymmetry, Information
Precision, and the Cost of Capital, 16 Rev. Fin. 1, 16-18 (2012); David Easley & Maureen O’Hara, Information and
the Cost of Capital, 59 J. Fin. 1553, 1571 (2005); and William Robert Scott & Patricia C. O’Brien, Financial
Accounting Theory 412 (Prentice Hall 3d ed. 2003).

result in substantial costs for the firms and individuals involved. Staff could not provide an
estimate for the per-case cost; however, the small number of incremental cases could limit the
aggregate cost of the amendment, in particular, when the total number of issuers and brokerdealers is taken into account.
i.

Costs to Firms and Individuals

With the anticipated increase of enforcement proceedings of two to three per year, certain
firms will incur direct and indirect costs with respect to those proceedings as a result of the
amendment. These costs include legal costs and broader financial and operational impacts.
Direct costs include increased hours and resources (including attorneys, experts, and
other personnel) to prepare for, respond to, and defend against investigations and charges—
actual or anticipated. The Board expects that, in most cases, the costs of defending associated
persons who have negligently contributed to a firm’s violation will be borne by the firm.184 The
direct defense costs can be grouped into two categories based on the stage of the matter:
●

First, during the investigative stage, staff works to determine whether it is likely
that a primary violation occurred and if so, whether an individual directly and
substantially contributed to the violation. Because this inquiry already takes place
(albeit to determine whether someone acted recklessly rather than negligently),
the incremental resource cost to firms at the investigative stage will not be
significant.

●

Second, staff works to determine whether the individual acted negligently and
notifies the potential respondent of that determination. After this point, the direct
costs of the amendment to firms may increase more significantly.185 Staff lacks

184
That is, the Board believes that the firm would have advancement and indemnification agreements
in place with relevant firm personnel. In certain circumstances, it is possible that an individual respondent that is
found liable would have to reimburse the firm (or the firm’s insurer) for defense costs, but the extent and nature of
that obligation depends on the facts and circumstances as applicable to the terms and conditions of the
indemnification and insurance agreements.

One commenter expressed concern that the PCAOB’s investigations and enforcement could
become at least marginally more costly given enforcement requirements of the negligence criteria. The Board
agrees; there could be incremental costs to the PCAOB of pursuing negligence-based cases. The Board expects
sufficient data to reliably estimate the costs of each matter because the costs
depend on numerous factors, including the duration of the matter,186 the
complexity of the matter (e.g., a complex audit case versus a simpler case of
noncompliance with PCAOB filing requirements), the number and nature of
counsel and expert witnesses retained, and so forth.187
Apart from these direct defense costs, if the individual is adjudicated as having acted
negligently and a sanction is imposed, the individual would incur potential financial costs of
having been found liable for failing to act with reasonable care and thereby contributing to the
firm’s violation. To the extent that there are civil money penalties, they would be assessed
against the individual.188
A firm that has indemnification agreements in place that would compel it to bear the
financial burden of defending or indemnifying associated persons may choose to purchase
insurance to help alleviate the contingent financial burden. If so, it would have to buy insurance
in the market, and the pricing of such insurance may depend on the risks of loss identified by the

these would be generally proportional to the costs discussed above for potential individual respondents (e.g., both
sides may need to hire expert witnesses to litigate whether conduct met the standard of care). Another comment
letter expressed doubt that the firm would cover an individual’s defense costs if the individual chose to mount a
defense that involved attributing responsibility to the firm. The Board believes that in these circumstances, it is
more likely that the firm would nonetheless have to continue abiding by its advancement and indemnification
obligations, but that the firm might then have to retain separate counsel for the individual, which would increase the
overall costs as discussed (given an increase in complexity and number of counsel).
As set out in the PCAOB rules, a PCAOB enforcement case has numerous stages where the
proceedings might halt. For example, a persuasive Rule 5109(d) submission may convince the staff not to
recommend proceedings; the Board may determine not to institute proceedings under Rule 5200; the Hearing
Officer might dismiss the matter; the matter might end with a Hearing Officer’s initial decision; or the initial
decision might be appealed to the Board, the Commission, or the courts. The longer the litigation, the greater the
costs (e.g., attorney fees, expert witness fees, and opportunity costs).
These factors make it impracticable to construct a quantitative estimate of the anticipated cost—
there is no “typical” case that the Board could use to construct an estimate that would be extensible across the two to
three cases per year anticipated here. While the Board requested information about costs, including relevant data,
commenters did not provide specific data about defense costs that would permit the Board to construct a quantified
estimate. The Board’s analysis therefore continues to be qualitative in nature.
If not foreclosed from doing so, individuals might seek to have their firm bear these financial costs
pursuant to indemnification agreements, insurance agreements, or otherwise. However, such agreements or
arrangements might not cover civil money penalties.
underwriting process. Or a firm may self-insure against such liabilities, in which case the
amount held in reserve or reinsurance may vary based on anticipated losses.
There may also be opportunity costs as enforcement proceedings distract individuals
from their everyday responsibilities. The opportunity costs relate to diversion from engagement
tasks and other work.
Further, an individual may incur reputational costs, such as adverse employment or career
events. Commenters asserted that the effects of the Proposal would include causing harm to
individuals’ careers (e.g., by being removed from issuer client service roles or being demoted)
and collateral consequences (e.g., follow-on proceedings by state boards of accountancy or
disciplinary measures by other regulators) consistent with having been found to have violated the
Board’s standards, and hence the federal securities laws. The Board agrees and recognizes that
these costs could exist in any proceeding brought under the amendment. 189 While the Board
may consider the relevant facts and circumstances in determining the sanction it believes
appropriate in the public interest, the Board recognizes that additional consequences beyond the
sanctions imposed in the case frequently occur. The Board acknowledges that these
consequences could be significant to the individual against whom they are imposed. However,
the Board also believes that these consequences would not be significant in the aggregate, taking
into account the number of associated persons across all registered firms and in light of the
anticipated number of additional proceedings likely to be brought as a result of the amendment.
Certain commenters raised concerns about the potential increase in legal costs for firms.
In particular, they noted the increased legal liability that associated persons might face under the
amendment, which may result in higher costs of firms defending their associated persons and
liability insurance for firms. Other commenters voiced concerns about the potential for increased
state-level investigations and disciplinary proceedings against individuals, which could lead to

189
See J. Krishnan, M. Li, M. Mehta & H. Park, Consequences for Culpable Auditors, available at
https://ssrn.com/abstract=4627460.

the suspension or revocation of professional licenses. However, another commenter asserted the
amendment’s contributory negligence standard would better align the PCAOB’s liability
approach with the majority of the states’ liability approach, which does not limit individual
liability for negligent conduct.
The Board agrees that the amendment could increase legal and liability insurance costs,
as well as the number of state investigations. Those incremental costs, however, would not be
significant based on the two to three additional cases expected per year.
Several commenters highlighted that the amendment could significantly increase audit
firms’ litigation risk and legal liability for small firms. They indicated that increased costs,
encompassing defense expenditures and opportunity costs, are expected to disproportionately
affect small firms, which may lack the resources and market influence to offset these expenses.
The commenters cautioned that small firms with a limited capacity to absorb these costs or
demand higher fees could face significant challenges.
The Board acknowledges that litigation risk and legal liability involve costs, and those
costs may have a greater impact on small firms, where direct costs and distractions are less
absorbable by firms’ other activities or personnel. For example, small firms are especially
vulnerable to increases in legal costs, as small firms may disproportionately bear the burden of
insuring against the risk. However, the Board believes certain features of the market and this
amendment would limit these effects.
First, smaller firms typically have simpler supervisory structures that may make it easier
for these firms to supervise their partners to help to ensure that partners are acting with
reasonable care.190 They also may be less impacted by the concern raised by other commenters
that responsibility for firm compliance could be divided up among many individuals, with

The Board acknowledges that smaller firms may have fewer resources to invest in dedicated
supervisory structures. However, given that their respective QC systems oversee a smaller number of engagements,
the same level of resources may not be necessary for the firm to nonetheless obtain reasonable assurance that their
personnel comply with applicable professional standards and regulatory requirements.
accountability for any one act of negligence being more difficult to establish. Second, in
assessing insurance costs, the Board distinguishes between market-wide effects (i.e., a marketwide increase in directors & officers or professional liability coverage) and specific-firm effects
(i.e., a specific firm experiencing an increase in the cost of insurance if it has a specific claim
brought against its associated persons). The Board believes the market-wide effects are likely to
be smaller: Again, the Commission already has the authority to bring negligence-based cases,
and the staff has estimated that the amendment would result in an average of two to three more
cases per year. The Board believes it less likely that the amendment or resulting incremental
claims experience would cause a significant shift in underwriters’ perception of risk and thus the
availability or pricing of insurance for smaller firms in general. However, the Board
acknowledges that the impact on a specific firm that is involved in a specific matter could be
more significant; an increase in its individual claims experience could cause an increase in the
cost of coverage and/or retention amounts in the future or make it more difficult to secure
acceptable coverage.
In addition to the direct costs described above, the amendment could result in indirect
costs as individuals adjust their behavior and put forth additional effort to ensure they do not
contribute to a firm’s violation through their negligence. However, to the extent that these
indirect costs are incurred to bring previously negligent conduct up to a level of reasonable care,
these costs are properly allocable to the underlying law, rule, or standard that the firm is alleged
to have violated, as those provisions each assume a level of costs necessary for the firm to
comply.
One commenter expressed concerns about a requirement in the Proposal that involves the
application of “directly and substantially” only to the sufficiency of the connection between an
associated person’s conduct and a firm’s violation. The commenter asserted that this is an
important change from the present rule, under which an alleged violator must know (or
recklessly not know) not only that they are contributing to a violation, but also that the

contribution is direct and substantial. The Board notes that its analysis, which includes staff
estimate of two to three additional cases per year based on the Proposal, takes into account the
application of “directly and substantially” only on the sufficiency of the connection between the
associated person’s conduct and a firm’s violation. The Board does not believe that this change
would be a significant driver of costs to individuals or firms in the aggregate.191
ii.

Costs to Issuers (Audit Fees)

To the extent that firms pass on some of the costs to their audit clients, the amendment
could result in audit fee increases to cover firms’ compliance costs related to the amendment.
Consistent with this notion, academic studies find that increased enforcement intensity can lead
to temporary increases in audit fees for some issuers.192 Further academic research provides
evidence that audit fees increase with the auditor’s assessment of business risk, which includes
risk of regulatory sanctions, among others.193 The findings indicate that the increases in audit
fees are due to the increase in the number of audit hours, but not hourly rates.
3.

Potential Unintended Consequences

The following discussion describes potential unintended consequences that the Board
considered and, where applicable, factors that mitigate the adverse effects, such as the steps the
Board has taken or the existence of countervailing forces.

191
Nor would it be a significant contributor to costs in particular cases; indeed, it might save costs by
avoiding effort seeking to establish the reasonableness of the individual’s belief as to the directness and
substantialness of the participation or lack thereof where a direct and substantial connection in fact has already been
established.
192
Annita Florou, Serena Morricone & Peter F. Pope, Proactive Financial Reporting Enforcement:
Audit Fees and Financial Reporting Quality Effects, 95 Acct. Rev. 167, 167 (2020) (“We examine the costs and
benefits of proactive financial reporting enforcement by the U.K. Financial Reporting Review Panel. Enforcement
scrutiny is selective and varies by sector and over time, yet can be anticipated by auditors and companies. We find
evidence that increased enforcement intensity leads to temporary increases in audit fees and more conservative
accruals. However, cross-sectional analysis across market segments reveals that audit fees increase primarily in the
less-regulated AIM segment, and especially those AIM companies with a higher likelihood of financial distress and
less stringent governance. On the contrary, less reliable operating asset-related accruals are more conservative in the
Main segment and, in particular, those Main companies with stronger incentives for higher financial reporting
quality. Overall, our study indicates that financial reporting enforcement generates costs and benefits, but not
always for the same companies.”).
193
See, e.g., Timothy B. Bell, Wayne R. Landsman & Douglas A. Shackelford, Auditors’ Perceived
Business Risk and Audit Fees: Analysis and Evidence, 39 J. Acct. Res. 35 (2001).

i.

Self-Protective Behavior

The Board recognized in the Proposal that auditors might engage in self-protective
behavior.194 Specifically, while the threat of enforcement action can motivate individuals to act
in a manner consistent with their legal obligations, it can also result in excessive monitoring and
self-protective behavior, leading to an inefficient allocation of time and resources. The effect on
audit quality may change as the degree of intervention increases. Individuals may spend more
time on a task than is necessary to accomplish it at the appropriate level of care. Similarly,
individuals may excessively document the nature of their task performance to demonstrate
compliance in a future proceeding. Time spent on unproductive, self-protective activities may
detract from other important obligations and directly impact audit quality.
Many commenters echoed this concern and emphasized the potential significance of this
issue, including that its effects may discourage effective collaboration between and among
accountants, especially in complex audits. Some of these commenters expressed concern that
moving to a negligence standard for contributory liability would lead to sanctions of
professionals who make judgments in good faith. A few commenters asserted that emphasizing
every error an auditor makes will encourage auditors to focus on defensive auditing—which
could result in a decrease in audit quality. These commenters’ concerns center on the prospect
that increased liability risk could lead auditors to prioritize self-protective measures (e.g.,
overemphasizing compliance documentation) and excessive monitoring over more important
audit tasks, particularly in small- and mid-sized firms with limited resources. Another comment
letter raised concerns about the impact of coercive enforcement strategies on audit practices,
suggesting that such strategies could lead to defensive behaviors rather than genuine quality
improvements.

See 2023 Proposing Release at 26.

The Board notes that the compliance and documentation requirements in applicable
professional standards are designed to sufficiently demonstrate compliance, thus mitigating the
need for excessive, unproductive documentation.195 Furthermore, the possibility of such selfprotective behavior is not new. As discussed above, the Commission currently can initiate
enforcement proceedings against individuals for negligent contributory conduct.196 And, as
commenters have pointed out, the PCAOB currently possesses a robust enforcement regime
covering negligent primary conduct. Therefore, the risk of litigation and sanctions is already a
factor in the current regulatory environment, driving the existing need for individuals to act with
reasonable care and to be able to demonstrate their compliance. Thus, while the Board
acknowledges some inefficient behavior could result from the amendment, consistent with the
incremental increase in deterrence that the Board posits above, the Board continues to believe
that the likelihood that the amendment would drive significant increases in self-protective
behavior is low.
ii.

Lack of Available Personnel or Compensation Enhancements

As recognized in the Proposal, excessive risk of enforcement action could unintentionally
discourage auditors from accepting important audit roles if they fear being held liable, leaving
these roles to be accepted by less cautious or less qualified individuals.197 Alternatively, auditors
may seek to offset the increased risk by demanding higher compensation for taking certain roles
or responsibilities, which could have downstream effects on audit fees.
Many commenters remarked about the amendment’s potential negative impact on the
accounting and audit workforce. These commenters highlighted an existing “talent crisis,”
especially affecting small- and mid-sized firms. They noted that the amendment’s threshold for

See, e.g., AS 1215, Audit Documentation.

196
Also, as discussed in section C above, the AICPA’s Code of Professional Conduct makes certain
negligent contributory acts by individuals an “act discreditable to the profession.” See AICPA Code of Professional
Conduct, ET § 501.05(a), Negligence in the Preparation of Financial Statements or Records, recodified at Section
1.400.040.01.
See 2023 Proposing Release at 26.

sanctionable conduct and resulting increased liability risks could intensify the crisis. The
commenters contended that the amendment might discourage talented individuals at various
career stages from engaging in PCAOB-regulated work, potentially leading to lower audit
quality, higher fees, and public company delisting. The commenters identified fear of punitive
action and a culture of defensive auditing as factors that could deter newcomers from entering
the profession and prompt experienced auditors to leave, further jeopardizing the talent pipeline.
In addition, the commenters argued that the amendment would affect the on-the-job nature of
auditors’ learning. Many of the same commenters also raised concerns that a shift to a
negligence standard might discourage experienced auditors from accepting essential roles due to
the fear of increased liability for good faith judgments. According to these commenters, a
negligence standard could dissuade risk-averse and diligent professionals integral to a firm’s
quality control system, thus affecting auditors’ development, training, and monitoring. One
commenter added that this amendment in combination with other recent proposed standards may
exacerbate the talent crisis problem.
Some commenters cited literature to support their concerns that there has been a steady
decline in the number of accounting graduates and that this is partly due to the regulatory
environment making the profession unappealing.198 While the cited studies indicate a decline in
the number of accounting graduates and professionals or a waning interest in the accounting
profession, they do not expressly point out regulatory oversight as a reason for the decline.
Rather, according to one of these studies, the 150 CPA credit hour requirement as well as
relatively low starting salaries are the two main reasons for not choosing accounting as a major
among college students who considered accounting.199
198
See Association of International Certified Professional Accountants, 2023 Trends Report (2023),
available at https://www.aicpa-cima.com/professional-insights/download/2023-trends-report; see also Center for
Audit Quality and Edge Research, Increasing Diversity in the Accounting Profession Pipeline: Challenges and
Opportunities (2023) (“CAQ–Edge Report”), available at https://thecaqprod.wpenginepowered.com/wpcontent/uploads/2023/07/caq_increasing-diversity-in-the-accounting-profession-pipeline_2023-07.pdf.

See CAQ–Edge Report at 7; see also Daniel Aobdia, Qin Li, Ke Na & Hong Wu, The Influence of
Labor Market Power in the Audit Profession, Social Science Research Network (SSRN) (2024), available at
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4732093 (“[W]e confirm that audit offices in more
The Board acknowledges the commenters’ concerns about the amendment’s potential
impact on auditing personnel. However, the lack of available auditing personnel is likely the
result of the interplay between numerous factors in the labor market. On the supply side, a
notable decline in the number of entry-level auditors, as evidenced by a significant decrease in
the number of new CPA candidates, suggests a waning interest among entry-level professionals
in auditing careers.200 A study found that for graduates who have already completed the 150
CPA credit hour requirement, finding the time to study for the CPA exam and the overall rigor of
the exam are the most significant challenges to licensure.201 Other contributing factors may
include the retirement of baby boomers and a lack of diversity in the profession.202
On the demand side, as the economy grows, businesses evolve, and more companies go
public, the demand for auditors will increase.203 Furthermore, technological advancements and
the integration of digital tools into business processes have created a need for auditors with
expertise in cybersecurity, blockchain, and data analytics.204 Taking into account the current
state of supply of and demand for auditors, attracting talent likely would depend primarily on

concentrated labor markets have greater labor market power and exercise it in the form of higher skill requirements
and greater required effort from their auditors, at similar or slightly lower wages.”).
According to the 2023 Trends Report, the number of new CPA candidates decreased from 48,004
in 2016 to 30,251 in 2022.
201

See CAQ–Edge Report at 15.

202
See Drew Niehaus, Fixing the Crisis in Accounting: Five Steps to Attracting Tomorrow’s CPAs,
CPA Journal (Nov. 2022), and Mark Maurer, Job Security Isn’t Enough to Keep Many Accountants from Quitting,
Wall St. J. (Sept. 22, 2023), available at https://www.wsj.com/articles/accounting-quit-job-security-675fc28f.
203
See Bureau of Labor Statistics, Occupational Outlook Handbook: Accountants and Auditors,
available at https://www.bls.gov/ooh/business-and-financial/accountants-and-auditors.htm#tab-6 (“In general,
employment growth of accountants and auditors is expected to be closely tied to the health of the overall economy.
As the economy grows, these workers will continue being needed to prepare and examine financial records. In
addition, as more companies go public, there will be greater need for public accountants to handle the legally
required financial documentation. The continued globalization of business may lead to increased demand for
accounting expertise and services related to international trade and international mergers and acquisitions.”).

See, e.g., Najoura Elommal & Riadh Manita, How Blockchain Innovation Could Affect the Audit
Profession: A Qualitative Study, 37 J. Innovation Econ. & Mgmt. 37, 38 (2022) (“According to Alles (2015), the use
of advanced technologies and blockchain by audit clients would be the catalyst for the adoption of these
technologies by auditors. Blockchain, associated with other digital technologies, could change the audit process by
modifying the way in which the auditor accesses data, collects evidence, and analyzes data (Rozario, Thomas,
2019). Auditors have the choice only to integrate these technologies and to change their organization and their
process at the risk of losing their legitimacy in the audit market.”).
factors under firms’ control, such as auditor compensation, especially given that college students
have cited low starting salary as one of the main hurdles to choosing accounting as a major.
Thus, while the Board acknowledges the potential for this amendment to affect the
market for audit services, the Board disagrees with commenters’ assessment of the magnitude of
these risks. First, the Board continues to believe that the Board is not establishing a novel
burden on individuals to refrain from acting negligently and thereby contributing to a firm’s
violation; instead, the Board is merely providing a mechanism for the PCAOB to discipline
individuals who fail to meet that standard. The effect is, therefore, the incremental probability of
PCAOB enforcement. However, this increased probability is not so novel and significant that it
would be expected to impact noticeably the market for associated persons’ services. Second,
firms have a tool at their disposal—adjusting compensation—that could tend to increase the
supply of these services as needed, although there may be short-term displacements. The
increased cost of labor may be absorbed by firms or passed to issuers and investors through
increased audit fees.
iii.

Reduced Competition in the Audit Market

The amendment to Rule 3502 could disproportionately impact small- and medium-sized
firms if they are less able to bear the cost of defending their personnel. As discussed above,
these costs include attorney fees to defend associated persons against charges and distracting
personnel from generating income from the performance of client services. In an extreme case, a
firm might not be able to sustain its practice considering the negative impact; more broadly, less
profitable firms may perceive that the risk of such costs is too significant compared to their
existing net profit from issuer and broker-dealer audit work and, therefore, decide to exit those
markets. This result could further consolidate the market for issuer and broker-dealer audit
services.
Several commenters asserted that the amendment could reduce competition in the audit
market. They noted that the increase in liability could discourage firms, especially non-U.S.

firms, from participating in U.S. issuer and broker-dealer audits. One commenter argued that the
amendment “may inadvertently create barriers” for smaller firms and those servicing emerging
industries by elevating the risk profile of conducting audits.205 Another commenter asserted that
there has been a decline in PCAOB-registered firms auditing issuers and broker-dealers due to
regulatory burdens.
The likelihood that defense costs cause substantial changes in the relevant markets is
lowered by three factors. First, a firm may already defend against an allegation of negligent
primary conduct (brought using the PCAOB’s current authority) such that, in any additional
cases brought under the amended rule, defending individuals facing a charge of negligent
contributory conduct would likely involve common sets of facts and legal theories and could be
done more efficiently (i.e., at lower additional cost) as compared to a wholly novel proceeding.
Second, a firm may already defend an individual against an allegation of primary violations,
involving common sets of facts and legal theories related to an allegation against a firm. Third,
the Commission’s existing authority to sanction associated persons for negligent contributory
conduct means that firms’ profitability calculations should already factor in the risk of defending
personnel against charges of this nature, albeit with a modestly greater frequency in light of the
amended rule. Thus, in addition to the firm’s defense, the incremental cost of defending an
individual may not be as significant as it appears at first glance. 206
While the Board agrees that there has been a decline in the number of firms performing
audits of public companies, the Board notes that firms may decide to cease providing audits for

Comment Letter from Chamber of Digital Commerce at 1 (Nov. 2, 2023).

206
One commenter stated that the assertions in the Proposal that defense costs would be lowered by
an increase in the volume of cases to defend is not based in fact. It appears that the nature of the Board’s assertion
was misinterpreted; as discussed above, the Board believes that individuals and firms will incur additional litigation
costs to defend against charges brought under the amended rule. However, the Board has considered the nature of
those costs and how they would relate to the way that staff might investigate and make recommendations regarding
these cases, and the frequency of those charges, and the Board believes that those factors diminish the size of the
expected increase—i.e., while costs will go up, they will go up less than if firms needed to defend a wholly new
class of charges.

any number of reasons, mostly strategic in nature.207 While the amendment could lead some
firms to exit the issuer audit market because of increased risk of higher expected litigation
expenses (thus reducing competition), this exit might involve low-quality auditors and lead to
better matching between auditors and clients.208 While the amendment may induce market
shifts, the resulting landscape could be characterized by a higher concentration of more capable
and compliant audit firms, mitigating the negative impacts on the competitive landscape.
iv.

Other Distortions/Inefficiencies

One commenter expressed concern that the amendment could change the dynamics of the
settlement negotiation process during enforcement cases and “tip the scale” in the PCAOB’s
favor.209 The commenter further contended that the PCAOB may pursue weaker cases, which
would divert its resources to less meritorious cases, while another commenter asserted its belief
that the PCAOB will appropriately exercise its prosecutorial discretion. Some commenters
asserted that the amendment could have negative effects on the PCAOB’s inspections program.
One commenter noted that the amendment could cause firms to be particularly reluctant to
provide services to novel industries.
The Board emphasizes that the amendment is designed to enhance regulatory oversight
and accountability, not to unfairly “tip the scale” against firms and their associated persons. The
PCAOB is committed to using its enforcement resources efficiently, and the Board emphasizes
that enforcement proceedings are based on substantive evidence and legal principles, thereby
helping to maintain the integrity and effectiveness of the PCAOB’s overall enforcement process
to protect investors’ interests. Moreover, the Board believes that enhancements to the PCAOB’s

207
Michael Ettredge, Juan Mao & Mary S. Stone, Small Audit Firm De-registrations from the
PCAOB-Regulated Audit Market: Strategic Considerations and Consequences, Social Science Research Network
(SSRN) (2022), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3572291.
208
One study suggests that PCAOB inspections incentivize low-quality auditors to exit the market,
resulting in an overall improvement in audit quality. See Mark L. DeFond & Clive S. Lennox, The Effect of SOX on
Small Auditor Exits and Audit Quality, 52 J. Acct. & Econ. 21, 39 (2011) (“We conclude that while the PCAOB
inspections are intended to improve audit quality primarily through the remediation of poor audit practices, they also
improve audit quality by incentivizing the lower quality auditors to exit the market.”).
Comment Letter from U.S. Chamber of Commerce at 12.

enforcement program will serve as a natural complement to the inspections program; even today,
with a primary liability regime based on negligence, the vast majority of inspection deficiencies
do not result in enforcement proceedings. The Board does not anticipate that the incremental
effects of the amendment to Rule 3502 will prompt significant changes in the nature of the
inspections process that has developed over time.
The amendment is intended to strengthen the PCAOB's ability to address instances of
negligence that may harm investors or undermine the integrity of the audit process, ensuring a
more effective and transparent regulatory framework. On balance the Board believes that the
amendment will enhance audit quality, not diminish it. Enhancements in audit quality will also
benefit emerging industries: while the amendment does not specifically target these industries, it
is precisely because these industries operate in evolving regulatory and legal frameworks that
they may benefit from more thorough and diligent auditing practices. Therefore, the Board
believes that, rather than deterring firms from engaging with innovative sectors, the amendment
can serve to enhance the quality and effectiveness of audits in these industries, ultimately
benefiting both participants in the emerging industries and investors.
D.

Alternatives Considered

The Board considered two alternatives to the amendment, as discussed below.210
1.

Alternative Articulations of the Standard of Liability

Rather than amending Rule 3502 as done, the Board considered rewriting Rule 3502 to
mirror the language in the cease-and-desist provisions of the Exchange Act, 15 U.S.C. 78u-3(a).
The primary benefit of such an approach would be to facilitate interpretive alignment
with the scope of the Commission’s causing-liability regime, which may provide associated
persons with more clarity on the nature of the legal risk. However, for more than a dozen years,
the Board has developed a distinguishable body of practice under Rule 3502 through its

As discussed in section C above, the Proposal considered amending Rule 3502 to provide that an
associated person that negligently contributes to a firm’s violation need not be an associated person of the firm that
commits the primary violation. The Board decided not to adopt this aspect of the Proposal.
enforcement program—including via the rule-based requirement that any contribution to a
primary violation be “direct[ ] and substantial[ ]”—and the amended rule will maintain that
familiar practice while narrowly adjusting only the standard of liability.
In response to comments, the Board also considered other potential liability standards,
including whether to adopt a framework that would require a showing of multiple acts of
negligence to hold an individual liable for contributory conduct at the negligence level.
Commenters noted that because Section 21C proceedings are usually brought in conjunction with
Rule 102(e) proceedings, the Commission often pursues a multiple acts of negligence or a
heightened form of negligence theory. Commenters also discussed their belief that it would be
inequitable or inappropriate for the Board to hold individuals liable for one-time errors.
However, as discussed in section C above, while the Commission often chooses to bring
Section 21C and Rule 102(e) matters together, nothing requires it to do so. Similarly, under the
amendment, the Board may choose to bring a case that has repeated acts of negligence, so that an
appropriate remedial sanction can be imposed. Or, in appropriate facts and circumstances, it
may choose to bring a case that involves a single act of negligence. This optionality thus mirrors
that available to the Commission under Section 21C. Requiring multiple instances of
negligence, moreover, would not fully close the regulatory gap noted above, would not give the
Board authority that is co-extensive with the Commission, and would not fully achieve the
efficiency benefits that the amendment seeks to achieve.
2.

Removing Additional Barriers to Contributory Liability

The Board also considered an alternative that would expand the Board’s ability to hold
persons liable for contributing to firm violations by changing the “directly and substantially”
modifier that describes the relationship of an associated person’s contribution to a firm’s primary
violation, including removing it altogether. This is currently an element of proof required for the
Board to find a violation of Rule 3502.

Removing “directly and substantially” would enable the Board to use Rule 3502 to hold
accountable any individual who took part in any way in the chain of events leading to a firm’s
violation, even if only remotely. The relationship between contributory conduct and the primary
violation could be a discretionary factor to consider in bringing a proceeding in the first instance
and when determining the appropriate sanction.
This alternative could improve audit quality by ensuring that all individuals with relevant
professional responsibilities are appropriately motivated to perform their responsibilities with
reasonable care. However, this could exacerbate the costs and unintended consequences
discussed above in conjunction with the amendment. Therefore, this alternative might lead to
excessive motivation for auditors to increase defensive efforts that do not contribute to audit
quality (e.g., excessive self-protective measures in anticipation of future litigation).
The amended rule maintains the criteria of nexus and magnitude (“directly and
substantially”) for an associated person’s contribution to a firm’s violation, although it does not
require proof that the individual knew or was negligent in not knowing that their conduct would
be a direct and substantial contributor. These requirements appropriately specify the conduct the
Board considers actionable for “contributing” to a primary violation, as outlined above. This
approach tailors the incentives to individuals with the most direct responsibility for firm
compliance. In other words, the amendment continues to focus on individuals most likely
influenced by increased litigation risk leading to improved firm compliance and audit quality.
Conversely, individuals who are less involved would experience lower benefits in relation to
costs and unintended consequences.
3.

Nonenforcement Alternatives Suggested by Commenters

Several commenters asserted that an alternative to the amendment is for the Board to
provide auditors with additional guidance, training, and tools illustrating successful and
problematic practices. Commenters indicated that this could be achieved through enhanced
communication, such as issuing interpretive guidance and publishing observations from

enforcement activities, to educate auditors and to help them better understand accountability
expectations for associated persons, or through implementing a real-time consultation process
similar to the Commission’s. One commenter also expressed appreciation of the PCAOB’s
Spotlight series that is published to help users of financial statements better understand the
PCAOB’s activities and observations.
Although the Board agrees that these alternative approaches are beneficial, devoting
additional resources to activities buttressing these approaches, without addressing the existing
regulatory gap, would not yield the benefits discussed above that are associated with providing
the PCAOB with the appropriate tool to hold individuals accountable for failing to act reasonably
and contributing directly and substantially to a firm’s violation. An increase in the number of
regulators that can pursue negligent contributory conduct increases the likelihood of the conduct
being detected and deterred through a range of sanctions that can be imposed by the PCAOB,
including training.
One commenter suggested an alternative to the amendment could be to adopt standards
addressing the roles of individuals involved in designing and monitoring firms’ systems of
quality control. The commenter believes this approach would provide predictability in
enforcement of PCAOB standards and would more effectively accomplish the PCAOB’s goals.
While addressing the conduct of individuals involved in designing and monitoring a firm’s
system of quality control is important, the scope of the amendment, and Rule 3502 generally, are
broader than quality control.211 As discussed previously, the amendment aims to address a
specific gap in the PCAOB’s regulatory framework related to liability standards for firms and
associated persons, ensuring a more consistent and effective regulatory framework.
SPECIAL CONSIDERATIONS FOR AUDITS OF EMERGING GROWTH COMPANIES

QC 1000, if approved by the Commission, would provide clear expectations for certain individuals
serving in quality control roles. QC 1000 and Rule 3502 may overlap in some but not all circumstances because
Rule 3502 applies to individuals more broadly than just quality control roles.
The amendment does not impose additional requirements on emerging growth company
(EGC) audits. Accordingly, the Board believes that Section 103(a)(3)(C) of Sarbanes-Oxley
does not apply. Nevertheless, the discussion of benefits, costs, and potential unintended
consequences above generally applies to the audits of EGCs, and the Board includes this analysis
for completeness.
Under Section 104 of the Jumpstart Our Business Startups Act (JOBS Act), rules adopted
by the Board after April 5, 2012, generally do not apply to the audits of EGCs, as defined in
Section 3(a)(80) of the Exchange Act, unless the Commission “determines that the application of
such additional requirements is necessary or appropriate in the public interest, after considering
the protection of investors, and whether the action will promote efficiency, competition, and
capital formation.”212 As a result of the JOBS Act, the rules and related amendments to PCAOB
standards adopted by the Board are generally subject to a separate determination by the
Commission regarding their applicability to audits of EGCs.
To inform consideration of the application of auditing standards to audits of EGCs, Board
staff prepares a white paper annually that provides general information about the characteristics
of EGCs.213 As of November 15, 2022, PCAOB staff identified 3,031 companies that selfidentified with the Commission as EGCs and filed audited financial statements in the 18 months
preceding that date.214

See Pub. L. No. 112-106 (Apr. 5, 2012). Section 103(a)(3)(C) of Sarbanes-Oxley, as added by
Section 104 of the JOBS Act, also provides that any rules of the Board requiring (1) mandatory audit firm rotation or
(2) a supplement to the auditor’s report in which the auditor would be required to provide additional information
about the audit and the issuer’s financial statements (auditor discussion and analysis) do not apply to an audit of an
EGC. The amended Rule 3502 falls outside these two categories.
For the most recent EGC report, see White Paper on Characteristics of Emerging Growth
Companies and Their Audit Firms at November 15, 2022 (February 20, 2024), available at https://
pcaobus.org/resources/other-research-projects (“EGC White Paper”).
The EGC White Paper uses a lagging 18-month window to identify companies as EGCs. Please
refer to the “Current Methodology” section of the EGC White Paper for details. Using an 18-month window enables
staff to analyze the characteristics of a fuller population in the EGC White Paper, but may tend to result in a larger
number of EGCs being included for purposes of the present EGC analysis than would alternative methodologies.
For example, an estimate using a lagging 12-month window would exclude some EGCs that are delinquent in
making periodic filings. An estimate as of the measurement date would exclude EGCs that have terminated their
registration or exceeded the eligibility or time limits. See id.
EGCs are likely to be newer public companies, which may increase the importance to
investors of the external audit to enhance the credibility of management disclosures. All else
equal, the benefits of the higher audit quality resulting from the amendment may be more
significant for EGCs than for non-EGCs, including improved efficiency of capital allocation,
lower cost of capital, and enhanced capital formation. By increasing the likelihood that
associated persons are held accountable for their negligent contributory roles in firm violations,
the amendment to Rule 3502 aims to bolster investor confidence in the audit process. Because
investors who lack confidence in a company’s financial statements may require a larger risk
premium that increases the cost of capital to companies, the improved audit quality resulting
from applying the amendment to EGC audits could reduce the cost of capital to those EGCs.215
The amendment could impact competition in an EGC product market if the costs
disproportionately affect the EGCs relative to their competitors. However, as discussed above,
the costs associated with the amendment are expected to be small, particularly given the
Commission’s existing authority to sanction associated persons for single acts of contributory
negligence. Therefore, the amendment’s impact on competition, if any, is expected to be limited.
Overall, the amendment is expected to enhance audit quality and increase the credibility of
financial reporting by EGCs, thereby fostering efficiency.
Some commenters agreed that the amendment should apply to audits of EGCs and that
doing so would benefit such audits. One commenter remarked that there was no reason not to
apply the amendment to audits of EGCs and that the principles, standards, and scope of
enforcement against violations involving contributory negligence should be the same regardless
of the scale and size of the entity and of the firm. Another commenter posited that excluding

For a discussion of how increasing reliable public information about a company can reduce risk
premiums, see David Easley & Maureen O’Hara, Information and the Cost of Capital, 59 J. Fin. 1553, 1573 (2004)
(“These findings suggest an important role for the accuracy of accounting information in asset pricing. Here, greater
precision directly lowers a company’s cost of capital because it reduces the riskiness of the asset to the
uninformed.”).
EGCs from the application of the amendment would be inconsistent with protecting the public
interest.
As previously discussed, one commenter suggested that the amendment would have a
greater impact on smaller firms with fewer resources to defend personnel and navigate an
uncertain liability environment, and consequently, these firms are more likely to cease auditing
entities that require PCAOB-registered auditors. The Board agrees that the amendment may
have a greater impact on smaller firms to the extent that their individual auditors are investigated
under the amended rule, and the firms are unable to absorb the direct costs and distractions. This
would, in turn, impact EGCs because they are more likely than non-EGCs to engage small
firms.216 The Board believes that the amendment should apply uniformly to audits of EGCs to
maintain high standards of audit quality and uphold investor protection across all entities.
Considering these comments and the reasons explained above, the Board will request that
the Commission determine, to the extent that Section 103(a)(3)(C) of the Sarbanes-Oxley
applies, that it is necessary or appropriate in the public interest, after considering the protection
of investors and whether the amendment will promote efficiency, competition, and capital
formation, to apply the amendment to audits of EGCs.
III.

Date of Effectiveness of the Proposed Rules and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or within

such longer period (i) as the Commission may designate up to 90 days of such date if it finds
such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which
the Board consents, the Commission will:
(A) By order approve or disapprove such proposed rules; or
(B) Institute proceedings to determine whether the proposed rules should be
disapproved.

Staff analysis indicates that, compared to exchange-listed non-EGCs, exchange-listed EGCs are
approximately 2.6 times as likely to be audited by a firm that is not affiliated with the largest global networks, and
approximately 1.3 times as likely to be audited by a triennially inspected firm. Source: EGC White Paper and S&P.
IV.

Solicitation of Comments
Interested persons are invited to submit written data, views and arguments concerning the

foregoing, including whether the proposed rules are consistent with the requirements of Title I of
the Act. Comments may be submitted by any of the following methods:
Electronic comments:
•

Use the Commission's internet comment form (https://www.sec.gov/rules/pcaob); or

•

Send an e-mail to rule-comments@sec.gov. Please include PCAOB-2024-04 on the subject
line.

Paper comments:
•

Send paper comments in triplicate to Vanessa A. Countryman, Secretary, Securities and
Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090.
All submissions should refer to PCAOB-2024-04. This file number should be included on

the subject line if e-mail is used. To help the Commission process and review your comments
more efficiently, please use only one method. The Commission will post all comments on the
Commission's internet website (https://www.sec.gov/rules/pcaob). Copies of the submission, all
subsequent amendments, all written statements with respect to the proposed rules that are filed
with the Commission, and all written communications relating to the proposed rules between the
Commission and any person, other than those that may be withheld from the public in
accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street, NE, Washington, DC 20549,
on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing will also
be available for inspection and copying at the principal office of the PCAOB. Do not include
personal identifiable information in submissions; you should submit only information that you

wish to make available publicly. We may redact in part or withhold entirely from publication
submitted material that is obscene or subject to copyright protection. All submissions should
refer to PCAOB-2024-04 and should be submitted on or before [INSERT DATE 21 DAYS
AFTER DATE OF PUBLICATION IN THE FEDERAL REGISTER].
For the Commission by the Office of the Chief Accountant.

Sherry R. Haywood,
Assistant Secretary.

[FR Doc. 2024-14487 Filed: 7/1/2024 8:45 am; Publication Date: 7/2/2024]