SEC Tightens the Reins: New Rules Hold Auditors Accountable for Negligence

Wall Street’s top watchdog took a decisive step on Tuesday, with the U.S. Securities and Exchange Commission (SEC) voting 3-2 to implement tougher rules that make it easier to hold individuals accountable for audit firm violations. This move comes as a result of a rule change initiated by the U.S. Public Company Accounting Oversight Board (PCAOB) in June, now officially backed by the SEC.

The newly approved regulation shifts the liability for audit firm employees, partners, independent contractors, and others involved from recklessness to a lower threshold—negligence. This change harmonizes the standards of auditor liability used by the PCAOB with those already in place at the SEC, ensuring that auditors and their firms are held to a consistent standard across the board.

SEC Chair Gary Gensler emphasized the importance of this change, noting that it aligns the accountability framework between the two bodies, reinforcing the responsibility of auditors to uphold stringent professional standards. However, not everyone is on board.

Republican commissioners expressed concerns about the necessity of the rule and the process by which it was brought to a vote. Commissioner Hester Peirce argued that existing regulations already provide mechanisms to address individual misconduct and questioned whether the new rule might deter talent from entering an industry that’s already struggling with recruitment.

The PCAOB, established in the wake of the Enron-era accounting scandals, has been tasked with overseeing audit firms to prevent such crises from reoccurring. The SEC’s approval of these rules is a significant step in strengthening that oversight.

In addition to the rule change, the SEC also unanimously approved two new sets of PCAOB standards aimed at modernizing and consolidating auditor responsibilities and technology-assisted audits. These updates will require auditors to exercise due professional care, skepticism, and ensure the reliability of information used in technology-assisted audit procedures.

As Wall Street braces for the impact of these changes, the SEC’s latest move signals a clear message: accountability in the auditing world is about to get a lot stricter.

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